##### 



Exhibit 2


CONSOLIDATED FINANCIAL STATEMENTS
AND

AUDITORS REPORT TO
SHAREHOLDERS


For the Year Ended December 31,
2003



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##### 



Exhibit 2

MANAGEMENTS REPORT

The management of Husky Energy Inc. is
responsible for the financial information and operating data
presented in this annual report.

The financial statements have been prepared by
management in accordance with generally accepted accounting
principles. When alternative accounting methods exist,
management has chosen those it deems most appropriate in the
circumstances. Financial statements are not precise as they
include certain amounts based on estimates and judgements.
Management has determined such amounts on a reasonable basis in
order to ensure that the financial statements are presented
fairly, in all material respects. Financial information
presented elsewhere in this annual report has been prepared on a
basis consistent with that in the financial statements.

Husky Energy Inc. maintains systems of internal
accounting and administrative controls. These systems are
designed to provide reasonable assurance that the financial
information is relevant, reliable and accurate and that the
Companys assets are properly accounted for and adequately
safeguarded. The system of internal controls is further
supported by an internal audit function.

The Audit Committee of the Board of Directors,
composed of non-management directors, meets regularly with
management, as well as the external auditors, to discuss
auditing (external, internal and joint venture), internal
controls, accounting policy, financial reporting matters and
reserves determination process. The Committee reviews the annual
consolidated financial statements with both management and the
independent auditors and reports its findings to the Board of
Directors before such statements are approved by the Board.

The consolidated financial statements have been
audited by KPMG LLP, the independent auditors, in accordance
with generally accepted auditing standards on behalf of the
shareholders. KPMG LLP have full and free access to the Audit
Committee.

|                        |  |                        
|----------------------- |  | -----------------------
|John C. S. Lau          |  | Neil McGee             
|President &             |  | Vice President &       
|Chief Executive Officer |  | Chief Financial Officer

Calgary, Alberta, Canada

February 2, 2004


1



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##### 



AUDITORS REPORT TO THE
SHAREHOLDERS

We have audited the consolidated balance sheets
of Husky Energy Inc., as at December 31, 2003, 2002 and
2001 and the consolidated statements of earnings, retained
earnings, and cash flows for each of the years in the three-year
period ended December 31, 2003. These financial statements
are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements based on our audits.

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

In our opinion, these consolidated financial
statements present fairly, in all material respects, the
financial position of the Company as at December 31, 2003,
2002 and 2001 and the results of its operations and its cash
flows for each of the years in the three-year period ended
December 31, 2003 in accordance with Canadian generally
accepted accounting principles.

KPMG LLP

Chartered Accountants


Calgary, Alberta, Canada

February 2, 2004


2



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##### 



CONSOLIDATED BALANCE SHEETS

|                                                                          |                                                        |                       |        |       |  |      |        |       |  |   |       |       | 
|------------------------------------------------------------------------- | ------------------------------------------------------ | --------------------- | ------ | ----- |  | ---- | ------ | ----- |  | - | ----- | ----- | 
|                                                                          |                                                        |                      
|                                                                          |                                                        | As at December 31    
|                                                                          |                                                        |                      
|                                                                          |                                                        | 2003                  |        | 2002  |  | 2001
|                                                                          |                                                        |                       |        |       |  |     
|                                                                          |                                                        |                      
|                                                                          |                                                        | (millions of dollars)
|Assets                                                                   
|Current assets                                                            |                                                        |                       |        |       |  |      |        |       |  |   |       |      
|                                                                          | Cash and cash equivalents                              |                       | $      | 3     |  |      | $      | 306   |  |   | $     |      | 
|                                                                          | Accounts receivable (note 4)                           |                       |        | 618   |  |      |        | 572   |  |   |       | 376   | 
|                                                                          | Inventories (note 5)                                   |                       |        | 211   |  |      |        | 243   |  |   |       | 226   | 
|                                                                          | Prepaid expenses                                       |                       |        | 33    |  |      |        | 23    |  |   |       | 24    | 
|                                                                          |                                                        |                       |        |       |  |      |        |       |  |   |       |      
|                                                                          |                                                        |                       | 865    |       |  |      | 1,144  |       |  |   | 626   |      
|Property, plant and equipment, net
    (notes 1, 6)(full cost accounting) |                                                        |                       | 10,685 |       |  |      | 9,347  |       |  |   | 8,715 |      
|Goodwill (note 7)                                                         |                                                        |                       | 120    |       |  |      |       |       |  |   |      |      
|Other assets (note 11)                                                    |                                                        |                       | 112    |       |  |      | 84     |       |  |   | 29    |      
|                                                                          |                                                        |                       |        |       |  |      |        |       |  |   |       |      
|                                                                          |                                                        | $                     | 11,782 |       |  | $    | 10,575 |       |  | $ | 9,370 |      
|                                                                          |                                                        |                       |        |       |  |      |        |       |  |   |       |      
|Liabilities and Shareholders
    Equity                                 
|Current liabilities                                                       |                                                        |                       |        |       |  |      |        |       |  |   |       |      
|                                                                          | Bank operating loans (note 9)                          |                       | $      | 71    |  |      | $      |      |  |   | $     | 100   | 
|                                                                          | Accounts payable and accrued liabilities
    (note 10) |                       |        | 1,126 |  |      |        | 794   |  |   |       | 805   | 
|                                                                          | Long-term debt due within one year
    (note 11)       |                       |        | 259   |  |      |        | 421   |  |   |       | 144   | 
|                                                                          |                                                        |                       |        |       |  |      |        |       |  |   |       |      
|                                                                          |                                                        |                       | 1,456  |       |  |      | 1,215  |       |  |   | 1,049 |      
|Long-term debt (note 11)                                                  |                                                        |                       | 1,439  |       |  |      | 1,964  |       |  |   | 1,948 |      
|Other long-term liabilities (note 12)                                     |                                                        |                       | 390    |       |  |      | 266    |       |  |   | 228   |      
|Future income taxes (note 13)                                             |                                                        |                       | 2,608  |       |  |      | 2,003  |       |  |   | 1,659 |      
|Commitments and contingencies
    (note 14)                               |                                                        |                       |        |       |  |      |        |       |  |   |       |      
|Shareholders equity                                                      |                                                        |                       |        |       |  |      |        |       |  |   |       |      
|                                                                          | Capital securities and accrued return
    (note 15)    |                       |        | 298   |  |      |        | 364   |  |   |       | 367   | 
|                                                                          | Common shares (note 16)                                |                       |        | 3,457 |  |      |        | 3,406 |  |   |       | 3,397 | 
|                                                                          | Retained earnings                                      |                       |        | 2,134 |  |      |        | 1,357 |  |   |       | 722   | 
|                                                                          |                                                        |                       |        |       |  |      |        |       |  |   |       |      
|                                                                          |                                                        |                       | 5,889  |       |  |      | 5,127  |       |  |   | 4,486 |      
|                                                                          |                                                        |                       |        |       |  |      |        |       |  |   |       |      
|                                                                          |                                                        | $                     | 11,782 |       |  | $    | 10,575 |       |  | $ | 9,370 |      
|                                                                          |                                                        |                       |        |       |  |      |        |       |  |   |       |      

|                            |  |                                
|--------------------------- |  | -------------------------------
|On behalf of the Board:     |  |                                
|                           
|John C. S. Lau
    Director |  | Martin J. G. Glynn
    Director

The accompanying notes to the consolidated
financial statements are an integral part of these statements.

3



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##### 



CONSOLIDATED STATEMENTS OF EARNINGS

|                                               |                                                           |                                  |       |       |   |      |       |       |  |   |       |       | 
|---------------------------------------------- | --------------------------------------------------------- | -------------------------------- | ----- | ----- | - | ---- | ----- | ----- |  | - | ----- | ----- | 
|                                               |                                                           |                                 
|                                               |                                                           | Year ended December 31          
|                                               |                                                           |                                 
|                                               |                                                           | 2003                             |       | 2002  |   | 2001
|                                               |                                                           |                                  |       |       |   |     
|                                               |                                                           |                                 
|                                               |                                                           | (millions of dollars, except per
|                                               |                                                           | share amounts)                  
|Sales and operating revenues, net of royalties |                                                           | $                                | 7,658 |       |   | $    | 6,384 |       |  | $ | 6,596 |      
|Costs and expenses                             |                                                           |                                  |       |       |   |      |       |       |  |   |       |      
|                                               | Cost of sales and operating expenses                      |                                  |       | 4,825 |   |      |       | 4,009 |  |   |       | 4,425 | 
|                                               | Selling and administration expenses                       |                                  |       | 119   |   |      |       | 94    |  |   |       | 88    | 
|                                               | Depletion, depreciation and amortization
    (notes 1, 6) |                                  |       | 1,058 |   |      |       | 939   |  |   |       | 807   | 
|                                               | Interest  net (note 11)                                  |                                  |       | 73    |   |      |       | 104   |  |   |       | 101   | 
|                                               | Foreign exchange (note 11)                                |                                  |       | (215  | ) |      |       | 13    |  |   |       | 94    | 
|                                               | Other  net                                               |                                  |       | 3     |   |      |       | 1     |  |   |       | 7     | 
|                                               |                                                           |                                  |       |       |   |      |       |       |  |   |       |      
|                                               |                                                           |                                  | 5,863 |       |   |      | 5,160 |       |  |   | 5,522 |      
|                                               |                                                           |                                  |       |       |   |      |       |       |  |   |       |      
|Earnings before income taxes                   |                                                           |                                  | 1,795 |       |   |      | 1,224 |       |  |   | 1,074 |      
|                                               |                                                           |                                  |       |       |   |      |       |       |  |   |       |      
|Income taxes (note 13)                         |                                                           |                                  |       |       |   |      |       |       |  |   |       |      
|                                               | Current                                                   |                                  |       | 147   |   |      |       | 66    |  |   |       | 20    | 
|                                               | Future                                                    |                                  |       | 327   |   |      |       | 354   |  |   |       | 400   | 
|                                               |                                                           |                                  |       |       |   |      |       |       |  |   |       |      
|                                               |                                                           |                                  | 474   |       |   |      | 420   |       |  |   | 420   |      
|                                               |                                                           |                                  |       |       |   |      |       |       |  |   |       |      
|Net earnings                                   |                                                           | $                                | 1,321 |       |   | $    | 804   |       |  | $ | 654   |      
|                                               |                                                           |                                  |       |       |   |      |       |       |  |   |       |      
|Earnings per share (note 16)                   |                                                           |                                  |       |       |   |      |       |       |  |   |       |      
|                                               | Basic                                                     |                                  | $     | 3.23  |   |      | $     | 1.88  |  |   | $     | 1.49  | 
|                                               | Diluted                                                   |                                  | $     | 3.22  |   |      | $     | 1.88  |  |   | $     | 1.48  | 

CONSOLIDATED STATEMENTS OF RETAINED
EARNINGS

|                                       |                                       |                        |       |      |   |      |       |    |  |   |      |    | 
|-------------------------------------- | ------------------------------------- | ---------------------- | ----- | ---- | - | ---- | ----- | -- |  | - | ---- | -- | 
|                                       |                                       |                       
|                                       |                                       | Year ended December 31
|                                       |                                       |                       
|                                       |                                       | 2003                   |       | 2002 |   | 2001
|                                       |                                       |                        |       |      |   |     
|                                       |                                       |                       
|                                       |                                       | (millions of dollars) 
|Beginning of year                      |                                       | $                      | 1,357 |      |   | $    | 722   |    |  | $ | 253  |   
|Net earnings                           |                                       |                        | 1,321 |      |   |      | 804   |    |  |   | 654  |   
|Dividends on common shares (note 16)   |                                       |                        | (580  | )    |   |      | (151  | )  |  |   | (150 | ) 
|Return on capital securities (note 15) |                                       |                        | 38    |      |   |      | (29   | )  |  |   | (53  | ) 
|                                       | Related future income taxes (note 13) |                        |       | (2   | ) |      |       | 11 |  |   |      | 18 | 
|                                       |                                       |                        |       |      |   |      |       |    |  |   |      |   
|End of year                            |                                       | $                      | 2,134 |      |   | $    | 1,357 |    |  | $ | 722  |   
|                                       |                                       |                        |       |      |   |      |       |    |  |   |      |   

The accompanying notes to the consolidated
financial statements are an integral part of these statements.

4



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##### 



CONSOLIDATED STATEMENTS OF CASH
FLOWS

|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |        |     | 
|------------------------------------------------ | ----------------------------------------------- | ---------------------------------------- | ----- | ------ | ----- | ---- | ----- | ------ | --- | - | ----- | ------ | --- | 
|                                                 |                                                 |                                         
|                                                 |                                                 | Year ended December 31                  
|                                                 |                                                 |                                         
|                                                 |                                                 | 2003                                     |       | 2002   |       | 2001
|                                                 |                                                 |                                          |       |        |       |     
|                                                 |                                                 |                                         
|                                                 |                                                 | (millions of dollars)                   
|Operating activities                             |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|                                                 | Net earnings                                    |                                          | $     | 1,321  |       |      | $     | 804    |     |   | $     | 654    |    
|                                                 | Items not affecting cash                        |                                          |       |        |       |      |       |        |     |   |       |        |    
|                                                 |                                                 | Depletion, depreciation and amortization |       |        | 1,058 |      |       |        | 939 |   |       |        | 807 | 
|                                                 |                                                 | Future income taxes                      |       |        | 327   |      |       |        | 354 |   |       |        | 400 | 
|                                                 |                                                 | Foreign exchange (note 11)               |       |        | (242  | )    |       |        |    |   |       |        | 82  | 
|                                                 |                                                 | Other                                    |       |        | (5    | )    |       |        | (1  | ) |       |        | 3   | 
|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|                                                 | Cash flow from operations                       |                                          |       | 2,459  |       |      |       | 2,096  |     |   |       | 1,946  |    
|                                                 | Change in non-cash working capital
    (note 8) |                                          |       | 113    |       |      |       | (204   | )   |   |       | (16    | )  
|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|                                                 | Cash flow  operating activities                |                                          |       | 2,572  |       |      |       | 1,892  |     |   |       | 1,930  |    
|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|Financing activities                             |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|                                                 | Bank operating loans financing  net            |                                          |       | 71     |       |      |       | (100   | )   |   |       | 66     |    
|                                                 | Long-term debt issue                            |                                          |       | 598    |       |      |       | 972    |     |   |       |       |    
|                                                 | Long-term debt repayment                        |                                          |       | (971   | )     |      |       | (678   | )   |   |       | (356   | )  
|                                                 | Settlement of cross currency swap               |                                          |       | (32    | )     |      |       |       |     |   |       |       |    
|                                                 | Return on capital securities payment            |                                          |       | (29    | )     |      |       | (31    | )   |   |       | (30    | )  
|                                                 | Debt issue costs                                |                                          |       |       |       |      |       | (9     | )   |   |       |       |    
|                                                 | Deferred credits                                |                                          |       |       |       |      |       |       |     |   |       | (4     | )  
|                                                 | Proceeds from exercise of stock options         |                                          |       | 51     |       |      |       | 9      |     |   |       | 9      |    
|                                                 | Proceeds from interest swaps monetization       |                                          |       | 44     |       |      |       |       |     |   |       |       |    
|                                                 | Dividends on common shares                      |                                          |       | (580   | )     |      |       | (151   | )   |   |       | (150   | )  
|                                                 | Change in non-cash working capital
    (note 8) |                                          |       | 48     |       |      |       | (9     | )   |   |       | 42     |    
|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|                                                 | Cash flow  financing activities                |                                          |       | (800   | )     |      |       | 3      |     |   |       | (423   | )  
|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|Available for investing                          |                                                 |                                          | 1,772 |        |       |      | 1,895 |        |     |   | 1,507 |       
|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|Investing activities                             |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|                                                 | Capital expenditures                            |                                          |       | (1,905 | )     |      |       | (1,692 | )   |   |       | (1,473 | )  
|                                                 | Corporate acquisitions                          |                                          |       | (809   | )     |      |       | (3     | )   |   |       | (125   | )  
|                                                 | Asset sales                                     |                                          |       | 511    |       |      |       | 93     |     |   |       | 67     |    
|                                                 | Other                                           |                                          |       | 5      |       |      |       | (20    | )   |   |       | 6      |    
|                                                 | Change in non-cash working capital
    (note 8) |                                          |       | 123    |       |      |       | 33     |     |   |       | 18     |    
|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|                                                 | Cash flow  investing activities                |                                          |       | (2,075 | )     |      |       | (1,589 | )   |   |       | (1,507 | )  
|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|Increase (decrease) in cash and cash equivalents |                                                 |                                          | (303  | )      |       |      | 306   |        |     |   |      |       
|Cash and cash equivalents at beginning of year   |                                                 |                                          | 306   |        |       |      |      |        |     |   |      |       
|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |       
|Cash and cash equivalents at end of year         |                                                 | $                                        | 3     |        |       | $    | 306   |        |     | $ |      |       
|                                                 |                                                 |                                          |       |        |       |      |       |        |     |   |       |       

The accompanying notes to the consolidated
financial statements are an integral part of these statements.

5



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##### 



NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS

Except where indicated and per share amounts, all
dollar amounts are in millions.


