EXHIBIT 2
                                                                       ---------



AUDITORS' REPORT

TO THE SHAREHOLDERS OF WESTERN OIL SANDS INC.

We have audited the consolidated balance sheets of Western Oil Sands Inc. as at
December 31, 2003 and 2002 and the consolidated statements of operations and
deficit, and cash flows for the years then ended. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of Western Oil Sands Inc. as at
December 31, 2003 and 2002 and the results of its operations and its cash flows
for the years then ended in accordance with Canadian generally accepted
accounting principles.


"PRICEWATERHOUSECOOPERS LLP"

Chartered Accountants


Calgary, Canada
February 18, 2004



                                        1
<PAGE>

WESTERN OIL SANDS INC.
CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
December 31                                                                2003           2002
==============================================================================================
(THOUSANDS)
<S>                                                                 <C>            <C>
ASSETS
Current Assets
     Cash                                                           $     3,770    $    14,428
     Accounts Receivable                                                 57,994          6,624
     Inventory (Note 3)                                                   9,100          4,175
     Prepaid Expense                                                      7,033             --
----------------------------------------------------------------------------------------------
                                                                         77,897         25,227
----------------------------------------------------------------------------------------------

Capital Assets (Note 4)                                               1,353,317      1,306,989
Deferred Charges (Note 5)                                                20,903         27,422
Future Income Taxes (Note 11)                                             6,307             --
----------------------------------------------------------------------------------------------
                                                                      1,380,527      1,334,411
----------------------------------------------------------------------------------------------

                                                                    $ 1,458,424    $ 1,359,638
==============================================================================================

LIABILITIES
Current Liabilities
   Accounts Payable and Accrued Liabilities                         $    65,949    $    40,953
   Convertible Notes (Note 6)                                                --          4,055
   Obligations Under Capital Lease (Note 8)                               1,340             --
----------------------------------------------------------------------------------------------
                                                                         67,289         45,008

 Long-term Liabilities
   Long-term Debt (Note 7)                                              860,580        775,820
   Obligations Under Capital Lease (Note 8)                              51,610         50,859
   Other (Note 9)                                                         9,720             --
   Future Income Taxes (Note 11)                                             --            454
----------------------------------------------------------------------------------------------
                                                                        921,910        827,133
----------------------------------------------------------------------------------------------
                                                                        989,199        872,141
----------------------------------------------------------------------------------------------

SHAREHOLDERS' EQUITY
Share Capital (Note 12)                                                 476,667        426,275
Contributed Surplus (Note 13)                                               278             --
Convertible Notes (Note 6)                                                   --         83,945
Deficit                                                                  (7,720)       (22,723)
----------------------------------------------------------------------------------------------
                                                                        469,225        487,497
----------------------------------------------------------------------------------------------

                                                                    $ 1,458,424    $ 1,359,638
==============================================================================================
</TABLE>
  Commitments and Contingencies (Note 17)

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Approved by the Board of Directors:

         "ROBERT G. PUCHNIAK"                    "BRIAN F. MACNEILL"
         Robert G. Puchniak                      Brian F. MacNeill
         Director                                Director


                                       2
<PAGE>

WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT

<TABLE>
<CAPTION>
Year ended December 31                                                      2003         2002
==============================================================================================
(THOUSANDS, EXCEPT AMOUNTS PER SHARE)
<S>                                                                    <C>          <C>
REVENUES                                                               $ 281,093    $      --

EXPENSES:
  Operating                                                              106,825           --
  Purchased Feedstocks and Transportation                                117,580           --
  Royalties                                                                1,151           --
  General and Administrative                                               6,539        5,688
  Insurance                                                                1,661           10
  Interest (Note 10)                                                      38,429           --
  Accretion on Asset Retirement Obligation (Note 9)                          471           --
  Depreciation, Depletion and Amortization                                27,531          192
  Write-off of Deferred Charges (Note 7)                                      --       22,759
  Foreign Exchange Gain                                                  (34,976)          --
----------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) BEFORE INCOME TAXES                                   15,882      (28,649)
  Income Tax Recovery (Note 11)                                           (1,251)     (19,646)
----------------------------------------------------------------------------------------------
NET EARNINGS (LOSS)                                                       17,133       (9,003)
  Charge for Convertible Notes (Note 6)                                    2,130        1,283
----------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) ATTRIBUTABLE TO COMMON SHAREHOLDERS                $  15,003    $ (10,286)
==============================================================================================

Deficit at Beginning of Year                                              22,723       12,437
----------------------------------------------------------------------------------------------
Deficit at End of Year                                                 $   7,720    $  22,723
==============================================================================================

Net Earnings (Loss) Per Share (Note 12):
  Basic                                                                $    0.30    $   (0.21)
  Diluted                                                              $    0.29    $   (0.21)
----------------------------------------------------------------------------------------------
</TABLE>


SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


                                       3
<PAGE>

WESTERN OIL SANDS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year ended December 31                                                      2003         2002
=============================================================================================
(THOUSANDS)
<S>                                                                    <C>          <C>
CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES
     Net Earnings (Loss)                                               $  17,133    $  (9,003)
Non-cash items:
   Depreciation, Depletion and Amortization                               27,531          192
   Accretion on Asset Retirement Obligation (Note 9)                         471           --
   Stock Based Compensation (Note 13)                                        278           --
   Write-off of Deferred Charges (Note 7)                                     --       22,759
   Unrealized Foreign Exchange Gain (Note7)                              (35,280)          --
   Future Income Tax Recovery (Note 11)                                   (4,330)     (22,551)
----------------------------------------------------------------------------------------------
CASH FROM OPERATIONS                                                       5,803       (8,603)
Increase in Non-Cash Working Capital (Note 18)                            (7,133)      (7,965)
----------------------------------------------------------------------------------------------
                                                                          (1,330)     (16,568)
----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
   Issue of Share Capital (Note 12)                                       51,682        1,977
   Share Issue Expenses (Note 12)                                         (2,211)          --
   Issue of Long-term Debt                                               214,000      773,840
   Repayment of Long-term Debt                                                --     (279,481)
   Deferred Charges                                                       (1,017)     (17,927)
   (Repayment) Issue of Convertible Notes                                (88,000)      88,000
   Charge for Convertible Notes (Note 6)                                  (3,640)      (1,283)
   Repayment of Other Long-term Liabilities                                 (470)     (53,687)
----------------------------------------------------------------------------------------------
CASH GENERATED                                                           170,344      511,439
----------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
   Capital Expenditures                                                 (158,153)    (527,541)
   Insurance Proceeds                                                      9,680           --
   Increase in Non-Cash Working Capital (Note 18)                        (31,199)      (5,875)
----------------------------------------------------------------------------------------------
CASH INVESTED                                                           (179,672)    (533,416)
----------------------------------------------------------------------------------------------

Decrease in Cash                                                         (10,658)     (38,545)
Cash at Beginning of Year                                                 14,428       52,973
----------------------------------------------------------------------------------------------

CASH AT END OF YEAR                                                    $   3,770    $  14,428
=============================================================================================
</TABLE>


SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


                                       4
<PAGE>

WESTERN OIL SANDS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


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

         1.       BUSINESS OF THE CORPORATION

         Western Oil Sands Inc. (the "Corporation") was incorporated on June 18,
         1999 under the laws of the Province of Alberta. The Corporation holds
         an undivided 20 per cent working interest in an oil sands project in
         the Athabasca region of northeast Alberta ("the Oil Sands Project").
         Shell Canada Limited and Chevron Canada Limited hold the remaining 60
         percent and 20 percent interests, respectively. The Oil Sands Project
         consists of direct or indirect participation in the design,
         construction and operation of mining, extracting, transporting and
         upgrading of oil sands deposits. The Corporation is also actively
         pursuing other oil sands and related business opportunities.


         2.       SUMMARY OF ACCOUNTING POLICIES

(a)      PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of the
         Corporation and its wholly-owned subsidiary corporations and limited
         partnership, 852006 Alberta Limited, Western Oil Sands, L.P., Western
         Oil Sands Finance Inc. and Western Oil Sands (USA) Inc. (inactive). The
         Corporation's oil sands activities are conducted jointly with others.
         These financial statements reflect only the Corporation's proportionate
         interest in such activities.

