EXHIBIT 2
                                                                      ---------

MANAGEMENT'S REPORT

TO THE SHAREHOLDERS OF WESTERN OIL SANDS INC.,

The accompanying  consolidated  financial statements and all information in the
annual  report  including  the  Management's  Discussion  and  Analysis are the
responsibility of Management.  The consolidated  financial statements have been
prepared by Management in accordance with the accounting  policies described in
the  notes  to  the  consolidated  financial  statements.  In  the  opinion  of
Management,  the  consolidated  financial  statements have been prepared within
acceptable limits of materiality and are in accordance with Canadian  generally
accepted accounting principles appropriate in the circumstances.  The financial
information  contained  elsewhere  in the annual  report has been  reviewed  to
ensure consistency with that in the consolidated financial statements.

Management has developed and maintains systems of internal  controls,  policies
and procedures in order to provide  reasonable  assurance as to the reliability
of the financial records and the safeguard of assets.

PricewaterhouseCoopers  LLP,  independent  external  auditors  appointed by the
shareholders of the Corporation,  review Western's system of internal  controls
and conduct their work to the extent they deem appropriate.  They have examined
the  consolidated  financial  statements  and have  expressed an opinion on the
statements.   Their  report  is  included  with  the   consolidated   financial
statements. Western also retains independent petroleum engineering consultants,
GLJ Petroleum Consultants Ltd., to conduct independent evaluations or audits of
the Corporation's oil and gas reserves.

The Board of Directors of the  Corporation  has  established an Audit Committee
consisting of four non-management  directors.  The Audit Committee reviews with
Management  and the  external  auditors  any  significant  financial  reporting
issues, the presentation and impact of significant risks and uncertainties, and
key estimates  and  judgments of Management  that may be material for financial
reporting  purposes.  On an annual basis,  the Audit  Committee  meets with the
independent  petroleum consultants and reviews the Corporation's annual reserve
estimates.  The Audit  Committee  meets quarterly to review and approve interim
consolidated  financial  statements prior to their release, as well as annually
to review  Western's annual  consolidated  financial  statements,  Management's
Discussion and Analysis and Annual  Information  Form/Form  40-F, and recommend
their  approval  to  the  Board  of  Directors.   The  external  auditors  have
unrestricted  access to the  Corporation,  the Audit Committee and the Board of
Directors.


/s/ James C. Houck                          /s/ David A. Dyck
----------------------------------          ----------------------------------
JAMES C. HOUCK                              DAVID A. DYCK
President and Chief Executive Officer       Senior Vice President, Finance and
                                            Chief Financial Officer
February 22, 2007

<PAGE>

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our  management  is  responsible  for  establishing  and  maintaining  adequate
internal  control over  financial  reporting as defined in Rules  13a-15(f) and
15d-15(f) under the Securities  Exchange Act of 1934, as amended.  Our internal
control over financial  reporting is designed to provide  reasonable  assurance
regarding the  reliability  of our financial  reporting and  preparation of our
consolidated  financial  statements  for external  purposes in accordance  with
accounting  principles  generally accepted in Canada. Our internal control over
financial reporting includes those policies and procedures that: pertain to the
maintenance of records that in reasonable  detail accurately and fairly reflect
our transactions and disposition of the assets;  provide  reasonable  assurance
that  transactions  are  recorded as  necessary  to permit  preparation  of our
consolidated   financial  statements  in  accordance  with  generally  accepted
accounting  principles  and that  receipts and  expenditures  of our assets are
being  made  only in  accordance  with  authorizations  of our  management  and
directors;  and provide  reasonable  assurance  regarding  prevention or timely
detection of  unauthorized  acquisition,  use or disposition of our assets that
could have a material effect on our consolidated financial statements.  Because
of its inherent limitations,  internal control over financial reporting may not
prevent  or  detect  misstatements.  Also,  projections  of any  evaluation  of
effectiveness  to future  periods  are  subject to the risk that  controls  may
become  inadequate  because  of changes  in  conditions,  or that the degree of
compliance with the policies or procedures may deteriorate.

Our management,  with the participation of our principal  executive officer and
principal  financial  officer,  evaluated  the  effectiveness  of our  internal
control  over  financial  reporting  as of December  31,  2006.  In making this
evaluation,  management  used  the  criteria  set  forth  by the  Committee  of
Sponsoring  Organizations  of the  Treadway  Commission  ("COSO")  in  Internal
Control - Integrated Framework.

There was one exclusion from our evaluation.  Our 20 per cent undivided working
interest in the Alberta Oil Sands Project ("AOSP"), representing 96 per cent of
our total Property, Plant and Equipment, 100 per cent of Operating Expenses, 54
percent of Purchased Feedstocks and Transportation, and 64 per cent of Research
and  Business  Development  Expense as at and for the year ended  December  31,
2006, was excluded from our evaluation as we do not have the ability to dictate
or modify this entity internal control over financial reporting,  and we do not
have the ability,  in  practice,  to assess those  controls.  However,  we have
assessed our  internal  control over  financial  reporting  with respect to the
inclusion  of our  share of the  AOSP  and its  results  of  operations  in our
consolidated financial statements.

Based on our  evaluation,  our management  concluded that our internal  control
over financial reporting was effective as of December 31, 2006.

Our management's  evaluation of the  effectiveness of our internal control over
financial   reporting   as  of  December   31,   2006,   has  been  audited  by
PricewaterhouseCoopers LLP, independent auditors, as stated in their report.



/s/ James C. Houck                          /s/ David A. Dyck
----------------------------------          ----------------------------------
JAMES C. HOUCK                              DAVID A. DYCK
President and Chief Executive Officer       Senior Vice President and Chief
                                            Financial Officer
February 22, 2007


<PAGE>

INDEPENDENT AUDITORS' REPORT


TO THE SHAREHOLDERS OF WESTERN OIL SANDS INC.,

We have completed an integrated audit of the consolidated  financial statements
and internal  control over financial  reporting of Western Oil Sands Inc. as of
December 31, 2006 and an audit of its December 31, 2005 consolidated  financial
statements. Our opinions, based on our audits, are presented below.

CONSOLIDATED FINANCIAL STATEMENTS

We have audited the  accompanying  consolidated  balance  sheets of Western Oil
Sands Inc.  (the  "Corporation")  as at  December  31,  2006 and 2005,  and the
related  consolidated  statements of operations and retained  earnings and cash
flows for the years then ended. These consolidated financial statements are the
responsibility  of  the  Corporation's  management.  Our  responsibility  is to
express an  opinion on these  consolidated  financial  statements  based on our
audits.

We conducted our audit of the Corporation's  consolidated  financial statements
as at December 31, 2006 and for the year then ended in accordance with Canadian
generally  accepted auditing  standards and the standards of the Public Company
Accounting  Oversight  Board  (United  States).  We conducted  our audit of the
Corporation's consolidated financial statements as at December 31, 2005 and for
the year then ended in accordance  with Canadian  generally  accepted  auditing
standards.  Those standards require that we plan and perform an audit to obtain
reasonable  assurance about whether the consolidated  financial  statements are
free of material  misstatement.  An audit of consolidated  financial statements
includes  examining,  on a test  basis,  evidence  supporting  the  amounts and
disclosures in the consolidated financial statements.  A consolidated financial
statement  audit also includes  assessing the  accounting  principles  used and
significant   estimates  made  by   management,   and  evaluating  the  overall
consolidated financial statement presentation.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects,  the financial position of the Corporation as
at December  31, 2006 and 2005 and the results of its  operations  and its cash
flows for the year then ended in accordance  with Canadian  generally  accepted
accounting principles.

INTERNAL CONTROL OVER FINANCIAL REPORTING

We have also  audited  management's  assessment,  included in the  Management's
Report on Internal  Control  Over  Financial  Reporting,  that the  Corporation
maintained  effective internal control over financial  reporting as of December
31,  2006,  based on  criteria  established  in Internal  Control -  Integrated
Framework  issued by the Committee of Sponsoring  Organizations of the Treadway
Commission   ("COSO").   The   Corporation's   management  is  responsible  for
maintaining  effective  internal  control over financial  reporting and for its
assessment of the  effectiveness of internal control over financial  reporting.
Our responsibility is to express opinions on management's assessment and on the
effectiveness of the  Corporation's  internal control over financial  reporting
based on our audit.

We  conducted  our  audit of  internal  control  over  financial  reporting  in
accordance with the standards of the Public Company Accounting  Oversight Board
(United States).  Those standards require that we plan and perform the audit to
obtain  reasonable  assurance  about whether  effective  internal  control over
financial  reporting  was  maintained  in all  material  respects.  An audit of
internal control over financial  reporting  includes obtaining an understanding
of  internal  control  over  financial   reporting,   evaluating   management's
assessment,  testing and evaluating the design and operating  effectiveness  of
internal control, and performing such other procedures as we consider necessary
in the circumstances. We believe that our audit provides a reasonable basis for
our opinions.

A company's internal control over financial  reporting is a process designed to
provide reasonable  assurance  regarding the reliability of financial reporting
and the preparation of consolidated  financial statements for external purposes
in  accordance  with  generally  accepted  accounting  principles.  A company's
internal  control  over  financial   reporting   includes  those  policies  and
procedures  that (i) pertain to the  maintenance of records that, in reasonable
detail,  accurately and fairly reflect the transactions and dispositions of the
assets of the company;  (ii) provide reasonable assurance that transactions are
recorded  as  necessary  to  permit   preparation  of  consolidated   financial
statements in accordance with generally  accepted  accounting  principles,  and
that receipts and expenditures of the company are being made only in accordance
with  authorizations  of  management  and  directors of the company;  and (iii)
provide  reasonable  assurance  regarding  prevention  or timely  detection  of
unauthorized  acquisition,  use, or  disposition  of the company's  assets that
could have a material effect on the consolidated financial statements.

Because of its inherent limitations,  internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness  to future  periods  are  subject to the risk that  controls  may
become  inadequate  because  of changes  in  conditions,  or that the degree of
compliance with the policies or procedures may deteriorate.

As  described in the  Management's  Report on Internal  Control Over  Financial
Reporting, management has excluded the Corporation's undivided working interest
in the Athabasca Oil Sands Project (the "AOSP") from its assessment of internal
control  over  financial   reporting  as  of  December  31,  2006  because  the
Corporation  does not have the  ability  to  dictate  or modify  this  entity's
control  over  financial  reporting,  and it does  not  have  the  ability,  in
practice,  to assess these controls.  AOSP represented 96 per cent of the total
Property,  Plant and Equipment, 100 per cent of Operating Expenses, 54 per cent
of Purchased  Feedstocks  and  Transportation,  and 64 per cent of Research and
Business  Development Expense of the Corporation's  financial statement amounts
as at and for the year ended December 31, 2006.

In  our  opinion,  management's  assessment  that  the  Corporation  maintained
effective internal control over financial  reporting as at December 31, 2006 is
fairly  stated,  in all material  respects,  based on criteria  established  in
Internal Control - Integrated Framework issued by the COSO. Furthermore, in our
opinion,  the  Corporation  maintained,  in all  material  respects,  effective
internal  control  over  financial  reporting  as of December 31, 2006 based on
criteria  established in Internal Control - Integrated  Framework issued by the
COSO.


/s/ PricewaterhouseCoopers LLP
-----------------------------------
PRICEWATERHOUSECOOPERS LLP
Chartered Accountants
Calgary, Alberta
February 22, 2007

<PAGE>







WESTERN OIL SANDS INC.