Note 1     Segmented
Financial Information

|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |       | 
|-------------------------------------------------------- | --------------------------------------------- | -------- | ------ | --------- |  | -------------- | ------ | ------ |  | ---- | ------ | ------ |  | ---- | ----- | ----- |  | ---- | --- | --- |  | - | --- | --- |  | - | ----- | ----- |  | - | ----- | ----- |  | - | ----- | ----- | 
|                                                         |                                               |          |        |          
|                                                         |                                               | Upstream |        | Midstream
|                                                         |                                               |          |        |          
|                                                         |                                               |          |        |           |  |               
|                                                         |                                               |          |        |           |  | Infrastructure
|                                                         |                                               |          |        | Upgrading |  | and Marketing 
|                                                         |                                               |          |        |           |  |               
|                                                         |                                               | 2003     |        | 2002      |  | 2001           |        | 2003   |  | 2002 |        | 2001   |  | 2003 |       | 2002  |  | 2001
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |     
|Year ended December 31                                   |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|Sales and operating revenues, net of royalties           |                                               | $        | 3,186  |           |  | $              | 2,665  |        |  | $    | 2,165  |        |  | $    | 1,013 |       |  | $    | 909 |     |  | $ | 886 |     |  | $ | 4,946 |       |  | $ | 4,230 |       |  | $ | 4,380 |      
|Costs and expenses                                       |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|                                                         | Operating, cost of sales, selling and general |          |        | 855       |  |                |        | 729    |  |      |        | 648    |  |      |       | 901   |  |      |     | 811 |  |   |     | 638 |  |   |       | 4,747 |  |   |       | 4,038 |  |   |       | 4,193 | 
|                                                         | Depletion, depreciation and amortization      |          |        | 958       |  |                |        | 851    |  |      |        | 728    |  |      |       | 20    |  |      |     | 18  |  |   |     | 17  |  |   |       | 21    |  |   |       | 20    |  |   |       | 17    | 
|                                                         | Interest  net                                |          |        |          |  |                |        |       |  |      |        |       |  |      |       |      |  |      |     |    |  |   |     |    |  |   |       |      |  |   |       |      |  |   |       |      | 
|                                                         | Foreign exchange                              |          |        |          |  |                |        |       |  |      |        |       |  |      |       |      |  |      |     |    |  |   |     |    |  |   |       |      |  |   |       |      |  |   |       |      | 
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|                                                         |                                               |          | 1,813  |           |  |                | 1,580  |        |  |      | 1,376  |        |  |      | 921   |       |  |      | 829 |     |  |   | 655 |     |  |   | 4,768 |       |  |   | 4,058 |       |  |   | 4,210 |      
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|Earnings (loss) before income taxes                      |                                               |          | 1,373  |           |  |                | 1,085  |        |  |      | 789    |        |  |      | 92    |       |  |      | 80  |     |  |   | 231 |     |  |   | 178   |       |  |   | 172   |       |  |   | 170   |      
|Current income taxes                                     |                                               |          | 95     |           |  |                | 55     |        |  |      | 17     |        |  |      | 1     |       |  |      | 1   |     |  |   | 1   |     |  |   | 27    |       |  |   | 6     |       |  |   | 1     |      
|Future income taxes                                      |                                               |          | 230    |           |  |                | 342    |        |  |      | 290    |        |  |      | 20    |       |  |      | 25  |     |  |   | 72  |     |  |   | 37    |       |  |   | 59    |       |  |   | 71    |      
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|Net earnings (loss)                                      |                                               | $        | 1,048  |           |  | $              | 688    |        |  | $    | 482    |        |  | $    | 71    |       |  | $    | 54  |     |  | $ | 158 |     |  | $ | 114   |       |  | $ | 107   |       |  | $ | 98    |      
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|Capital employed  As at
    December 31                 |                                               | $        | 6,652  |           |  | $              | 6,040  |        |  | $    | 5,715  |        |  | $    | 456   |       |  | $    | 319 |     |  | $ | 320 |     |  | $ | 350   |       |  | $ | 431   |       |  | $ | 395   |      
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|Property, plant and equipment 
    As at December 31    |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|Cost                                                     |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|                                                         | Canada                                        |          | $      | 13,601    |  |                | $      | 11,525 |  |      | $      | 10,353 |  |      | $     | 1,022 |  |      | $   | 998 |  |   | $   | 958 |  |   | $     | 615   |  |   | $     | 591   |  |   | $     | 575   | 
|                                                         | International                                 |          |        | 496       |  |                |        | 469    |  |      |        | 394    |  |      |       |      |  |      |     |    |  |   |     |    |  |   |       |      |  |   |       |      |  |   |       |      | 
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|                                                         |                                               | $        | 14,097 |           |  | $              | 11,994 |        |  | $    | 10,747 |        |  | $    | 1,022 |       |  | $    | 998 |     |  | $ | 958 |     |  | $ | 615   |       |  | $ | 591   |       |  | $ | 575   |      
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|Accumulated depletion, depreciation and
    amortization |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|                                                         | Canada                                        |          | $      | 4,633     |  |                | $      | 3,894  |  |      | $      | 3,272  |  |      | $     | 391   |  |      | $   | 372 |  |   | $   | 354 |  |   | $     | 203   |  |   | $     | 184   |  |   | $     | 165   | 
|                                                         | International                                 |          |        | 250       |  |                |        | 185    |  |      |        | 147    |  |      |       |      |  |      |     |    |  |   |     |    |  |   |       |      |  |   |       |      |  |   |       |      | 
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|                                                         |                                               | $        | 4,883  |           |  | $              | 4,079  |        |  | $    | 3,419  |        |  | $    | 391   |       |  | $    | 372 |     |  | $ | 354 |     |  | $ | 203   |       |  | $ | 184   |       |  | $ | 165   |      
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|Net                                                      |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|                                                         | Canada                                        |          | $      | 8,968     |  |                | $      | 7,631  |  |      | $      | 7,081  |  |      | $     | 631   |  |      | $   | 626 |  |   | $   | 604 |  |   | $     | 412   |  |   | $     | 407   |  |   | $     | 410   | 
|                                                         | International                                 |          |        | 246       |  |                |        | 284    |  |      |        | 247    |  |      |       |      |  |      |     |    |  |   |     |    |  |   |       |      |  |   |       |      |  |   |       |      | 
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|                                                         |                                               | $        | 9,214  |           |  | $              | 7,915  |        |  | $    | 7,328  |        |  | $    | 631   |       |  | $    | 626 |     |  | $ | 604 |     |  | $ | 412   |       |  | $ | 407   |       |  | $ | 410   |      
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|Capital expenditures  Year ended
    December 31(2)     |                                               | $        | 1,781  |           |  | $              | 1,567  |        |  | $    | 1,317  |        |  | $    | 25    |       |  | $    | 41  |     |  | $ | 47  |     |  | $ | 18    |       |  | $ | 17    |       |  | $ | 58    |      
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|Total assets  As at
    December 31(3)                  |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|                                                         | Canada                                        |          | $      | 9,547     |  |                | $      | 7,883  |  |      | $      | 7,160  |  |      | $     | 649   |  |      | $   | 658 |  |   | $   | 644 |  |   | $     | 701   |  |   | $     | 850   |  |   | $     | 862   | 
|                                                         | International                                 |          |        | 259       |  |                |        | 337    |  |      |        | 247    |  |      |       |      |  |      |     |    |  |   |     |    |  |   |       |      |  |   |       |      |  |   |       |      | 
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      
|                                                         |                                               | $        | 9,806  |           |  | $              | 8,220  |        |  | $    | 7,407  |        |  | $    | 649   |       |  | $    | 658 |     |  | $ | 644 |     |  | $ | 701   |       |  | $ | 850   |       |  | $ | 862   |      
|                                                         |                                               |          |        |           |  |                |        |        |  |      |        |        |  |      |       |       |  |      |     |     |  |   |     |     |  |   |       |       |  |   |       |       |  |   |       |      






|    |                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Eliminations relate to sales and operating
    revenues between segments recorded at transfer prices based on
    current market prices, and to unrealized intersegment profits in
    inventories.
|   
|(2) | Includes site restoration expenditures. See
    note 12, Other Long-term Liabilities.                                                                                                              
|   
|(3) | 2003 includes goodwill on Marathon Canada Limited
    acquisition related to Upstream.                                                                                                             

6



---



##### 



|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |        | 
|-------------------------------------------------------- | --------------------------------------------- | ---------------- | ----- | --------------- |  | ----- | ----- | ----- |  | ---- | ----- | ----- |  | ---- | ------ | ------ | - | ---- | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ | - | - | ------ | ------ |  | - | ------ | ------ | 
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |     
|                                                         |                                               |                  |       | Corporate and   |  |      
|                                                         |                                               | Refined Products |       | Eliminations(1) |  | Total
|                                                         |                                               |                  |       |                 |  |      
|                                                         |                                               | 2003             |       | 2002            |  | 2001  |       | 2003  |  | 2002 |       | 2001  |  | 2003 |        | 2002   |   | 2001
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |     
|Year ended December 31                                   |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|Sales and operating revenues, net of royalties           |                                               | $                | 1,502 |                 |  | $     | 1,310 |       |  | $    | 1,349 |       |  | $    | (2,989 | )      |   | $    | (2,730 | )      |   | $ | (2,184 | )      |   | $ | 7,658  |        |   | $ | 6,384  |        |  | $ | 6,596  |       
|Costs and expenses                                       |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|                                                         | Operating, cost of sales, selling and general |                  |       | 1,422           |  |       |       | 1,222 |  |      |       | 1,206 |  |      |        | (2,978 | ) |      |        | (2,696 | ) |   |        | (2,165 | ) |   |        | 4,947  |   |   |        | 4,104  |  |   |        | 4,520  | 
|                                                         | Depletion, depreciation and amortization      |                  |       | 34              |  |       |       | 34    |  |      |       | 31    |  |      |        | 25     |   |      |        | 16     |   |   |        | 14     |   |   |        | 1,058  |   |   |        | 939    |  |   |        | 807    | 
|                                                         | Interest  net                                |                  |       |                |  |       |       |      |  |      |       |      |  |      |        | 73     |   |      |        | 104    |   |   |        | 101    |   |   |        | 73     |   |   |        | 104    |  |   |        | 101    | 
|                                                         | Foreign exchange                              |                  |       |                |  |       |       |      |  |      |       |      |  |      |        | (215   | ) |      |        | 13     |   |   |        | 94     |   |   |        | (215   | ) |   |        | 13     |  |   |        | 94     | 
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|                                                         |                                               |                  | 1,456 |                 |  |       | 1,256 |       |  |      | 1,237 |       |  |      | (3,095 | )      |   |      | (2,563 | )      |   |   | (1,956 | )      |   |   | 5,863  |        |   |   | 5,160  |        |  |   | 5,522  |       
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|Earnings (loss) before income taxes                      |                                               |                  | 46    |                 |  |       | 54    |       |  |      | 112   |       |  |      | 106    |        |   |      | (167   | )      |   |   | (228   | )      |   |   | 1,795  |        |   |   | 1,224  |        |  |   | 1,074  |       
|Current income taxes                                     |                                               |                  | 9     |                 |  |       | 4     |       |  |      | 1     |       |  |      | 15     |        |   |      |       |        |   |   |       |        |   |   | 147    |        |   |   | 66     |        |  |   | 20     |       
|Future income taxes                                      |                                               |                  | 9     |                 |  |       | 18    |       |  |      | 48    |       |  |      | 31     |        |   |      | (90    | )      |   |   | (81    | )      |   |   | 327    |        |   |   | 354    |        |  |   | 400    |       
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|Net earnings (loss)                                      |                                               | $                | 28    |                 |  | $     | 32    |       |  | $    | 63    |       |  | $    | 60     |        |   | $    | (77    | )      |   | $ | (147   | )      |   | $ | 1,321  |        |   | $ | 804    |        |  | $ | 654    |       
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|Capital employed  As at
    December 31                 |                                               | $                | 320   |                 |  | $     | 338   |       |  | $    | 329   |       |  | $    | (120   | )      |   | $    | 384    |        |   | $ | (81    | )      |   | $ | 7,658  |        |   | $ | 7,512  |        |  | $ | 6,678  |       
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|Property, plant and equipment 
    As at December 31    |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|Cost                                                     |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|                                                         | Canada                                        |                  | $     | 757             |  |       | $     | 702   |  |      | $     | 655   |  |      | $      | 188    |   |      | $      | 165    |   |   | $      | 143    |   |   | $      | 16,183 |   |   | $      | 13,981 |  |   | $      | 12,684 | 
|                                                         | International                                 |                  |       |                |  |       |       |      |  |      |       |      |  |      |        |       |   |      |        |       |   |   |        |       |   |   |        | 496    |   |   |        | 469    |  |   |        | 394    | 
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|                                                         |                                               | $                | 757   |                 |  | $     | 702   |       |  | $    | 655   |       |  | $    | 188    |        |   | $    | 165    |        |   | $ | 143    |        |   | $ | 16,679 |        |   | $ | 14,450 |        |  | $ | 13,078 |       
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|Accumulated depletion, depreciation and
    amortization |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|                                                         | Canada                                        |                  | $     | 391             |  |       | $     | 360   |  |      | $     | 330   |  |      | $      | 126    |   |      | $      | 108    |   |   | $      | 95     |   |   | $      | 5,744  |   |   | $      | 4,918  |  |   | $      | 4,216  | 
|                                                         | International                                 |                  |       |                |  |       |       |      |  |      |       |      |  |      |        |       |   |      |        |       |   |   |        |       |   |   |        | 250    |   |   |        | 185    |  |   |        | 147    | 
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|                                                         |                                               | $                | 391   |                 |  | $     | 360   |       |  | $    | 330   |       |  | $    | 126    |        |   | $    | 108    |        |   | $ | 95     |        |   | $ | 5,994  |        |   | $ | 5,103  |        |  | $ | 4,363  |       
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|Net                                                      |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|                                                         | Canada                                        |                  | $     | 366             |  |       | $     | 342   |  |      | $     | 325   |  |      | $      | 62     |   |      | $      | 57     |   |   | $      | 48     |   |   | $      | 10,439 |   |   | $      | 9,063  |  |   | $      | 8,468  | 
|                                                         | International                                 |                  |       |                |  |       |       |      |  |      |       |      |  |      |        |       |   |      |        |       |   |   |        |       |   |   |        | 246    |   |   |        | 284    |  |   |        | 247    | 
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|                                                         |                                               | $                | 366   |                 |  | $     | 342   |       |  | $    | 325   |       |  | $    | 62     |        |   | $    | 57     |        |   | $ | 48     |        |   | $ | 10,685 |        |   | $ | 9,347  |        |  | $ | 8,715  |       
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|Capital expenditures  Year ended
    December 31(2)     |                                               | $                | 58    |                 |  | $     | 44    |       |  | $    | 29    |       |  | $    | 23     |        |   | $    | 23     |        |   | $ | 22     |        |   | $ | 1,905  |        |   | $ | 1,692  |        |  | $ | 1,473  |       
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|Total assets  As at
    December 31(3)                  |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|                                                         | Canada                                        |                  | $     | 525             |  |       | $     | 534   |  |      | $     | 428   |  |      | $      | 101    |   |      | $      | 313    |   |   | $      | 29     |   |   | $      | 11,523 |   |   | $      | 10,238 |  |   | $      | 9,123  | 
|                                                         | International                                 |                  |       |                |  |       |       |      |  |      |       |      |  |      |        |       |   |      |        |       |   |   |        |       |   |   |        | 259    |   |   |        | 337    |  |   |        | 247    | 
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       
|                                                         |                                               | $                | 525   |                 |  | $     | 534   |       |  | $    | 428   |       |  | $    | 101    |        |   | $    | 313    |        |   | $ | 29     |        |   | $ | 11,782 |        |   | $ | 10,575 |        |  | $ | 9,370  |       
|                                                         |                                               |                  |       |                 |  |       |       |       |  |      |       |       |  |      |        |        |   |      |        |        |   |   |        |        |   |   |        |        |   |   |        |        |  |   |        |       

Note 2    Nature of
Operations and Organization

Husky Energy Inc. (Husky or the
Company) is a publicly traded, integrated energy and
energy-related company headquartered in Calgary, Alberta, Canada.

Management has segmented the Companys
business based on differences in products and services and
management strategy and responsibility. The Companys
business is conducted predominantly through three major business
segments  upstream, midstream and refined products.

Upstream includes exploration for, development
and production of crude oil, natural gas and natural gas
liquids. The Companys upstream operations are located
primarily in Western Canada, offshore Eastern Canada (East
Coast), South China Sea (Wenchang), with some other interests
outside Canada (International).

Midstream includes upgrading of heavy crude oil
feedstock into synthetic crude oil (Upgrading); marketing of the
Companys and other producers crude oil, natural gas,
natural gas liquids, sulphur and petroleum coke; and pipeline
transportation and processing of heavy crude oil, storage of
crude oil, diluent and natural gas and cogeneration of
electrical and thermal energy (Infrastructure and marketing).

Refined products includes refining of crude oil
and marketing of refined petroleum products including gasoline,
alternative fuels and asphalt.

Note 3    Significant
Accounting Policies



| |                                                                                
| | -------------------------------------------------------------------------------
| | a)  Principles of Consolidation
    and the Preparation of Financial Statements

These financial statements are prepared in
accordance with Canadian generally accepted accounting
principles (GAAP) which, in the case of the Company,
differ in certain respects from those in the United States.
These differences are described in note 20, Reconciliation
to Accounting Principles Generally Accepted in the United States.

7



---



##### 



The preparation of financial statements in
conformity with Canadian GAAP requires management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.

The consolidated financial statements include
the accounts of the Company and its subsidiaries.

Substantially all of the Companys upstream
activities are conducted jointly with third parties and
accordingly the accounts reflect the Companys
proportionate share of the assets, liabilities, revenues,
expenses and cash flow from these activities.



| |                                   
| | ----------------------------------
| | b)   Cash and Cash
    Equivalents

Cash and cash equivalents consist of cash on
hand and deposits with a maturity of less than three months.



| |                             
| | ----------------------------
| | c)   Inventory
    Valuation

Crude oil, natural gas, refined petroleum
products and purchased sulphur inventories are valued at the
lower of cost, on a first-in, first-out basis, or net realizable
value. Materials and supplies are stated at average cost. Cost
consists of raw material, labour, direct overhead and
transportation. Intersegment profits are eliminated.



| |                                       
| | --------------------------------------
| | d)   Property, Plant and
    Equipment



| |                 
| | ----------------
| | i)   Oil and Gas

The Company employs the full cost method of
accounting for oil and gas interests whereby all costs of
acquisition, exploration for and development of oil and gas
reserves are capitalized and accumulated within cost centres on
a country-by-country basis. Such costs include land acquisition,
geological and geophysical activity, drilling of productive and
non-productive wells, carrying costs directly related to
unproved properties and administrative costs directly related to
exploration and development activities. Interest is capitalized
on certain major capital projects based on the Companys
long-term cost of borrowing.

The provision for depletion of oil and gas
properties and depreciation of associated production facilities
is calculated using the unit of production method, based on
gross proved oil and gas reserves as estimated by the
Companys engineers, for each cost centre. Depreciation of
gas plants and certain other oil and gas facilities is provided
using the straight-line method based on their estimated useful
lives. In the normal course of operations, retirements of oil
and gas interests are accounted for by charging the asset cost,
net of any proceeds, to accumulated depletion or depreciation.
Gains or losses on the disposition of oil and gas properties are
not recognized unless the gain or loss changes the depletion
rate by 20 percent or more.