(b)      COMMENCEMENT OF COMMERCIAL OPERATIONS

         Effective June 1, 2003, the Corporation commenced commercial
         operations, as determined by management, as all aspects of the
         facilities became fully operational and the Oil Sands Project achieved
         50 percent of the stated design capacity of 155,000 barrels per day.
         Accordingly, the Corporation has recorded revenues and expenses related
         to the Corporation's share of operations of the Oil Sands Project from
         that date. Prior to June 1, 2003 all revenues, operating costs and
         interest were capitalized as part of the costs of the Oil Sands
         Project, and no depreciation, depletion and amortization expensed.

(c)      MEASUREMENT UNCERTAINTY

         The preparation of financial statements in conformity with Canadian
         Generally Accepted Accounting Principles requires management to make
         estimates and assumptions that affect the reported amounts of assets
         and liabilities at the date of the financial statements, and the
         reported amounts of revenues and expenses during the reporting period.
         Such estimates relate to unsettled transactions and events as of the
         date of the Consolidated Financial Statements. Actual results may
         differ from these estimated amounts as future events occur.

         Specifically, amounts recorded for Depreciation, Depletion and
         Amortization are based on estimates of crude oil reserves, for Asset
         Retirement Obligation are based on assumptions of the future costs to
         dismantle the assets and restore the site of the Oil Sands Project and
         for Future Income Tax are based on assumptions of the timing and at
         which tax rates temporary differences are expected to reverse. These
         estimates of reserves and assumptions of future costs and timing of tax
         pool use are subject to


                                       5
<PAGE>

         measurement uncertainty, and the impact to the Consolidated Financial
         Statements of future periods could be material.

(d)      FOREIGN CURRENCY TRANSLATION

         Transactions in foreign currencies are translated into Canadian dollars
         at exchange rates prevailing at the transaction dates. Monetary assets
         and liabilities denominated in a foreign currency are translated into
         Canadian dollars at rates of exchange in effect at the end of the
         period, with the resulting unrealized gain or loss being recorded in
         the Consolidated Statement of Operations and Deficit, after the
         commencement of operations. Prior to the commencement of operations
         these unrealized gains and losses were capitalized.

(e)      CASH

         Cash presented in the Consolidated Financial Statements is comprised of
         cash and cash equivalents and includes short-term investments with a
         maturity of three months or less when purchased.

(f)      INVENTORY

         Product and Parts, Supplies and Other inventories are stated at the
         lower of average cost and net realizable value.

(g)      CAPITAL ASSETS

         Capital assets are recorded at cost less accumulated provisions for
         depreciation, depletion and amortization. Capitalized costs include
         costs specifically related to the acquisition, exploration, development
         and construction of the related project. This includes interest, which
         is capitalized during the construction and start-up phase for each
         project. Capital assets are reviewed for impairment whenever events or
         conditions indicate that their net carrying amount may not be
         recoverable from estimated future cash flows. If an impairment is
         determined the assets are written down to the fair market value.

         Depletion on the Oil Sands Project is provided over the life of proved
         and probable reserves on a unit of production basis, commencing when
         the facilities were substantially complete and after commercial
         production had begun. Other capital assets are depreciated on a
         straight-line basis over their useful lives, except for lease
         acquisition costs and certain mine assets, which are amortized and
         depreciated over the life of proved and probable reserves. The
         estimated useful lives of depreciable capital assets are as follows:

         Leasehold improvements                                      5 years
         Furniture and fixtures                                      5 years
         Computers                                                   3 years

(h)      ASSET RETIREMENT OBLIGATION

         Effective January 1, 2003 the Corporation early adopted CICA 3110
         "Asset Retirement Obligations". The new standard requires that the
         Corporation recognize an asset and a liability for any existing asset
         retirement obligations, which is determined by estimating the fair
         value of this commitment at the balance sheet date. The fair value is
         determined by the Corporation by first estimating the expected timing
         and amount of cash flows, using third party costs, that will be
         required for future dismantlement and site restoration, and then
         present valuing these future payments using a credit adjusted risk free
         rate appropriate for the Corporation. Any change in timing or amount of
         the cash flows subsequent to initial recognition results in a change in
         the asset and liability. Over the estimated life of the asset and
         liability the Corporation recognizes depletion on the asset and
         accretion on the liability.


                                       6
<PAGE>

(i)      CONVERTIBLE NOTES

         Amounts drawn under the Note Purchase Facility are deemed to consist of
         both an equity and a liability component in accordance with Canadian
         GAAP. The initial carrying amounts recognized for the equity and debt
         component are adjusted for accretion to bring the equity component to
         the stated principal amount of the Note Purchase Facility at maturity
         and to remove the debt component. Accretion is charged directly to the
         Deficit. Upon maturity of the Note Purchase Facility the equity
         component amount was refinanced by the Corporation under the Revolving
         Credit Facility, see note 7(c).

(j)      STOCK-BASED COMPENSATION PLAN

         The Corporation has a stock-based compensation plan, which is described
         in Note 13. Effective January 1, 2002, the Corporation adopted CICA
         3870 "Stock-based Compensation and Other Stock-based Payments". CICA
         3870 is applied to all stock-based payments to non-employees and to
         employee awards that are direct awards of stock, stock appreciation
         rights and similar awards to be settled in cash. CICA 3870 is applied
         to all grants of stock options on or after January 1, 2002.

         During the fourth quarter, effective for January 1, 2003 the
         Corporation began prospectively recognizing compensation expense for
         options granted under the plan in accordance with the fair value
         method. Under the transitional provisions in CICA 3870 the Corporation
         is required only to apply the fair value based method, and record
         compensation expense and Contributed Surplus, to awards granted,
         modified or settled on or after the beginning of the fiscal year, in
         which the Corporation adopts the fair value method for those awards.
         Accordingly, only awards issued from January 1, 2003 require
         compensation expense to be recognized in accordance with CICA 3870.
         Compensation expense for options granted during 2003 is determined
         based on the fair values at the time of grant and are recognized over
         the estimated vesting periods of the respective options. For options
         granted prior to January 1, 2003 the Corporation continues to disclose
         the pro forma net earnings (loss) impact of the related compensation
         expense. Pro forma compensation-related earnings impacts are determined
         on the same basis as the 2003 options.

         Consideration received on the exercise of stock options granted is
         credited to share capital, and if related to any stock options that
         were granted during the year ended December 31, 2003, then an amount
         equal to the compensation expense recognized to that date is
         reclassified from Contributed Surplus to Common Shares.

(k)      REVENUE RECOGNITION

         The revenue associated with the sale of crude oil products is recorded
         as title and other significant risks and rewards of ownership are
         passed to the customer.

(l)      NET EARNINGS (LOSS) PER SHARE

         The Corporation uses the treasury stock method to determine the
         dilutive effects of stock options and other dilutive instruments.


                                       7
<PAGE>

(m)      DERIVATIVE FINANCIAL INSTRUMENTS

         Financial instruments are used by the Corporation to hedge its exposure
         to market risks relating to commodity prices and foreign currency
         exchange rates. The Corporation's policy is not to utilize financial
         instruments for speculative purposes.

         The Corporation formally documents all relationships between hedging
         instruments and hedged items as well as its risk management objectives
         and strategies for undertaking various hedge transactions. This process
         includes linking all derivatives to specific assets and liabilities on
         the balance sheet or to specific firm commitments or forecasted
         transactions. The Corporation also assesses, both at the hedges'
         inception and on an ongoing basis, whether the derivatives that are
         used in hedging transactions are highly effective in offsetting changes
         in fair values or cash flows of hedged items.

         The Corporation enters into hedges with respect to a portion of its oil
         production to achieve a more predictable cash flow by reducing its
         exposure to price and currency fluctuations. These transactions are
         entered into with major Canadian financial institutions. Gains and
         losses from these financial instruments are recognized in oil revenues
         as the hedge sale transactions occur.

(n)      EMPLOYEE FUTURE BENEFITS (PENSION PLAN)

         The Corporation has a defined contribution pension plan for its direct
         employees and as a result of the 20 percent ownership in the Oil Sands
         Project has a defined benefit pension plan for employees of the Oil
         Sands Project. For the defined contribution pension plan the expense is
         recognized as payments are made or entitlements are earned.