Consolidated Financial Statements
DECEMBER 31, 2006 AND 2005
(in thousands of dollars)







<PAGE>

<TABLE>
<CAPTION>
WESTERN OIL SANDS INC.
Consolidated Balance Sheets

----------------------------------------------------------------------------------

December 31 ($ THOUSANDS)                                         2006        2005
----------------------------------------------------------------------------------
<S>                                                              <C>         <C>
ASSETS

Current Assets
      Cash                                                       3,139       5,590
      Accounts Receivable                                      110,039      87,398
      Inventory (NOTE 4)                                        21,761      21,083
      Prepaid Expense                                           12,443       9,355
      Current Portion of Risk Management (NOTE 18)               7,601          --
                                                             ---------------------
                                                               154,983     123,426
                                                             ---------------------
Property, Plant and Equipment (NOTE 5)                       1,606,966   1,352,605
Risk Management (NOTE 18)                                       18,707      98,426
Deferred Charges (NOTE 6)                                       13,503      16,063
                                                             ---------------------
                                                             1,639,176   1,467,094
                                                             ---------------------

                                                             1,794,159   1,590,520
                                                             =====================

LIABILITIES

Current Liabilities
      Accounts Payable and Accrued Liabilities                 158,501     101,303
      Current Portion of Lease Obligations (NOTE 8 )             1,958       3,396
      Current Portion of Option Premium Liability (NOTE 9)      24,966          --
                                                             ---------------------
                                                               185,425     104,699
                                                             ---------------------

Long-term Liabilities
      Long-term Debt (NOTE 7)                                  601,385     565,655
      Lease Obligations (NOTE 8)                                57,480      55,809
      Option Premium Liability (NOTE 9)                         64,309      85,416
      Asset Retirement Obligation (NOTE 10)                     20,773       9,094
      Future Income Taxes (NOTE 12)                             73,113      56,445
                                                             ---------------------
                                                               817,060     772,419
                                                             ---------------------
                                                             1,002,485     877,118
                                                             ---------------------

SHAREHOLDERS' EQUITY

Share Capital (NOTE 13)                                        554,233     548,747
Contributed Surplus (NOTE 14)                                   12,890       3,474
Retained Earnings                                              224,551     161,181
                                                             ---------------------
                                                               791,674     713,402
                                                             ---------------------

                                                             1,794,159   1,590,520
                                                             =====================
</TABLE>
Commitments and Contingencies (NOTE 19)

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

APPROVED BY THE BOARD OF DIRECTORS


/s/ Robert G. Puchniak                                    /s/ Randall Oliphant
----------------------                                    --------------------
ROBERT G. PUCHNIAK                                            RANDALL OLIPHANT
Director                                                              Director

<PAGE>

WESTERN OIL SANDS INC.
Consolidated Statements of Operations and Retained Earnings

-------------------------------------------------------------------------------

Year ended December 31
($ THOUSANDS, EXCEPT AMOUNTS PER SHARE)                        2006        2005
-------------------------------------------------------------------------------

REVENUES (NOTE 18)                                          983,560     910,330
LESS PURCHASED FEEDSTOCKS AND TRANSPORTATION               (353,522)   (318,934)
                                                           ---------------------
                                                            630,038     591,396
                                                           ---------------------

EXPENSES
      Royalties                                               4,064       4,005
      Operating                                             286,325     250,389
      Research and Business Development                      34,863      10,657
      General and Administrative (NOTE 15)                   28,456      14,491
      Insurance                                              11,497       7,995
      Interest (NOTE 11)                                     50,017      58,165
      Accretion on Asset Retirement Obligation (NOTE 10)      1,256         562
      Depreciation, Depletion and Amortization (NOTE 5)      61,560      50,738
                                                           ---------------------
                                                            478,038     397,002
                                                           ---------------------
EARNINGS BEFORE OTHER INCOME (EXPENSE) AND INCOME TAXES     152,000     194,394
OTHER INCOME (EXPENSE)
      Foreign Exchange Gain                                      49      15,561
      Risk Management Gain (Loss) (NOTE 18)                 (72,118)     13,450
                                                           ---------------------
EARNINGS BEFORE INCOME TAXES                                 79,931     223,405
Income Tax Expense (NOTE 12)                                 16,561      73,956
                                                           ---------------------

NET EARNINGS                                                 63,370     149,449

Retained Earnings at Beginning of Year                      161,181      11,732
                                                           ---------------------

RETAINED EARNINGS AT END OF YEAR                            224,551     161,181
                                                           =====================

NET EARNINGS PER SHARE (NOTE 13)
        Basic                                                  0.39        0.93
        Diluted                                                0.39        0.92
                                                           ---------------------


SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


<PAGE>

<TABLE>
<CAPTION>
WESTERN OIL SANDS INC.
Consolidated Statements of Cash Flows

-------------------------------------------------------------------------------------

Year ended December 31 ($ THOUSANDS)                                 2006        2005
-------------------------------------------------------------------------------------
<S>                                                               <C>         <C>
CASH PROVIDED BY (USED IN)

CASH FROM OPERATING ACTIVITIES
      Net Earnings                                                 63,370     149,449
Non-cash Items:
      Stock-based Compensation (NOTE 15)                           12,083       3,149
      Accretion on Asset Retirement Obligations (NOTE 10)           1,256         562
      Depreciation, Depletion and Amortization (NOTE 5)            61,560      50,738
      Interest Expense on Option Premium Liability (NOTE 9)         3,801       1,278
      Unrealized (Gain) Loss on Risk Management (NOTE 18)          72,118     (13,450)
      Unrealized Foreign Exchange Gain (NOTE 7 AND NOTE 9)           (212)    (17,803)
      Future Income Tax Expense (NOTE 12)                          16,668      70,956
Cash Items:
      Cash Settlement of Asset Retirement Obligation (NOTE 10)        (91)        (52)
      Cash Settlement of Performance Share Unit Plan (NOTE 14)     (2,104)       (596)
                                                                  -------------------
                                                                  228,449     244,231
Increase in Non-cash Working Capital (NOTE 20)                    (59,436)    (32,489)
                                                                  -------------------

                                                                  169,013     211,742
                                                                  -------------------

CASH FROM (USED IN) FINANCING ACTIVITIES
      Issue of Share Capital (NOTE 13)                              4,923       2,724
      Issuance (Repayment) of Long-term Debt, Net                  36,000    (175,000)
      Deferred Charges                                                 --        (216)
      Repayment of Obligations Under Capital Lease                 (1,341)     (1,340)
                                                                  -------------------

                                                                   39,582    (173,832)
                                                                  -------------------

CASH INVESTED
      Capital Expenditures                                       (301,273)    (69,350)
      Insurance Proceeds (NOTE 19)                                     --      22,517
      Decrease in Non-cash Working Capital (NOTE 20)               90,227      10,798
                                                                  -------------------

                                                                 (211,046)    (36,035)
                                                                  -------------------

INCREASE (DECREASE) IN CASH                                        (2,451)      1,875

CASH AT BEGINNING OF YEAR                                           5,590       3,715
                                                                  -------------------

CASH AT END OF YEAR                                                 3,139       5,590
                                                                  ===================
</TABLE>

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


<PAGE>
(TABULAR 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 the Athabasca Oil Sands Project
      ("AOSP") located in the Athabasca region of northeastern  Alberta.  Shell
      Canada  Limited and Chevron Canada Limited hold the remaining 60 per cent
      and 20 per cent interests,  respectively.  The AOSP 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 pursuing initiatives primarily related to in-situ oil
      sands and technology development and downstream integration opportunities
      regarding the processing of production from both mineable and in-situ oil
      sands deposits.  WesternZagros Limited ("WesternZagros"),  a wholly-owned
      subsidiary  of the  Corporation,  is  pursuing  conventional  oil and gas
      opportunities in the Federal Region of Kurdistan in northern Iraq.

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  and  certain  in-situ
           activities  are  conducted  jointly  with  others.  These  financial
           statements reflect only the Corporation's  proportionate interest in
           such activities.

      b)   USE OF ESTIMATES

           The  preparation  of  the  Consolidated   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  and  disclosure of
           contingent  assets and  liabilities at the date of the  Consolidated
           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.  Accordingly,  actual results may differ from
           these  estimated   amounts  as  future   confirming   events  occur.
           Significant  estimates used in the  preparation of the  Consolidated
           Financial  Statements include, but are not limited to, the estimates
           of crude oil reserves,  recovery of exploration costs capitalized in
           accordance  with  full cost  accounting,  risk  management  asset or
           liability,  asset retirement  obligations,  income taxes, royalties,
           stock-based compensation and employee future benefits.

      c)   FOREIGN CURRENCY TRANSLATION

           Accounts in foreign  currencies and operations in foreign  countries
           that are integrated are translated  into Canadian  dollars using the
           temporal method. Under this method,  monetary assets and liabilities
           denominated  in foreign  currencies  are  translated  into  Canadian
           dollars  at rates of  exchange  in effect at the end of the  period.
           Non-monetary  assets and  liabilities  are translated  into Canadian
           dollars at  exchange  rates  prevailing  at the  transaction  dates.
           Revenues and expenses are  translated  into Canadian  dollars at the
           monthly  average  exchange  rates.   Provisions  for   depreciation,
           depletion and  amortization  are  translated at the same rate as the
           related items.  The resulting  exchange gains or losses are included
           in the Consolidated Statements of Operations and Retained Earnings.

                                       1
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


      d)   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.

      e)   INVENTORY

           Product  Inventories and Parts,  Supplies and Other  Inventories are
           valued  at the  lower  of  cost,  at  average  cost  basis,  and net
           realizable  value.   Product  Inventory  costs  include  direct  and
           indirect expenditures incurred in bringing an item or product to its
           existing  condition.  Parts,  Supplies  and  Other  Inventory  costs
           represent the store stock held at the Mine and Upgrader.

      f)   PROPERTY, PLANT AND EQUIPMENT

           Property,  plant and equipment  ("PP&E") assets are recorded at cost
           less  accumulated   provisions  for   depreciation,   depletion  and
           amortization.  Prior to the  commencement of commercial  operations,
           interest costs of debt attributable to major  development  projects,
           administrative   overhead,   operating   costs  and   revenues   are
           capitalized.

           The Corporation  engages in research and  development  activities to
           develop or improve  processes and techniques to extract oil from oil
           sands deposits.  Research  involves planned  investigation  with the
           goal of attaining new knowledge.  Development  involves  translating
           that knowledge into a new technology or process.  Research costs are
           expensed  as  incurred.   Development  costs  are  capitalized  once
           technical  feasibility is established and if the Corporation intends
           to proceed with  development.  These costs are  capitalized  in PP&E
           until the  commencement  of  commercial  operations  or  production.
           Otherwise,  development costs are expensed as incurred.  Development
           costs include pre-operating revenues and costs.

           OIL SANDS MINING

           Capitalized  costs  include  costs   specifically   related  to  the
           acquisition,  exploration,  development and construction of the AOSP
           and  other  projects,   including  asset   retirement   obligations.
           Development  costs to expand  capacity  of  existing  mines are also
           capitalized.   Costs  relating  to  a  turnaround  are  expensed  as
           incurred.  Oil Sands  Mining  assets  are  reviewed  for  impairment
           annually or 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 value.

           Depletion on oil sands mining  properties  is provided over the life
           of proved  and  probable  reserves  on a unit of  production  basis,
           commencing when the facilities are substantially  complete and after
           commercial production has begun.

           CONVENTIONAL CRUDE OIL AND IN-SITU OIL SANDS

           The  Corporation  accounts for its crude oil and in-situ  properties
           and equipment in accordance with the Canadian Institute of Chartered
           Accountants'  guideline on full cost  accounting  in the oil and gas
           industry.   Under  this  method,   all  costs  associated  with  the
           acquisition of, exploration for and the development of crude oil and
           in-situ  reserves,   including  asset  retirement   obligations  are
           capitalized   and    accumulated    within   cost   centres   on   a
           country-by-country  basis.  Such  costs  include  land  acquisition,
           geological  and  geophysical  activity,   drilling  and  testing  of
           productive and non-productive wells, carrying costs directly related

                                       2
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           to   unproved    properties,    major   development   projects   and
           administrative costs directly related to exploration and development
           activities.

           Once the Corporation  commences commercial  production from the cost
           centres,  capitalized costs accumulated  within each cost centre are
           depleted on the  unit-of-production  method  based on the  estimated
           proved  reserves of that country using  estimated  future prices and
           costs.  Proceeds  from  the  disposal  of  properties  are  normally
           deducted  from the full cost pool without  recognition  of a gain or
           loss unless that deduction would result in a change to the depletion
           rate by 20 per  cent  or  more,  in  which  case,  a gain or loss is
           recorded.

           In  determining  the  depletion   base,  the  Corporation   includes
           estimated future costs to be incurred in developing  proved reserves
           and excludes the cost of unproved  properties and major  development
           projects. Costs of major development projects and costs of acquiring
           and evaluating  significant  unproved properties are excluded,  on a
           cost  centre  basis,  from costs  subject to  depletion  until it is
           determined  whether or not proved  reserves are  attributable to the
           properties,  or  impairment  has  occurred.  To date,  no  depletion
           related  to the  Corporation's  conventional  crude oil and  in-situ
           properties  has been  recorded  as  commercial  operations  have not
           commenced.

           The  Corporation  reviews the  carrying  amount of its  conventional
           crude oil in-situ  properties  relative to their recoverable  amount
           (the  "ceiling  test") for each cost centre at each  annual  balance
           sheet date, or more frequently if  circumstances  or events indicate
           impairment has occurred. The recoverable amount is calculated as the
           sum of:

           o     the undiscounted cash flow from proved reserves using expected
                 future prices and costs;

           o     the cost of unproved properties; and

           o     the costs of major development projects less impairment.

           If the carrying amount of the properties  exceeds their  recoverable
           amount,  an impairment  loss is recognized in depletion equal to the
           amount by which the carrying amount of the properties  exceeds their
           fair value. Fair value is calculated as the sum of:

           o     the  cash  flows  from  proved  and  probable  reserves  using
                 expected  future  prices and costs,  discounted at a risk-free
                 interest rate; and

           o     the cost,  less  impairment,  of unproved  reserves  and major
                 development  projects  that  do  not  have  probable  reserves
                 attributable to them.

           CORPORATE

           Corporate PP&E assets are depreciated on a straight-line  basis over
           their useful lives ranging from three to five years.

      g)   DEFERRED CHARGES

           Deferred charges  primarily include debt financing costs incurred in
           establishing the  Corporation's  various debt  facilities.  Deferred
           charges are amortized over the life of the related debt facilities.