Costs of acquiring and evaluating significant
unproved oil and gas interests are excluded from costs subject
to depletion and depreciation until it is determined that proved
oil and gas reserves are attributable to such interests or until
impairment occurs. Costs of major development projects are
excluded from costs subject to depletion and depreciation until
the earliest of when a portion of the property becomes capable
of production, or when development activity ceases, or when
impairment occurs.

The aggregate carrying values of oil and gas
interests are subject to cost recovery ceiling tests. Net
capitalized costs in each cost centre are limited to the
estimated future net revenues from proved oil and gas reserves,
at prices and costs in effect at year-end, plus the cost of
unproved properties and major development projects, less
impairment. In addition, the net capitalized costs of all cost
centres, less the related future income tax liability and site
restoration liability, are limited to the estimated future net
revenues from all cost centres plus the net cost of major
development projects and unproved properties less future removal
and site restoration costs, administration expenses, financing
costs and income taxes. Any amounts in excess of these limits
are charged to earnings.

In September 2003, the Accounting Standards
Board (AcSB) of the Canadian Institute of Chartered
Accountants (CICA) issued Accounting
Guideline 16, Oil and Gas Accounting  Full
Cost (AcG-16), which replaces Accounting
Guideline 5, Full Cost Accounting in the Oil and Gas
Industry (AcG-5). AcG-16 will be effective
January 1, 2004. AcG-16 modifies the ceiling test in AcG-5
to be consistent with CICA section 3063, Impairment
of Long-lived Assets, which requires the impairment test
to be performed by comparing the carrying amount of a cost
centre to its fair value. For full cost oil and gas companies an
impairment loss is to be recognized when the carrying amount is
not recoverable and exceeds its fair value. The carrying amount
is not considered recoverable if the carrying amount exceeds the
sum of the undiscounted cash flows expected from the cost
centres use and eventual disposition. Fair value is
estimated using the expected present value approach which
incorporates risks and uncertainties in the expected future cash
flows which are discounted using a risk free rate. AcG-16 is
consistent with CICA section 3475, Disposal of
Long-lived Assets and Discontinued Operations. For full
cost oil and gas companies, discontinued operations presentation
is only used when a cost centre has been disposed of.



| |                                    
| | -----------------------------------
| | ii)   Other Plant and
    Equipment

Depreciation for substantially all other plant
and equipment, except upgrading assets, is provided using the
straight-line method based on estimated useful lives of assets
which range from five to 20 years. Depreciation for
upgrading assets is provided using the unit of production
method, based on the plants estimated productive life.
When the net carrying amount of other plant and equipment, less
related accumulated provisions for future removal and site
restoration costs and future income taxes, exceeds the net
recoverable amount, the excess is charged to earnings. Repairs
and maintenance costs, other than major turnaround costs, are
charged to earnings as incurred. Major turnaround costs are
deferred when incurred and amortized over the estimated period
of time to the next scheduled turnaround. At the time of
disposition of plant and equipment, accounts are relieved of the
asset values and accumulated depreciation and any resulting gain
or loss is reflected in earnings.

8



---



##### 





| |                                                    
| | ---------------------------------------------------
| | iii)  Future Removal and Site
    Restoration Costs

Future removal and site restoration costs, where
they are probable and can be reasonably estimated, are provided
for using the method of depletion or depreciation related to the
asset. Costs are estimated by the Companys engineers based
on current regulations, costs, technology and industry
standards. The annual charge is included in the provision for
depletion, depreciation and amortization. Removal and site
restoration expenditures are charged to the accumulated
provision as incurred.

In March 2003, the AcSB issued CICA
section 3110, Asset Retirement Obligations,
that addresses financial accounting and reporting for
obligations associated with the retirement of tangible
long-lived assets and the related asset retirement costs. The
new recommendations will be effective January 1, 2004 and
are substantially similar to the U.S. Financial Accounting
Standards Board (FASB) Statement No. 143,
Accounting for Asset Retirement Obligations
(FAS 143). Note 20 presents the
recognition, measurement and disclosure required by FAS 143
in the financial statements.



| |                                                     
| | ----------------------------------------------------
| | e)   Impairment or Disposal
    of Long-lived Assets

In December 2002, the AcSB issued CICA
section 3063, Impairment of Long-lived Assets,
and section 3475, Disposal of Long-lived Assets and
Discontinued Operations, that address the accounting and
reporting for the impairment and disposal of long-lived assets
and are substantially similar to FASB Statement No. 144,
Accounting for the Impairment and Disposal of Long-lived
Assets. Section 3063 will be effective
January 1, 2004. Section 3475 was in effect for 2003.
An impairment loss is recognized when the carrying value of a
long-lived asset is not recoverable and exceeds its fair value.
Testing for recoverability uses the undiscounted cash flows
expected from the assets use and disposition. To test for
and measure impairment, long-lived assets are grouped at the
lowest level for which identifiable cash flows are largely
independent.

A long-lived asset that meets the conditions as
held for sale is measured at the lower of its carrying amount or
fair value less costs to sell. Such assets are not amortized
while they are classified as held for sale. The results of
operations of a component of an entity that has been disposed
of, or is classified as held for sale, are reported in
discontinued operations if: i) the operations and cash
flows of the component have been or will be eliminated as a
result of the disposal transaction; and, ii) the entity
will not have a significant continuing involvement in the
operations of the component after the disposal transaction.

A component of an entity comprises operations
and cash flows that can be clearly distinguished operationally
and for financial reporting purposes from the rest of the
enterprise. A component may be a reportable segment or an
operating segment, a reporting unit, a subsidiary or an asset
group.



| |              
| | -------------
| | f)   Goodwill

Goodwill is the excess of the purchase price
paid over the fair value of net assets acquired. Goodwill is
subject to impairment tests on an annual basis unless three
conditions are met: i) the assets and liabilities that make
up the reporting unit have not changed significantly since the
most recent fair value determination; ii) the most recent
fair value determination resulted in an amount that exceeded the
carrying amount of the reporting unit by a substantial margin;
and, iii) based on an analysis of events that have occurred
and circumstances that have changed since the most recent fair
value determination, the likelihood that a current fair value
determination would be less than the current carrying amount of
the reporting unit is remote. The two-step impairment test
begins with comparing the fair value of the reporting unit with
its carrying amount. If any potential impairment is indicated,
then it is quantified by comparing the carrying value of
goodwill to its fair value, based on the fair value of the
assets and liabilities of the reporting unit. Impairment losses
would be recognized in current period earnings. Refer to
note 7, Acquisition of Marathon Canada.



| |                                          
| | -----------------------------------------
| | g)   Derivative Financial
    Instruments

Derivative financial instruments are utilized by
the Company to manage market risk against the volatility in
commodity prices, foreign exchange rates and interest rate
exposures. The Companys policy is not to utilize
derivative financial instruments for speculative purposes.

When applicable, the Company formally documents
all relationships between hedged items and hedging items, the
risk management objectives and strategy 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 Company also formally assesses, both at the
inception of the hedge 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 Company may enter into commodity price
contracts to hedge anticipated sales of oil and natural gas
production to manage its exposure to price fluctuations. The
Companys production is expected to be sufficient to
deliver all required volumes. Gains and losses from these
contracts are recognized in upstream oil and gas revenues as the
related sales occur.

The Company may enter into commodity price
contracts to offset fixed price contracts entered into with
customers and suppliers in order to retain market prices while
meeting customer or supplier pricing requirements. The
Companys production is expected to be sufficient to
deliver all required volumes. Gains and losses from these
contracts are recognized in midstream revenues or cost of sales
as the related sales or purchases occur.

The Company may enter into interest rate swap
agreements to manage its fixed and floating interest rate mix on
long-term debt. These swaps are designated as hedges of the
underlying debt. These agreements require the periodic exchange
of payments without the exchange of the notional principal
amount upon which the payments are based and are recorded as an
adjustment to the interest expense on the hedged debt
instrument. The related amount payable or receivable from the
counterparties is recorded as an adjustment to accrued interest.

9



---



##### 



The Company may enter into foreign exchange
contracts to hedge its foreign currency exposures on
U.S. dollar denominated long-term debt. Gains and losses on
these instruments are accrued under other current, or
non-current, assets or liabilities on the balance sheet and
recognized in foreign exchange in the period to which they
relate, offsetting the respective foreign exchange gains and
losses recognized on the underlying foreign currency long-term
debt. The forward premium or discount on the forward foreign
exchange option contract is amortized as an adjustment to
interest expense over the term of the contract.

The Company may enter into foreign exchange
forwards and foreign exchange collars to hedge anticipated
U.S. dollar denominated sales. Gains and losses on these
instruments are recognized as an adjustment to upstream oil and
gas revenues when the sale is recorded.

Realized and unrealized gains or losses
associated with derivative financial instruments which have been
terminated or cease to be effective prior to maturity are
deferred under current or non-current assets or liabilities on
the balance sheet and recognized into income in the period in
which the underlying hedged transaction is recognized. In the
event that a designated hedged item is sold, extinguishes or
matures prior to the termination of the related derivative
financial instrument, any realized or unrealized gain or loss is
recognized into earnings.

In December 2001, the AcSB issued Accounting
Guideline 13, Hedging Relationships, that
establishes standards for the documentation and effectiveness of
hedging activities that are substantially similar to the
corresponding documentation requirements in FASB Statement
No. 133 Accounting for Derivative Instruments and
Hedging Activities (FAS 133). The new
recommendations will be effective January 1, 2004.
Note 20 discloses the impact of FAS 133 on the
financial statements for 2003.



| |                                  
| | ---------------------------------
| | h)   Employee Future
    Benefits

The Company provides a defined contribution
pension plan and a post-retirement health and dental care plan
to qualified employees. The Company also maintains a defined
benefit pension plan for a small number of employees who did not
choose to join the defined contribution pension plan in 1991.
The cost of the pension benefits earned by employees in the
defined contribution pension plan is paid and expensed when
incurred. The cost of the benefits earned by employees in the
post-retirement health and dental care plan and defined benefit
pension plan is charged to earnings as services are rendered
using the projected benefit method prorated on service. The cost
of the post-retirement health and dental care plan and defined
benefit pension plan reflects a number of assumptions that
affect the expected future benefit payments. These assumptions
include, but are not limited to, attrition, mortality, the rate
of return on pension plan assets and salary escalations for the
defined benefit pension plan and expected health care cost
trends for the post-retirement health and dental care plan. The
plan assets are valued at fair value for the purposes of
calculating the expected return on plan assets.

Adjustments arising out of plan amendments,
changes in assumptions and experience gains and losses are
normally amortized over the expected remaining average service
life of the employee group.



| |                             
| | ----------------------------
| | i)   Revenue
    Recognition

Revenues from the sale of crude oil, natural
gas, natural gas liquids, synthetic crude oil, purchased
commodities and refined petroleum products are recorded on a
gross basis when title passes to an external party. Sales
between the business segments of the Company are eliminated from
sales and operating revenues and cost of sales. Revenues
associated with the sale of transportation, processing and
natural gas storage services are recognized when the services
are provided.



| |                                      
| | -------------------------------------
| | j)   Foreign Currency
    Translation

Results of foreign operations, all of which are
considered financially and operationally integrated, are
translated to Canadian dollars at the monthly average exchange
rates for revenue and expenses, except for depreciation and
depletion which are translated at the rate of exchange
applicable to the related assets. Monetary assets and
liabilities are translated at current exchange rates and
non-monetary assets and liabilities are translated using
historical rates of exchange. Gains or losses resulting from
these translation adjustments are included in earnings. Capital
securities are adjusted to the current rate of exchange and
included in retained earnings.



| |                                  
| | ---------------------------------
| | k)   Stock-based
    Compensation

In accordance with the Companys stock
option plan, common share options may be granted to directors,
officers and certain other employees. The Company does not
recognize compensation expense on the issuance of common share
options under this plan because the exercise price of the
options is equal to the market value of the common shares when
the options are granted. In accordance with CICA
section 3870, Stock-based Compensation and Other
Stock-based Payments, note 16 discloses the impact on
the financial statements for options granted after
January 1, 2002. The recommendations are substantially
similar to those in FASB Statement No. 123,
Accounting for Stock-based Compensation
(FAS 123). Note 20 presents the
disclosures required by FAS 123 in the financial statements.

In September 2003, the AcSB amended the
recommendations on stock-based compensation. The new
recommendations will be effective January 1, 2004 and will
require that all stock-based compensation be measured and
recognized based on the fair value of the instruments and will
result in an expense that is recognized in the financial
statements. The Company intends to adopt the changes
retroactively in 2004 without restatement of prior periods.
Retained earnings for 2004 will be decreased by $44 million
with an increase to contributed surplus of $21 million and
an increase to share capital of $23 million.



| |                            
| | ---------------------------
| | l)   Earnings Per
    Share

Basic common shares outstanding are the weighted
average number of common shares outstanding for each period.
Diluted common shares outstanding are calculated using the
treasury stock method, which assumes that any proceeds received
from in-the-money options would be used to buy back common
shares at the average market price for the period. In addition,
diluted common shares also include the effect of the potential
exercise of any outstanding warrants.

10



---



##### 





| |                     
| | --------------------
| | m)  Reclassification

Certain prior years amounts have been
reclassified to conform with current presentation.

Note 4    Accounts
Receivable

|                                |  |      |     |      |  |      |     |   |  |   |     |  
|------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | -
|                                |  | 2003 |     | 2002 |  | 2001
|                                |  |      |     |      |  |     
|Trade receivables               |  | $    | 568 |      |  | $    | 530 |   |  | $ | 379 |  
|Investment tax credit           |  |      | 48  |      |  |      | 45  |   |  |   |    |  
|Allowance for doubtful accounts |  |      | (12 | )    |  |      | (11 | ) |  |   | (8  | )
|Other                           |  |      | 14  |      |  |      | 8   |   |  |   | 5   |  
|                                |  |      |     |      |  |      |     |   |  |   |     |  
|                                |  | $    | 618 |      |  | $    | 572 |   |  | $ | 376 |  
|                                |  |      |     |      |  |      |     |   |  |   |     |  



| |                            
| | ---------------------------
| | Sale of Accounts Receivable

In November 2003, the Company established a
securitization program to sell, on a revolving basis, up to
$250 million of accounts receivable to a third party. As at
December 31, 2003, $250 million in outstanding
accounts receivable had been sold under the program. The
agreement includes a program fee based on Canadian commercial
paper rates.

In 2002 and 2001, the Company had an agreement to
sell up to $200 million of net trade receivables on a
continual basis. The agreement called for purchase discounts
which were based on Canadian commercial paper rates. The average
effective rate for 2002 and 2001 was approximately
2.8 percent and 4.7 percent, respectively.



|       |            
|------ | -----------
|Note 5 | Inventories

|                                         |  |      |     |      |  |      |     |  |  |   |     | 
|---------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                         |  | 2003 |     | 2002 |  | 2001
|                                         |  |      |     |      |  |     
|Crude oil and refined petroleum products |  | $    | 121 |      |  | $    | 166 |  |  | $ | 140 | 
|Natural gas                              |  |      | 69  |      |  |      | 50  |  |  |   | 69  | 
|Materials, supplies and other            |  |      | 21  |      |  |      | 27  |  |  |   | 17  | 
|                                         |  |      |     |      |  |      |     |  |  |   |     | 
|                                         |  | $    | 211 |      |  | $    | 243 |  |  | $ | 226 | 
|                                         |  |      |     |      |  |      |     |  |  |   |     | 



|       |                              
|------ | -----------------------------
|Note 6 | Property, Plant and Equipment

Refer to note 1, Segmented Financial
Information, which presents the Companys property, plant
and equipment by segment.

Costs of oil and gas properties, including major
development projects, excluded from costs subject to depletion
and depreciation at December 31 were as follows:

|              |  |      |       |      |  |      |       |  |  |   |       | 
|------------- |  | ---- | ----- | ---- |  | ---- | ----- |  |  | - | ----- | 
|              |  | 2003 |       | 2002 |  | 2001
|              |  |      |       |      |  |     
|Canada        |  | $    | 1,814 |      |  | $    | 1,318 |  |  | $ | 1,226 | 
|International |  |      | 54    |      |  |      | 37    |  |  |   | 235   | 
|              |  |      |       |      |  |      |       |  |  |   |       | 
|              |  | $    | 1,868 |      |  | $    | 1,355 |  |  | $ | 1,461 | 
|              |  |      |       |      |  |      |       |  |  |   |       | 



|       |                               
|------ | ------------------------------
|Note 7 | Acquisition of Marathon Canada

Effective October 1, 2003 the Company
acquired all of the issued and outstanding shares of Marathon
Canada Limited and the Western Canadian assets of Marathon
International Petroleum Canada, Ltd. (Marathon
Canada) for cash consideration of
U.S. $611 million (Cdn. $831 million). The
results of Marathon Canada are included in the consolidated
financial statements of the Company from the date of acquisition.

The allocation of the aggregate purchase price
based on the estimated fair values of Marathon Canadas net
assets acquired at October 1, 2003 was as follows:

|                    |                               |            |     |       |  
|------------------- | ----------------------------- | ---------- | --- | ----- | -
|                    |                               | Allocation
|                    |                               |           
|Net assets acquired |                               |            |     |      
|                    | Working capital (1)           |            | $   | 5     |  
|                    | Property, plant and equipment |            |     | 1,008 |  
|                    | Goodwill (2)                  |            |     | 120   |  
|                    | Site restoration              |            |     | (38   | )
|                    | Future income taxes           |            |     | (264  | )
|                    |                               |            |     |      
|                    |                               | $          | 831 |      
|                    |                               |            |     |      






|    |                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Working capital acquired includes cash of
    $22 million.                                                                                       
|   
|(2) | Allocated to the Companys upstream segment
    and not deductible for income tax purposes. Refer to
    note 1, Segmented Financial Information.

In conjunction with the above acquisition of
Marathon Canada, the Company sold certain of the Marathon Canada
oil and gas properties to a third party for cash consideration
of U.S. $320 million (Cdn. $431 million).