         For the defined benefit pension plan the costs are determined using the
         projected benefit method based on length of service and reflects the
         Oil Sands Project's best estimate of expected plan investment
         performance, salary escalation, retirement ages of employees,
         withdrawal rates and mortality rates. The expected return on plan
         assets is based on the fair value of those assets and the obligation is
         discounted using a market interest rate at the beginning of the year 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
         percent of the greater of the benefits obligation and the fair value of
         plan assets. The amortization period covers the expected average
         remaining service lives of employees covered by the plans.

(o)      COMPARATIVE AMOUNTS

         Certain comparative amounts have been reclassified to conform to the
         current year's presentation.


         3.       INVENTORY

                                                           2003            2002
 ===============================================================================
 Product Inventory                                 $      3,381    $      4,175
 Parts, Supplies and Other                                5,719              --
 -------------------------------------------------------------------------------
                                                   $      9,100    $      4,175
 ===============================================================================


                                       8
<PAGE>

         4.       CAPITAL ASSETS

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

                                                                                 2002
-----------------------------------------------------------------------------------------------------

Oil Sands Project                                          $ 1,243,061    $        --    $ 1,243,061
Oil Sands Project Assets Under Capital Lease                    50,859             --         50,859
Other Assets                                                    13,601           (532)        13,069
-----------------------------------------------------------------------------------------------------
                                                           $ 1,307,521    $      (532)   $ 1,306,989
=====================================================================================================
</TABLE>
* Accumulated Depreciation, Depletion and Amortization


5.       DEFERRED CHARGES

<TABLE>
<CAPTION>
                                                                               2003            2002
-----------------------------------------------------------------------------------------------------
 <S>                                                                     <C>             <C>
 Deferred Charges                                                        $   28,440      $   27,422
 Less: Amortization                                                          (7,537)             --
-----------------------------------------------------------------------------------------------------
                                                                            $20,903      $   27,422
=====================================================================================================
</TABLE>

Deferred charges include primarily debt financing costs that have been incurred
in establishing the Corporation's various debt facilities. These amounts are
being amortized over the term of the related debt facilities following start-up
of the Oil Sands Project.

         6.       CONVERTIBLE NOTES

On October 25, 2001 the Corporation established an $88 million two-year Note
Purchase Facility (the "Note Purchase Facility") with a Canadian chartered bank.
Borrowings under the Note Purchase Facility bore interest at the bank's prime
lending rate, the bankers' acceptance rate or the LIBOR rate plus applicable
margins ranging from 125 to 225 basis points. The notes issuable pursuant to
draws on the Note Purchase Facility were convertible, at maturity at the option
of the Corporation and in the event of a default at the option of the bank, into
Common Shares of the Corporation. The Convertible Notes matured on October 25,
2003, and the Corporation refinanced these Convertible Notes using availability
that it had under its new Revolving Credit Facility (see Note 7 (c)). For the
year ended December 31, 2003 the Corporation accreted $3.6 million ($2.1 million
net of tax) in respect to the interest paid on the Note Purchase Facility.


                                       9
<PAGE>

         7.       LONG-TERM DEBT
                                                          2003            2002
-------------------------------------------------------------------------------
US$450 million Senior Secured Notes         (a)      $ 581,580       $ 710,820
Senior Credit Facility                      (b)         91,000          45,000
Revolving Credit Facility                   (c)        188,000          20,000
-------------------------------------------------------------------------------
                                                     $ 860,580       $ 775,820
===============================================================================


(a)      On April 23, 2002, the Corporation issued Senior Secured Notes in the
         amount of US$450 million, bearing interest at 8.375 percent, with a
         maturity of May 1, 2012 (the "Offering"). The net proceeds of the
         Offering were used to repay all amounts outstanding under the
         Corporation's original $535 million bank facility (which was cancelled
         upon repayment) and repay an amount of $53.7 million due to Shell
         Canada Limited (representing the acquisition cost of the Corporation's
         interest in the Oil Sands Project lease plus accumulated interest),
         with the balance of the proceeds used to fund the Corporation's share
         of remaining construction costs for the Oil Sands Project. The Senior
         Secured Notes provide the holders with security over all the assets of
         the Corporation, subordinated to the Senior Credit Facility, until the
         Corporation achieves an investment grade corporate credit rating, at
         which time the Senior Secured Notes become unsecured. Upon completion
         of the offering, $22.8 million of issue costs and charges relating to
         non-continuing debt facilities were written off.

         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 totaling $129.3 million was recognized during the
         year as a result of changes in the foreign exchange rate between the US
         and Canadian dollars. Of this gain $94.0 million was capitalized as it
         occurred prior to commercial operations and the balance of $35.3
         million was recognized in the Statement of Operations and Deficit.

(b)      In conjunction with the Offering, the Corporation established a new
         $100 million Senior Credit Facility (the "Senior Credit Facility") with
         a syndicate of Canadian chartered banks, up to $75 million of which was
         to be used to fund the first year's debt service under the Offering and
         construction completion costs; the remaining $25 million was to be used
         for working capital and letter of credit requirements. Borrowings under
         the facility bear interest at the lenders' prime lending rate, the
         bankers' acceptance rate or the LIBOR rate plus applicable margins
         ranging from 100 to 200 basis points. The Senior Credit Facility
         matures and is repayable on April 23, 2005. The Senior Credit Facility
         contains certain covenants and other provisions, which restrict the
         Corporation's ability to incur additional indebtedness, pay dividends
         or make distributions of any kind, undertake an expansion of the Oil
         Sands Project, dispose of its interest in the oil sands project, or
         change the nature of its business. The Senior Credit Facility provides
         the banks with security over all of the assets of the Corporation, with
         the exception of certain intercompany notes and note guarantees issued
         in connection with the Offering detailed in Note 7(a). At December 31,
         2003, an amount of $91 million ($45 million - 2002) had been drawn
         under this Senior Credit Facility and letters of credit for $7.1
         million ($15.4 million - 2002) had been issued.

(c)      On November 19, 2002, the Corporation established a $50 million 364-day
         Extendible Revolving Credit Facility (the "Revolving Facility") with a
         syndicate of Canadian chartered banks. On January 30, 2003 the
         Corporation increased the availability under the Revolving Facility
         with the addition of another Canadian chartered bank to the syndicate
         by $25 million to a total of $75 million. On May 1, 2003 the
         Corporation further increased the availability with the existing
         lenders by $35 million to a total of $110 million. Borrowings under the
         Revolving Facility bore interest at the lenders' prime lending rate,
         the bankers' acceptance rate or the LIBOR rate plus


                                       10
<PAGE>

         applicable margins ranging from 100 to 200 basis points. The Revolving
         Facility provided 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 Offering detailed in Note 7(a). The
         Revolving Facility contained a two-year term-out provision should the
         facility not be renewed.

         On October 16, 2003 the Corporation established a new Revolving Credit
         Facility ("Revolving Credit Facility") in the amount of $240 million,
         $15 million of which is available only for letter of credit
         requirements. This new Revolving Credit Facility refinanced the
         Corporation's Convertible Notes and the existing Revolving Facility,
         and provided additional working capital availability. The new Revolving
         Credit Facility has the same terms and conditions as described in the
         above paragraph for the Revolving Facility and in addition established
         certain financial covenants including a limit on the amount available
         for drawdown. At December 31, 2003 the limit available for drawdown was
         $215 million, of which $188 million ($20 million - 2002) had been
         drawn. In addition letters of credit for $0.5 million (nil - 2002) had
         been issued.


         8.       OBLIGATIONS UNDER CAPITAL LEASE


                                                           2003            2002
--------------------------------------------------------------------------------

Obligations Under Capital Lease                     $    52,950     $    50,859
Less:  Current Portion                                   (1,340)             --
--------------------------------------------------------------------------------
                                                    $    51,610     $    50,859
================================================================================

The capital lease obligation relates to the Corporation's share of capital costs
for the hydrogen-manufacturing unit within the Oil Sands Project. Repayment of
the principal obligation is scheduled to be $1.3 million in 2004 and thereafter
until fully repaid.