                                       3
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


      h)   DERIVATIVE FINANCIAL INSTRUMENTS

           The  Corporation  utilizes  financial   instruments  to  manage  its
           exposure to  fluctuations  in foreign  currency  exchange  rates and
           commodity  prices.  These derivative  financial  instruments are not
           used for  speculative  purposes.  The  Corporation  has policies and
           procedures in place with respect to the required  documentation  and
           approvals for the use of financial instruments and specifically ties
           their use, in the case of  commodities,  to the mitigation of market
           price risk  associated  with cash flows  expected  to be  generated.
           Where applicable,  the Corporation identifies  relationships between
           financial  instruments and  anticipated  transactions as well as its
           risk  management  objectives  and the strategy for  undertaking  the
           economic  hedge  transaction.  The  Corporation  assesses,  both  at
           inception and on an ongoing basis,  whether the financial instrument
           used  in the  particular  transaction  is  effective  in  offsetting
           changes in fair values or cash flows of the transaction.

           The fair  values  of these  financial  instruments  are  based on an
           estimate  of the  amounts  that would have been  received or paid to
           settle  these  instruments   prior  to  maturity.   The  Corporation
           considers  all  of  these  financial  instruments  to  be  effective
           economic hedges.  However,  certain of the  Corporation's  financial
           instruments do not qualify or have not been designated as hedges for
           accounting purposes in accordance with Accounting Guideline 13.

           In  accordance   with  Emerging   Issues   Committee   Abstract  128
           ("EIC-128")  "Accounting  for Trading,  Speculative  or  Non-Hedging
           Derivative Financial Instruments", financial instruments that do not
           qualify as hedges or have not been designated as hedges are recorded
           using the mark-to-market  method of accounting,  whereby instruments
           are recorded in the Consolidated Balance Sheet as either an asset or
           a liability  with changes in fair value  recognized in net earnings.
           Financial  instruments  that do qualify as hedges  under  Accounting
           Guideline 13 and are  designated as hedges are not recognized on the
           Consolidated  Balance  Sheet and  gains and  losses on the hedge are
           deferred  and  recognized  in  revenues in the period the hedge sale
           transaction occurs.

      i)   ASSET RETIREMENT OBLIGATION

           The  Corporation,  in  association  with  its  20 per  cent  working
           interest  in the AOSP and its  conventional  crude  oil and  in-situ
           initiatives,   recognizes   an  asset  and  a  liability  for  asset
           retirement  obligations  in the period in which they are incurred by
           estimating  the fair  value  of the  obligation.  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
           calculating the present value of these future  expenditures  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.  The
           Corporation  recognizes,  over the  estimated  life of the asset and
           liability,  depletion on the asset and  accretion on the  liability.
           Actual  expenditures  incurred are charged  against the  accumulated
           obligation.

      j)   STOCK-BASED COMPENSATION PLANS

           The Corporation  maintains stock option,  performance share unit and
           deferred stock unit plans as described in note 15.

           For the  Corporation's  stock option plan,  compensation  expense is
           recorded in the Consolidated Statements of Operations as general and
           administrative  expense with a corresponding increase in Contributed
           Surplus in the  Consolidated  Balance  Sheets  for all common  share
           options granted to employees and non-employee  directors on or after
           January 1,  2003.  The  expense  is based on the fair  values of the
           options at the time of grant and is recognized  in the  Consolidated
           Statements of Operations  over the requisite  service  period of the
           respective  options  on  a  straight-line  basis.  Fair  values  are

                                       4
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           determined,   at   the   grant   date,   using   the   Black-Scholes
           option-pricing  model.  For common share  options  granted  prior to
           January 1, 2003 ("pre-2003  options"),  compensation  expense is not
           recognized  in  the  Consolidated   Statement  of  Operations.   The
           Corporation  continues to disclose the pro forma earnings  impact of
           related  stock-based  compensation  expense  for  pre-2003  options.
           Consideration  paid to the  Corporation  on  exercise  of options is
           credited to Share  Capital and, if related to any stock options that
           were granted  subsequent  to January 1, 2003, an amount equal to the
           compensation  expense  recognized to that date is reclassified  from
           Contributed Surplus to Share Capital.

           The Performance  Share Unit Plan ("PSUP") is accounted for under the
           fair value  method.  The  compensation  expense is based on the fair
           values of the award at the time of grant  and is  recognized  in the
           Consolidated  Statements of Operations as general and administrative
           expense  with  a  corresponding  amount  recognized  in  Contributed
           Surplus in the Consolidated Balance Sheets, using the graded vesting
           method for the respective grants. Fair values are determined, at the
           grant date, using a Monte-Carlo Simulation pricing model.

           The  Deferred  Share  Unit  Plan  ("DSUP")  is  accounted  for  on a
           mark-to-market  basis whereby a liability and  compensation  expense
           are recorded  for each period based on the number of Deferred  Share
           Units  ("DSUs")  outstanding  and the  current  market  price of the
           Corporation's shares.

           The  Corporation,  as an owner in the AOSP,  shares  in any  related
           costs associated with the AOSP's stock-based compensation plans. The
           AOSP's plans  involve  Stock  Appreciation  Rights  (SARs) which may
           require  settlement  with cash payments.  During the vesting period,
           compensation  expense is recorded in the Consolidated  Statements of
           Operations as operating expense over the requisite service period on
           a straight-line basis and is recognized at period end date using the
           Black-Scholes  option-pricing  model. 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  when  title and other  significant  risks and  rewards  of
           ownership  are passed to the customer  and  delivery  has  occurred.
           Crude oil  products  produced and sold by the  Corporation  below or
           above our working interest share results in production underliftings
           and  overliftings.  Overliftings  are  recorded as  liabilities  and
           underliftings are recorded as assets.

      l)   INCOME TAXES

           The  Corporation  follows the  liability  method of  accounting  for
           income taxes. Under this method,  future income taxes are recognized
           based on the estimated tax effects of temporary  differences  in the
           carrying  value  of  assets  and  liabilities  in  the  Consolidated
           Financial  Statements and their  respective tax bases,  using income
           tax rates  substantively  enacted on the Consolidated  Balance Sheet
           date.  The effect of a change in income  tax rates on future  income
           tax assets and  liabilities  is recognized in earnings in the period
           the change occurs.

      m)   NET EARNINGS PER SHARE

           Basic net  earnings  per share are  calculated  by dividing  the net
           earnings  available to common  shareholders by the  weighted-average
           number of common shares outstanding  during the period.  Diluted net
           earnings per share reflect the  potential  dilution that would occur
           if stock options were exercised.  The Corporation  uses the treasury
           stock method to determine  the dilutive  effect of stock options and
           other dilutive  instruments.  The treasury stock method assumes that

                                       5
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           proceeds  received from the exercise of  in-the-money  stock options
           are used to repurchase common shares at the average market price for
           the period.

      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 AOSP,  has a defined  benefit  pension plan for employees of the
           AOSP.  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 AOSP'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 is over 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     CHANGES IN ACCOUNTING POLICIES

      a)   STOCK-BASED COMPENSATION FOR EMPLOYEES ELIGIBLE TO RETIRE BEFORE THE
           VESTING DATE

           For the year ending December 31, 2006, the Corporation retroactively
           adopted Emerging Issues Committee Abstract 162 ("EIC-162").  EIC-162
           requires  the  Corporation  to  recognize  stock-based  compensation
           expense for awards  granted to  employees  eligible  for  retirement
           under stock-based  compensation  plans that contain  provisions that
           allow an employee to continue vesting in an award in accordance with
           the  stated   vesting   terms  after  the   employee   has  retired.
           Accordingly,  stock-based  compensation  expense of $3.6 million has
           been included in general and  administrative  expense,  representing
           the  additional   compensation   expense  recognized  for  employees
           eligible  for  retirement  during the  vesting  period.  There is no
           impact to the Consolidated  Financial  Statements as at December 31,
           2005 as no such  retirement  provisions  existed during this period.
           The  Corporation's  stock  option  and PSU  plans  did  not  include
           retirement  provisions  until  2006 when the plans  were  amended to
           include retirement provisions.

      b)   NON-MONETARY TRANSACTIONS

           On January 1,  2006,  the  Corporation  prospectively  adopted  CICA
           Handbook Section 3831,  "Non-Monetary  Transactions"  which replaces
           Section 3830, "Non-Monetary Transactions".  Section 3831 establishes
           standards  for  the   measurement  and  disclosure  of  non-monetary
           transactions. Section 3830 prescribes that exchanges of non-monetary
           transactions  should  be  measured  based on the  fair  value of the
           assets  exchanged,  while  providing an exception  for  non-monetary
           exchanges in transactions  which do not result in the culmination of
           the  earnings  process.   Section  3831  eliminates  this  exception
           provided  in Section  3830 and  replaces  it with an  exception  for
           exchanges  of  non-monetary  assets  that  do  not  have  commercial
           substance.  A transaction has commercial substance when the entity's

                                       6
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           future cash flows are expected to change  significantly  as a result
           of the transaction. There is no impact on the Consolidated Financial
           Statements   as  the   Corporation   does  not  have   exchanges  of
           non-monetary  transactions after January 1, 2006 within the scope of
           Section 3831.

      c)   IMPLICIT VARIABLE INTERESTS UNDER ACG-15

           On  January  1,  2006,  the  Corporation   adopted  Emerging  Issues
           Committee   Abstract  157  ("EIC-157").   EIC-157  requires  that  a
           reporting  enterprise consider whether it holds an implicit variable
           interest in the Variable  Interest  Entity ("VIE") or potential VIE.
           The  determination of whether an implicit  variable  interest exists
           should also be based on whether the reporting  enterprise may absorb
           variability on the VIE or potential VIE. The Corporation has entered
           into operating leases, as described in note 19(a), with a VIE. These
           operating  leases  as  structured  do  not  meet  the  criteria  for
           consolidation by the Corporation and therefore, the adoption of this
           accounting  policy had no impact on the  Corporation's  Consolidated
           Financial Statements.

      d)   CONDITIONAL ASSET RETIREMENT OBLIGATIONS

           On January 1, 2006, the Corporation  retroactively  adopted Emerging
           Issues Committee  Abstract 159 ("EIC-159").  EIC-159  clarifies that
           the term "conditional  asset retirement  obligation" as used in CICA
           3110, "Asset Retirement Obligations" refers to a legal obligation to
           perform an asset  retirement  activity  in which the timing and (or)
           method of settlement  are  conditional on a future event that may or
           may not be within the  control  of the  entity.  EIC-159  requires a
           liability to be recognized for the fair value of a conditional asset
           retirement  obligation  if the fair  value of the  liability  can be
           reasonably  estimated;  an entity to apply  expected  present  value
           technique  if  certain   conditions  exist   indicating   sufficient
           information  to reasonably  estimate  conditional  asset  retirement
           obligation;  and that a liability should be recognized  initially in
           the period in which  sufficient  information  becomes  available  to
           estimate a  conditional  asset  retirement  obligations  fair value.
           There is no impact on the Consolidated  Financial  Statements of the
           Corporation from the retroactive adoption of EIC-159.

4     INVENTORY

                                                          2006           2005
      -------------------------------------------------------------------------

      Product Inventory                                  9,938         11,262
      Parts, Supplies and Other                         11,823          9,821
      -------------------------------------------------------------------------

                                                        21,761         21,083
      =========================================================================



                                      7
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


5     PROPERTY, PLANT AND EQUIPMENT

      2006                                      Cost   Accum. DD&A*          Net
      --------------------------------------------------------------------------

      Athabasca Oil Sands Project
            Producing Assets               1,414,560      (155,226)    1,259,334
            Capital Leases                    52,705        (5,914)       46,791
            Asset Retirement Obligation       18,246        (1,145)       17,101
            Expansion                        225,599            --       225,599
      --------------------------------------------------------------------------
                                           1,711,110      (162,285)    1,548,825
      In-Situ Projects                        25,842            --        25,842
      Kurdistan Exploration Project           23,954            --        23,954
      Corporate                               15,726        (7,381)        8,345
      --------------------------------------------------------------------------

                                           1,776,632      (169,666)    1,606,966
      ==========================================================================


      2005                                      Cost   Accum. DD&A*          Net
      --------------------------------------------------------------------------

      Athabasca Oil Sands Project
            Producing Assets               1,342,704      (104,437)    1,238,267
            Capital Leases                    52,705        (4,294)       48,411
            Asset Retirement Obligation        7,732          (573)        7,159
            Expansion                         38,235            --        38,235
      --------------------------------------------------------------------------
                                           1,441,376      (109,304)    1,332,072
      In-Situ Projects                           797            --           797
      Kurdistan Exploration Project            8,962            --         8,962
      Corporate                               12,136        (1,362)       10,774
      --------------------------------------------------------------------------

                                           1,463,271      (110,666)    1,352,605
      ==========================================================================

      * ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION

      Costs currently not subject to  depreciation,  depletion and amortization
      include $225.6 million  relating to the AOSP (2005 - $38.2  million).  In
      2005, $5.7 million relating to Corporate was not subject to depreciation,
      depletion and  amortization  as the projects  associated with these costs
      were not  substantially  complete and there was no commercial  production
      associated with these projects.