11



---



##### 





|       |                                                    
|------ | ---------------------------------------------------
|Note 8 | Cash Flows  Change in Non-cash
    Working Capital



| |                                                                   
| | ------------------------------------------------------------------
| | a)          Change
    in non-cash working capital was as follows:

|                                                |                                          |      |     |      |   |      |      |      |   |  |    |      |  
|----------------------------------------------- | ---------------------------------------- | ---- | --- | ---- | - | ---- | ---- | ---- | - |  | -- | ---- | -
|                                                |                                          | 2003 |     | 2002 |   | 2001
|                                                |                                          |      |     |      |   |     
|Decrease (increase) in non-cash working capital |                                          |      |     |      |   |      |      |      |   |  |    |     
|                                                | Accounts receivable                      |      | $   | (7   | ) |      | $    | (153 | ) |  | $  | 361  |  
|                                                | Inventories                              |      |     | 31   |   |      |      | (17  | ) |  |    | (40  | )
|                                                | Prepaid expenses                         |      |     | (10  | ) |      |      | 1    |   |  |    | 3    |  
|                                                | Accounts payable and accrued liabilities |      |     | 270  |   |      |      | (11  | ) |  |    | (280 | )
|                                                |                                          |      |     |      |   |      |      |      |   |  |    |     
|Change in non-cash working capital              |                                          |      | 284 |      |   |      | (180 | )    |   |  | 44 |     
|Relating to:                                    |                                          |      |     |      |   |      |      |      |   |  |    |     
|                                                | Financing activities                     |      |     | 48   |   |      |      | (9   | ) |  |    | 42   |  
|                                                | Investing activities                     |      |     | 123  |   |      |      | 33   |   |  |    | 18   |  
|                                                |                                          |      |     |      |   |      |      |      |   |  |    |     
|                                                | Operating activities                     |      | $   | 113  |   |      | $    | (204 | ) |  | $  | (16  | )
|                                                |                                          |      |     |      |   |      |      |      |   |  |    |     



| |                                             
| | --------------------------------------------
| | b)          Other
    cash flow information:

|                   |  |      |     |      |  |      |     |  |  |   |     | 
|------------------ |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                   |  | 2003 |     | 2002 |  | 2001
|                   |  |      |     |      |  |     
|Cash taxes paid    |  | $    | 69  |      |  | $    | 20  |  |  | $ | 13  | 
|                   |  |      |     |      |  |      |     |  |  |   |     | 
|Cash interest paid |  | $    | 134 |      |  | $    | 139 |  |  | $ | 145 | 
|                   |  |      |     |      |  |      |     |  |  |   |     | 



|       |                     
|------ | --------------------
|Note 9 | Bank Operating Loans

At December 31, 2003 the Company had
short-term borrowing lines of credit with banks totalling
$195 million (2002 and 2001  $195 million).
As at December 31, 2003, $71 million (2002 
nil; 2001  $100 million) had been used for bank
operating loans and $18 million (2002 
$12 million; 2001  $2 million) had been
used for letters of credit. Interest payable is based on
Bankers Acceptance, money market, or prime rates. During
2003, the weighted average interest rate on short-term
borrowings was approximately 3.7 percent (2002 
2.9 percent; 2001  4.6 percent).



|        |                                             
|------- | --------------------------------------------
|Note 10 | Accounts Payable and Accrued
    Liabilities

|                     |  |      |       |      |  |      |     |  |  |   |     | 
|-------------------- |  | ---- | ----- | ---- |  | ---- | --- |  |  | - | --- | 
|                     |  | 2003 |       | 2002 |  | 2001
|                     |  |      |       |      |  |     
|Trade payables       |  | $    | 58    |      |  | $    | 87  |  |  | $ | 58  | 
|Accrued liabilities  |  |      | 794   |      |  |      | 562 |  |  |   | 547 | 
|Dividend payable     |  |      | 42    |      |  |      | 38  |  |  |   | 38  | 
|Current income taxes |  |      | 117   |      |  |      | 51  |  |  |   | 7   | 
|Other                |  |      | 115   |      |  |      | 56  |  |  |   | 155 | 
|                     |  |      |       |      |  |      |     |  |  |   |     | 
|                     |  | $    | 1,126 |      |  | $    | 794 |  |  | $ | 805 | 
|                     |  |      |       |      |  |      |     |  |  |   |     | 



|        |               
|------- | --------------
|Note 11 | Long-term Debt

|                     |                                      |          |         |               |       |               |   |      |       |      |   |      |       |      |   |   |     |     |  |   |       |     |  |   |     |     | 
|-------------------- | ------------------------------------ | -------- | ------- | ------------- | ----- | ------------- | - | ---- | ----- | ---- | - | ---- | ----- | ---- | - | - | --- | --- |  | - | ----- | --- |  | - | --- | --- | 
|                     |                                      |          |         |               |       |              
|                     |                                      |          |         | Cdn. $ Amount |       | U.S. $ Amount
|                     |                                      |          |         |               |       |              
|                     |                                      | Maturity |         | 2003          |       | 2002          |   | 2001 |       | 2003 |   | 2002 |       | 2001
|                     |                                      |          |         |               |       |               |   |      |       |      |   |      |       |     
|Long-term debt       |                                      |          |         |               |       |               |   |      |       |      |   |      |       |      |   |   |     |     |  |   |       |     |  |   |     |    
|                     | Revolving syndicated credit facility |          |         |               | $     |              |   |      | $     |     |   |      | $     | 185  |   |   | $   |    |  |   | $     |    |  |   | $   | 116 | 
|                     | 6.25% notes                          |          | 2012    |               |       | 517           |   |      |       | 632  |   |      |       |     |   |   |     | 400 |  |   |       | 400 |  |   |     |    | 
|                     | 6.875% notes                         |          |         |               |       |              |   |      |       | 237  |   |      |       | 239  |   |   |     |    |  |   |       | 150 |  |   |     | 150 | 
|                     | 7.125% notes                         |          | 2006    |               |       | 194           |   |      |       | 237  |   |      |       | 239  |   |   |     | 150 |  |   |       | 150 |  |   |     | 150 | 
|                     | 7.55% debentures                     |          | 2016    |               |       | 258           |   |      |       | 316  |   |      |       | 318  |   |   |     | 200 |  |   |       | 200 |  |   |     | 200 | 
|                     | 8.45% senior secured bonds           |          | 2004-12 |               |       | 188           |   |      |       | 256  |   |      |       | 276  |   |   |     | 145 |  |   |       | 162 |  |   |     | 173 | 
|                     | Private placement notes              |          | 2004-5  |               |       | 41            |   |      |       | 107  |   |      |       | 135  |   |   |     | 32  |  |   |       | 68  |  |   |     | 85  | 
|                     | Medium-term notes                    |          | 2004-9  |               |       | 500           |   |      |       | 600  |   |      |       | 700  |   |   |     |    |  |   |       |    |  |   |     |    | 
|                     |                                      |          |         |               |       |               |   |      |       |      |   |      |       |      |   |   |     |     |  |   |       |     |  |   |     |    
|Total long-term debt |                                      |          |         |               | 1,698 |               |   |      | 2,385 |      |   |      | 2,092 |      |   | $ | 927 |     |  | $ | 1,130 |     |  | $ | 874 |    
|                     |                                      |          |         |               |       |               |   |      |       |      |   |      |       |      |   |   |     |     |  |   |       |     |  |   |     |    
|                     | Amount due within one year           |          |         |               |       | (259          | ) |      |       | (421 | ) |      |       | (144 | ) |   |     |     |  |   |       |     |  |   |     |     | 
|                     |                                      |          |         |               |       |               |   |      |       |      |   |      |       |      |   |   |     |     |  |   |       |     |  |   |     |    
|                     |                                      |          |         | $             | 1,439 |               |   | $    | 1,964 |      |   | $    | 1,948 |      |   |   |     |     |  |   |       |     |  |   |     |    
|                     |                                      |          |         |               |       |               |   |      |       |      |   |      |       |      |   |   |     |     |  |   |       |     |  |   |     |    

12



---



##### 



Interest  net for the years ended
December 31 was as follows:

|                   |  |      |     |      |  |      |     |   |  |   |     |  
|------------------ |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | -
|                   |  | 2003 |     | 2002 |  | 2001
|                   |  |      |     |      |  |     
|Long-term debt     |  | $    | 129 |      |  | $    | 128 |   |  | $ | 148 |  
|Short-term debt    |  |      | 2   |      |  |      | 3   |   |  |   | 5   |  
|                   |  |      |     |      |  |      |     |   |  |   |     |  
|                   |  |      | 131 |      |  |      | 131 |   |  |   | 153 |  
|Amount capitalized |  |      | (52 | )    |  |      | (26 | ) |  |   | (51 | )
|                   |  |      |     |      |  |      |     |   |  |   |     |  
|                   |  |      | 79  |      |  |      | 105 |   |  |   | 102 |  
|Interest income    |  |      | (6  | )    |  |      | (1  | ) |  |   | (1  | )
|                   |  |      |     |      |  |      |     |   |  |   |     |  
|                   |  | $    | 73  |      |  | $    | 104 |   |  | $ | 101 |  
|                   |  |      |     |      |  |      |     |   |  |   |     |  

Foreign exchange for the years ended
December 31 was as follows:

|                                                                         |  |      |      |      |  |      |    |  |  |   |    | 
|------------------------------------------------------------------------ |  | ---- | ---- | ---- |  | ---- | -- |  |  | - | -- | 
|                                                                         |  | 2003 |      | 2002 |  | 2001
|                                                                         |  |      |      |      |  |     
|(Gain) loss on translation of U.S. dollar
    denominated long-term debt |  | $    | (315 | )    |  | $    |   |  |  | $ | 82 | 
|Cross currency swaps                                                     |  |      | 73   |      |  |      |   |  |  |   |   | 
|Other losses                                                             |  |      | 27   |      |  |      | 13 |  |  |   | 12 | 
|                                                                         |  |      |      |      |  |      |    |  |  |   |    | 
|                                                                         |  | $    | (215 | )    |  | $    | 13 |  |  | $ | 94 | 
|                                                                         |  |      |      |      |  |      |    |  |  |   |    | 

As at December 31, 2003, other assets
included $19 million (2002  $23 million;
2001  $17 million) of deferred debt issue costs.

The revolving syndicated credit facility allows
the Company to borrow up to $830 million in either Canadian
or U.S. currency from a group of banks on an unsecured
basis. The facility is structured as a one-year committed
revolving credit facility, extendible annually. In the event
that the lenders do not consent to such extension, the revolving
credit facility will convert to a three-year non-revolving
amortizing term loan. Interest rates vary based on Canadian
prime, Bankers Acceptance, U.S. LIBOR or
U.S. base rate, depending on the borrowing option selected,
credit ratings assigned by certain credit rating agencies to the
Companys rated senior unsecured debt and whether the
Company borrows under the revolving or non-revolving condition.

The Companys $100 million credit
facility has substantially the same terms as the syndicated
credit facility.

The 6.25 percent notes were issued
June 14, 2002 and rank on equal footing with other
unsecured indebtedness of the Company. The notes mature
June 15, 2012 and are redeemable at the option of the
Company at any time. Interest is payable semi-annually. The
notes were issued under a base shelf prospectus dated
June 6, 2002 filed with securities regulatory authorities
in Canada and the United States. The prospectus permits Husky to
offer for sale, from time to time, up to
U.S. $1 billion of debt securities during the
25 months from June 6, 2002.

The 7.125 percent notes and the
7.55 percent debentures represent unsecured securities
issued under a trust indenture dated October 31, 1996.
These securities mature in 2006 and 2016, respectively. The
7.125 percent notes are not redeemable prior to maturity.
The 7.55 percent debentures are redeemable, at the option
of the Company, at any time and at a price determinable at the
time of redemption. Interest is payable semi-annually.

The 8.45 percent senior secured bonds
represent securities issued by a subsidiary under a trust
indenture dated July 20, 1999. These securities amortize
semi-annually with final maturity in 2012 and are redeemable
prior to maturity under certain circumstances. Such securities
were issued in connection with the financing of the
Companys share of the costs for the exploration and
development of the Terra Nova oil field located off the East
Coast of Canada. Interest is payable semi-annually. Although the
Company commenced principal payments on August 1, 2001
($8 million) it has the option of subsequently delaying the
repayment schedule by one year. The Company, through a wholly
owned partnership, owns 12.51 percent of the Terra Nova oil
field and associated facilities. The repayment of the securities
is contracted to be made solely from revenue from the Terra Nova
oil field. There is also a charge created by the partnership on
its interest in the assets of the Terra Nova oil field and
associated facilities in favour of the security holders. In
addition, certain financial obligations require letters of
credit or cash equivalents as collateral.

The private placement notes were issued under two
separate note agreements dated January 31, 2001 and have a
weighted average interest rate of 6.86 percent. The notes
are unsecured and redeemable at any time by the Company at a
price determinable at the time of redemption. Interest is
payable semi-annually or quarterly, depending on the particular
note.

The medium-term notes Series B represent
unsecured securities issued under a trust indenture dated
February 3, 1997 and the Series D and E notes
represent unsecured securities issued under a trust indenture
dated May 4, 1999. The amounts, rates and maturities are as
follows:

|         |  |        |     |               |  |               |      |   |  |  |               | 
|-------- |  | ------ | --- | ------------- |  | ------------- | ---- | - |  |  | ------------- | 
|Issue    |  | Amount |     | Interest Rate |  | Maturity Date
|         |  |        |     |               |  |              
|Series B |  | $      | 100 |               |  |               | 6.85 | % |  |  | February 2007 | 
|Series D |  |        | 200 |               |  |               | 6.30 | % |  |  | June 2004     | 
|Series E |  |        | 200 |               |  |               | 6.95 | % |  |  | July 2009     | 
|         |  |        |     |               |  |               |      |   |  |  |               | 
|         |  | $      | 500 |               |  |               |      |   |  |  |               | 
|         |  |        |     |               |  |               |      |   |  |  |               | 

Interest is payable semi-annually on all series.
The Series B and E notes are redeemable at any time at the
option of the Company, at a price determinable at the time of
redemption.

Aggregate maturities of long-term debt for the
next five years are: 2004  $259 million;
2005  $60 million; 2006 
$226 million; 2007  $126 million; and,
2008  $20 million.

13



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##### 





|        |                            
|------- | ---------------------------
|Note 12 | Other Long-term Liabilities

|                         |  |      |     |      |  |      |     |  |  |   |     | 
|------------------------ |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                         |  | 2003 |     | 2002 |  | 2001
|                         |  |      |     |      |  |     
|Site restoration         |  | $    | 303 |      |  | $    | 248 |  |  | $ | 211 | 
|Cross currency swaps     |  |      | 41  |      |  |      |    |  |  |   |    | 
|Interest rate swaps      |  |      | 26  |      |  |      |    |  |  |   |    | 
|Employee future benefits |  |      | 20  |      |  |      | 17  |  |  |   | 16  | 
|Other                    |  |      |    |      |  |      | 1   |  |  |   | 1   | 
|                         |  |      |     |      |  |      |     |  |  |   |     | 
|                         |  | $    | 390 |      |  | $    | 266 |  |  | $ | 228 | 
|                         |  |      |     |      |  |      |     |  |  |   |     | 

The Company has estimated future removal and site
restoration costs of $851 million at December 31, 2003
(2002  $703 million; 2001 
$653 million). During 2003 actual removal and site
restoration expenditures amounted to $35 million
(2002  $17 million; 2001 
$18 million) and were included in capital expenditures.

Note 13    Income
Taxes

The combined provision for income taxes in the
Consolidated Statements of Earnings and Retained Earnings
reflects an effective tax rate which differs from the expected
statutory tax rate. Differences for the years ended
December 31 were accounted for as follows:

|                                    |                                                                     |      |       |       |   |      |       |       |   |   |       |       |  
|----------------------------------- | ------------------------------------------------------------------- | ---- | ----- | ----- | - | ---- | ----- | ----- | - | - | ----- | ----- | -
|                                    |                                                                     | 2003 |       | 2002  |   | 2001
|                                    |                                                                     |      |       |       |   |     
|Earnings before income taxes        |                                                                     |      |       |       |   |      |       |       |   |   |       |      
|                                    | Canadian                                                            |      | $     | 1,572 |   |      | $     | 1,070 |   |   | $     | 1,067 |  
|                                    | Foreign jurisdictions                                               |      |       | 223   |   |      |       | 154   |   |   |       | 7     |  
|                                    |                                                                     |      |       |       |   |      |       |       |   |   |       |      
|                                    |                                                                     |      | 1,795 |       |   |      | 1,224 |       |   |   | 1,074 |      
|Statutory income tax rate (percent) |                                                                     |      | 40.2  |       |   |      | 41.6  |       |   |   | 43.7  |      
|                                    |                                                                     |      |       |       |   |      |       |       |   |   |       |      
|Expected income tax                 |                                                                     |      | 722   |       |   |      | 509   |       |   |   | 469   |      
|Effect on income tax of:            |                                                                     |      |       |       |   |      |       |       |   |   |       |      
|                                    | Change in statutory tax rate                                        |      |       | (161  | ) |      |       | (31   | ) |   |       | (52   | )
|                                    | Return on capital securities                                        |      |       | 2     |   |      |       | (11   | ) |   |       | (18   | )
|                                    | Royalties, lease rentals and mineral taxes
    payable to the crown |      |       | 175   |   |      |       | 159   |   |   |       | 184   |  
|                                    | Resource allowance on Canadian production income                    |      |       | (183  | ) |      |       | (212  | ) |   |       | (219  | )
|                                    | Non-deductible capital taxes                                        |      |       | 22    |   |      |       | 18    |   |   |       | 20    |  
|                                    | Gains and losses on foreign exchange                                |      |       | (45   | ) |      |       |      |   |   |       | 20    |  
|                                    | Rate benefit on timing of partnership earnings                      |      |       | (23   | ) |      |       |      |   |   |       |      |  
|                                    | Foreign jurisdictions                                               |      |       | (16   | ) |      |       | (13   | ) |   |       |      |  
|                                    | Other  net                                                         |      |       | (17   | ) |      |       | (10   | ) |   |       | (2    | )
|                                    |                                                                     |      |       |       |   |      |       |       |   |   |       |      
|                                    |                                                                     | $    | 476   |       |   | $    | 409   |       |   | $ | 402   |      
|                                    |                                                                     |      |       |       |   |      |       |       |   |   |       |      
|Charged (credited) to:              |                                                                     |      |       |       |   |      |       |       |   |   |       |      
|                                    | Income tax expense                                                  |      | $     | 474   |   |      | $     | 420   |   |   | $     | 420   |  
|                                    | Retained earnings                                                   |      |       | 2     |   |      |       | (11   | ) |   |       | (18   | )
|                                    |                                                                     |      |       |       |   |      |       |       |   |   |       |      
|                                    |                                                                     | $    | 476   |       |   | $    | 409   |       |   | $ | 402   |      
|                                    |                                                                     |      |       |       |   |      |       |       |   |   |       |      