         9.       OTHER LONG-TERM LIABILITIES


                                                           2003            2002
-------------------------------------------------------------------------------

Operating Lease Guarantee Obligation                $     2,583    $         --
Asset Retirement Obligation                               7,137              --
-------------------------------------------------------------------------------
                                                    $     9,720    $         --
================================================================================

Under the Mobile Equipment Lease, described in note 17(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.

The Corporation, in association with its 20 per cent working interest in the Oil
Sands Project, is also responsible for its share of future dismantlement costs
and site restoration costs in the mining, extracting and upgrading activities.
The Corporation currently estimates that the total undiscounted amount of its
share of these costs to be approximately $37.3 million, with the majority of
that amount to be paid at the end of the current reserves for the Project. The
Corporation has assumed a credit adjusted risk free rate of 7.0 percent,
resulting in the Corporation recognizing a Capital Asset and a long-term
liability of $6.7 million at January 1, 2003. Accretion expense of $0.5 million
has been recognized during 2003 on the


                                       11
<PAGE>

long-term liability and the amount included in Capital Assets has been depleted
in accordance with the Capital Assets policy. During the year the Corporation
incurred $0.1 million of restoration costs in respect of this liability.


         10.      INTEREST EXPENSE


                                                        2003              2002
--------------------------------------------------------------------------------
Interest on Long-term Debt                     $      60,522        $   48,126
Capitalized Interest in Oil Sands Project            (23,479)          (48,126)
--------------------------------------------------------------------------------
Interest Expense, Net                                 37,043                --
Interest on Obligations Under Capital Lease            1,386                --
--------------------------------------------------------------------------------
                                               $      38,429        $       --
================================================================================

It is the Corporation's policy to capitalize carrying costs including interest
expense for capital assets acquired, constructed or developed over time. As at
December 31, 2003, $87.1 million of net interest expense (December 31, 2002 -
$63.6 million) had been capitalized as part of the cost of the Oil Sands
Project, representing the interest expense from inception to June 1, 2003 the
date the Corporation commenced commercial operations.

On a cash basis interest paid for the year ended December 31, 2003 was $63.8
million (December 31, 2002 - $40.6 million). Cash interest received for the year
ended December 31, 2003 was $0.2 million (December 31, 2002 - $2.3 million).

         11.      INCOME TAXES

                                                         2003              2002
--------------------------------------------------------------------------------
Large Corporations Tax                         $        3,079     $       2,905
Future Income Tax                                      (4,330)          (22,551)
--------------------------------------------------------------------------------
INCOME TAX RECOVERY                            $       (1,251)    $     (19,646)
================================================================================

Cash taxes paid during the year ended December 31, 2003 were $4.5 million
(December 31, 2002 - $2.4 million) and related solely to Large Corporations Tax.


                                       12
<PAGE>

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

                                                       2003              2002
--------------------------------------------------------------------------------
Future Income Tax Assets
   Net Losses Carried Forward                  $     49,682       $    19,069
   Share Issue Costs                                  1,723             2,096
   Debt Issue Costs                                      --             1,386
Future Income Tax Liabilities
   Capital Assets in Excess of Tax Values           (38,860)          (23,005)
   Unrealized Foreign Exchange Gain                  (6,209)               --
   Debt Issue Costs                                     (29)               --
--------------------------------------------------------------------------------
NET FUTURE INCOME TAX ASSET (LIABILITY)        $      6,307       $      (454)
================================================================================

  The following table reconciles income taxes calculated at the Canadian
  statutory rate of 41.12% (2002 - 42.12%) with actual income taxes:

                                                         2003              2002
--------------------------------------------------------------------------------
Net Earnings (Loss) Before Income Taxes         $      15,882    $      (28,649)

Income Tax Expense (Recovery) at Statutory Rate         6,531           (12,067)
Effect of Tax Rate Changes                              1,851                --
Non-Taxable Portion of Foreign Exchange Gain           (8,298)               --
Resource Allowance                                     (4,414)               --
Recognition of Losses Brought Forward                      --           (10,484)
Large Corporations Tax                                  3,079             2,905
--------------------------------------------------------------------------------
INCOME TAX RECOVERY                             $      (1,251)   $      (19,646)
================================================================================

At December 31, 2003, the Corporation had approximately $1.5 billion of tax
pools available. Included in the tax pools are $129.3 million of tax loss carry
forward balances as evaluated at December 31, 2003, with expiry dates as
follows:

          YEAR CREATED                    AMOUNT                EXPIRY
     ------------------------------------------------------------------------
              1999                  $    1.2 million             2006
              2000                  $   11.7 million             2007
              2001                  $    8.8 million             2008
              2002                  $   24.7 million             2009
              2003                  $   82.9 million             2010
     ------------------------------------------------------------------------


                                       13
<PAGE>

         12.     SHARE CAPITAL

(a)      AUTHORIZED

         The Corporation is authorized to issue an unlimited number of Class A
         shares ("Common Shares"), an unlimited number of non-voting Convertible
         Class B Equity Shares ("Class B Shares"), an unlimited number of
         non-voting Class C Preferred Shares and an unlimited number of Class D
         Preferred Shares, issuable in series.

         The Common Shares are without nominal or par value. The Class B Shares
         were convertible into Common Shares upon successful completion of a
         public offering or certain other events, but with no additional
         consideration owing to the Corporation. There have been no Class C
         Preferred Shares issued. The Class D Preferred Shares, Series A, which
         have been issued, are convertible into Common Shares at the holders'
         options prior to redemption on a one for one basis.

(b)      ISSUED AND OUTSTANDING
                                                       NUMBER
COMMON SHARES                                       OF SHARES          AMOUNT
===============================================================================
Balance at December 31, 2001                       47,513,971      $  435,340
-------------------------------------------------------------------------------
Issued for cash                                       228,500           1,977
Renunciation of Flow-through Shares (1)                    --         (23,005)
-------------------------------------------------------------------------------
Balance at December 31, 2002                       47,742,471         414,312
Issued for Cash                                     2,050,000          50,225
Issued on Exercise of Employee Stock Options          163,800           1,457
Share Issue Costs, Net of Tax                              --          (1,290)
-------------------------------------------------------------------------------
Balance at December 31, 2003                       49,956,271         464,704


CLASS D PREFERRED SHARES

Balance at December 31, 2002 and 2003               666,667        $    11,963
--------------------------------------------------------------------------------
TOTAL SHARE CAPITAL                              50,622,938        $   476,667
================================================================================

(1)      In accordance with certain provisions of the Income Tax Act, Canadian
         exploration expenses or Canadian development expenses related to
         expenditures of the subscribed funds for shares issued on a
         flow-through basis are transferred to the shareholders. Effective
         December 31, 2002, all the expenditures related to these shares had
         been renounced and the tax deductions were transferred to the
         shareholders. Accordingly, a future income tax liability is created and
         share capital is reduced by the tax effect of the renounced
         expenditures.

(c)      NET EARNINGS (LOSS) PER SHARE

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

<TABLE>
<CAPTION>
                                                                                 2003           2002
         -----------------------------------------------------------------------------------------------
<S>                                                                            <C>           <C>
         Weighted Average Common Shares Outstanding - Basic                    50,344,332    48,330,320
         Effect of Stock Options and Warrants                                     965,308            --
         -----------------------------------------------------------------------------------------------
         WEIGHTED AVERAGE COMMON SHARES OUTSTANDING - DILUTED                  51,309,640    48,330,320
         ===============================================================================================
</TABLE>

         Due to a loss for the twelve months ended December 31, 2002 zero
         incremental shares are included in the 2002 diluted weighted average
         common shares outstanding.


                                       14
<PAGE>

(d)      CLASS D PREFERRED SHARES

         The Corporation has 666,667 Class D Preferred Shares, Series A
         outstanding. The Class D Preferred Shares, Series A, can be converted
         into Common Shares at the holders' option prior to redemption on a one
         for one basis. If not previously converted, they are redeemable at the
         option of the Corporation at any time at a price equal to their issue
         price, plus a cumulative dividend of 12 percent per year compounded
         semi-annually until January 1, 2007, from which date the dividend
         increases by 3 percent per quarter to a maximum of 24 percent per year.
         Cash dividends are not paid on the Class D Preferred Shares.