      All costs included in the Kurdistan  Exploration  Project and the In-Situ
      Projects are excluded from depletion as they  represent  costs related to
      properties  incurred in cost  centres  that are  considered  to be in the
      pre-production  stage.  Currently,  there are no proved reserves in these
      cost centres.  All costs, net of any associated  revenues,  in these cost
      centres have been  capitalized.  During the year ended December 31, 2006,
      the Corporation  capitalized  $2.8 million (2005 - nil) in interest costs
      relating to the expansion of the AOSP.

      During  the  year  ended  December  31,  2006,  assets  included  in AOSP
      Producing  Assets and Corporate with a carrying value of $9.4 million and
      $5.6 million,  respectively,  were determined to be impaired. The capital
      projects   associated   with  these  assets  have  been   cancelled  and,

                                       8
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


      consequently,  the assets have no future economic  benefit.  Accordingly,
      the Corporation has determined the carrying value of these projects to be
      nil and has recognized, in Depreciation,  Depletion and Amortization,  an
      impairment of $15 million.

6     DEFERRED CHARGES

                                                               2006       2005
      --------------------------------------------------------------------------

      Deferred Charges                                       28,712     28,712
      Less: Amortization                                    (15,209)   (12,649)
      --------------------------------------------------------------------------

                                                             13,503     16,063
      ==========================================================================


7     LONG-TERM DEBT

                                                               2006       2005
      --------------------------------------------------------------------------

      US$450 million Senior Secured Notes            (a)    524,385    524,655
      Revolving Credit Facility                      (b)     77,000     41,000
      --------------------------------------------------------------------------

                                                            601,385    565,655
      ==========================================================================

      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  $340  million   Revolving   Credit  Facility
           ("Revolving  Credit  Facility")  described  in note 7(b),  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 $0.3 million was recognized for the
           year ended  December  31,  2006 (2005 - $17  million) as a result of
           changes in the foreign  exchange  rate  between the US and  Canadian
           dollars.  As at  December  31,  2006,  a total of $184.5  million of
           unrealized   foreign   exchange  gains  were  recognized  since  the
           inception of the Notes,  approximately $92 million of which has been
           capitalized  as the  unrealized  gains  occurred prior to commercial
           operations.

      b)   The Revolving  Credit  Facility bears interest at the lenders' prime
           lending rate,  the bankers'  acceptance  rate or the LIBOR rate plus
           applicable  margins  ranging  from  nil to  225  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  7(a),  and  have  certain  financial  covenants,
           including a limit on the amount available for drawdown.  At December
           31, 2006, the limit  available for drawdown was $340 million (2005 -
           $299  million),  of which $77 million  (2005 - $41 million) had been
           drawn and $9.6  million  (2005 - $8.9  million)  had been  issued in
           letters of credit.  The Revolving  Credit Facility  contains a three
           year  revolving   maturity,   extendible  annually  at  the  lending
           institutions' discretion.

                                       9
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


9     LEASE OBLIGATIONS

                                                             2006         2005
      -------------------------------------------------------------------------

      Obligations Under Capital Lease               (a)    48,928       50,266
      Operating Lease Guarantee Obligation          (b)    10,510        8,939
      -------------------------------------------------------------------------
                                                           59,438       59,205
      Less: Current Portion                                 1,958        3,396
      -------------------------------------------------------------------------

                                                           57,480       55,809
      =========================================================================

      a)   The capital lease obligation  relates to the Corporation's  share of
           capital costs for the  hydrogen-manufacturing  unit within the AOSP.
           Repayment of the principal  obligation  was $1.3 million in 2006 and
           is scheduled to remain at that level until fully repaid.

      b)   Under the Mobile  Equipment  Lease,  described  in note  19(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.  For the year ended December 31, 2006, the Corporation  paid
           $1.1 million (2005 - $2.3 million) in regards to this obligation.

9     OPTION PREMIUM LIABILITY

      The Corporation  deferred payment and receipt of the premiums  associated
      with the options  described in note 18(a)(i)  until the settlement of the
      option  contracts  between  2007 and 2009.  The  total  net  undiscounted
      premiums payable by the Corporation are US$21.9 million for 2007, US$32.4
      million  for 2008 and  US$27.8  million  for 2009.  On the dates that the
      option  contracts  were entered,  a net  liability was  recognized on the
      Consolidated  Balance  Sheet at the  estimated  present  value of the net
      premiums  payable.  Subsequent  to the  inception  dates  of  the  option
      contracts,  interest expense is recognized, with a corresponding increase
      to the liability,  at annual rates ranging from 4.25 per cent to 4.50 per
      cent.  For the year ended  December  31,  2006,  $3.8 million of interest
      expense was recognized (2005 - $1.3 million).

      The  option  premium  liability  is  denominated  in US  dollars  and  is
      translated  into Canadian  dollars at the period end exchange  rate.  The
      unrealized  foreign exchange loss arising on the option premium liability
      for the year  ended  December  31,  2006 was  $0.1  million  (2005 - $0.8
      million unrealized foreign exchange gain).

      The  following  table  reconciles  the change in the net  option  premium
      liability:

                                                               2006        2005
      --------------------------------------------------------------------------

      Option Premium Liability at Beginning of Year          85,416          --
      Net Premiums                                               --      84,976
      Interest Expense                                        3,801       1,278
      Unrealized Foreign Exchange (Gain) Loss                    58        (838)
      --------------------------------------------------------------------------
      Option Premium Liability at End of Year                89,275      85,416
      Less: Current Portion                                  24,966          --
      --------------------------------------------------------------------------

                                                             64,309      85,416
      ==========================================================================

                                      10
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


10    ASSET RETIREMENT OBLIGATION

      The Corporation,  in association with its 20 per cent working interest in
      the AOSP, is responsible for its share of future  dismantlement costs and
      site   restoration   costs  in  the  mining,   extracting  and  upgrading
      activities.  The Corporation's  share of the total undiscounted amount of
      estimated cash flows  required to settle the  obligations at December 31,
      2006 was approximately $85.1 million (2005 - $39.2 million). The increase
      in the total undiscounted cash flows during the year was the result of an
      anticipated increase to inflation associated with the Fort McMurray area,
      increasing future  reclamation costs for land disturbed prior to 2006 and
      the costs associated with reclaiming land disturbed during 2006.

      The obligations will be settled on an ongoing basis over the useful lives
      of the operating assets, which may extend up to approximately 30 years in
      the  future  with the  majority  to be  settled  at the end of this  time
      period. In determining the fair value of the Asset Retirement Obligation,
      the  estimated  cash flows  have been  discounted  using  credit-adjusted
      risk-free  rates  between  6 per cent  and 7 per  cent.  Considering  the
      increased  anticipated inflation and changes in the anticipated timing of
      certain  reclamation  activities,  the  Corporation has revised the asset
      retirement obligation liability by $10.3 million. In addition, the AOSP's
      Upgrader  has  retirement  obligations  for which  fair  value  cannot be
      reasonably  determined  because the asset currently has an  indeterminate
      life. The asset  retirement  obligation for these assets will be recorded
      in the first  period in which the lives of the assets  are  determinable.
      The following table presents the  reconciliation  of the Asset Retirement
      Obligation from the beginning of each respective  period until the end of
      that period:

                                                                2006      2005
      -------------------------------------------------------------------------

      Asset Retirement Obligations at Beginning of Year        9,094     8,191
      Liabilities Incurred                                       259       393
      Liabilities Settled                                        (91)      (52)
      Accretion on Asset Retirement Obligation                 1,256       562
      Revision of Estimates                                   10,255        --
      -------------------------------------------------------------------------

      Asset Retirement Obligations at End of Year             20,773     9,094
      =========================================================================

      The  Corporation  currently  does not have asset  retirement  obligations
      associated with In-Situ Projects or the Kurdistan  Exploration Project as
      these projects are in the early stages of development.

11    INTEREST EXPENSE

                                                                2006      2005
      -------------------------------------------------------------------------

      Interest on Long-term Debt                              46,190    54,325
      Interest on Obligations Under Capital Lease              2,823     2,562
      Interest on Option Premium Liability                     3,799     1,278
      -------------------------------------------------------------------------
      Total Financing Charges                                 52,812    58,165
      Less: Capitalized Interest for AOSP Expansion            2,795        --
      -------------------------------------------------------------------------

      Interest Expense                                        50,017    58,165
      =========================================================================

      Cash interest paid for the year ended December 31, 2006 was $49.3 million
      (2005 - $57.4  million).  Cash  interest  received  for  the  year  ended
      December 31, 2006 was $0.3 million (2005 - $0.2 million).

                                      11
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


12    INCOME TAXES

                                                               2006       2005
      -------------------------------------------------------------------------

      Large Corporations (Recovery) Tax                        (107)     3,000
      Future Income Tax  Expense                             16,668     70,956
      -------------------------------------------------------------------------

      Income Tax Expense                                     16,561     73,956
      =========================================================================

      Cash taxes paid during the year ended December 31, 2006 were $0.8 million
      (2005 - $2.5 million).

      At December 31, the future income tax liability consists of:

                                                               2006       2005
      -------------------------------------------------------------------------

      Future Income Tax Assets
                 Unrealized Loss on Risk Management          19,375         --
                 Net Losses Carried Forward                   2,908      4,707
                 Share Issue Costs                              510        973
                 Impairment of Long-lived Assets                686        796

      Future Income Tax Liabilities
                 Capital Assets in Excess of Tax Values     (79,824)   (39,924)
                 Unrealized Foreign Exchange Gain           (13,409)   (15,500)
                 Unrealized Gain on Risk Management              --     (4,374)
                 Debt Issue Costs                            (3,359)    (3,123)
      -------------------------------------------------------------------------

      Net Future Income Tax Liability                       (73,113)   (56,445)
      =========================================================================

      The following table  reconciles  income taxes  calculated at the Canadian
      statutory  rate of 34.5 per cent  (2005 - 37.62  per  cent)  with  actual
      income taxes:

                                                              2006        2005
      -------------------------------------------------------------------------

      Net Earnings Before Income Taxes                      79,931     223,405

      Income Tax Expense at Statutory Rate                  27,576      84,045
      Effect of Tax Rate Changes and Timing of Use         (13,877)       (267)
      Non-taxable Portion of Foreign Exchange Gain             (54)     (3,530)
      Non-deductible Expenses                                  326          --
      Resource Allowance                                      (236)    (10,792)
      Provision to Actual                                     (510)        642
      Stock-based Compensation                               3,443         858
      Large Corporations Tax                                  (107)      3,000
      -------------------------------------------------------------------------

      Income Tax  Expense                                   16,561      73,956
      =========================================================================

      At December 31, 2006, the Corporation had  approximately  $1.4 billion of
      tax  pools  available.  Included  in the  tax  pools  are $9  million  of
      non-capital tax loss carry forward  balances as estimated at December 31,
      2006,  with expiry dates ranging from 2007 to 2014,  the benefit of which
      has been recognized in the accounts.

                                      12
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


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.

      b)   SHARE SPLIT

           The Corporation's shareholders approved a subdivision or share split
           of its issued and outstanding Common Shares on a three-for-one basis
           at the  Corporation's  Annual and  Special  Meeting  held on May 11,
           2005.  All  Common  Share and per  Common  Share  amounts  have been
           restated to retroactively reflect the share split.

      c)   ISSUED AND OUTSTANDING

<TABLE>
<CAPTION>
                                                                        NUMBER OF
                                                                           SHARES        AMOUNT
           -------------------------------------------------------------------------------------
           <S>                                                        <C>               <C>
           COMMON SHARES
           Balance at December 31, 2004                               159,836,286       545,699
           Issued on Exercise of Employee Stock Options                   681,755         2,724
           Exercise of Stock Options Previously Recognized                     --           324
           -------------------------------------------------------------------------------------
           Balance at December 31, 2005                               160,518,041       548,747
           Issued on Exercise of Employee Stock Options                   860,358         4,923
           Exercise of Stock Options Previously Recognized                     --           563
           -------------------------------------------------------------------------------------

           Balance at December 31, 2006                               161,378,399       554,233
           =====================================================================================

      d)   NET EARNINGS PER SHARE

           The following table summarizes the Common Shares used in calculating
           Net Earnings per Common Share:

                                                                              2006          2005
           --------------------------------------------------------------------------------------

           Weighted Average Common Shares Outstanding - Basic          160,991,406   160,169,887
           Effect of Stock Options                                       2,163,883     2,739,179
           --------------------------------------------------------------------------------------

           Weighted Average Common Shares Outstanding - Diluted        163,155,289   162,909,066
           ======================================================================================
</TABLE>

                                      13
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


14    CONTRIBUTED SURPLUS

      The following table presents the  reconciliation  of Contributed  Surplus
      for the year ended December 31:

<TABLE>
<CAPTION>
                                                                                            2006              2005
      -------------------------------------------------------------------------------------------------------------
      <S>                                                                                 <C>                <C>
      Contributed Surplus Beginning of Period                                              3,474             1,245
      Stock-based Compensation Expense                                                    12,083             3,149
      Cash Settlement of Performance Share Unit Plan                                      (2,104)             (596)
      Exercise of Stock Options Previously Recognized                                       (563)             (324)
      -------------------------------------------------------------------------------------------------------------

      Contributed Surplus End of Period                                                   12,890             3,474
      =============================================================================================================
</TABLE>

15    STOCK-BASED COMPENSATION

      The number of Common Share options  outstanding  reflects the share split
      of the Corporation's Common Shares as described in note 13(b).