The future income tax liability at
December 31 comprised the tax effect of temporary
differences as follows:

|                       |                                                   |      |       |       |  |      |       |       |  |   |       |       | 
|---------------------- | ------------------------------------------------- | ---- | ----- | ----- |  | ---- | ----- | ----- |  | - | ----- | ----- | 
|                       |                                                   | 2003 |       | 2002  |  | 2001
|                       |                                                   |      |       |       |  |     
|Future tax liabilities |                                                   |      |       |       |  |      |       |       |  |   |       |      
|                       | Property, plant and equipment                     |      | $     | 2,261 |  |      | $     | 2,014 |  |   | $     | 1,882 | 
|                       | Foreign exchange gains taxable on realization     |      |       | 32    |  |      |       |      |  |   |       |      | 
|                       | Timing of partnership items                       |      |       | 504   |  |      |       | 185   |  |   |       |      | 
|                       | Other temporary differences                       |      |       | 2     |  |      |       | 30    |  |   |       | 7     | 
|                       |                                                   |      |       |       |  |      |       |       |  |   |       |      
|                       |                                                   |      | 2,799 |       |  |      | 2,229 |       |  |   | 1,889 |      
|Future tax assets      |                                                   |      |       |       |  |      |       |       |  |   |       |      
|                       | Loss carryforwards                                |      |       | 2     |  |      |       | 7     |  |   |       | 28    | 
|                       | Foreign exchange losses deductible on realization |      |       |      |  |      |       | 28    |  |   |       | 26    | 
|                       | Site restoration and other deferred credits       |      |       | 112   |  |      |       | 105   |  |   |       | 93    | 
|                       | Provincial royalty rebates                        |      |       | 52    |  |      |       | 48    |  |   |       | 46    | 
|                       | Other temporary differences                       |      |       | 25    |  |      |       | 38    |  |   |       | 37    | 
|                       |                                                   |      |       |       |  |      |       |       |  |   |       |      
|                       |                                                   |      | 191   |       |  |      | 226   |       |  |   | 230   |      
|                       |                                                   |      |       |       |  |      |       |       |  |   |       |      
|                       |                                                   | $    | 2,608 |       |  | $    | 2,003 |       |  | $ | 1,659 |      
|                       |                                                   |      |       |       |  |      |       |       |  |   |       |      

Note 14    Commitments
and Contingencies

Certain former owners of interests in the
upgrading assets retained a 20-year upside financial interest
expiring in 2014 which requires payments to them when the
average differential between heavy crude oil feedstock and
synthetic crude oil exceeds $6.50 per barrel. The calculation is
based on

14



---



##### 



a two-year rolling average of the differential.
During 2003, the Company capitalized $10 million
(2002  $23 million; 2001 
$32 million) of payments under this arrangement.


The Company has firm commitments for
transportation services that require the payment of tariffs. The
Company has sufficient production to utilize these transmission
services.

At December 31, 2003, the Company had
commitments for non-cancellable operating leases and other
long-term agreements that require the following minimum future
payments:

|                                         |  |      |       |      |  |      |     |      |  |      |     |       |  |       |     |  |  |   |     |  |  |   |       |  |  |   |       | 
|---------------------------------------- |  | ---- | ----- | ---- |  | ---- | --- | ---- |  | ---- | --- | ----- |  | ----- | --- |  |  | - | --- |  |  | - | ----- |  |  | - | ----- | 
|                                         |  |      |       |      |  |      |     |      |  |      |     | After |  |      
|                                         |  | 2004 |       | 2005 |  | 2006 |     | 2007 |  | 2008 |     | 2008  |  | Total
|                                         |  |      |       |      |  |      |     |      |  |      |     |       |  |      
|Operating leases                         |  | $    | 50    |      |  | $    | 68  |      |  | $    | 76  |       |  | $     | 75  |  |  | $ | 70  |  |  | $ | 175   |  |  | $ | 514   | 
|Firm transportation agreements           |  |      | 236   |      |  |      | 219 |      |  |      | 224 |       |  |       | 199 |  |  |   | 170 |  |  |   | 740   |  |  |   | 1,788 | 
|Unconditional purchase obligations       |  |      | 332   |      |  |      | 234 |      |  |      | 210 |       |  |       | 118 |  |  |   | 6   |  |  |   | 15    |  |  |   | 915   | 
|Exploration lease agreements             |  |      | 47    |      |  |      | 47  |      |  |      | 73  |       |  |       | 51  |  |  |   | 46  |  |  |   | 233   |  |  |   | 497   | 
|Engineering and construction commitments |  |      | 391   |      |  |      | 206 |      |  |      |    |       |  |       |    |  |  |   |    |  |  |   |      |  |  |   | 597   | 
|                                         |  |      |       |      |  |      |     |      |  |      |     |       |  |       |     |  |  |   |     |  |  |   |       |  |  |   |       | 
|                                         |  | $    | 1,056 |      |  | $    | 774 |      |  | $    | 583 |       |  | $     | 443 |  |  | $ | 292 |  |  | $ | 1,163 |  |  | $ | 4,311 | 
|                                         |  |      |       |      |  |      |     |      |  |      |     |       |  |       |     |  |  |   |     |  |  |   |       |  |  |   |       | 

The Company is involved in various claims and
litigation arising in the normal course of business. While the
outcome of these matters is uncertain and there can be no
assurance that such matters will be resolved in the
Companys favour, the Company does not currently believe
that the outcome of adverse decisions in any pending or
threatened proceedings related to these and other matters or any
amount which it may be required to pay by reason thereof would
have a material adverse impact on its financial position,
results of operations or liquidity.

The Company has income tax filings that are
subject to audit and potential reassessment. The findings may
impact the tax liability of the Company. The final results are
not reasonably determinable at this time and management believes
that it has adequately provided for current and future income
taxes.

Note 15    Capital
Securities

The Company issued U.S. $225 million
unsecured capital securities under an indenture dated
August 10, 1998. Such securities rank junior to all senior
debt and other financial debt of the Company. They yield an
annual return of 8.9 percent, payable semi-annually until
August 15, 2008 and mature in 2028. The capital securities
are redeemable, in whole or in part, by the Company at any time
prior to August 15, 2008 at a price determinable at the
time of redemption. They are redeemable at par, in whole but not
in part, by the Company on or after August 15, 2008. If not
redeemed in whole, commencing on August 15, 2008, the
annual return changes to a floating rate equal to
U.S. LIBOR plus 5.50 percent payable semi-annually.
The Company has the right at any time prior to maturity to defer
payment of the return on the securities. Since the Company also
has the unrestricted ability to settle its deferred return,
principal and redemption obligations through the issuance of
common or preferred shares, the principal amount of the capital
securities, net of issue costs, has been classified as equity.
The return amount, net of income taxes, is classified as a
distribution of equity. Return on capital securities comprises
the return and foreign exchange on the capital securities.

The amounts disclosed as capital securities and
accrued return in shareholders equity at December 31
were as follows:

|                               |  |      |     |      |  |      |     |   |  |   |     |  
|------------------------------ |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | -
|                               |  | 2003 |     | 2002 |  | 2001
|                               |  |      |     |      |  |     
|Capital securities  U.S. $225 |  | $    | 291 |      |  | $    | 355 |   |  | $ | 358 |  
|Unamortized costs of issue     |  |      | (3  | )    |  |      | (3  | ) |  |   | (3  | )
|Accrued return                 |  |      | 10  |      |  |      | 12  |   |  |   | 12  |  
|                               |  |      |     |      |  |      |     |   |  |   |     |  
|                               |  | $    | 298 |      |  | $    | 364 |   |  | $ | 367 |  
|                               |  |      |     |      |  |      |     |   |  |   |     |  

In November 2003 the AcSB revised recommendations
in CICA section 3860, Financial
Instruments  Disclosure and Presentation, on
the classification of obligations that must or could be settled
with an entitys own equity instruments. The new
recommendations will be effective January 1, 2005 and will
result in the Companys capital securities being classified
as liabilities instead of equity. The accrued return on the
capital securities and the issue costs would be classified
outside of shareholders equity. The return on the capital
securities would be a charge to earnings. The revision will be
applied retroactively in 2005.

15



---



##### 



Note 16    Share
Capital

The Companys authorized share capital is as
follows:

Common shares  an unlimited number of
no par value.

Preferred shares  an unlimited number
of no par value, none outstanding.

Changes to issued share capital were as follows:



| |              
| | -------------
| | Common Shares

|                               |  |                  |             |        |  |   |       | 
|------------------------------ |  | ---------------- | ----------- | ------ |  | - | ----- | 
|                               |  | Number of Shares |             | Amount
|                               |  |                  |             |       
|January 1, 2001                |  |                  | 415,803,083 |        |  | $ | 3,388 | 
|Options and warrants exercised |  |                  | 1,075,010   |        |  |   | 9     | 
|                               |  |                  |             |        |  |   |       | 
|December 31, 2001              |  |                  | 416,878,093 |        |  |   | 3,397 | 
|Options and warrants exercised |  |                  | 995,508     |        |  |   | 9     | 
|                               |  |                  |             |        |  |   |       | 
|December 31, 2002              |  |                  | 417,873,601 |        |  |   | 3,406 | 
|Options and warrants exercised |  |                  | 4,302,141   |        |  |   | 51    | 
|                               |  |                  |             |        |  |   |       | 
|December 31, 2003              |  |                  | 422,175,742 |        |  | $ | 3,457 | 
|                               |  |                  |             |        |  |   |       | 



| |              
| | -------------
| | Stock Options

At December 31, 2003, 25.7 million
common shares were reserved for issuance under the Company stock
option plan. The exercise price of the option is equal to the
average market price of the Companys common shares during
the five trading days prior to the date of the award. A downward
adjustment of $0.82 to the exercise price of all outstanding
stock options effective September 3, 2003 was made pursuant
to the terms of the stock option plan under which the options
were issued as a result of the special $1.00 per share dividend
that was declared on July 23, 2003. Under the stock option
plan the options awarded have a maximum term of five years and
vest over three years on the basis of one-third per year.

The following options to purchase common shares
have been awarded to directors, officers and certain other
employees:

|                  |  |             |        |                 |  |             |       |             |  |  |   |  |  |  |       | 
|----------------- |  | ----------- | ------ | --------------- |  | ----------- | ----- | ----------- |  |  | - |  |  |  | ----- | 
|                  |  |             |        |                 |  | Weighted    |       |            
|                  |  |             |        | Weighted        |  | Average     |       |            
|                  |  | Number of   |        | Average         |  | Contractual |       | Options    
|                  |  | Shares      |        | Exercise Prices |  | Life        |       | Exercisable
|                  |  |             |        |                 |  |             |       |            
|                  |  | (thousands) |        |                 |  | (years)     |       | (thousands)
|January 1, 2001   |  |             | 9,761  |                 |  | $           | 13.91 |             |  |  | 4 |  |  |  | 1,372 | 
|Granted           |  |             | 664    |                 |  | $           | 15.60 |             |  |  | 4 |  |  |  |       | 
|Exercised         |  |             | (656   | )               |  | $           | 13.99 |             |  |  | 3 |  |  |  |       | 
|Forfeited         |  |             | (1,167 | )               |  | $           | 15.81 |             |  |  | 2 |  |  |  |       | 
|                  |  |             |        |                 |  |             |       |             |  |  |   |  |  |  |       | 
|December 31, 2001 |  |             | 8,602  |                 |  | $           | 13.78 |             |  |  | 4 |  |  |  | 2,853 | 
|Granted           |  |             | 568    |                 |  | $           | 16.11 |             |  |  | 5 |  |  |  |       | 
|Exercised         |  |             | (608   | )               |  | $           | 13.63 |             |  |  | 2 |  |  |  |       | 
|Forfeited         |  |             | (642   | )               |  | $           | 14.37 |             |  |  | 3 |  |  |  |       | 
|                  |  |             |        |                 |  |             |       |             |  |  |   |  |  |  |       | 
|December 31, 2002 |  |             | 7,920  |                 |  | $           | 13.91 |             |  |  | 3 |  |  |  | 4,822 | 
|Granted           |  |             | 591    |                 |  | $           | 19.17 |             |  |  | 5 |  |  |  |       | 
|Exercised         |  |             | (3,789 | )               |  | $           | 13.45 |             |  |  | 2 |  |  |  |       | 
|Forfeited         |  |             | (125   | )               |  | $           | 14.71 |             |  |  | 2 |  |  |  |       | 
|                  |  |             |        |                 |  |             |       |             |  |  |   |  |  |  |       | 
|December 31, 2003 |  |             | 4,597  |                 |  | $           | 13.88 |             |  |  | 2 |  |  |  | 3,564 | 
|                  |  |             |        |                 |  |             |       |             |  |  |   |  |  |  |       | 

At December 31, 2003, the options
outstanding had exercise prices ranging from $10.34 to $22.01.



| |         
| | --------
| | Warrants

In 2000, the Company granted 1.4 million
Renaissance Energy Ltd. (Renaissance) replacement
options to purchase common shares of Husky in exchange for
certain share purchase options to purchase common shares of
Renaissance previously held by employees of Renaissance. The
former shareholders of Husky Oil Limited were also granted
warrants to acquire, for no additional consideration, 1.86
common shares of the Company for each common share issued on the
exercise of a Renaissance replacement option. The warrants are
exercisable only if and when the Renaissance replacement options
are exercised and provide for the issue of a maximum of
2.5 million common shares. During 2003, 276,500 warrants
were exercised (2002  208,500; 2001 
226,000). As at December 31, 2003, there were 295,820
common shares remaining which could potentially be issued as a
result of the exercise of these warrants. The Renaissance
replacement options had a weighted average contractual life of
0.6 years.

16



---



##### 





| |                         
| | ------------------------
| | Stock-based Compensation

The fair values of all common share options
granted are estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average fair
market value of options granted during the year and the
assumptions used in their determination are as noted below:

|                                              |  |      |      |      |  |      |      |  |  |   |      | 
|--------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                              |  | 2003 |      | 2002 |  | 2001
|                                              |  |      |      |      |  |     
|Weighted average fair market value per option |  | $    | 4.00 |      |  | $    | 5.19 |  |  | $ | 5.70 | 
|Risk-free interest rate (percent)             |  |      | 3.9  |      |  |      | 3.6  |  |  |   | 3.5  | 
|Volatility (percent)                          |  |      | 23   |      |  |      | 43   |  |  |   | 45   | 
|Expected life (years)                         |  |      | 5    |      |  |      | 5    |  |  |   | 5    | 
|Expected annual dividend per share            |  | $    | 0.36 |      |  | $    | 0.36 |  |  | $ | 0.36 | 

The fair values of all common share options
granted prior to September 3, 2003 were revalued at the
modification date using the Black-Scholes option-pricing model.
The weighted average fair market value of outstanding stock
options as at September 3, 2003 and the assumptions used in
their determination are as noted below:

|                                              |  |   |      | 
|--------------------------------------------- |  | - | ---- | 
|Weighted average fair market value per option |  | $ | 7.14 | 
|Risk-free interest rate (percent)             |  |   | 2.8  | 
|Volatility (percent)                          |  |   | 20   | 
|Expected life (years)                         |  |   | 2.3  | 
|Expected annual divided per share             |  | $ | 0.40 | 

The Company follows the intrinsic value method of
accounting for stock-based compensation for its stock option
plan, under which compensation cost is not recognized. If the
Company applied the fair value method, additional compensation
cost of $3.9 million for all options granted would be
recognized over the vesting period due to the modification of
all options outstanding. For the year ended December 31,
2003, additional compensation cost of $3.6 million would be
recognized.

If the Company applied the fair value method at
the grant dates for options granted after January 1, 2002
and also to all options granted, the Companys net earnings
and earnings per share would have been as follows:

|                                                                    |                                       |      |    |       |  |      |    |       |  |   |    |       | 
|------------------------------------------------------------------- | ------------------------------------- | ---- | -- | ----- |  | ---- | -- | ----- |  | - | -- | ----- | 
|                                                                    |                                       | 2003 |    | 2002  |  | 2001
|                                                                    |                                       |      |    |       |  |     
|Compensation cost  options granted
    after January 1, 2002(1)    |                                       | $    | 5  |       |  | $    |   |       |  | $ |   |      
|Compensation cost  all options
    granted(1)                      |                                       | $    | 14 |       |  | $    | 13 |       |  | $ | 13 |      
|Net earnings available to common shareholders                       |                                       |      |    |       |  |      |    |       |  |   |    |      
|                                                                    | As reported                           |      | $  | 1,357 |  |      | $  | 787   |  |   | $  | 620   | 
|                                                                    | Options granted after January 1, 2002 |      | $  | 1,352 |  |      | $  | 787   |  |   | $  | 620   | 
|                                                                    | All options granted                   |      | $  | 1,343 |  |      | $  | 774   |  |   | $  | 607   | 
|Weighted average number of common shares
    outstanding (millions) |                                       |      |    |       |  |      |    |       |  |   |    |      
|                                                                    | Basic                                 |      |    | 419.5 |  |      |    | 417.4 |  |   |    | 416.1 | 
|                                                                    | Diluted                               |      |    | 421.5 |  |      |    | 419.3 |  |   |    | 418.6 | 
|Basic earnings per share                                            |                                       |      |    |       |  |      |    |       |  |   |    |      
|                                                                    | As reported                           |      | $  | 3.23  |  |      | $  | 1.88  |  |   | $  | 1.49  | 
|                                                                    | Options granted after January 1, 2002 |      | $  | 3.22  |  |      | $  | 1.88  |  |   | $  | 1.49  | 
|                                                                    | All options granted                   |      | $  | 3.20  |  |      | $  | 1.86  |  |   | $  | 1.46  | 
|Diluted earnings per share                                          |                                       |      |    |       |  |      |    |       |  |   |    |      
|                                                                    | As reported                           |      | $  | 3.22  |  |      | $  | 1.88  |  |   | $  | 1.48  | 
|                                                                    | Options granted after January 1, 2002 |      | $  | 3.21  |  |      | $  | 1.88  |  |   | $  | 1.48  | 
|                                                                    | All options granted                   |      | $  | 3.18  |  |      | $  | 1.85  |  |   | $  | 1.45  | 



---



|    |                           
|--- | --------------------------
|(1) | Includes options modified.