(e)      CALL OBLIGATIONS

         The Corporation entered into call obligation agreements with certain
         shareholders, which obligated the holders of the obligations to
         purchase up to 3,040,000 Class B Shares for $5.00 per share. The
         Corporation was entitled to require the subscriber to exercise their
         call obligations at its discretion upon the satisfaction of certain
         conditions. These call obligations were to have expired on December 31,
         2001, but were extended until March 31, 2003 at which time they expired
         unexercised. An additional 2,589,641 call obligations were entered into
         in July 2001, whereby each call obligation is exercisable into one
         Class B Share and one warrant to purchase a Class B Share upon the
         payment of $13.00 per call obligation. These call obligations were
         exercisable until March 31, 2003 and the underlying warrant was
         exercisable at the then market price for a period of four years after
         the call obligation exercise. These obligations expired unexercised.

(f)      WARRANTS

         The Corporation has 494,224 Class A Warrants outstanding. Each Class A
         Warrant entitles the holder to purchase one Common Share at $2.50 per
         share until five years after start-up of the Oil Sands Project.

(g)      ISSUANCES

         On February 7, 2003, the Corporation completed a public offering for
         the issuance of 2,050,000 Common Shares for aggregate proceeds of $50.2
         million, before consideration of share issue costs of $2.2 million
         ($1.3 million net of tax). The offering was underwritten by a syndicate
         of Canadian underwriters and undertaken through the filing of a short
         form prospectus. Proceeds of the offering were used to pay down certain
         amounts that had been drawn on the bank debt and to fund capital
         expenditures.


                                       15
<PAGE>


         13.      STOCK OPTIONS

(a)      STOCK OPTION PLAN

         The Corporation has established a Stock Option Plan for the issuance of
         options to purchase Common Shares to directors, officers and employees
         of the Corporation and its subsidiaries. Options granted under the
         Stock Option Plan generally vest on an annual basis over four years.
         The stock options expire five years from each vesting date.

<TABLE>
<CAPTION>
                                                              2003                           2002
         -----------------------------------------------------------------------------------------------------
                                                                    Weighted                      Weighted
                                                   Number of        Average       Number of       Average
                                                    Options      Exercise Price    Options     Exercise Price
          -----------------------------------------------------------------------------------------------------
<S>                                                 <C>            <C>             <C>            <C>
           Outstanding at Beginning of Year         1,329,500      $    14.40      1,238,000      $   9.52
           Granted                                    233,000           25.72        429,000         23.91
           Exercised                                 (163,800)           8.90       (228,500)         8.64
           Cancelled                                  (54,000)           9.13       (109,000)         8.50
          -----------------------------------------------------------------------------------------------------
           Outstanding at End of Year               1,344,700      $    17.25      1,329,500      $  14.40
          -----------------------------------------------------------------------------------------------------
           Exercisable at End of Year                 660,700      $    11.46        550,000      $   9.02
          -----------------------------------------------------------------------------------------------------
</TABLE>

         The following table summarizes Stock Options outstanding and
         exercisable under the Stock Option Plan at December 31, 2003:

<TABLE>
<CAPTION>
                                              Options Outstanding                   Options Exercisable
                                  -------------------------------------------------------------------------
                                                   Weighted          Weighted                      Weighted
                                                    Average           Average                        Average
          Exercise Price              Number      Remaining          Exercise      Number of       Exercise
                                   of Options          Life             Price        Options          Price
          -------------------------------------------------------------------------------------------------
                                                    (months)
<S>                                 <C>           <C>                <C>           <C>           <C>
            $ 8.50 - $12.00           504,100          44.8              8.57        486,600     $     8.55
            $12.01 - $16.00           178,600          63.7             14.66         81,850          14.70
            $20.01 - $24.00           411,500          69.1             23.85         87,875          23.82
            $24.01 - $28.00           200,500          80.3             25.07          4,375          25.43
            $28.01 - $32.00            50,000          90.0             28.22             --             --
          -------------------------------------------------------------------------------------------------
                                    1,344,700          61.7             17.25        660,700     $    11.46
          -------------------------------------------------------------------------------------------------
</TABLE>

     The number of Common Shares reserved for issuance under the Stock Option
     Plan was 2,607,700 at December 31, 2003 (3,000,000 at December 31, 2002).


                                       16
<PAGE>


(b)      STOCK-BASED COMPENSATION

         During 2003 the Corporation recognized $0.3 million (nil - 2002) in
         compensation expense related to stock-based compensation issued during
         2003. This is the portion of stock based compensation that is related
         to 2003 employee services rendered. The weighted average fair value of
         the 233,000 options granted during 2003 was $9.08 using the
         Black-Scholes option pricing model. In 2002 there were 429,000 options
         granted at a weighted average fair value of $8.39, however in
         accordance with CICA 3870 no compensation expense has been recognized.
         The following table sets out the assumptions used in applying the
         Black-Scholes model:

                                                            2003         2002
         --------------------------------------------------------------------
         Risk free interest rate, average for year          4.54%        4.55%
         Expected life (in years)                           5.00         5.00
         Expected volatility                                0.30         0.30
         Dividend per share                                   --           --
         --------------------------------------------------------------------

No compensation expense has been recognized for stock options granted before
January 1, 2003, in accordance with Note 1(j). Had compensation expense been
determined based on the fair value method for awards made after December 31,
2001 but before January 1, 2003, the Company's net earnings (loss) attributable
to common shareholders and earnings (loss) per share would have been adjusted to
the proforma amounts indicated below:

<TABLE>
<CAPTION>
                                                                                              2003           2002
      ------------------------------------------------------------------------------------------------------------
<S>                                                                                    <C>             <C>
      Net Earnings (Loss) Attributable to Common Shareholders - As Reported            $    15,003     $  (10,286)
      Compensation Expense                                                                   1,177            703
      ------------------------------------------------------------------------------------------------------------
      Net Earnings (Loss) Attributable to Common Shareholders - Proforma               $    13,826     $  (10,989)
      ============================================================================================================
      Basic Earnings (Loss) Per Share:
        As Reported                                                                     $     0.30     $    (0.21)
        Proforma                                                                        $     0.27     $    (0.23)
      Diluted Earnings (Loss) Per Share:
        As Reported                                                                     $     0.29     $    (0.21)
        Proforma                                                                        $     0.27     $    (0.23)
      ============================================================================================================
</TABLE>

         14.      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 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
<PAGE>


         15.      EMPLOYEE FUTURE BENEFITS

The Corporation has a defined contribution pension plan for its direct employees
and as a result of the 20 percent ownership in the Oil Sands Project has a
defined benefit pension plan for employees of the Oil Sands Project. All of the
information pertaining to the defined benefit pension plan in this note
represents the Corporation's 20 percent ownership in the Oil Sands Project.

The total expense for the year ended December 31, 2003 for the Corporation's
defined contribution plan was $0.2 million (December 31, 2002 - $0.09 million).

Information for the defined benefit pension plan is as follows:

                                                                         2003
-----------------------------------------------------------------------------
Accrued Benefit Obligation, Beginning of Year                         $    --
     Current Service Cost                                                 824
     Interest Cost                                                         88
     Other                                                                200
     Benefits Paid                                                        (28)
-----------------------------------------------------------------------------
Accrued Benefit Obligation, End of Year                               $ 1,084
=============================================================================

Fair Value of Plan Assets, Beginning of Year                          $    --
     Employer Contributions                                             1,078
     Actual Return on Plan Assets                                          81
     Benefits Paid                                                        (28)
-----------------------------------------------------------------------------
Fair Value of Plan Assets, End of Year                                $ 1,131
=============================================================================

Funded Status - Plan Surplus                                          $    47
Other                                                                     165
-----------------------------------------------------------------------------
Accrued Benefit Asset                                                 $   212
=============================================================================

Components of Expense
     Current Service Cost                                             $   824
     Interest Cost                                                         88
     Expected Return on Plan Assets                                       (70)
     Other                                                                  8
-----------------------------------------------------------------------------
Net Expense                                                           $   850
=============================================================================

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

                                                                        2003
----------------------------------------------------------------------------
Discount Rate                                                           6.50%
Expected Long-term Rate of Return on Plan Assets                        7.00%
Rate of Compensation Increase                                           4.25%
----------------------------------------------------------------------------


                                      18
<PAGE>


         16.      FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

The Corporation's financial instruments that are included in the Consolidated
Balance Sheets are comprised of cash, accounts receivable, accounts payable and
accrued liabilities, long-term borrowings and the Convertible Notes.