      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>
                                                                          2006                                2005
      -------------------------------------------------------------------------------------------------------------
                                                                      Weighted                            Weighted
                                                                       Average                             Average
                                                    Number of   Exercise Price         Number of    Exercise Price
                                                      Options                $           Options                 $
      -------------------------------------------------------------------------------------------------------------
      <S>                                           <C>                  <C>           <C>                   <C>
      Outstanding at Beginning of Year              3,527,932             8.72         3,766,938              6.51
      Granted                                         966,540            30.59           443,670             20.23
      Exercised                                      (860,358)            3.10          (681,755)             4.00
      Forfeited                                          (850)           33.62              (921)             9.07
      -------------------------------------------------------------------------------------------------------------

      Outstanding at End of Year                    3,633,264            15.79         3,527,932              8.72
      =============================================================================================================

      Options Exercisable at End of Year            2,234,308             8.06         2,212,647              6.24
      =============================================================================================================
</TABLE>

                                      14
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           The following table summarizes Stock Options outstanding and
           exercisable under the Stock Option Plan at December 31, 2006:

<TABLE>
<CAPTION>
                                                       Options Outstanding                   Options Exercisable
      -----------------------------------------------------------------------------------------------------------
                                                  Weighted        Weighted                              Weighted
                                                   Average         Average                               Average
                                  Number of      Remaining  Exercise Price           Number of    Exercise Price
        Exercise Price              Options    Life (Years)              $             Options                 $
      -----------------------------------------------------------------------------------------------------------
      <S>                         <C>                 <C>            <C>             <C>                   <C>
        $2.83 - $10.00            1,985,075           3.17            7.11           1,967,575              7.09
        $10.01 - $20.00             592,499           5.58           15.83             244,233             14.19
        $20.01 - $30.00             222,000           6.76           26.44              22,500             26.18
        $30.01 - $35.40             833,690           6.68           33.60                  --                --
      -----------------------------------------------------------------------------------------------------------

                                  3,633,264           4.59           15.79           2,234,308              8.06
      ===========================================================================================================
</TABLE>

           The number of Common  Shares  reserved for issuance  under the Stock
           Option Plan was 5,796,187 at December 31, 2006 (2005 - 6,656,545).

           The weighted  average  grant-date  fair value of the 966,540 options
           granted  during  2006 was  $15.14  using  the  Black-Scholes  option
           pricing  model.  During  2005,  443,670  options  were  granted at a
           weighted  average fair value of $8.22.  The following table sets out
           the assumptions used in applying the Black-Scholes model:

<TABLE>
<CAPTION>
                                                                                        2006               2005
           -----------------------------------------------------------------------------------------------------
           <S>                                                                   <C>                <C>
           Risk Free Interest Rate                                               3.95 - 4.49%       3.72 - 4.06%
           Expected Life (In Years)                                                    4 -  6                  6
           Expected Volatility                                                      33 -  43%           26 - 44%
           Dividend Per Share                                                              --                 --
           =====================================================================================================
</TABLE>

      b)   PERFORMANCE SHARE UNIT PLAN

           The  Corporation  has  established  a  Performance  Share  Unit Plan
           ("PSUP") for issuance of awards to  directors,  officers,  employees
           and  consultants of the  Corporation  and its  subsidiaries.  Awards
           under PSUP will be in the form of  performance  share units ("PSU"),
           with each PSU  entitling  the holder to receive one Common  Share of
           the  Corporation  for no  additional  consideration  and  subject to
           certain  restrictions.  Each PSU  award  will  vest at a rate of one
           third of the PSUs  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 PSUs otherwise eligible to vest with respect
           to such PSU 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 PSUs  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 PSUs eligible to vest on such
           date will vest.


                                      15
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           The following  table  presents the  reconciliation  of the number of
           PSUs for the year ended December 31:

                                                              2006        2005
           --------------------------------------------------------------------

           Outstanding at Beginning of Year                160,128      99,291
           Granted                                         149,530     113,880
           Vested                                          (63,969)    (33,093)
           Forfeited                                        (8,019)    (19,950)
           --------------------------------------------------------------------

           Outstanding at End of Year                      237,670     160,128
           ====================================================================

           During the year ended  December 31, 2006,  the  Corporation  settled
           63,969 PSUs for cash through the purchase  and  distribution  of its
           shares to  holders of the PSUs of $2.1  million.  During  2005,  the
           Corporation  settled  33,093 PSUs for cash  through the purchase and
           distribution of its shares to holders of the PSUs of $0.6 million.

           The  weighted  average  grant-date  fair value of the  149,530  PSUs
           granted  during  2006 was $32.96  using the  Monte-Carlo  Simulation
           pricing model (2005 - 113,880 PSUs at $21.71).

      c)   DEFERRED SHARE UNIT PLAN

           In October 2005,  the  Corporation  initiated a Deferred  Share Unit
           Plan  ("DSUP"),  whereby  directors,  officers and  employees of the
           Corporation  can elect to receive  all or a portion of their  annual
           cash compensation in the form of Deferred Stock Units ("DSU"). Under
           the DSUP,  notional  share units are issued for the  elected  amount
           which is based on the then current market price of the Corporation's
           common shares. Upon ceasing directorship,  termination of employment
           or retirement, the units are settled in cash or common shares of the
           Corporation as determined by the  Corporation.  Final DSU redemption
           amounts are subject to change,  depending on the Corporation's share
           price at the time of exercise. Accordingly, the Corporation revalues
           the DSUs on each  reporting  date with any changes in value recorded
           as an adjustment to compensation expense in the period. For the year
           ended  December  31,  2006,  $0.6  million in  compensation  expense
           relating to the DSUs was recorded  (2005 - $0.1  million) in General
           and  Administrative  Expenses and no DSUs were  redeemed for cash or
           shares  of  the   Corporation.   The  Corporation  had  19,852  DSUs
           outstanding at December 31, 2006 (2005 - 2,261).

      d)   AOSP STOCK APPRECIATION RIGHTS PLANS

           The AOSP implemented two stock-based compensation plans in 2004 that
           awarded  Stock  Appreciation  Rights  (SARs) to  certain  employees.
           Accordingly,  the  Corporation,  as a 20 per cent owner in the AOSP,
           shares in the costs of these SARs.  Under the first plan,  SARs were
           granted to  employees of the AOSP that entitle the holders to a cash
           payment   once   exercised,   if   the   composite   value   of  the
           weighted-average  stock price of certain AOSP 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.


                                      16
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           The following table presents the reconciliation,  at the AOSP level,
           of the  number  of SARs  under  the  first  plan for the year  ended
           December 31:

                                                              2006        2005
           --------------------------------------------------------------------

           Outstanding at Beginning of Year                251,280     153,210
           Granted                                         157,760     163,110
           Exercised                                       (41,390)         --
           Forfeited                                            --     (65,040)
           --------------------------------------------------------------------

           Outstanding at End of Year                      367,650     251,280
           ====================================================================

           Under the second  plan,  SARs were  granted to employees of the AOSP
           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 AOSP  owners'  shares at the time of exercise
           exceeds  the  issue  price of the SARs  and if  certain  performance
           measures are met.

           The following table presents the reconciliation,  at the AOSP level,
           of the  number of SARs  under  the  second  plan for the year  ended
           December 31:

                                                              2006        2005
           --------------------------------------------------------------------

           Outstanding at Beginning of Year                135,300      79,950
           Granted                                          91,100      79,950
           Exercised                                            --          --
           Forfeited                                       (33,840)    (24,600)
           --------------------------------------------------------------------

           Outstanding at End of Year                      192,560     135,300
           ====================================================================

           For the year ended December 31, 2006,  $0.8 million in  compensation
           expense was recorded in operating  expense for these two plans (2005
           - $0.7 million).

      e)   STOCK-BASED COMPENSATION

           For the year ended  December 31, 2006,  the  Corporation  recognized
           $12.1 million (2005 - $3.1 million) 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
           2006 services rendered and is comprised of $7.8 million (2005 - $1.4
           million) in respect to the Corporation's  stock option plan and $4.3
           million  (2005  - $1.7  million)  in  respect  to the  Corporation's
           Performance Share Unit Plan.


                                      17
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           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 Corporation's net earnings  attributable to common  shareholders
           and  earnings  per share  would have been  adjusted to the pro forma
           amounts indicated below:

                                                              2006         2005
           --------------------------------------------------------------------

           Net  Earnings - As reported                      63,370      149,449
           Less: Compensation Expense                          133          891
           --------------------------------------------------------------------

           Net Earnings - Pro Forma                         63,237      148,558
           ====================================================================

           Basic Earnings Per Share
                 As Reported                                  0.39         0.93
                 Pro Forma                                    0.39         0.93

           Diluted Earnings Per Share
                 As Reported                                  0.39         0.92
                 Pro Forma                                    0.39         0.91
           ====================================================================

16    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.

17    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 AOSP, has a
      defined  benefit  pension  plan for  employees  of the  AOSP.  All of the
      information  pertaining to the defined  benefit pension plan in this note
      represents  the  Corporation's  20 per cent  ownership  in the AOSP.  The
      Corporation  uses its fiscal year-end as the measurement date for both of
      these pension plans.

      a)   DEFINED CONTRIBUTION PENSION PLAN

           For the year ended December 31, 2006,  the total expense  recognized
           for the  Corporation's  defined  contribution  pension plan was $0.5
           million (2005 - $0.3 million).

      b)   DEFINED BENEFIT PENSION PLAN

           For the year ended December 31, 2006,  the total expense  recognized
           for the  Corporation's 20 per cent ownership  interest in the AOSP's
           defined benefit pension plan was $1.3 million (2005 - $0.8 million).
           As at  December  31,  2006,  the  Corporation's  share of the funded
           status of the defined benefit pension plan was in a deficit position
           of  $0.5  million   (2005  -  $0.7  million   deficit).   Additional

                                      18
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           information for the Corporation's 20 per cent ownership  interest in
           the AOSP's defined benefit pension plan is as follows:

<TABLE>
<CAPTION>
                                                                         2006      2005
           -----------------------------------------------------------------------------
           <S>                                                          <C>       <C>
           Accrued Benefit Obligation, Beginning of Year                3,478     1,860
                 Current Service Cost                                   1,268       821
                 Interest Cost                                            240       161
                 Actuarial (Gain) Loss                                   (395)      821
                 Plan Amendments                                           --      (115)
                 Benefits Paid                                            (95)      (70)
           -----------------------------------------------------------------------------

           Accrued Benefit Obligation, End of Year                      4,496     3,478
           =============================================================================

           Fair Value of Plan Assets,  Beginning of Year                2,730     1,866
                 Employer Contributions                                   931       810
                 Actual Return on Plan Assets                             418       124
                 Benefits Paid                                            (95)      (70)
           -----------------------------------------------------------------------------

           Fair Value of Plan Assets, End of Year                       3,984     2,730
           =============================================================================

           Funded Status - Plan Deficit                                  (512)     (747)
           Unamortized Past Service Costs                                (106)     (115)
           Unamortized Net Actuarial Loss                                 493     1,145
           Unamortized Transitional Asset                                 (10)      (11)
           -----------------------------------------------------------------------------

           Accrued Benefit Asset (Liability)                             (135)      272
           =============================================================================

           Components of Net Periodic Pension Cost
                 Current Service Cost                                   1,268       821
                 Interest Cost                                            240       161
                 Actual Return on Plan Assets                            (418)     (124)
                 Actuarial (Gain) Loss on Accrued Benefit Obligation     (395)      821
           -----------------------------------------------------------------------------

           Costs Arising in the Period                                    695     1,679

           Differences in Costs Arising and Costs
                 Recognized in the Period in Respect of:
                      Return on Plan Assets                               196       (32)
                      Actuarial Gain (Loss)                               456      (812)
                      Transitional Asset                                  (10)       (1)
           -----------------------------------------------------------------------------

           Net Periodic Pension Cost Recognized                         1,337       834
           =============================================================================
</TABLE>

                                      19
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           The significant actuarial assumptions used to determine the periodic
           expense and accrued benefit obligations are as follows:

                                                                   2006    2005
           ---------------------------------------------------------------------

           Discount Rate - Expense                                5.10%    6.10%
           Discount Rate - Year-end Disclosure                    5.40%    5.10%
           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, 2006 was as
           follows:

                                                             ACTUAL     Target
           --------------------------------------------------------------------

           Domestic Equities                                    31%        33%
           Foreign Equities                                     29%        25%
           Fixed Income Securities                              36%        37%
           Money Market                                          4%         5%
           --------------------------------------------------------------------

                                                               100%       100%
           ====================================================================

18    FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

      The  Corporation's   financial  instruments  that  are  included  in  the
      Consolidated  Balance Sheets are comprised of cash and cash  equivalents,
      accounts  receivable,  risk management  activities,  accounts payable and
      accrued liabilities, option premium liability and long-term borrowings.

      a)   COMMODITY PRICE RISK

           The   Corporation  has  entered  into  various   commodity   pricing
           agreements  designed to mitigate the exposure to the  volatility  of
           crude oil prices in US dollars,  thereby providing greater certainty
           of future  cash flow  from the sale of the  Corporation's  synthetic
           crude oil  products.  This risk  management  strategy is intended to
           protect  the  Corporation's  base and future  capital  programs  and
           ensure the funding of debt  obligations.  Certain of these commodity
           pricing  agreements are accounted for as hedges, as they qualify for
           hedge accounting  under Accounting  Guideline 13 and were designated
           as hedges,  while other commodity  pricing  agreements are accounted
           for under fair value  accounting as they did not qualify or have not
           been designated as hedges for accounting purposes.