Effective January 1, 2004 the Company is
required to measure stock-based compensation and recognize an
expense in the financial statements. The Company will be
adopting the change in 2004 on a retroactive basis without
restatement of prior periods for all options granted. Retained
earnings will be decreased by $44 million, which includes a
cost of $4 million for the year ended December 31,
2000.



| |                           
| | --------------------------
| | Earnings Per Share Amounts

The calculation of basic earnings per common
share is based on net earnings after deducting return on capital
securities, net of applicable income taxes, divided by the
weighted average number of common shares outstanding.

Diluted earnings per common share includes the
dilutive impact of options and warrants outstanding under the
Company stock option plan calculated using the treasury stock
method. Shares potentially issuable on the settlement of the
capital securities have not been included in the determination
of diluted earnings per common share, as the Company has neither
the obligation nor intention to settle amounts due through the
issuance of shares.

During 2003 the Company declared dividends of
$1.38 per common share (2002 and 2001  $0.36 per
common share), including a special dividend of $1.00 per common
share.

17



---



##### 



Note 17    Employee
Future Benefits

The Company currently provides a defined
contribution pension plan for all qualified employees. The
Company also maintains a defined benefit pension plan, which is
closed to new entrants, and all current participants are vested.
The Company also provides certain health and dental coverage to
its retirees which is accrued over the expected average
remaining service life of the employees.

Weighted average long-term assumptions used for
the defined benefit pension plan and the post-retirement health
and dental care plan were as follows:

|                                                                |  |           |     |      |  |      |     |  |  |  |     | 
|--------------------------------------------------------------- |  | --------- | --- | ---- |  | ---- | --- |  |  |  | --- | 
|                                                                |  | 2003      |     | 2002 |  | 2001
|                                                                |  |           |     |      |  |     
|                                                                |  |          
|                                                                |  | (percent)
|Discount rate                                                   |  |           | 6.0 |      |  |      | 6.3 |  |  |  | 7.3 | 
|Long-term rate of increase in compensation levels
    (percent) |  |           | 5.0 |      |  |      | 5.0 |  |  |  | 5.0 | 
|Long-term rate of return on plan assets
    (percent)           |  |           | 8.0 |      |  |      | 8.0 |  |  |  | 8.0 | 

The average health care cost trend used was eight
percent, which is reduced by 0.50 percent until 2009. The
average dental care cost trend used was four percent, which
remains constant.



| |                             
| | ----------------------------
| | Defined Benefit Pension Plan

The status of the defined benefit pension plan at
December 31 was as follows:

|                                      |  |      |     |      |  |      |     |   |  |   |    |  
|------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | -- | -
|Benefit Obligation                    |  | 2003 |     | 2002 |  | 2001
|                                      |  |      |     |      |  |     
|Benefit obligation, beginning of year |  | $    | 108 |      |  | $    | 95  |   |  | $ | 93 |  
|Current service cost                  |  |      | 2   |      |  |      | 2   |   |  |   | 1  |  
|Interest cost                         |  |      | 7   |      |  |      | 7   |   |  |   | 6  |  
|Benefits paid                         |  |      | (6  | )    |  |      | (6  | ) |  |   | (5 | )
|Actuarial losses                      |  |      | 7   |      |  |      | 10  |   |  |   |   |  
|                                      |  |      |     |      |  |      |     |   |  |   |    |  
|Benefit obligation, end of year       |  | $    | 118 |      |  | $    | 108 |   |  | $ | 95 |  
|                                      |  |      |     |      |  |      |     |   |  |   |    |  

|                                             |  |      |    |      |  |      |     |   |  |   |    |  
|-------------------------------------------- |  | ---- | -- | ---- |  | ---- | --- | - |  | - | -- | -
|Fair Value of Plan Assets                    |  | 2003 |    | 2002 |  | 2001
|                                             |  |      |    |      |  |     
|Fair value of plan assets, beginning of year |  | $    | 77 |      |  | $    | 85  |   |  | $ | 90 |  
|Contributions                                |  |      | 8  |      |  |      | 2   |   |  |   | 2  |  
|Benefits paid                                |  |      | (6 | )    |  |      | (6  | ) |  |   | (5 | )
|Return on plan assets                        |  |      | 6  |      |  |      | 7   |   |  |   | 6  |  
|Gain (loss) on plan assets                   |  |      | 2  |      |  |      | (11 | ) |  |   | (8 | )
|Foreign exchange losses                      |  |      | (2 | )    |  |      |    |   |  |   |   |  
|                                             |  |      |    |      |  |      |     |   |  |   |    |  
|Fair value of plan assets, end of year       |  | $    | 85 |      |  | $    | 77  |   |  | $ | 85 |  
|                                             |  |      |    |      |  |      |     |   |  |   |    |  

|                                |  |      |      |      |  |      |      |   |  |   |     |  
|------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | --- | -
|Funded Status of Plan           |  | 2003 |      | 2002 |  | 2001
|                                |  |      |      |      |  |     
|Fair value of plan assets       |  | $    | 85   |      |  | $    | 77   |   |  | $ | 85  |  
|Benefit obligation              |  |      | (118 | )    |  |      | (108 | ) |  |   | (95 | )
|Excess assets (obligation)      |  |      | (33  | )    |  |      | (31  | ) |  |   | (10 | )
|Unrecognized past service costs |  |      | 1    |      |  |      | 1    |   |  |   |    |  
|Unrecognized losses             |  |      | 32   |      |  |      | 27   |   |  |   | 6   |  
|                                |  |      |      |      |  |      |      |   |  |   |     |  
|Accrued benefit liability       |  | $    |     |      |  | $    | (3   | ) |  | $ | (4  | )
|                                |  |      |      |      |  |      |      |   |  |   |     |  

The composition of the defined benefit pension
plans assets at year-end 2003 was U.S. common
equities 15 percent, Canadian common equities
27 percent, Canadian mutual funds 12 percent, Canadian
government bonds 33 percent and Canadian corporate bonds
13 percent.

During 2003 Husky contributed $8 million to
the defined benefit pension plans assets, $6 million
of which was in respect of additional contributions as a result
of the plans deficiency. Husky currently plans to
contribute a similar amount in 2004.

18



---



##### 





| |                                                
| | -----------------------------------------------
| | Post-retirement Health and Dental Care
    Plan

The status of the post-retirement health and
dental care plan at December 31 was as follows:

|                                      |  |      |    |      |  |      |    |  |  |   |    | 
|------------------------------------- |  | ---- | -- | ---- |  | ---- | -- |  |  | - | -- | 
|Benefit Obligation                    |  | 2003 |    | 2002 |  | 2001
|                                      |  |      |    |      |  |     
|Benefit obligation, beginning of year |  | $    | 21 |      |  | $    | 16 |  |  | $ | 14 | 
|Current service cost                  |  |      | 2  |      |  |      | 1  |  |  |   | 1  | 
|Interest cost                         |  |      | 1  |      |  |      | 1  |  |  |   | 1  | 
|Benefits paid                         |  |      | (1 | )    |  |      |   |  |  |   |   | 
|Actuarial losses                      |  |      |   |      |  |      | 3  |  |  |   |   | 
|                                      |  |      |    |      |  |      |    |  |  |   |    | 
|Benefit obligation, end of year       |  | $    | 23 |      |  | $    | 21 |  |  | $ | 16 | 
|                                      |  |      |    |      |  |      |    |  |  |   |    | 

|                          |  |      |     |      |  |      |     |   |  |   |     |  
|------------------------- |  | ---- | --- | ---- |  | ---- | --- | - |  | - | --- | -
|Funded Status of Plan     |  | 2003 |     | 2002 |  | 2001
|                          |  |      |     |      |  |     
|Benefit obligation        |  | $    | (23 | )    |  | $    | (21 | ) |  | $ | (16 | )
|Unrecognized losses       |  |      | 3   |      |  |      | 4   |   |  |   |    |  
|                          |  |      |     |      |  |      |     |   |  |   |     |  
|Accrued benefit liability |  | $    | (20 | )    |  | $    | (17 | ) |  | $ | (16 | )
|                          |  |      |     |      |  |      |     |   |  |   |     |  

The assumed health care cost trend can have a
significant effect on the amounts reported for Huskys
post-retirement health and dental care plan. A one percent
increase and decrease in the assumed trend rate would have the
following effect:

|                                                         |  |             |   |             |  |   |    |  
|-------------------------------------------------------- |  | ----------- | - | ----------- |  | - | -- | -
|                                                         |  | 1% Increase |   | 1% Decrease
|                                                         |  |             |   |            
|Effect on total service and interest cost
    components |  | $           | 1 |             |  | $ |   |  
|Effect on post-retirement benefit obligation             |  | $           | 4 |             |  | $ | (3 | )



| |                                                                       
| | ----------------------------------------------------------------------
| | Pension Expense and Post-retirement Health
    and Dental Care Expense

The expenses for the years ended December 31
were as follows:

|                                  |                                      |      |    |      |   |      |    |    |   |   |   |    |  
|--------------------------------- | ------------------------------------ | ---- | -- | ---- | - | ---- | -- | -- | - | - | - | -- | -
|Pension Expense                   |                                      | 2003 |    | 2002 |   | 2001
|                                  |                                      |      |    |      |   |     
|Defined benefit pension plan      |                                      |      |    |      |   |      |    |    |   |   |   |   
|                                  | Employer current service cost        |      | $  | 2    |   |      | $  | 2  |   |   | $ | 1  |  
|                                  | Interest cost                        |      |    | 7    |   |      |    | 7  |   |   |   | 6  |  
|                                  | Expected return on plan assets       |      |    | (6   | ) |      |    | (7 | ) |   |   | (6 | )
|                                  | Amortization of net actuarial losses |      |    | 2    |   |      |    |   |   |   |   |   |  
|                                  |                                      |      |    |      |   |      |    |    |   |   |   |   
|                                  |                                      |      | 5  |      |   |      | 2  |    |   |   | 1 |   
|Defined contribution pension plan |                                      |      | 11 |      |   |      | 10 |    |   |   | 8 |   
|                                  |                                      |      |    |      |   |      |    |    |   |   |   |   
|Total expense                     |                                      | $    | 16 |      |   | $    | 12 |    |   | $ | 9 |   
|                                  |                                      |      |    |      |   |      |    |    |   |   |   |   

|                                               |  |      |   |      |  |      |   |  |  |   |   | 
|---------------------------------------------- |  | ---- | - | ---- |  | ---- | - |  |  | - | - | 
|Post-retirement Health and Dental Care Expense |  | 2003 |   | 2002 |  | 2001
|                                               |  |      |   |      |  |     
|Employer current service cost                  |  | $    | 2 |      |  | $    | 1 |  |  | $ | 1 | 
|Interest cost                                  |  |      | 1 |      |  |      | 1 |  |  |   | 1 | 
|                                               |  |      |   |      |  |      |   |  |  |   |   | 
|Total expense                                  |  | $    | 3 |      |  | $    | 2 |  |  | $ | 2 | 
|                                               |  |      |   |      |  |      |   |  |  |   |   | 

Note 18    Related
Party Transactions

Husky, in the ordinary course of business,
entered into a lease for an eight-year term effective
September 1, 2000 with Western Canadian Place Ltd. The
terms of the lease provide for the lease of office space,
management services and operating costs at commercial rates.
Western Canadian Place Ltd. is indirectly controlled by
Huskys principal shareholders. During 2003 Husky paid
approximately $17 million for office space in Western
Canadian Place.

Husky did not have any customers that constituted
more than five percent of total sales and operating revenues
during 2003.

Note 19    Financial
Instruments and Risk Management



| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Carrying Values and Estimated Fair Values
    of Financial Assets and Liabilities

The carrying value of cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities
approximates their fair value due to the short-term maturity of
these instruments. The estimated fair value of the long-term
debt at December 31 was as follows:

|               |  |          |       |       |  |          |       |       |  |          |       |       |  |   |       |  |  |   |       |  |  |   |       | 
|-------------- |  | -------- | ----- | ----- |  | -------- | ----- | ----- |  | -------- | ----- | ----- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | 
|               |  |          |       |       |  |         
|               |  | 2003     |       | 2002  |  | 2001    
|               |  |          |       |       |  |         
|               |  | Carrying |       | Fair  |  | Carrying |       | Fair  |  | Carrying |       | Fair 
|               |  | Value    |       | Value |  | Value    |       | Value |  | Value    |       | Value
|               |  |          |       |       |  |          |       |       |  |          |       |      
|Long-term debt |  | $        | 1,698 |       |  | $        | 1,869 |       |  | $        | 2,385 |       |  | $ | 2,579 |  |  | $ | 2,092 |  |  | $ | 2,143 | 

19



---



##### 



The fair value of the long-term debt is the
present value of future cash flows associated with the debt.
Market information such as treasury rates and credit spreads is
used to determine the appropriate discount rates.



| |                                                          
| | ---------------------------------------------------------
| | Unrecognized Gains (Losses) on Derivative
    Instruments

|                                 |                            |      |   |      |   |      |   |    |   |  |   |     |  
|-------------------------------- | -------------------------- | ---- | - | ---- | - | ---- | - | -- | - |  | - | --- | -
|                                 |                            | 2003 |   | 2002 |   | 2001
|                                 |                            |      |   |      |   |     
|Commodity price risk management  |                            |      |   |      |   |      |   |    |   |  |   |    
|                                 | Natural gas                |      | $ | (8   | ) |      | $ | (4 | ) |  | $ | 15  |  
|                                 | Crude oil                  |      |   | (109 | ) |      |   | 6  |   |  |   |    |  
|                                 | Power consumption          |      |   | 2    |   |      |   |   |   |  |   |    |  
|Interest rate risk management    |                            |      |   |      |   |      |   |    |   |  |   |    
|                                 | Interest rate swaps        |      |   | 31   |   |      |   | 86 |   |  |   | 4   |  
|Foreign currency risk management |                            |      |   |      |   |      |   |    |   |  |   |    
|                                 | Foreign exchange contracts |      |   | (19  | ) |      |   | (7 | ) |  |   | (29 | )
|                                 | Foreign exchange forwards  |      |   | 15   |   |      |   | (5 | ) |  |   |    |  



| |                                    
| | -----------------------------------
| | Commodity Price Risk
    Management



| |            
| | -----------
| | Natural Gas

At December 31, 2003 the Company had hedged
70 mmcf of natural gas per day at NYMEX for February and March
2004 at an average price of U.S. $6.69 per mmbtu and 20
mmcf of natural gas per day at NYMEX for April 2004 at an
average price of U.S. $6.38 per mmbtu. During 2003 the
impact of the 2003 hedge program was a gain of $24 million.

At December 31, 2003 the Company had also
hedged 7.5 mmcf of natural gas per day at NYMEX for the years
2004 and 2005 at an average price of U.S. $1.92 per mcf.
During 2003 the impact was a loss of $8 million (2002 and
2001  insignificant).



| |          
| | ---------
| | Crude Oil

At December 31, 2003 the Company had hedged
crude oil averaging 85,000 bbls per day from January to December
2004 at an average fixed WTI price of U.S. $27.46 per bbl.
The impact of the hedge program for 2003 was a loss of
$36 million (2002  gain of $5 million).



| |                  
| | -----------------
| | Power Consumption

In 2003 the Company hedged power consumption of
329,400 MWh from January to December 2004 at an average fixed
price of $46.72 per MWh.



| |                      
| | ---------------------
| | Natural Gas Contracts

The Company has a portfolio of fixed and basis
price offsetting physical forward purchase and sale natural gas
contracts. The objective of these contracts is to lock
in a positive spread between the physical purchase and
sale contract prices. At December 31, 2003 the Company had
the following offsetting physical purchase and sale contracts:

|                            |  |         |         |              |  |   |   | 
|--------------------------- |  | ------- | ------- | ------------ |  | - | - | 
|                            |  | Volumes |         | Unrecognized
|                            |  | (mmcf)  |         | Gain (Loss) 
|                            |  |         |         |             
|Physical purchase contracts |  |         | 16,971  |              |  | $ |  | 
|Physical sale contracts     |  |         | (16,971 | )            |  | $ | 2 | 



| |                              
| | -----------------------------
| | Interest Rate Risk Management

The majority of the Companys long-term debt
has fixed interest rates and various maturities. The Company
periodically uses interest rate swaps to manage its financing
costs. At December 31, 2003 the Company had entered into
interest rate swap arrangements whereby the fixed interest rate
coupon on certain debt was swapped to floating rates with the
following terms:

|                        |  |        |            |               |  |                   |  |                     
|----------------------- |  | ------ | ---------- | ------------- |  | ----------------- |  | --------------------
|Debt                    |  | Amount |            | Swap Maturity |  | Swap Rate        
|                        |  |        |            |               |  |                  
|                        |  |        |            |               |  | (percent)        
|6.95% medium-term notes |  |        | $200       |               |  | July 14, 2009     |  | CDOR + 175 bps      
|7.55% debentures        |  |        | U.S.  $200 |               |  | November 15, 2011 |  | U.S. LIBOR + 194 bps

During 2003 the Company realized a gain of
$17 million (2002  gain of $29 million;
2001  gain of $2 million) from interest rate
risk management activities.

In 2003, the Company unwound three interest rate
swaps. Proceeds of $44 million have been deferred and are
being amortized to income over the remaining term of the debt.



| |                                 
| | --------------------------------
| | Foreign Currency Risk Management

The Company manages its exposure to foreign
exchange rate fluctuations by balancing the U.S. dollar
denominated cash flows from operations with U.S. dollar
denominated borrowings and other financial instruments. Husky
utilizes spot and forward sales to convert cash flows to or from
U.S. or Canadian currency.