(a)      COMMODITY PRICE RISK

         The Corporation has entered into various commodity pricing agreements
         designed to mitigate the exposure to the volatility of future crude
         oil prices. As at December 31, 2003 the agreements are summarized as
         follows:

<TABLE>
<CAPTION>
                                                                           Average
                          Notional Volume                                Swap Price    Unrealized Increase (Decrease)
         Instrument          (bbls/d)            Hedge Period              ($/bbl)       To Future Revenue (Cdn $)
         ------------------------------------------------------------------------------------------------------------
<S>                       <C>               <C>                           <C>           <C>
         WTI Swaps            20,000              Fiscal 2004             US$27.37          $     (25,955)
         WTI Swaps            16,000         January to March 2005        US$26.17                 (3,221)
         WTI Swaps             7,000        April to December 2005        US$26.87                   (850)
         ------------------------------------------------------------------------------------------------------------
                                                                                            $     (30,026)
         ============================================================================================================
</TABLE>

(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 has in place credit practices
         that limit transactions to counterparties of minimum investment grade
         quality.

         The Corporation's crude oil swap agreements are all with major
         financial institutions in Canada.

(c)      INTEREST RATE RISK

         At December 31, 2003, the increase or decrease in net earnings for
         each one percent change in the interest rates on floating debt
         amounts to $2.8 million. At December 31, 2002, there would be no
         increase or decrease in net earnings from a one percent change in the
         interest rates on floating rate debt as all interest had been
         capitalized as part of the cost of the Oil Sands Project.

(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. At December 31, 2003,
         the Corporation has revenue and expenses transacted in US dollars,
         and has US dollar denominated Senior Secured Notes, as described in
         Note 7(a). At December 31, 2002, the Corporation's only significant
         exposure to these foreign exchange risks was in connection with its
         Senior Secured Notes.



                                      19
<PAGE>

(e)     FAIR VALUES OF FINANCIAL ASSETS AND LIABILITIES

         The fair values of financial instruments that are included in the
         Consolidated Balance Sheet, other than long-term borrowings,
         approximate their carrying amount due to the relatively short period
         to maturity of these instruments.

         The estimated fair values of long-term borrowings have been
         determined based upon market prices at December 31, 2003 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>
                                                        2003                               2002
=============================================================================================================
                                           Balance Sheet                       Balance Sheet
                                              Amount          Fair Value          Amount          Fair Value
-------------------------------------------------------------------------------------------------------------
<S>                                          <C>             <C>                 <C>                <C>
Floating rate debt:
      Revolving  credit  and term  loan      $ 279,000       $    279,000        $   65,000         $  65,000
      borrowings
      Other long-term liabilities               62,670             62,670            50,859            50,859
Fixed rate debt:
      US Senior Secured Notes                   581,580           661,547           710,820           700,158
-------------------------------------------------------------------------------------------------------------
Long-term borrowings                        $  923,250       $  1,003,217        $  826,679         $ 816,017
-------------------------------------------------------------------------------------------------------------
</TABLE>

         17.      COMMITMENTS AND CONTINGENCIES

a)       COMMITMENTS

         The Corporation has executed long-term third party agreements to
         provide for pipeline transportation of bitumen and upgraded products,
         electrical and thermal energy, production and supply of hydrogen and
         transportation of natural gas. Under the terms of certain of these
         agreements, the Corporation is committed to pay for these utilities
         and services on a long-term basis, regardless of the extent that such
         services and utilities are actually used. If due to project delay,
         suspension, shut down or other reason, the Corporation fails to meet
         its commitment under these agreements, the Corporation may incur
         substantial costs and may, in some circumstances, be obligated to
         purchase the facilities constructed by the third parties for a
         purchase price in excess of the fair market value of the facilities.
         The Corporation has also entered into long-term third party
         agreements to purchase certain feedstocks on a `take or pay' basis.

         The Corporation and the other owners of the oil sands Joint Venture
         have entered into long-term operating lease obligations for certain
         equipment related to the Oil Sands Project. The term of the lease
         obligations is between three and seven years. The Corporation
         anticipates its share of the final value of the leased equipment will
         total between $40 to $60 million. A guarantee has been provided to
         the lessor in order to secure attractive leasing terms and is payable
         when the equipment is returned to the lessor. At December 31, 2003,
         the Corporation's share of the maximum payable under the guarantee
         was $41.1 million. However, any proceeds received from the sale of
         the equipment would be used to offset against the payment required
         under the guarantee. At December 31, 2003, the Corporation's share of
         committed lease payments amounted to $50.8 million. The estimate of
         lease interest obligations, excluding any committed payments, is $2.0
         million per year for each of 2004 through 2006, $1.9 million for 2007
         and $1.8 million for 2008.



                                      20
<PAGE>

The following table summarizes the Corporation's operating commitments at
December 31, 2003:

<TABLE>
<CAPTION>
                              FEEDSTOCKS AND         ELECTRICAL AND        MOBILE EQUIPMENT
                              TRANSPORTATION         THERMAL ENERGY              LEASE                 TOTAL
         -----------------------------------------------------------------------------------------------------
<S>                            <C>                     <C>                  <C>                 <C>
         2004                  $   71,581              $  21,102            $     2,380         $     95,063
         2005                      72,837                 21,105                  5,960               99,903
         2006                      81,180                 20,696                  2,940              104,815
         2007                      81,482                 20,928                  3,340              105,750
         2008                      16,800                 21,252                  9,800               47,852
         Thereafter               305,600                307,709                 26,340              639,949
         -----------------------------------------------------------------------------------------------------
         Total                 $  629,480              $ 412,792            $    50,760         $  1,093,051
         -----------------------------------------------------------------------------------------------------
</TABLE>

b)       CONTINGENCIES

         During the year the Corporation has submitted claims, under the
         insurance coverage provided in our Joint Venture construction
         policies, in respect of the fire that occurred in January 2003 at the
         Muskeg River Mine extraction plant. The Corporation has extensive
         insurance coverage in place and is seeking to recover these costs
         from insurers. Claims for $125 million ($25 million for the
         Corporation's share) have been submitted and a total of $9.7 million
         received by the Corporation as of December 31, 2003 for property
         damages. The Joint Venture has also filed a $500 million claim ($100
         million for the Corporation's share) in respect of loss of profits
         due to production delays from the fire.

         The Corporation has filed a Statement of Claim, against the parties
         involved in placing and issuing the cost overrun and start up delay
         insurance policy, in an amount exceeding $200 million. Aggravated and
         punitive damages totaling $650 million have also been claimed against
         the insurers. The Statement of Claim will only be served on the
         insurers and pursued in the courts in the event that resolution
         procedures cannot otherwise be agreed to on a timely basis.
         Arbitration proceedings under the terms of the insurance policy have
         been initiated to resolve the disputes with insurers surrounding
         these claims for payment.

         No amounts, other than those collected at December 31, 2003, have
         been recognized in these statements relating to these insurance
         policies nor will an amount be recognized until the proceeds are
         received.