           (i) Fair Value Accounting

           During 2005, the Corporation  purchased put options at strike prices
           ranging from US$50.00 to US$55.00 per barrel, averaging US$52.42 per
           barrel  for the three year  period  beginning  January 1, 2007.  The
           premiums for the purchased put options were partially offset through
           the sale of call options at strike  prices  ranging from US$90.00 to
           US$95.00  per  barrel,   averaging   US$92.41  per  barrel  for  the
           three-year  period  beginning  January 1, 2007,  resulting  in a net

                                      20
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           premium liability.  Payment of the net premium liability is deferred
           until the settlement of the option contracts  between 2007 and 2009.
           As at December 31, 2006, the  Corporation  had the following put and
           call options outstanding:

                                                      2007       2008       2009
           ---------------------------------------------------------------------
           Barrels Per Day
                 Put Options Purchased              20,000     20,000     20,000
                 Call Options Sold                  10,000     15,000     15,000

           US$ Per Barrel
                 Average Put Strike Price         US$52.50   US$54.25   US$50.50
                 Average Call Strike Price        US$92.50   US$94.25   US$90.50
           ---------------------------------------------------------------------

           The  fair  value  of the  option  contracts  was  recognized  on the
           Consolidated  Balance  Sheet on the dates  they were  entered  into.
           During the year ended December 31, 2006, the Corporation  recognized
           an unrealized  loss of $72.1 million on the Risk  Management  Asset,
           marking it to the fair value at the end of the period  (2005 - $13.5
           million   unrealized  gain).  The  following  table  reconciles  the
           movement in the fair value of these option  contracts  that have not
           been designated as hedges:

                                                                2006       2005
           ---------------------------------------------------------------------

           Risk Management Asset at Beginning of Year         98,426         --
           Net Premium                                            --     84,976
           Unrealized Gain (Loss) on Risk Management Asset   (72,118)    13,450
           ---------------------------------------------------------------------
           Risk Management Asset at End of Year               26,308     98,426
           Less: Current Portion                               7,601         --
           ---------------------------------------------------------------------

                                                              18,707     98,426
           =====================================================================

           (ii)  Hedge Accounting

           As at December 31, 2006,  there were no crude oil swap  positions in
           place.  For the year ended  December  31,  2005,  the  Corporation's
           revenues were reduced by $110.4 million from crude oil price hedging
           losses.

      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  manages this risk through
           management  review of  credit  ratings  and  potential  exposure  to
           individual counterparties on a regular basis. Where appropriate, the
           Corporation  ensures that netting  arrangements and, where required,
           letters of credit are in place to  minimize  the impact in the event
           of customer default.

           The  counterparties of all of the Corporation's put and call options
           are major  financial  institutions  in Canada and the United States,
           all  with  investment  grade  credit  ratings,   thereby   partially
           mitigating  the  credit  risk   associated   with  these   financial
           instruments.

                                      21
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


      c)   INTEREST RATE RISK

           At December 31,  2006,  the increase or decrease in net earnings for
           each one per cent  change in the  interest  rates on  floating  debt
           amounts to $1.3 million (2005 - $0.4 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
           transactions in foreign  currencies,  and has US dollar  denominated
           Risk  Management  Assets,  Senior  Secured Notes and Option  Premium
           Liabilities,  as  described  in note  18(a),  note  7(a) and note 9,
           respectively.

      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  or have  interest  rates  that
           approximate their fair value.

           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>
                                                                2006                               2005
      --------------------------------------------------------------------------------------------------

                                         Balance Sheet                      Balance Sheet
                                                Amount    Fair Value               Amount    Fair Value
      --------------------------------------------------------------------------------------------------
      <S>                                      <C>           <C>                  <C>           <C>
      Floating Rate Debt
            Revolving Credit                    77,000        77,000               41,000        41,000
            Lease Obligation                    57,480        57,480               59,205        59,205
      Fixed Rate Debt
            US Senior Secured Notes            524,385       584,034              524,655       591,549
      --------------------------------------------------------------------------------------------------

      Long-term Borrowings                     658,865       718,514              624,860       691,754
      ==================================================================================================
</TABLE>

                                      22
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


19    COMMITMENTS AND CONTINGENCIES

      a)   COMMITMENTS

      The following table summarizes the Corporation's operating commitments at
      December 31, 2006:

<TABLE>
<CAPTION>
                                        2007     2008     2009     2010     2011  Thereafter      Total
      -------------------------------------------------------------------------------------------------
      <S>                            <C>       <C>      <C>      <C>      <C>        <C>        <C>
      Feedstocks (1)                 106,352   29,159   10,453   10,393   10,333     58,727     225,417
      Pipelines and Utilities (1)     33,300   35,417   43,384   43,195   43,152    558,641     757,089
      Mobile Equipment
      Lease (2)                        5,242   12,322   19,852    8,625       --         --      46,041
      Exploration Work
      Commitments (3)                  8,728      500       --       --       --         --       9,228
      -------------------------------------------------------------------------------------------------
                                     153,622   77,398   73,689   62,213   53,485    617,368   1,037,775
      =================================================================================================
</TABLE>

      (1)  The  Corporation  and the other owners of the AOSP 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, 2006 market prices.  In addition,  the  Corporation and
           the other  owners of the AOSP 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,  shutdown 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.

      (2)  The  Corporation  and the other owners of the AOSP have entered into
           long-term  operating lease obligations for certain equipment related
           to the AOSP. The term of the lease  obligations is between three and
           seven years. 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,  2006,  the  Corporation's
           share of the maximum  payable under the guarantee was $33.9 million.
           However,  any proceeds received from the sale of the equipment would
           be used to offset  the  payment  required  under the  guarantee.  At
           December  31,  2006,  the  Corporation's  share of  committed  lease
           payments  amounted to $46 million.  The  estimate of lease  interest
           obligations,  excluding any committed payments,  is $4.7 million for
           2007,  $4.5 million for 2008, $2.4 million for 2009 and $0.4 million
           for 2010.

      (3)  Included in Exploration  Work  Commitments are amounts  committed by
           the  Corporation  relating  to the  Corporation's  operated  in-situ
           project and  Kurdistan  Exploration  Project,  as well as an in-situ
           project operated by one of the other owners of the AOSP.

           The Corporation, through WesternZagros,  negotiated the initial form
           of an Exploration and Production Sharing Agreement ("EPSA") with the
           Kurdistan Regional Government ("KRG") subject to finalization of key
           terms and  ratification  by the KRG to comply with expected  federal
           petroleum  legislation.  The EPSA  provides for the  exploration  of
           conventional  oil and gas in the  Federal  Region  of  Kurdistan  in
           northern Iraq.  WesternZagros continues to work towards ratification

                                      23
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           of  an  EPSA  with  the  KRG  which  is   expected  to  include  the
           finalization   of  terms   including   its  contract  area  and  the
           corresponding work program commitments.

      In the fourth quarter of 2006, the  Corporation and the other AOSP Owners
      formally  sanctioned  Expansion 1 of the AOSP. The budget for Expansion 1
      is  $2.2  billion  with  $207.7  million  incurred  to  date  net  to the
      Corporation.

      The  Corporation  has future  commitments  related to its Option  Premium
      Liability as described in note 9.

      b)   CONTINGENCIES

     (i)   INSURANCE CLAIMS

           At the end of  2006,  the  Corporation  had one  claim  outstanding,
           namely,  the $200 million claim pursuant to the  Corporation's  cost
           overrun and project delay claim,  commonly referred to as Section IV
           and two settled  claims,  Section I and III,  however,  a portion of
           these  settled  claims  continue  to be  outstanding.  In the second
           quarter of 2005, the AOSP was  successful in settlement  proceedings
           with the named  insurers  on Section  III,  a loss of profits  claim
           stemming  from the fire at the Muskeg River Mine ("Mine") on January
           6,  2003,  in the amount of $220  million  ($44  million  net to the
           Corporation). To date, the Corporation has received $19.4 million of
           its share of this settlement  amount as certain  insurers on Section
           III are also named  insurers on Section  IV, and they have  withheld
           insurance proceeds payable to the Corporation. In 2003 and 2004, the
           Corporation  received  $16.1  million  in  respect  to the  coverage
           provided under Section I, a physical  property damage claim stemming
           from the above mentioned fire at the Mine. However, certain insurers
           that were  involved  in the Section IV claim  again  withheld  their
           portion  of  the  Section  I  claim  totalling  $19.4  million.  The
           Corporation   anticipates  that  it  will  receive  the  outstanding
           settlement  amount  from  both  Section I and  Section  III of $19.4
           million  and $24.6  million,  respectively,  in the event that it is
           successful in the Section IV arbitration proceedings.

           Arbitration  proceedings  under  the  terms  of  Section  IV of  the
           Corporation's  cost  overrun  and  project  delay  insurance  policy
           continue with formal  hearings  expected to commence  during 2007. A
           judgment  is  expected  subsequent  to this  process,  although  the
           Corporation makes no  representations as to the timing or results of
           this arbitration. In preparation of the arbitration process, several
           examinations  for discovery have been conducted with key individuals
           over the last several months. In order to preserve the Corporation's
           rights regarding this policy,  the Corporation has filed a Statement
           of Claim for the full limit of the policy,  namely $200 million, and
           the  Corporation  will also be seeking  interest  and  punitive  and
           aggravated damages.

           During the year ended  December 31, 2005, the  Corporation  received
           $3.1  million  in  respect  of  an  errors  and  omission  insurance
           settlement that was negotiated by the AOSP. This errors and omission
           insurance  policy related to initial  construction and as such these
           proceeds have been applied against the cost of the AOSP. The related
           settlements  of both the  Section I,  Section III and the errors and
           omission  insurance  policy have been credited to capital,  as these
           claims  relate  to  costs  that  were  capitalized  as  part  of the
           construction  of the  AOSP,  or to costs  that were  capitalized  in
           association  with  repairing the assets damaged by the fire or those
           capitalized prior to the commercial operations.

           No amounts,  other than those  collected at December 31, 2006,  have
           been recognized in these statements  relating to insurance  policies
           nor will an amount be recognized until the proceeds are received.

     (ii)  FLOW-THROUGH SHARES

           In connection with the issuance of flow-through shares in 2001 and
           2002, the Corporation renounced Canadian exploration expenses in the
           aggregate amount of $29.2 million and $19.5 million, respectively.
           Under the subscription agreements for such flow-through shares, the
           Corporation has agreed to indemnify subscribers for an amount equal

                                      24
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


           to the tax payable by the subscribers if such renunciations are
           reduced under the INCOME TAX ACT (Canada). Discussions between the
           AOSP and the Canada Revenue Agency are ongoing with respect to the
           proper characterizations of certain expenditures included in the
           Canadian exploration expenses in those years. If the Canada Revenue
           Agency successfully asserts a change in the characterization of
           these expenditures, any resulting reduction in the renunciations
           could impact the Corporation's obligations under the indemnity
           provisions in these subscription agreements.

     (iii) OTHER

           The  Corporation,  in association  with its 20 per cent ownership of
           the AOSP,  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.