20



---



##### 



At December 31, 2003 the Company had the
following cross currency debt swaps:

|             |  |             |     |            |  |               |     |               |  |                   |  |  |      | 
|------------ |  | ----------- | --- | ---------- |  | ------------- | --- | ------------- |  | ----------------- |  |  | ---- | 
|             |  |             |     | Canadian   |  |               |     |              
|Debt         |  | Swap Amount |     | Equivalent |  | Swap Maturity |     | Interest Rate
|             |  |             |     |            |  |               |     |              
|             |  |             |     |            |  |               |     | (percent)    
|7.125% notes |  | U.S. $      | 150 |            |  | $             | 218 |               |  | November 15, 2006 |  |  | 8.74 | 
|6.25% notes  |  | U.S. $      | 150 |            |  | $             | 212 |               |  | June 15, 2012     |  |  | 7.41 | 

The Company hedged U.S. dollar revenues for
various amounts and maturities through 2005 through the use of
foreign exchange forwards. The total amount hedged using
long-dated forwards at December 31, 2003 was
U.S. $52 million at an average forward rate of
$1.5625. The total amount hedged using short-dated forwards at
December 31, 2003 was U.S. $70 million at an
average forward rate of $1.3166.

During 2003 the Company realized a loss of
$56 million (2002  loss of $11 million;
2001  loss of $4 million) from foreign currency
risk management activities.



| |            
| | -----------
| | Credit Risk

Accounts receivable are predominantly with
customers in the energy industry and are subject to normal
industry credit risks. In addition, the Company is exposed to
credit related losses in the event of non-performance by
counterparties to its financial instruments. The Company
primarily deals with major financial institutions and investment
grade rated entities to mitigate these risks.



|        |                                                                                    
|------- | -----------------------------------------------------------------------------------
|Note 20 | Reconciliation to Accounting Principles
    Generally Accepted in the United States

The Companys consolidated financial
statements have been prepared in accordance with GAAP in Canada,
which differ in some respects from those in the United States.
Any differences in accounting principles as they pertain to the
accompanying consolidated financial statements were
insignificant except as described below:

Consolidated Statements of Earnings

|                                                                                                  |                      |      |       |       |   |      |     |       |   |   |      |       |  
|------------------------------------------------------------------------------------------------- | -------------------- | ---- | ----- | ----- | - | ---- | --- | ----- | - | - | ---- | ----- | -
|                                                                                                  |                      | 2003 |       | 2002  |   | 2001
|                                                                                                  |                      |      |       |       |   |     
|Net earnings                                                                                      |                      | $    | 1,321 |       |   | $    | 804 |       |   | $ | 654  |      
|Adjustments:                                                                                      |                      |      |       |       |   |      |     |       |   |   |      |      
|Full cost accounting(a)                                                                           |                      |      | 80    |       |   |      | 88  |       |   |   | (544 | )    
|                                                                                                  | Related income taxes |      |       | (30   | ) |      |     | (37   | ) |   |      | 235   |  
|Foreign currency translation on capital
    securities(b)                                         |                      |      | 67    |       |   |      | 3   |       |   |   | (20  | )    
|                                                                                                  | Related income taxes |      |       | (12   | ) |      |     | (1    | ) |   |      | 5     |  
|Return on capital securities(b)                                                                   |                      |      | (29   | )     |   |      | (32 | )     |   |   | (33  | )    
|                                                                                                  | Related income taxes |      |       | 11    |   |      |     | 11    |   |   |      | 14    |  
|Derivatives and hedging(c)                                                                        |                      |      | (1    | )     |   |      | 22  |       |   |   | (30  | )    
|                                                                                                  | Related income taxes |      |       | 1     |   |      |     | (9    | ) |   |      | 12    |  
|Gain (loss) on energy trading contracts(c)                                                        |                      |      | (15   | )     |   |      | (2  | )     |   |   | 20   |      
|                                                                                                  | Related income taxes |      |       | 6     |   |      |     | 1     |   |   |      | (8    | )
|Asset retirement obligations(d)                                                                   |                      |      | 15    |       |   |      |    |       |   |   |     |      
|                                                                                                  | Related income taxes |      |       | (2    | ) |      |     |      |   |   |      |      |  
|Stock-based compensation(e)                                                                       |                      |      | (46   | )     |   |      |    |       |   |   |     |      
|Accounting for income taxes(f)                                                                    |                      |      |      |       |   |      | (37 | )     |   |   | (14  | )    
|                                                                                                  |                      |      |       |       |   |      |     |       |   |   |      |      
|Earnings before cumulative effect of change in
    accounting principle under U.S. GAAP           |                      |      | 1,366 |       |   |      | 811 |       |   |   | 291  |      
|Cumulative effect of change in accounting
    principle, net of tax(c)(d)                         |                      |      | 9     |       |   |      |    |       |   |   | 6    |      
|                                                                                                  |                      |      |       |       |   |      |     |       |   |   |      |      
|Net earnings under U.S. GAAP                                                                      |                      | $    | 1,375 |       |   | $    | 811 |       |   | $ | 297  |      
|                                                                                                  |                      |      |       |       |   |      |     |       |   |   |      |      
|Weighted average number of common shares
    outstanding under U.S. GAAP (millions)               |                      |      |       |       |   |      |     |       |   |   |      |      
|                                                                                                  | Basic                |      |       | 419.5 |   |      |     | 417.4 |   |   |      | 416.1 |  
|                                                                                                  | Diluted              |      |       | 421.5 |   |      |     | 419.3 |   |   |      | 418.6 |  
|Earnings per share before cumulative effect of
    change in accounting principle under U.S. GAAP |                      |      |       |       |   |      |     |       |   |   |      |      
|                                                                                                  | Basic                |      | $     | 3.26  |   |      | $   | 1.94  |   |   | $    | 0.70  |  
|                                                                                                  | Diluted              |      | $     | 3.24  |   |      | $   | 1.93  |   |   | $    | 0.70  |  
|Earnings per share under U.S. GAAP                                                                |                      |      |       |       |   |      |     |       |   |   |      |      
|                                                                                                  | Basic                |      | $     | 3.28  |   |      | $   | 1.94  |   |   | $    | 0.71  |  
|                                                                                                  | Diluted              |      | $     | 3.26  |   |      | $   | 1.93  |   |   | $    | 0.71  |  

21



---



##### 



Condensed Consolidated Balance
Sheets

|                                            |                                          |          |        |      |  |          |        |      |   |          |        |      |  |   |        |     |   |   |       |   |  |   |       |   | 
|------------------------------------------- | ---------------------------------------- | -------- | ------ | ---- |  | -------- | ------ | ---- | - | -------- | ------ | ---- |  | - | ------ | --- | - | - | ----- | - |  | - | ----- | - | 
|                                            |                                          |          |        |      |  |         
|                                            |                                          | 2003     |        | 2002 |  | 2001    
|                                            |                                          |          |        |      |  |         
|                                            |                                          | Canadian |        | U.S. |  | Canadian |        | U.S. |   | Canadian |        | U.S.
|                                            |                                          | GAAP     |        | GAAP |  | GAAP     |        | GAAP |   | GAAP     |        | GAAP
|                                            |                                          |          |        |      |  |          |        |      |   |          |        |     
|Current assets(c)                           |                                          | $        | 865    |      |  | $        | 924    |      |   | $        | 1,144  |      |  | $ | 1,292  |     |   | $ | 626   |   |  | $ | 756   |  
|Property, plant and equipment, net(a)(d)    |                                          |          | 10,685 |      |  |          | 10,251 |      |   |          | 9,347  |      |  |   | 8,670  |     |   |   | 8,715 |   |  |   | 7,950 |  
|Other assets(c)(j)                          |                                          |          | 232    |      |  |          | 236    |      |   |          | 84     |      |  |   | 89     |     |   |   | 29    |   |  |   | 33    |  
|                                            |                                          |          |        |      |  |          |        |      |   |          |        |      |  |   |        |     |   |   |       |   |  |   |       |  
|                                            |                                          | $        | 11,782 |      |  | $        | 11,411 |      |   | $        | 10,575 |      |  | $ | 10,051 |     |   | $ | 9,370 |   |  | $ | 8,739 |  
|                                            |                                          |          |        |      |  |          |        |      |   |          |        |      |  |   |        |     |   |   |       |   |  |   |       |  
|Current liabilities(b)(c)(j)                |                                          | $        | 1,456  |      |  | $        | 1,635  |      |   | $        | 1,215  |      |  | $ | 1,301  |     |   | $ | 1,049 |   |  | $ | 1,187 |  
|Long-term debt(b)(c)                        |                                          |          | 1,439  |      |  |          | 1,761  |      |   |          | 1,964  |      |  |   | 2,406  |     |   |   | 1,948 |   |  |   | 2,306 |  
|Other long-term liabilities(d)              |                                          |          | 390    |      |  |          | 519    |      |   |          | 266    |      |  |   | 266    |     |   |   | 228   |   |  |   | 228   |  
|Future income taxes(a)(b)(c)(d)(f)(j)       |                                          |          | 2,608  |      |  |          | 2,372  |      |   |          | 2,003  |      |  |   | 1,772  |     |   |   | 1,659 |   |  |   | 1,361 |  
|Capital securities and accrued return(b)    |                                          |          | 298    |      |  |          |       |      |   |          | 364    |      |  |   |       |     |   |   | 367   |   |  |   |      |  
|Share capital and contributed surplus(g)(h) |                                          |          | 3,457  |      |  |          | 3,737  |      |   |          | 3,406  |      |  |   | 3,640  |     |   |   | 3,397 |   |  |   | 3,631 |  
|Retained earnings                           |                                          |          | 2,134  |      |  |          | 1,478  |      |   |          | 1,357  |      |  |   | 683    |     |   |   | 722   |   |  |   | 23    |  
|Accumulated other comprehensive income      |                                          |          |        |      |  |          |        |      |   |          |        |      |  |   |        |     |   |   |       |   |  |   |       |  
|                                            | Cash flow hedges, net of tax(c)          |          |        |     |  |          |        | (76  | ) |          |        |     |  |   |        | (7  | ) |   |       |  |  |   |       | 3 | 
|                                            | Minimum pension liability, net of tax(j) |          |        |     |  |          |        | (15  | ) |          |        |     |  |   |        | (10 | ) |   |       |  |  |   |       |  | 
|                                            |                                          |          |        |      |  |          |        |      |   |          |        |      |  |   |        |     |   |   |       |   |  |   |       |  
|                                            |                                          | $        | 11,782 |      |  | $        | 11,411 |      |   | $        | 10,575 |      |  | $ | 10,051 |     |   | $ | 9,370 |   |  | $ | 8,739 |  
|                                            |                                          |          |        |      |  |          |        |      |   |          |        |      |  |   |        |     |   |   |       |   |  |   |       |  

Condensed Consolidated Statements of Retained
Earnings (Deficit) and

Accumulated Other Comprehensive
Income


|                                                              |  |          |       |      |  |          |       |      |  |          |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|------------------------------------------------------------- |  | -------- | ----- | ---- |  | -------- | ----- | ---- |  | -------- | ----- | ---- |  | - | ---- | - |  | - | ---- | - |  | - | ---- | -
|                                                              |  |          |       |      |  |         
|                                                              |  | 2003     |       | 2002 |  | 2001    
|                                                              |  |          |       |      |  |         
|                                                              |  | Canadian |       | U.S. |  | Canadian |       | U.S. |  | Canadian |       | U.S.
|                                                              |  | GAAP     |       | GAAP |  | GAAP     |       | GAAP |  | GAAP     |       | GAAP
|                                                              |  |          |       |      |  |          |       |      |  |          |       |     
|Retained earnings (deficit), beginning of year                |  | $        | 1,357 |      |  | $        | 683   |      |  | $        | 722   |      |  | $ | 23   |   |  | $ | 253  |   |  | $ | (124 | )
|Net earnings                                                  |  |          | 1,321 |      |  |          | 1,375 |      |  |          | 804   |      |  |   | 811  |   |  |   | 654  |   |  |   | 297  |  
|Dividends on common shares                                    |  |          | (580  | )    |  |          | (580  | )    |  |          | (151  | )    |  |   | (151 | ) |  |   | (150 | ) |  |   | (150 | )
|Capital securities, net of tax and foreign
    exchange(b)    |  |          | 36    |      |  |          |      |      |  |          | (18   | )    |  |   |     |   |  |   | (35  | ) |  |   |     |  
|                                                              |  |          |       |      |  |          |       |      |  |          |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Retained earnings, end of year                                |  | $        | 2,134 |      |  | $        | 1,478 |      |  | $        | 1,357 |      |  | $ | 683  |   |  | $ | 722  |   |  | $ | 23   |  
|                                                              |  |          |       |      |  |          |       |      |  |          |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Accumulated other comprehensive income, beginning
    of year |  | $        |      |      |  | $        | (17   | )    |  | $        |      |      |  | $ | 3    |   |  | $ |     |   |  | $ |     |  
|Cumulative effect of change in accounting,
    net of tax(c)  |  |          |      |      |  |          |      |      |  |          |      |      |  |   |     |   |  |   |     |   |  |   | (10  | )
|Cash flow hedges, net of tax(c)                               |  |          |      |      |  |          | (69   | )    |  |          |      |      |  |   | (10  | ) |  |   |     |   |  |   | 13   |  
|Minimum pension liability, net of tax(j)                      |  |          |      |      |  |          | (5    | )    |  |          |      |      |  |   | (10  | ) |  |   |     |   |  |   |     |  
|                                                              |  |          |       |      |  |          |       |      |  |          |       |      |  |   |      |   |  |   |      |   |  |   |      |  
|Accumulated other comprehensive income,
    end of year       |  | $        |      |      |  | $        | (91   | )    |  | $        |      |      |  | $ | (17  | ) |  | $ |     |   |  | $ | 3    |  
|                                                              |  |          |       |      |  |          |       |      |  |          |       |      |  |   |      |   |  |   |      |   |  |   |      |  

Condensed Consolidated Statements of Earnings
and Comprehensive Income

|                                                                          |  |          |       |      |  |          |       |      |  |          |       |      |  |   |       |  |  |   |       |  |  |   |       |  
|------------------------------------------------------------------------- |  | -------- | ----- | ---- |  | -------- | ----- | ---- |  | -------- | ----- | ---- |  | - | ----- |  |  | - | ----- |  |  | - | ----- | -
|                                                                          |  |          |       |      |  |         
|                                                                          |  | 2003     |       | 2002 |  | 2001    
|                                                                          |  |          |       |      |  |         
|                                                                          |  | Canadian |       | U.S. |  | Canadian |       | U.S. |  | Canadian |       | U.S.
|                                                                          |  | GAAP     |       | GAAP |  | GAAP     |       | GAAP |  | GAAP     |       | GAAP
|                                                                          |  |          |       |      |  |          |       |      |  |          |       |     
|Sales and operating revenues(c)(i)                                        |  | $        | 7,658 |      |  | $        | 6,943 |      |  | $        | 6,384 |      |  | $ | 5,778 |  |  | $ | 6,596 |  |  | $ | 5,606 |  
|Costs and expenses(b)(c)(e)(i)                                            |  |          | 4,732 |      |  |          | 4,012 |      |  |          | 4,117 |      |  |   | 3,488 |  |  |   | 4,614 |  |  |   | 3,654 |  
|Accretion expense(d)                                                      |  |          |      |      |  |          | 22    |      |  |          |      |      |  |   |      |  |  |   |      |  |  |   |      |  
|Depletion, depreciation and amortization(a)(d)                            |  |          | 1,058 |      |  |          | 941   |      |  |          | 939   |      |  |   | 851   |  |  |   | 807   |  |  |   | 1,351 |  
|Interest  net(b)                                                         |  |          | 73    |      |  |          | 102   |      |  |          | 104   |      |  |   | 136   |  |  |   | 101   |  |  |   | 134   |  
|                                                                          |  |          |       |      |  |          |       |      |  |          |       |      |  |   |       |  |  |   |       |  |  |   |       |  
|Earnings before income taxes                                              |  |          | 1,795 |      |  |          | 1,866 |      |  |          | 1,224 |      |  |   | 1,303 |  |  |   | 1,074 |  |  |   | 467   |  
|Income taxes(a)(b)(c)(d)(f)                                               |  |          | 474   |      |  |          | 500   |      |  |          | 420   |      |  |   | 492   |  |  |   | 420   |  |  |   | 176   |  
|                                                                          |  |          |       |      |  |          |       |      |  |          |       |      |  |   |       |  |  |   |       |  |  |   |       |  
|Earnings before cumulative effect of change in
    accounting principle   |  |          | 1,321 |      |  |          | 1,366 |      |  |          | 804   |      |  |   | 811   |  |  |   | 654   |  |  |   | 291   |  
|Cumulative effect of change in accounting
    principle, net of tax(c)(d) |  |          |      |      |  |          | 9     |      |  |          |      |      |  |   |      |  |  |   |      |  |  |   | 6     |  
|                                                                          |  |          |       |      |  |          |       |      |  |          |       |      |  |   |       |  |  |   |       |  |  |   |       |  
|Net earnings                                                              |  |          | 1,321 |      |  |          | 1,375 |      |  |          | 804   |      |  |   | 811   |  |  |   | 654   |  |  |   | 297   |  
|Other comprehensive income(c)(j)                                          |  |          |      |      |  |          | 74    |      |  |          |      |      |  |   | 20    |  |  |   |      |  |  |   | (3    | )
|                                                                          |  |          |       |      |  |          |       |      |  |          |       |      |  |   |       |  |  |   |       |  |  |   |       |  
|Comprehensive income                                                      |  | $        | 1,321 |      |  | $        | 1,449 |      |  | $        | 804   |      |  | $ | 831   |  |  | $ | 654   |  |  | $ | 294   |  
|                                                                          |  |          |       |      |  |          |       |      |  |          |       |      |  |   |       |  |  |   |       |  |  |   |       |  