         18.      NET CHANGE IN NON-CASH WORKING CAPITAL


SOURCE/(USE)                                                 2003        2002
-----------------------------------------------------------------------------
Operating Activities
     Accounts Receivable                                 $(53,309)   $ (4,071)
     Inventory                                             (4,925)     (4,175)
     Prepaid Expenses                                      (7,033)         --
     Accounts Payable and Accrued Liabilities              58,134         281
                                                         --------------------
                                                         $ (7,133)   $ (7,965)
                                                         --------------------
Investing Activities
     Accounts Receivable                                 $  1,939    $  4,675
     Accounts Payable and Accrued Liabilities             (33,138)    (10,550)
                                                         --------------------
                                                         $(31,199)   $ (5,875)
=============================================================================


                                      21
<PAGE>

         19.      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) which, in most respect, conform to accounting principles
generally accepted in the United States (US GAAP). Canadian GAAP differs from
US GAAP in the following respects:

RECONCILIATION OF NET EARNINGS (LOSS) UNDER CANADIAN GAAP TO US GAAP

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31
                                                                         -------------------------------------
                                                                 NOTE             2003                 2002
                                                                         --------------------------------------
<S>                                                              <C>       <C>                  <C>
Net Earnings (Loss) - Canadian GAAP                                        $    17,133          $    (9,003)
   Impact of US GAAP
   Pre-Operating Items and Borrowing Costs                        iv            17,716               (4,669)
   Loss on Derivative Financial Instruments                        v            (1,348)                 (39)
   Interest on Convertible Notes                                  vii           (3,640)                 163
   Pre-Feasibility Costs                                         viii             (923)                   -
   Deferred Income Tax                                            iii           22,174              (19,929)
                                                                         --------------------------------------
Net Earnings (Loss) - US GAAP                                                $  51,112           $  (33,477)
                                                                         ======================================

Net Earnings (Loss) Per Share - US GAAP
   Basic                                                                   $      1.02        $      (0.69)
                                                                         --------------------------------------
   Diluted                                                                 $      1.00        $      (0.69)
                                                                         --------------------------------------

<CAPTION>
CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME
                                                                               YEAR ENDED DECEMBER 31
                                                                         --------------------------------------
                                                                                  2003                  2002
                                                                         --------------------------------------
<S>                                                                       <C>                <C>
Net Earnings (Loss) - US GAAP                                             $     51,112       $       (33,477)
Change in Realized and Unrealized Losses                           v           (15,666)               (1,483)
                                                                         --------------------------------------
Other Comprehensive Income                                                $     35,446       $       (34,960)
                                                                         ======================================
</TABLE>



                                      22
<PAGE>

<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS - US GAAP
                                                                                YEAR ENDED DECEMBER 31
                                                                         --------------------------------------
                                                                  NOTE             2003                 2002
                                                                         --------------------------------------
<S>                                                               <C>     <C>                  <C>
Cash Provided By (Used In)
Operating Activities - Canadian GAAP                                      $      (1,330)       $     (16,568)
   Pre-Operating Items and Borrowing Costs                         iv          (102,676)              (4,669)
   Interest on Convertible Notes                                   vii           (3,640)                 163
   Pre-Feasibility Costs                                          viii             (923)                   -
                                                                         --------------------------------------
Operating Activities - US GAAP                                                 (108,569)             (21,074)
                                                                         --------------------------------------
Financing Activities - Canadian GAAP                                            170,344              511,439
   Interest on Convertible Notes                                   vii            3,640                1,283
                                                                         --------------------------------------
Financing Activities - US GAAP                                                  173,984              512,722
                                                                         --------------------------------------
Investing Activities - Canadian GAAP                                           (179,672)            (533,416)
   Pre-Operating Items and Borrowing Costs                         iv           102,676                4,669
   Interest on Convertible Notes                                   vii                -               (1,446)
   Pre-Feasibility Costs                                          viii              923                    -
                                                                         --------------------------------------
Investing Activities - US GAAP                                                  (76,073)            (530,193)
                                                                         --------------------------------------
Decrease in Cash                                                          $     (10,658)       $     (38,545)
                                                                         ======================================

<CAPTION>
CONSOLIDATED BALANCE SHEET
                                                                          AS AT DECEMBER 31
                                                  ------------------------------------------------------------------
                                                               2003                              2002
                                                  --------------------------------------------------- --------------
                                        NOTE         AS REPORTED          US GAAP        AS REPORTED         US GAAP
                                        ----         -----------          -------        -----------         -------
<S>                                  <C>            <C>              <C>                <C>             <C>
ASSETS
Current Assets                                      $     77,897     $     77,897       $     25,227    $     25,227
Capital Assets                       iv,vii,viii       1,353,317        1,358,201          1,306,989       1,293,987
Deferred Charges                         iv               20,903           19,810             27,422          27,422
Future Income Taxes                     iii                6,307           37,837                 --              --
                                                  ------------------------------------------------------------------
                                                    $  1,458,424     $  1,493,745       $  1,359,638    $  1,346,636
                                                  ==================================================================

LIABILITIES
Current Liabilities                                 $     67,289     $     67,289       $     45,008    $    128,953
Financial Liabilities                    v                    --           30,026                 --           2,600
Long-term Debt                                           860,580          860,580            775,820         775,820
Obligations Under Capital Lease                           51,610           51,610             50,859          50,859
Other Long-term Liabilities                                9,720            9,720                 --              --
Future Income Taxes                     iii                   --               --                454              --
                                                  ------------------------------------------------------------------
                                                         989,199        1,019,225            872,141         958,580
SHAREHOLDERS' EQUITY
Share Capital                            ix              476,667          495,972            426,275         445,580
Contributed Surplus                                          278              278                 --              --
Convertible Notes                       vii                   --               --             83,945              --
Deficit                              iv,v,viii,ix         (7,720)          (4,581)           (22,723)        (55,693)
Accumulated Other                        v
  Comprehensive Income                                        --          (17,149)                --          (1,483)
                                                  ------------------------------------------------------------------
                                                    $  1,458,424     $  1,493,745         $1,359,638    $  1,346,636
                                                  ==================================================================
</TABLE>


                                      23
<PAGE>

i.       STOCK BASED COMPENSATION

The Corporation accounts for its stock-based compensation plans under CICA 3870,
under which no compensation expense was recognized in the consolidated financial
statements for stock options granted between January 1, 2002 to December 31,
2002. If compensation expense had been recorded in accordance with Statement of
Financial Accounting Standard ("FAS") No. 123, the Corporation's net earnings
(loss) and net earnings (loss) per share would approximate the following pro
forma amounts:

                                                   YEAR ENDED DECEMBER 31
                                                 --------------------------
                                                        2003           2002
                                                 --------------------------
Compensation Expense                              $    1,177     $      703
Net Earnings (Loss):
  As Reported - US GAAP                               51,112        (33,477)
                                                 --------------------------
  Pro Forma                                       $   49,935     $  (34,180)
                                                 ==========================
Basic Earnings (Loss) Per Share:
  As Reported - US GAAP                           $    1.02      $   (0.69)
  Pro Forma                                       $    0.99      $   (0.71)
Diluted Earnings (Loss) per Share:
  As Reported - US GAAP                           $    1.00      $   (0.69)
  Pro Forma                                       $    0.97      $   (0.71)
                                                 ==========================

The fair value of each option granted is estimated on the date of grant using
the Black-Scholes pricing model with weighted average assumptions for grants as
follows:

                                                     YEAR ENDED DECEMBER 31
                                                   --------------------------
                                                       2003          2002
                                                   --------------------------
Risk Free Interest Rate, Average for Year              4.54%         4.55%
Expected Life (In Years)                               5.00          5.00
Expected Volatility                                    0.30          0.30
Dividend Per Share                                       --            --


         ii.      RECENT ACCOUNTING PRONOUNCEMENTS

A.       FASB Interpretation 46 Consolidation of Variable Indirect Entities

         In February 2003, FASB issued FASB Interpretation 46, to be effective
         for the first interim or annual reporting period beginning after June
         14, 2003. The standard mandates that certain special-purpose entities
         be consolidated by their primary beneficiary. The Corporation does not
         expect that the adoption of this pronouncement will have an impact on
         its financial statements.

B.       Hedge Accounting

         The CICA issued Accounting Guideline 13 "Hedging Relationships",
         effective for fiscal years beginning on or after July 1, 2003. The
         guideline establishes certain conditions when hedge accounting may be
         applied, but does not specify hedge accounting methods. The Corporation
         does not expect that the adoption of this pronouncement will have an
         impact on its financial statements.