20    NET CHANGE IN NON-CASH WORKING CAPITAL

      Source/(Use)                                              2006       2005
      --------------------------------------------------------------------------

      OPERATING ACTIVITIES
            Accounts Receivable                              (22,641)   (24,834)
            Inventory                                           (678)    (6,897)
            Prepaid Expense                                   (3,088)    (3,584)
            Accounts Payable and Accrued Liabilities         (33,029)     2,826
      --------------------------------------------------------------------------

                                                             (59,436)   (32,489)
      ==========================================================================

      INVESTING ACTIVITIES
            Accounts Receivable                                   --         --
            Accounts Payable and Accrued liabilities          90,227     10,798
      --------------------------------------------------------------------------

                                                              30,791     10,798
      ==========================================================================

                                      25
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


21    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   measurement   differences  on  the   Consolidated   Financial
      Statements:

<TABLE>
<CAPTION>
      RECONCILIATION  OF NET  EARNINGS AND RETAINED  EARNINGS  (DEFICIT)  UNDER
      CANADIAN GAAP TO US GAAP

      Year Ended December 31                                       Notes       2006        2005
      ------------------------------------------------------------------------------------------
      <S>                                                          <C>       <C>        <C>
      Net Earnings - Canadian GAAP                                           63,370     149,449
            Impact of US GAAP
                 Revenue                                           vii           --      10,202
                 Depreciation, Depletion & Amortization            iv, v      5,679          23
                 Research and Business Development                 v           (959)    (34,503)
                 Deferred Income Tax                               iii       (5,657)      7,125
      ------------------------------------------------------------------------------------------
      Net Earnings - US GAAP                                                 62,433     132,296

      Retained Earnings (Deficit) at Beginning of Year - US GAAP            127,930      (4,366)
      ------------------------------------------------------------------------------------------

      Retained Earnings at End of Year - US GAAP                            190,363     127,930
      ==========================================================================================

      Net Earnings Per Share - US GAAP
            Basic                                                              0.39        0.83
            Diluted                                                            0.38        0.81
      ==========================================================================================


      CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

      Year Ended December 31                                       Notes       2006        2005
      ------------------------------------------------------------------------------------------

      Net Earnings - US GAAP                                                 62,433     132,296
      Pension Liability, Net of Deferred Income Tax                viii        (364)         --
      Change in Realized and Unrealized Losses                     ix            --      31,756
      ------------------------------------------------------------------------------------------

      Other Comprehensive Income                                             62,069     164,052
      ==========================================================================================
</TABLE>

                                      26
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


<TABLE>
<CAPTION>
      CONSOLIDATED STATEMENT OF CASH FLOWS - US GAAP

      Year Ended December 31                                     Notes             2006        2005
      ----------------------------------------------------------------------------------------------
      <S>                                                        <C>            <C>         <C>
      CASH PROVIDED BY (USED IN)

      Operating Activities - Canadian GAAP                                      169,013     211,742
            Research and Business Development Expense                v             (959)    (34,503)
      ----------------------------------------------------------------------------------------------
      Operating Activities - US GAAP                                            168,054     177,239
      ----------------------------------------------------------------------------------------------
      Financing Activities - Canadian and US GAAP                                39,582    (173,832)
      ----------------------------------------------------------------------------------------------

      Investing Activities - Canadian GAAP                                     (211,046)    (36,035)
            Research and Business Development Expense                v              959      34,503
      ----------------------------------------------------------------------------------------------
      Investing Activities - US GAAP                                           (210,087)     (1,532)
      ----------------------------------------------------------------------------------------------

      Increase (Decrease) in Cash                                                (2,451)      1,875
      ==============================================================================================
</TABLE>

<TABLE>
<CAPTION>
      CONSOLIDATED BALANCE SHEET

      As at December 31                                              2006                        2005
      ------------------------------------------------------------------------------------------------
                                         Notes   As Reported      US GAAP   As Reported       US GAAP
      ------------------------------------------------------------------------------------------------
      <S>                                <C>       <C>          <C>           <C>           <C>
      ASSETS
      Current Assets                                 154,983      154,983       123,426       123,426
      Property, Plant and Equipment           i    1,606,966    1,567,956     1,352,605     1,309,080
      Risk Management                                 18,707       18,707        98,426        98,426
      Deferred Charges                       iv       13,503       12,927        16,063        15,282
      ------------------------------------------------------------------------------------------------

                                                   1,794,159    1,754,573     1,590,520     1,546,214
      ================================================================================================

      LIABILITIES
      Current Liabilities                  viii      185,425      185,937       104,699       104,699
      Long-term Debt                                 601,385      601,385       565,655       565,655
      Lease Obligations                               57,480       57,480        55,809        55,809
      Option Premium Liability                        64,309       64,309        85,416        85,416
      Asset Retirement Obligations                    20,773       20,773         9,094         9,094
      Deferred Income Taxes                 iii       73,113       48,262        56,445        26,085
      ------------------------------------------------------------------------------------------------
                                                   1,002,485      978,146       877,118       846,758

      SHAREHOLDERS' EQUITY
      Share Capital                          vi      554,233      573,538       548,747       568,052
      Contributed Surplus                             12,890       12,890         3,474         3,474
      Retained Earnings                              224,551      190,363       161,181       127,930
      Accumulated Other Comprehensive
            Income                           ix           --         (364)           --            --
      ------------------------------------------------------------------------------------------------

                                                   1,794,159    1,754,573     1,590,520     1,546,214
      ================================================================================================
</TABLE>

                                      27
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


<TABLE>
<CAPTION>
      i)   PROPERTY, PLANT AND EQUIPMENT

      2006                                              Notes          Cost    Accum. DD&A*         Net
      --------------------------------------------------------------------------------------------------
      <S>                                               <C>       <C>             <C>         <C>

      As Reported - Canadian GAAP                                 1,776,632       (169,666)   1,606,966
            Borrowing Costs and
                 The End of Pre-operating Period           iv         7,935        (2,618)        5,317
            Pre-feasibility                                 v       (49,931)        5,604       (44,327)
      --------------------------------------------------------------------------------------------------

      Property Plant and Equipment - US GAAP                      1,734,636       (166,680)   1,567,956
      ==================================================================================================

      2005
      --------------------------------------------------------------------------------------------------

      As Reported - Canadian GAAP                                 1,463,271       (110,666)   1,352,605
            Borrowing Costs and
                 The End of Pre-operating Period           iv         7,935         (2,488)       5,447
            Pre-feasibility                                 v       (48,972)            --      (48,972)
      --------------------------------------------------------------------------------------------------

      Property Plant and Equipment - US GAAP                      1,422,234       (113,154)   1,309,080
      ==================================================================================================
</TABLE>
      * ACCUMULATED DEPRECIATION, DEPLETION AND AMORTIZATION

      ii)   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 and December 31, 2002. If  compensation  expense had been
      recorded in accordance  with Statement of Financial  Accounting  Standard
      ("SFAS") No. 123R, the Corporation's net earnings (loss) and net earnings
      (loss) per share would approximate the following pro forma amounts:

<TABLE>
<CAPTION>
      Year Ended December 31                                                         2006         2005
      -------------------------------------------------------------------------------------------------
      <S>                                                                          <C>         <C>
      Net Earnings As Reported - US GAAP                                           62,433      132,296
      Less: Compensation Expense                                                      133          891
      -------------------------------------------------------------------------------------------------

      Net Earnings Pro Forma - US GAAP                                             62,300      131,405
      -------------------------------------------------------------------------------------------------

      Basic Earnings Per Share
            As Reported - US GAAP                                                    0.39         0.83
            Pro Forma                                                                0.39         0.82

      Diluted Earnings Per Share
            As Reported - US GAAP                                                    0.38         0.81
            Pro Forma                                                                0.38         0.81
      =================================================================================================
</TABLE>

                                      28
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


      iii)   INCOME TAXES

      Under US GAAP,  the net deferred  income tax  liability as at December 31
      consists of:

      Year Ended December 31                                   2006       2005
      -------------------------------------------------------------------------

      Future Income Tax Assets
            Unrealized Loss on Risk Management               19,375         --
            Net Losses Carried Forward                        2,908      4,707
            Share Issue Costs                                   510        973
            Impairment of Long-lived Assets                     686        796
            Pension Liability                                   148         --
            Tax Values in Excess of Book Capital Assets          --      5,634

      Future Income Tax Liabilities
            Capital Assets in Excess of Tax Values          (41,953)        --
            Unrealized Foreign Exchange Gain                (26,745)   (30,961)
            Unrealized Gain on Risk Management                   --     (4,374)
            Debt Issue Costs                                 (3,191)    (2,860)
      -------------------------------------------------------------------------

      Net Future Income Liability - US GAAP                 (48,262)   (26,085)
      =========================================================================

      The following table  reconciles  income taxes  calculated at the Canadian
      statutory  rate of 34.50 per cent  (2004 - 37.62 per  cent)  with  actual
      income taxes:

      Year Ended December 31                                  2006        2005
      -------------------------------------------------------------------------

      Net Earnings Before Income Taxes - Canadian GAAP      79,931     223,405
      US GAAP Adjustments                                    4,720     (24,278)
      -------------------------------------------------------------------------

      Net Earnings Before Income Taxes - US GAAP            84,651     199,127
      -------------------------------------------------------------------------

      Expected Income Tax                                   29,205      74,912
      Effect of Tax Rate Changes  and Timing of Use         (9,849)      1,741
      Non-taxable Portion of Foreign Exchange Gain             (54)     (3,530)
      Non-deductible Expenses                                  326          --
      Resource Allowance                                      (236)    (10,792)
      Provision to Actual                                     (510)        642
      Stock-based Compensation                               3,443         858
      Large Corporations Tax (Recovery)                       (107)      3,000
      -------------------------------------------------------------------------

      Income Tax Expense - US GAAP                          22,218      66,831
      =========================================================================

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

      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
      AOSP during the  pre-operating  period were deferred and  capitalized  as

                                      29
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


      part of the AOSP.  Under US GAAP, the Corporation is deemed to have ended
      its  pre-operating  period upon mechanical  completion of the AOSP, which
      occurred  on December 1, 2002,  such that these  pre-operating  items are
      expensed  thereafter.  Consistent  with the  December  1, 2002 end of the
      pre-operating  period,  depreciation,  depletion and  amortization of the
      Corporation's  Property,  Plant and Equipment and Deferred Charges should
      have also commenced at that time under US GAAP.

      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.

      The  following   table   summarizes  the   cumulative   impact  of  these
      differences:

<TABLE>
<CAPTION>
      Year Ended December 31                                                       2006       2005
      ---------------------------------------------------------------------------------------------
      <S>                                                                         <C>       <C>
      Income Statement:
            Decrease Depreciation, Depletion and Amortization Expense                75         23
            Increase Deferred Income Tax Expense                                    (21)        (8)
      ---------------------------------------------------------------------------------------------

                                                                                     54         15
      =============================================================================================

      Balance Sheet:
      Assets:
            Increase Property, Plant and Equipment - Cost                         7,935      7,935
            Increase Property, Plant and Equipment - Accumulated Depreciation    (2,618)    (2,488)
            Increase Deferred Charges - Accumulated Depreciation                   (576)      (781)
      ---------------------------------------------------------------------------------------------

                                                                                  4,741      4,666
      ---------------------------------------------------------------------------------------------

      Total Liabilities and Shareholders' Equity:
            Decrease Deferred Income Tax Liability                              (18,764)   (18,785)
            Increase Retained Earnings                                           23,505     23,451
      ---------------------------------------------------------------------------------------------

                                                                                  4,741      4,666
      =============================================================================================
</TABLE>

      v)    PRE-FEASIBILITY

      Under Canadian GAAP,  costs  associated with projects that have yet to be
      determined to be technically  feasible can be capitalized as part of PP&E
      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 2006, the  Corporation  had  expenditures of $1
      million  (2005 - $34.5  million)  relating to projects  that have not yet
      been determined to be technically feasible. The effect of this difference
      is to increase Research and Business Development expense $1 million (2005
      - $34.5 million) and increase Deferred Income Tax expense by $0.3 million
      (2005 - $11.6  million).  The cumulative  effect of this difference is to
      reduce  PP&E Cost by $49.9  million  (2005 - $48.9  million),  reduce the
      Deferred  Future  Income Tax  Liability  by $16.8  million  (2005 - $16.5
      million)  and reduce  Retained  Earnings by $33.1  million  (2005 - $32.4
      million).

      During 2006 the Corporation, for Canadian reporting purposes,  determined
      that certain costs  previously  capitalized were impaired and accordingly
      included in  Depreciation,  Depletion and  Amortization are impairment of
      $5.6 million.  These costs had been previously  expensed for US reporting
      purposes as they relate to projects  that had not been  determined  to be

                                      30
<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


      technically  feasible.  The  effect  of  this  difference  is  to  reduce
      Depreciation,  Depletion  and  Amortization  expense by $5.6  million and
      increase  Deferred  Income Tax expense by $1.6  million.  The  cumulative
      effect of this difference is to reduce PP&E  Accumulated  Depreciation by
      $5.6 million,  increase Deferred Income Tax Liability by $1.6 million and
      increase Retained Earnings by $4 million.

      vi)   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 is  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.

      vii)   CRUDE OIL SWAPS

      Under Canadian GAAP, the crude oil swaps 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  18(a)(i)  as hedges  would be
      recognized as a liability.  The effect of this  difference in 2005 was to
      increase  Revenue  by $10.2  million,  to  increase  Deferred  Income Tax
      expense by $3.8  million  and to  decrease  the  Opening  Deficit by $6.4
      million as previously determined under US GAAP.

      viii) DEFINED BENEFIT PENSION

      FASB  issued   Statement  of  Financial   Accounting  No  158  Employer's
      Accounting for Defined Benefit Pension and Other Post-retirement Plans in
      September  2006.   Statement  158  requires  public  companies  to  fully
      recognize,  on a  prospective  basis,  an  asset  or  liability  for  the
      over-funded  or  under-funded  status  of  their  benefit  plans in their
      consolidated financial statements.  The pension asset or liability equals
      the  difference  between  the fair  value of the  plan's  assets  and its
      benefit  obligation.  The  Corporation  as a  result  of the 20 per  cent
      ownership in the AOSP, has a defined  benefit  pension plan for employees
      of the AOSP as  described in note 17(b).  As at December  31,  2006,  the
      Corporation's  share  of the  under-funded  pension  liability  was  $0.5
      million. The effect of this difference is to increase Current Liabilities
      by $0.5  million,  decrease  the  Deferred  Income Tax  Liability by $0.1
      million and decrease Other Comprehensive Income by $0.4 million.

      ix)   OTHER COMPREHENSIVE INCOME

      Comprehensive  income is measured in accordance  with SFAS 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. At December 31, 2006, the Corporation has a
      balance of $0.4 million as Other  Comprehensive  Income  representing the

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(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


      after tax balance of the  Corporation's 20 per cent share of under funded
      pension  liability which has been recognized by the Corporation  adopting
      FAS 158. The  Corporation had other  comprehensive  income arising due to
      unrealized losses on derivative financial instruments designated as hedge
      transactions for year ended 2005 (2005 -$31.8 million gain net of tax).