22



---



##### 



Condensed Consolidated Statements of Cash
Flows

|                                                     |                                            |      |        |      |   |      |        |     |   |   |        |     |  
|---------------------------------------------------- | ------------------------------------------ | ---- | ------ | ---- | - | ---- | ------ | --- | - | - | ------ | --- | -
|                                                     |                                            | 2003 |        | 2002 |   | 2001
|                                                     |                                            |      |        |      |   |     
|Cash flow  operating
    activities  Canadian GAAP |                                            | $    | 2,572  |      |   | $    | 1,892  |     |   | $ | 1,930  |    
|Adjustments                                          |                                            |      |        |      |   |      |        |     |   |   |        |    
|                                                     | Return on capital securities payment       |      |        | (29  | ) |      |        | (31 | ) |   |        | (30 | )
|                                                     | Settlement of asset retirement liabilities |      |        | (34  | ) |      |        |    |   |   |        |    |  
|                                                     |                                            |      |        |      |   |      |        |     |   |   |        |    
|Cash flow  operating
    activities  U.S. GAAP     |                                            |      | 2,509  |      |   |      | 1,861  |     |   |   | 1,900  |    
|                                                     |                                            |      |        |      |   |      |        |     |   |   |        |    
|Cash flow  financing
    activities  Canadian GAAP |                                            |      | (800   | )    |   |      | 3      |     |   |   | (423   | )  
|Adjustments                                          |                                            |      |        |      |   |      |        |     |   |   |        |    
|                                                     | Return on capital securities payment       |      |        | 29   |   |      |        | 31  |   |   |        | 30  |  
|                                                     |                                            |      |        |      |   |      |        |     |   |   |        |    
|Cash flow  financing
    activities  U.S. GAAP     |                                            |      | (771   | )    |   |      | 34     |     |   |   | (393   | )  
|                                                     |                                            |      |        |      |   |      |        |     |   |   |        |    
|Cash flow  investing
    activities  Canadian GAAP |                                            |      | (2,075 | )    |   |      | (1,589 | )   |   |   | (1,507 | )  
|Adjustments                                          |                                            |      |        |      |   |      |        |     |   |   |        |    
|                                                     | Settlement of asset retirement liabilities |      |        | 34   |   |      |        |    |   |   |        |    |  
|                                                     |                                            |      |        |      |   |      |        |     |   |   |        |    
|Cash flow  investing
    activities  U.S. GAAP     |                                            |      | (2,041 | )    |   |      | (1,589 | )   |   |   | (1,507 | )  
|                                                     |                                            |      |        |      |   |      |        |     |   |   |        |    
|Change in cash and cash equivalents                  |                                            | $    | (303   | )    |   | $    | 306    |     |   | $ |       |    
|                                                     |                                            |      |        |      |   |      |        |     |   |   |        |    

The increases or decreases noted above refer to
the following differences between U.S. GAAP and Canadian
GAAP:



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | The Company performs a cost recovery ceiling test
    for each cost centre which limits net capitalized costs to the
    undiscounted estimated future net revenue from proved oil and
    gas reserves plus the cost of unproved properties and major
    development projects less impairment, using year-end prices or
    average prices in that year if appropriate. In addition, the
    aggregate value of all cost centres is further limited by
    including financing costs, administration expenses, future
    removal and site restoration costs and income taxes. Under
    U.S. GAAP, companies using the full cost method of
    accounting for oil and gas producing activities perform a
    ceiling test on each cost centre using discounted estimated
    future net revenue from proved oil and gas reserves using a
    discount factor of 10 percent. Prices used in the
    U.S. GAAP ceiling tests performed for this reconciliation
    were those in effect at the applicable year-end. Financing and
    administration costs are excluded from the calculation under
    U.S. GAAP. At December 31, 2001 the Company recognized
    a U.S. GAAP ceiling test write down of $334 million
    after tax.                                                                                                             
|
| | (b) | The Company records the capital securities as a
    component of equity and the return and foreign exchange gains or
    losses thereon as a charge to retained earnings. Under
    U.S. GAAP, the capital securities, the accrued return
    thereon and costs of issue would be classified outside of
    shareholders equity and the related return and foreign
    exchange gains or losses would be charged to earnings. See
    note 15, Capital Securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|
| | (c) | Effective January 1, 2001, the Company
    adopted the provisions of FAS 133, Accounting for
    Derivative Instruments and Hedging Activities. On initial
    adoption of FAS 133, the Company recorded additional assets and
    liabilities of $20 million and $10 million,
    respectively, and recorded a resulting cumulative effect of
    change in accounting principle to increase earnings by
    $6 million, net of tax, for the fair value of derivatives
    which did not qualify as hedges on January 1, 2001. The
    Company also recorded assets and liabilities of $4 million
    and $23 million, respectively, and a resulting reduction of
    other comprehensive income within shareholders equity of
    $10 million, net of tax, for the fair value of derivatives
    designated as hedges against variability in future cash flows
    from the sale of natural gas. An additional asset of
    $7 million for the fair value of derivatives designated as
    hedges against changes in the fair value of certain firm
    commitments and an offsetting liability for the difference
    between carrying and fair values of the hedged items was also
    recorded. The cumulative effect of change in accounting
    principle increased earnings per share under U.S. GAAP by
    $0.01 (basic and diluted).

At December 31, 2003 the Company recorded
additional assets and liabilities for U.S. GAAP purposes of
$52 million (2002  $111 million;
2001  $22 million) and $172 million
(2002  $122 million; 2001 
$38 million), respectively, for the fair values of
derivative financial instruments. During 2003, a gain of
$1 million, net of tax (2002  gain of
$11 million; 2001  insignificant), was included
in income for U.S. GAAP purposes for unrealized gains on
foreign currency derivatives and natural gas basis swaps that
did not qualify for hedge accounting under FAS 133. The Company
also recorded a loss of $2 million, net of tax (2002 and
2001  gain of $1 million), in revenue for
U.S. GAAP purposes with respect to derivatives designated
as hedges of change in the fair value of certain fixed price
commodity contracts and offsetting changes in the fair value of
those contracts. In addition, the amount included in other
comprehensive income was adjusted by a $69 million loss,
net of tax (2002  gain of $10 million;
2001  loss of $13 million), for changes in the
fair values of the derivatives designated as hedges of cash
flows relating to commodity price risk, foreign exchange
derivatives and the transfer to income of amounts applicable to
cash flows occurring in 2003.

Under U.S. GAAP, energy trading contracts
entered into and physical energy trading inventories purchased
on or before October 26, 2002 have been recorded at fair
value. These contracts include derivatives as well as energy
trading contracts that do not meet the definition of
derivatives. Effective October 26, 2002, non-derivative
energy trading contracts and inventories purchased after the
effective date are no longer recorded at fair value in
accordance with Emerging Issues Task Force 02-03 Issues
Involved in Accounting for Derivative Contracts held for Trading
Purposes and Contracts Involved in Energy Trading and Risk
Management Activities. Under Canadian GAAP, the impact of
energy trading contracts is recorded as they settle. Under
U.S. GAAP, at December 31, 2003 the Company recorded
additional assets and liabilities of $7 million
(2002  $37 million; 2001 
$114 million) and $5 million (2002 
$19 million; 2001  $88 million),
respectively, and included the resulting unrealized loss, net of
tax, in earnings for the year of $9 million
(2002  loss of $1 million; 2001  gain
of $11 million).

23



---



##### 



Under U.S. GAAP, gains and losses on energy
trading contracts have been netted against sales and operating
revenues.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (d) | In 2003, the Company adopted FAS 143,
    Accounting for Asset Retirement Obligations, which
    requires the fair value of a liability for an asset retirement
    obligation to be recorded in the period in which it is incurred
    and a corresponding increase in the carrying amount of the
    related tangible long-lived asset. The standard applies to legal
    obligations associated with the retirement of long-lived assets
    that result from the acquisition, construction, development and
    normal use of the asset. The liability is accreted at the end of
    each period through charges to accretion expense. The change was
    effective January 1, 2003, and the related cumulative
    effect of change in accounting principle to net earnings to
    December 31, 2002 was an increase of $9 million
    ($20 million before income taxes) or $0.02 per share
    (diluted). At January 1, 2003, the change resulted in an
    increase to net property, plant and equipment of
    $58 million, an increase in the asset retirement
    obligations which are included in other long-term liabilities of
    $38 million, an increase to the future income tax liability
    of $11 million and an increase to retained earnings of
    $9 million. The application of FAS 143 did not have a
    material impact on the Companys depreciation, depletion
    and amortization rate. There was no impact on the Companys
    cash flow as a result of adopting FAS 143.

The following table provides changes to asset
retirement obligations for the year ended December 31, 2003:

|                                                    |  |   |     |  
|--------------------------------------------------- |  | - | --- | -
|Asset retirement obligations, January 1, 2003       |  | $ | 286 |  
|Liabilities incurred during year                    |  |   | 17  |  
|Acquisition of Marathon Canada                      |  |   | 38  |  
|Divestitures                                        |  |   | (5  | )
|Revision of previous estimate                       |  |   | 108 |  
|Liabilities settled during year                     |  |   | (34 | )
|Accretion expense                                   |  |   | 22  |  
|                                                    |  |   |     |  
|Asset retirement obligations,
    December 31, 2003 |  | $ | 432 |  
|                                                    |  |   |     |  

The following table shows the effect on the
Companys net earnings and earnings per share as if FAS 143
had been in effect in prior years. There was a $10 million
increase to net earnings for each of the years ended
December 31, 2002 and 2001.

|            |                                    |                   |   |      |      |  |   |     |      | 
|----------- | ---------------------------------- | ----------------- | - | ---- | ---- |  | - | --- | ---- | 
|            |                                    |                  
|            |                                    | As at and for    
|            |                                    | the years ended  
|            |                                    | December 31      
|            |                                    |                  
|            |                                    | 2002              |   | 2001
|            |                                    |                   |   |     
|As reported |                                    |                   |   |      |      |  |   |    
|            | Net earnings under U.S. GAAP       |                   | $ | 811  |      |  | $ | 297 |     
|            | Earnings per share under U.S. GAAP |                   |   |      |      |  |   |     |     
|            |                                    | Basic             |   | $    | 1.94 |  |   | $   | 0.71 | 
|            |                                    | Diluted           |   | $    | 1.93 |  |   | $   | 0.71 | 
|Pro forma   |                                    |                   |   |      |      |  |   |    
|            | Net earnings under U.S. GAAP       |                   | $ | 821  |      |  | $ | 307 |     
|            | Earnings per share under U.S. GAAP |                   |   |      |      |  |   |     |     
|            |                                    | Basic             |   | $    | 1.97 |  |   | $   | 0.74 | 
|            |                                    | Diluted           |   | $    | 1.96 |  |   | $   | 0.73 | 
|            | Asset retirement obligations       |                   |   |      |      |  |   |     |     
|            |                                    | Beginning of year |   | $    | 269  |  |   | $   | 255  | 
|            |                                    | End of year       |   | $    | 286  |  |   | $   | 269  | 



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (e) | On September 3, 2003 the Company modified
    the exercise price of all outstanding options. Under
    U.S. GAAP these options must be accounted for using
    variable accounting where the in-the-money portion of the vested
    stock options outstanding is required to be adjusted through the
    statement of earnings as compensation expense over the remaining
    vesting period. The amount of stock-based compensation expense
    charged to earnings for the year ended December 31, 2003
    was $46 million. The compensation expense will be revalued
    at each reporting date based on the share price and the number
    of vested stock options outstanding.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (f) | The liability method under Canadian GAAP requires
    the measurement of future income tax liabilities and assets
    using income tax rates that reflect enacted income tax rate
    reductions provided it is more likely than not that the Company
    will be eligible for such rate reductions in the period of
    reversal. U.S. GAAP allows recording of such rate
    reductions only when claimed.



| |     |                                                                                                                                                                                                                                                                                                                                                                           
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (g) | As a result of the reorganization of the capital
    structure which occurred in 2000, the deficit of Husky Oil
    Limited of $160 million was eliminated. Elimination of the
    deficit would not be permitted under U.S. GAAP.                                                                                                                                        
|
| | (h) | The Company recorded interest waived on
    subordinated shareholders loans and dividends waived on
    Class C shares as a reduction of ownership charges. Under
    U.S. GAAP, waived interest and dividends in those years
    would be recorded as interest on subordinated shareholders
    loans and dividends on Class C shares and as capital
    contributions.



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (i) | Under U.S. GAAP, transportation costs are
    included in cost of sales rather than netted against sales and
    operating revenues. Transportation costs for 2003 were
    $232 million (2002  $256 million;
    2001  $272 million).                                                                                                                                                                                                                
|
| | (j) | The Company amortizes the portion of the
    unrecognized gains or losses that exceed 10 percent of the
    greater of the projected benefit obligation or the
    market-related value of pension plan assets. The market-related
    value of the pension plan assets is either the fair value or a
    calculated value that recognizes changes in fair value over not
    more than five years. Under U.S. GAAP, an additional
    minimum liability

24



---



##### 



| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | is recognized if the unfunded accumulated benefit
    obligation exceeds the unfunded pension cost already recognized.
    If an additional minimum liability is recognized, an amount
    equal to the unrecognized prior service cost is recognized as an
    intangible asset and any excess is reported in other
    comprehensive income. At December 31, 2003 the additional
    minimum liability was increased by $6 million
    (2002  $19 million) with a decrease to other
    comprehensive income of $5 million (2002 
    decrease of $10 million), net of tax.

Additional U.S. GAAP
Disclosures



| |                                   
| | ----------------------------------
| | Acquisition of Marathon
    Canada

As described in note 7, Acquisition of
Marathon Canada, the Company purchased all of the outstanding
shares of Marathon Canada Limited and the Western Canadian
assets of Marathon International Petroleum Canada, Ltd. This
transaction increased the reserve base and created cost
efficiencies, increasing shareholder value.



| |        
| | -------
| | FAS 133

Effective January 1, 2001, the Company
adopted the provisions of FAS 133, which require that all
derivatives be recognized as assets and liabilities on the
balance sheet and measured at fair value. Gains or losses,
including unrealized amounts, on derivatives that have not been
designated as hedges, or were not effective as hedges, are
included in earnings as they arise.

For derivatives designated as fair value hedges,
changes in the fair value are recognized in earnings together
with equal or lesser amounts of changes in the fair value of the
hedged item. During 2003, no amount of the gains or losses on
these derivatives was excluded from the assessment of hedge
effectiveness in these hedging relationships.

For derivatives designated as cash flow hedges,
changes in the fair value of the derivatives are recognized in
other comprehensive income until the hedged items are recognized
in earnings. Any portion of the change in the fair value of the
derivatives that is not effective in hedging the changes in
future cash flows is included in earnings. The amount related to
the hedge of commodity price risk was included in other
comprehensive income at December 31, 2003. During 2003, no
amounts were excluded from the assessment of effectiveness of
the cash flow hedges.



| |                  
| | -----------------
| | Stock Option Plan

FAS 123, Accounting for Stock-based
Compensation, establishes financial accounting and
reporting standards for stock-based employee compensation plans
as well as transactions in which an entity issues its equity
instruments to acquire goods or services from non-employees. As
permitted by FAS 123, Husky has elected to follow the intrinsic
value method of accounting for stock-based compensation
arrangements, as provided for in Accounting Principles Board
Opinion 25. Since all options were granted with exercise prices
equal to the market price, no compensation expense has been
charged to income at the time of the option grants. On
September 3, 2003 the Company modified the exercise price
of all outstanding options, resulting in the use of variable
accounting for these modified stock options. The compensation
expense recorded under variable accounting has been removed from
the pro forma amounts indicated below. Had compensation cost for
Huskys stock options been determined based on the fair
market value at the grant dates of the awards, and amortized on
a straight-line basis, consistent with methodology prescribed by
FAS 123, Huskys net earnings and earnings per share for
the years ended December 31, 2003, 2002 and 2001 would have
been the pro forma amounts indicated below:

|                   |           |          |       |       |  |          |       |       |  |          |     |       |  |   |     |      |  |   |     |      |  |   |     |      | 
|------------------ | --------- | -------- | ----- | ----- |  | -------- | ----- | ----- |  | -------- | --- | ----- |  | - | --- | ---- |  | - | --- | ---- |  | - | --- | ---- | 
|                   |           |          |       |       |  |         
|                   |           | 2003     |       | 2002  |  | 2001    
|                   |           |          |       |       |  |         
|                   |           | As       |       | Pro   |  | As       |       | Pro   |  | As       |     | Pro  
|                   |           | Reported |       | Forma |  | Reported |       | Forma |  | Reported |     | Forma
|                   |           |          |       |       |  |          |       |       |  |          |     |      
|Net earnings       |           | $        | 1,375 |       |  | $        | 1,407 |       |  | $        | 811 |       |  | $ | 798 |      |  | $ | 297 |      |  | $ | 284 |     
|Earnings per share |           |          |       |       |  |          |       |       |  |          |     |       |  |   |     |      |  |   |     |      |  |   |     |     
|                   |  Basic   |          | $     | 3.28  |  |          | $     | 3.35  |  |          | $   | 1.94  |  |   | $   | 1.91 |  |   | $   | 0.71 |  |   | $   | 0.68 | 
|                   |  Diluted |          | $     | 3.26  |  |          | $     | 3.34  |  |          | $   | 1.93  |  |   | $   | 1.90 |  |   | $   | 0.71 |  |   | $   | 0.68 | 

The fair values of all common share options
granted are estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average fair
market value of options granted during the year and the
assumptions used in their determination are the same as
described in note 16.



| |                                             
| | --------------------------------------------
| | Depletion, Depreciation and
    Amortization

Upstream depletion, depreciation and
amortization, per gross equivalent barrel is calculated by
converting natural gas volumes to a barrel of oil equivalent
(boe) using the ratio of 6 mcf of natural gas to 1
barrel of crude oil (sulphur volumes have been excluded from the
calculation). Depletion, depreciation and amortization per boe
as calculated under U.S. GAAP for the years ended
December 31 were as follows:

|                                                        |  |      |      |      |  |      |      |  |  |   |      | 
|------------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                                        |  | 2003 |      | 2002 |  | 2001
|                                                        |  |      |      |      |  |     
|Depletion, depreciation and amortization per
    boe(1) |  | $    | 7.57 |      |  | $    | 6.96 |  |  | $ | 6.88 | 






|    |                                           
|--- | ------------------------------------------
|(1) | Excludes the 2001 ceiling test write down.

25



---



##### 





| |                                              
| | ---------------------------------------------
| | Accounting for Variable Interest
    Entities

In January 2003, the FASB issued Financial
Interpretation 46 Accounting for Variable Interest
Entities (FIN 46) that requires the
consolidation of Variable Interest Entities (VIEs).
VIEs are entities that have insufficient equity or their equity
investors lack one or more of the specified elements that a
controlling entity would have. The VIEs are controlled through
financial interests that indicate control (referred to as
variable interests). Variable interests are the
rights or obligations that expose the holder of the variable
interest to expected losses or expected residual gains of the
entity. The holder of the majority of an entitys variable
interests is considered the primary beneficiary of the VIE and
is required to consolidate the VIE. In December 2003 the FASB
issued FIN 46R which superceded FIN 46 and restricts the scope
of the definition of entities that would be considered VIEs that
require consolidation. The Company does not believe FIN 46R
results in the consolidation of any additional entities that
existed at December 31, 2003.

26