                                      24
<PAGE>


C.       FAS 143 Accounting for Asset Retirement Obligations

         FASB issued FAS 143, effective for fiscal years beginning after June
         15, 2002. FAS 143 applies to legal obligations associated with the
         retirement of a tangible long-lived asset that result from the
         acquisition, construction, development and/or the normal operation of a
         long-lived asset, except for certain obligations of lessees. The
         Corporation adopted CICA 3110 "Asset Retirement Obligations" during the
         year, and the impact is reflected in Corporation's consolidated
         financial statements as described in Note 1(h) and Note 9.

iii.     INCOME TAXES

Under US GAAP, the net deferred income tax liability as at December 31, 2003 and
2002 consists of:

                                                       YEAR ENDED DECEMBER 31
                                                      -------------------------
                                                             2003         2002
-------------------------------------------------------------------------------
Future Income Tax Assets
  Net Losses Carried Forward                           $   49,682    $  19,069
  Share Issue Costs                                         1,723        2,096
  Debt Issue Costs                                             --        1,386
  Financial Liabilities in Excess of Tax Values            12,046        1,078
Future Income Tax Liabilities
  Capital Assets in Excess of Tax Values                   (3,188)     (23,584)
  Unrealized Foreign Exchange Gain                        (22,397)          --
  Debt Issue Costs                                            (29)          --
Less: Valuation Allowance                                      --          (45)
--------------------------------------------------------------------------------
NET FUTURE INCOME TAX LIABILITY - US GAAP              $   37,837           --
================================================================================

The following table reconciles income taxes calculated at the Canadian statutory
rate of 41.12% (2002 - 42.12%) with actual income taxes:

                                                        YEAR ENDED DECEMBER 31
                                                      -------------------------
                                                            2003          2002
-------------------------------------------------------------------------------
Loss Before Income Taxes - Canadian GAAP              $   15,882    $  (28,649)
US GAAP Adjustments                                       11,805        (4,545)
-------------------------------------------------------------------------------
Loss Before Income Taxes - US GAAP                        27,687       (33,194)
-------------------------------------------------------------------------------

Expected Income Tax                                       11,385       (13,981)
Effect of Tax Rate Changes                                   665            --
Non-Taxable Portion of Foreign Exchange Gain             (30,397)           --
Resource Allowance                                        (4,414)           --
Loss on Derivative Financial Instruments                    (556)           --
Tax Values in Excess of Book Capital Assets               (1,677)           --
Interest on Convertible Notes                             (1,510)           --
Recognition of Losses Brought Forward                         --        (7,946)
Large Corporations Tax                                     3,079         2,905
Renunciation of Deductions for Flow-Through Shares            --        19,305
-------------------------------------------------------------------------------
INCOME TAX EXPENSE - US GAAP                          $  (23,425)   $      283
===============================================================================


                                      25
<PAGE>

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

Under Canadian GAAP, the Corporation is deemed to have ended its pre-operating
period upon commencement of commercial production, which occurred on June 1,
2003. Until that time, revenues, training and start-up costs, interest and
foreign exchange gains associated with the Project during the pre-operating
period were deferred and capitalized as part of the Project. Under US GAAP, the
Corporation is deemed to have ended its pre-operating period upon mechanical
completion of the Project, which occurred on December 1, 2002, such that these
pre-operating items are expensed thereafter. Consistent with the December 1,
2002 end of the pre-operating period depreciation, depletion and amortization of
the Corporation's Capital Assets and Deferred Charges should have also
commenced.

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 illustrates each of these differences:

                                                       YEAR ENDED DECEMBER 31
                                                     --------------------------
                                                          2003           2002
                                                     --------------------------
Pre-Operating Items:
  Revenues                                            $   29,653     $       --
  Feedstocks and Operating Expenses                      (79,197)        (1,374)
  Interest Expense                                       (23,479)        (3,295)
  Depreciation, Depletion and Amortization                (3,221)            --
  Foreign Exchange Gains                                  93,960             --
-------------------------------------------------------------------------------
  Impact on Net Earnings (Loss) Before Income Tax         17,716         (4,669)
  US GAAP Adjustments - Prior Years                      (14,448)        (9,779)
-------------------------------------------------------------------------------
                                                      $    3,268     $  (14,448)
===============================================================================

Adjustment to Capital Assets                          $    4,361     $  (14,448)
Adjustment to Deferred Charges                            (1,093)            --
-------------------------------------------------------------------------------
Adjustment to Assets                                  $   (3,268)    $  (14,448)
===============================================================================


v.       DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING

Under Canadian GAAP, the derivative financial instruments qualify for hedge
accounting and the payments or receipts on these contracts are recognized in
earnings concurrently with the hedged transaction and changes in the fair values
of the contracts are not reflected in the consolidated financial statements. US
GAAP requires that all derivative financial instruments be recorded on the
balance sheet as either assets or liabilities at their fair values. When
specific hedging criteria is met, then changes in the derivative's fair value
can be recorded in other comprehensive income and any ineffectiveness of the
hedge is recorded in earnings for the period.

Management has designated the derivative financial instruments described in Note
16(a) as hedges and as a result, under US GAAP, the effect is to record the
change in the fair value of the hedges of $28.6 million (2002 - $2.56 million),
$17.1 million net of tax (2002 - $1.48 million), in other comprehensive income
and $2.4 million (2002 - $0.04 million) in expenses. In addition, liabilities
increased by $30.0 million (2002 - $2.6 million), being the full amount of the
unrealized losses.


                                      26
<PAGE>

vi.      OTHER COMPREHENSIVE INCOME

Comprehensive income is measured in accordance with FAS 130 "Reporting
Comprehensive Income". This Standard defines comprehensive income as all changes
in equity other than those resulting from investments by owners and
distributions to owners. The Corporation had other comprehensive income arising
due to unrealized losses on derivative financial instruments designated as hedge
transactions. At December 31, 2003 this other comprehensive income amounted to a
loss net of tax of $17.1 million (2002 - $1.48 million).

vii.     CONVERTIBLE NOTES

Under Canadian GAAP, amounts drawn under the Note Purchase Facility are deemed
to consist of both an equity and a liability component, recognized as
convertible notes. The initial carrying amount of the equity component is
adjusted for accretion to bring it up to the stated principal amount of the Note
Purchase Facility at maturity. This accretion is charged to the Deficit. Under
US GAAP, all amounts drawn under the Note Purchase Facility are classified as a
liability and any charges paid on these notes are treated as interest expense.
During the pre-operating period, which ended December 1, 2002 under US GAAP, the
interest on the Note Purchase Facility, in place to finance the Oil Sands
Project, could be capitalized as part of the Oil Sands Project costs.

The effect of this difference in 2002 was to reclass the $83.9 million of
Convertible Notes from Shareholders' Equity to Current Liabilities. In addition,
the accretion was reversed and capitalized as part of the costs for the Oil
Sands Project. The effect was to decrease expenses by $0.16 million, decrease
the Deficit by $1.28 million and increase capital assets by $1.44 million.
Subsequent to the pre-operating period the interest on the Note Purchase
Facility would have been expensed and not accreted to the Deficit. The effect of
this difference in 2003 was to reclass $3.6 million to interest expense and $1.5
million to future income tax recovery.

viii.    PRE-FEASIBILITY COSTS

Under Canadian GAAP costs associated with projects that have yet to be
determined to be technically feasible can be capitalized as part of Capital
Assets if certain criteria are met. Under US GAAP costs associated with projects
that have not yet been determined to be technically feasible must be expensed.
During the year the Corporation had expenditures of $0.9 million relating to
projects that have not yet been determined to be technically feasible. The
effect of this difference is to reduce capital assets million and decrease net
earnings by $0.9 million.




                                      27
<PAGE>


ix.      FLOW-THROUGH SHARES

Under Canadian GAAP flow-through shares are recorded at their face value within
share capital. When the expenditures are renounced and the tax deductions
transferred to the shareholders, future income tax liabilities will increase and
the share capital will be reduced. Under US GAAP when the shares are issued the
proceeds are allocated between the offering of the shares and the sale of tax
benefits. The allocation is made based on the difference between the quoted
price of the existing shares and the amount the investor pays for the
flow-through shares (given no other differences between the securities). A
liability is recognized for this difference. The liability is reversed when tax
benefits are renounced and a deferred tax liability recognized at that time.
Income tax expense is the difference between the amount of the deferred tax
liability and the liability recognized on issuance. At December 31, 2002, the
Corporation had recognized all renouncements of the tax deductions to the
investors. The effect of this difference is to increase share capital by $19.3
million and increase deferred income tax expense by $19.3 million and no effect
on current liabilities.






                                      28