22.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

      CANADIAN

      FINANCIAL INSTRUMENTS

      The CICA issued Section 3855,  "Financial  Instruments - Recognition  and
      Measurement",  which  prescribes  when a  financial  instrument  is to be
      recognized on the balance sheet and at what amount - sometimes using fair
      value, other times using cost-based measures. This Section also specifies
      how  financial  instrument  gains  and  losses  are  to be  presented.  A
      financial instrument is any contract that gives rise to a financial asset
      of one party and a financial  liability or equity  instrument  of another
      party.  These  may  include  loans  and  notes  receivable  and  payable,
      investments in debt and equity  securities and derivative  contracts such
      as forwards, swaps and options. Other significant accounting implications
      arising on adoption of Section  3855 include the initial  recognition  of
      certain  financial  guarantees at fair value on the balance sheet and the
      requirement  to expense or use of the  effective  interest rate method of
      amortization  for any  transaction  costs or fees,  premiums or discounts
      earned or incurred for financial  instruments measured at amortized cost.
      This Section applies to interim and annual financial  statements relating
      to fiscal years  beginning on or after October 31, 2006. The  Corporation
      will adopt this  Section on  January 1, 2007.  The  Corporation  does not
      expect  there to be any  material  impact to the  Consolidated  Financial
      Statements upon adoption of the standard on January 1, 2007.

      HEDGES

      The CICA issued  Section  3865,  "Hedges",  which  replaces  the guidance
      formerly in Section 1650,  "Foreign Currency  Translation" and Accounting
      Guideline 13, "Hedging  Relationships" by specifying how hedge accounting
      is applied and what  disclosures  are necessary when it is applied.  This
      Section applies to interim and annual  financial  statements  relating to
      fiscal  years  beginning  on  or  after  October  31,  2006.  Retroactive
      application  is not permitted.  Earlier  adoption is permitted only as at
      the beginning of a fiscal year ending on or after  December 31, 2004. The
      Corporation  plans  to  adopt  this  Section  on  January  1,  2007.  The
      Corporation  does not  expect  there  to be any  material  impact  on the
      Consolidated  Financial  Statements  upon  adoption  of the  standard  on
      January 1, 2007.

      FINANCIAL INSTRUMENTS - DISCLOSURES AND PRESENTATIONS

      The CICA issued  Section 3862,  "Financial  Instruments  -  Disclosures",
      which modifies the disclosure  requirements  of Section 3861,  "Financial
      Instruments - Disclosures and Presentation" and Section 3863,  "Financial
      Instruments  -  Presentations",   which  carries  forward  unchanged  the
      presentation  requirements  for  financial  instruments  of Section 3861.
      Section 3862 requires entities to provide  disclosures in their financial
      statements  that enable users to evaluate the  significance  of financial
      instruments on the entity's financial  position and its performance,  and
      the nature and extent of risks  arising  from  financial  instruments  to
      which the entity is exposed  during the period and at the  balance  sheet
      date,  and how the entity manages those risks.  Section 3863  establishes
      standards for  presentation of financial  instruments  and  non-financial
      derivatives.  It deals with the classification of financial  instruments,
      from the perspective of the issuer, between liabilities and equities, the
      classification  of related  interest,  dividends,  losses and gains,  and
      circumstances  in which  financial  assets and financial  liabilities are
      offset.  These Sections apply to interim and annual financial  statements
      relating to fiscal  years  beginning on or after  October 1, 2007.  Early
      adoption is permitted at the same time an entity  adopts other  standards
      relating to the accounting  for financial  instruments.  The  Corporation
      plans to adopt this Section on January 1, 2007. The Corporation  does not
      expect  there to be any  material  impact on the  Consolidated  Financial
      Statements upon adoption of the standard on January 1, 2007.

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<PAGE>
(TABULAR AMOUNTS IN $ THOUSANDS, EXCEPT FOR SHARE AMOUNTS)


      COMPREHENSIVE INCOME

      The CICA issued Section 1530,  "Comprehensive  Income", which established
      new  standards  for  reporting  the  display  of  comprehensive   income.
      Comprehensive  income  is  the  change  in  equity  (net  assets)  of  an
      enterprise  during a reporting period from  transactions and other events
      and  circumstances  from  non-owner  sources.  It includes all changes in
      equity  during the period  except those  resulting  from  investments  by
      owners and  distributions to owners.  This Section applies to interim and
      annual  financial  statements  relating to fiscal  years  beginning on or
      after  October 31, 2006.  Earlier  adoption is  permitted  only as at the
      beginning  of a fiscal year ending on or after  December  31,  2004.  The
      Corporation  plans to adopt this  Section  on January 1, 2007.  Financial
      statements  for prior  periods are  required  to be restated  for certain
      comprehensive  income items, which at this time are not applicable to the
      Corporation.  The  Corporation  does not expect  there to be any material
      impact on the  Consolidated  Financial  Statements  upon  adoption of the
      standard on January 1, 2007.

      EQUITY

      The CICA issued  Section 3251,  "Equity",  which  replaces  Section 3250,
      "Surplus".  It establishes  standards for the  presentation of equity and
      changes in equity  during a reporting  period.  This  Section  applies to
      interim  and  annual  financial   statements  relating  to  fiscal  years
      beginning  on or after  October 31, 2006.  Earlier  adoption is permitted
      only as at the beginning of a fiscal year ending on or after December 31,
      2004.  The  Corporation  plans to adopt this  Section on January 1, 2007.
      Financial  statements  of prior  periods are  required to be restated for
      specific items which are not applicable to the  Corporation at this time.
      The  Corporation  does not expect there to be any material  impact on the
      Consolidated  Financial  Statements  upon  adoption  of the  standard  on
      January 1, 2007.

      ACCOUNTING CHANGES

      The CICA issued Section 1506, "Accounting Changes", which replaces former
      Section 1506. The Section  establishes  criteria for changing  accounting
      policies,  together  with the  accounting  treatment  and  disclosure  of
      changes in accounting  policies and estimates,  and correction of errors.
      This Section applies to interim and annual financial  statements relating
      to fiscal years  beginning on or after January 1, 2007.  The  Corporation
      plans to adopt this Section on January 1, 2007. The Corporation  does not
      expect  there to be any  material  impact on the  Consolidated  Financial
      Statements upon adoption of the standard on January 1, 2007.

      DETERMINING THE VARIABILITY TO BE CONSIDERED IN APPLYING ACG-15

      The Emerging  Issues  Committee  issued  Abstract 163,  "Determining  the
      Variability to be Considered in Applying AcG-15",  which addresses how an
      enterprise  should determine the variability to be considered in applying
      AcG-15,  "Consolidation  of Variable  Interest  Entities".  This Abstract
      applies to all entities  (including  newly created  entities)  with which
      that enterprise first becomes  involved,  and to all entities  previously
      required to be analyzed  under  AcG-15 when a  reconsideration  event has
      occurred  pursuant to paragraph 11 of AcG-15,  beginning the first day of
      the interim or annual  reporting  period beginning on or after January 1,
      2007. Retrospective application to the date of the initial application of
      AcG-15,  is permitted but not required.  The  Corporation  plans to adopt
      this Section on January 1, 2007. The Corporation does not expect there to
      be any material  impact on the  Consolidated  Financial  Statements  upon
      adoption of the standard on January 1, 2007.

      CAPITAL DISCLOSURES

      The CICA issued Section 1535,  "Capital  Disclosures",  which establishes
      new standards for disclosing  information  about an entity's  capital and
      how it is managed.  It requires the  disclosure of  information  about an
      entity's  objectives,  policies and processes for managing capital.  This
      Section applies to interim and annual  financial  statements  relating to
      fiscal years beginning on or after October 1, 2007. The Corporation plans
      to adopt this Section on January 1, 2008 for the  Consolidated  Financial
      Statements.

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<PAGE>

      UNITED STATES

      ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES

      In June 2006,  the FASB issued FIN 48,  "Accounting  for  Uncertainty  in
      Income  Taxes  - an  interpretation  of FASB  Statement  No.  109."  This
      interpretation  requires  that  an  entity  recognize  in  the  financial
      statements, the impact of a tax position, if that position is more likely
      than not to be sustained on examination by the taxing authorities,  based
      on technical merits of the position.  Tax benefits  resulting from such a
      position should be measured as the amount that is more likely than not on
      a cumulative  basis to be sustained on examination.  FIN 48 also provides
      guidance on  de-recognition,  classification,  interest and  penalties on
      income taxes and accounting in interim periods.  The provisions of FIN 48
      are effective for fiscal years  beginning  after December 15, 2006,  with
      the cumulative effect of the change in accounting  principle  recorded as
      an  adjustment  to the January 1, 2007  opening  retained  earnings.  The
      Corporation  does not  expect  there  to be any  material  impact  on the
      Consolidated Financial Statements upon adoption of the standard.

      FAIR VALUE MEASUREMENT

      FASB  issued  statement  of  Financial  Accounting  No.  157  Fair  Value
      Measurement,  this statement is effective for financial statements issued
      for fiscal years  beginning  after November 15, 2007 and interim  periods
      within those fiscal  years.  Early  adoption is  permitted.  The standard
      provides  enhanced  guidance  for using fair value to measure  assets and
      liabilities,  the information  used to measure fair value, and the effect
      of fair value  measurement  on earnings.  The standard  applies  whenever
      other standards  require (or permit) assets or liabilities to be measured
      at fair  value.  It does  not  expand  the use of fair  value  in any new
      circumstances.  The Corporation  does not expect there to be any material
      impact on the  Consolidated  Financial  Statements  upon  adoption of the
      standard.

      ACCOUNTING FOR CERTAIN HYBRID FINANCIAL INSTRUMENTS

      On February 16, 2006, FASB issued FASB Statement No. 155,  Accounting for
      Certain  Hybrid  Instruments - an amendment of FASB Statement No. 133 and
      140 (FAS 155),  which allows an entity to elect to measure certain hybrid
      financial  instruments at fair value in their  entirety,  with changes in
      fair value recognized in earnings. The fair value election will eliminate
      the need to separately  recognize certain derivatives  embedded in hybrid
      financial  instruments  under FASB  Statement  No.  133,  Accounting  for
      Derivative Instruments & Hedging Activities.  This statement is effective
      for  financial   statements  issued  for  fiscal  years  beginning  after
      September  15,  2006.  The  Corporation  does not expect  there to be any
      material impact on the Consolidated Financial Statements upon adoption.

      ACCOUNTING FOR PURCHASES AND SALES OF INVENTORY WITH THE SAME COUNTERPARTY

      On September 15, 2005, the Emerging  Issues Task Force (EITF) issued EITF
      No. 04-13  Accounting  for Purchases and Sales of Inventory with the Same
      Counterparty.  EITF issued EITF No. 04-13 requiring that the treatment of
      purchases and sales of inventory with the same  counterparty  be combined
      as one  transaction  for  applying  Opinion  29.  This is  effective  for
      financial   statements  issued  for  fiscal  years  and  interim  periods
      beginning after March 15, 2006. The Corporation  does not expect there to
      be any material  impact on the  Consolidated  Financial  Statements  upon
      adoption.

      ACCOUNTING FOR TAXES COLLECTED AND REMITTED TO GOVERNMENT AUTHORITIES

      On June 28,  2006,  the EITF issued No.  06-03 How Taxes  Collected  from
      Customers and Remitted to Governmental Authorities Should be Presented in
      the Income Statement.  EITF issued EITF no 06-03 requiring that companies
      disclose  in  their  policies  whether  taxes  that  are  collected  from
      customers and remitted to  governmental  authorities  are included in the
      income  statement on a net or gross  basis,  and require  companies  that
      present on a gross basis to disclose the amount of taxes  included.  This
      is effective for financial  statements  issued for fiscal years beginning
      after December 15, 2006.


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