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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 40-F**

[Check one]

 
| o          | **REGISTRATION STATEMENT PURSUANT TO SECTION 12   OF THE SECURITIES EXCHANGE ACT OF 1934**              |
|------------|--------------------------------------------------------------------------------------------------------------|
| ** ** | **OR**                                                                                                       |
| ** ** | ** **                                                                                                   |
| þ     | **ANNUAL REPORT PURSUANT TO SECTION 13(a) or   15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the fiscal year ended: December 31, 2011      Commission File Number:  1-34513**

 

**CENOVUS ENERGY INC.**

(Exact name of Registrant as specified in its charter)

 

**Not applicable**

(Translation of Registrant’s name into English (if applicable))

** **

**Canada**

(Province or other jurisdiction of incorporation or organization)

 

**1311**

(Primary Standard Industrial

Classification Code Number (if applicable))

 

**Not applicable**

(I.R.S. Employer

Identification Number (if applicable))

 

**4000, 421-7th Avenue S.W. Calgary, Alberta, Canada T2P 4K9 (403) 766-2000**

(Address and telephone number of Registrant’s principal executive offices)

 

**CT Corporation System 111 8th****Avenue New York, New York 10011**

**(212) 894-8641**

(Name, address (including zip code) and telephone number (including area code)

of agent for service in the United States)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

| Title of each class                                                                       |       | Name of each exchange on which registered |
|-------------------------------------------------------------------------------------------|------------|-------------------------------------------|
|                                                                                      |       |                                      |
| **Common shares, no par value (together with   associated common share purchase rights)** | ** ** | **New York Stock Exchange**          |

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

**None**

(Title of Class)

 

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Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

**None**

(Title of Class)

 

For annual reports indicate by check mark the information filed with this Form:

 

 

þ Annual information form      þ Audited annual financial statements

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

754,499,336

 

Indicate by check mark whether the Registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to filing requirements for the past 90 days.

 

Yes þ   No o

 

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

 

Yes o   No o

 

The annual report on Form 40-F shall be incorporated by reference into or as an exhibit to, as applicable, each of the Registrant’s Registration Statements under the Securities Act of 1933: Form S-8 (File No. 333-163397), Form F-3 (File No. 333-166419), and Form F-9 (File No. 333-167876).

 

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**Principal Documents**

 

The following documents have been filed as part of this annual report on Form 40-F, beginning on the following page:

 
| (a)    | Annual   Information Form of Cenovus Energy Inc. for the fiscal year ended   December 31, 2011.              |
|--------|------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                   |
| (b)    | Management’s   Discussion and Analysis of Cenovus Energy Inc. for the fiscal year ended   December 31, 2011. |
|   |                                                                                                                   |
| (c)    | Consolidated   Financial Statements of Cenovus Energy Inc. as at December 31, 2011.                               |
|   |                                                                                                                   |
|   |                                                                                                                   |
|   |                                                                                                                   |

 

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**CENOVUS ENERGY INC.**

 

 

**ANNUAL INFORMATION FORM**

 

**FOR THE YEAR ENDED DECEMBER 31, 2011**

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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**TABLE OF CONTENTS**

 

 
| **FORWARD-LOOKING INFORMATION**                                  | 1  |
|------------------------------------------------------------------|----|
| **CORPORATE STRUCTURE**                                          | 2  |
| **GENERAL   DEVELOPMENT OF OUR BUSINESS**                        | 2  |
| **NARRATIVE DESCRIPTION OF OUR BUSINESS**                        | 5  |
| **Oil Sands**                                                    | 6  |
| **Conventional**                                                 | 9  |
| **Refining   and Marketing**                                     | 12 |
| **RESERVES DATA AND OTHER OIL AND GAS INFORMATION**              | 13 |
| **Disclosure   of Reserves Data**                                | 14 |
| **Definitions**                                                  | 16 |
| **Reserves   Reconciliation**                                    | 19 |
| **Contingent and Prospective Resources**                         | 21 |
| **Other Oil and Gas Information**                                | 24 |
| **OTHER   INFORMATION**                                          | 34 |
| **Competitive   Conditions**                                     | 34 |
| **Environmental Considerations**                                 | 34 |
| **Corporate Responsibility Practice**                            | 35 |
| **Employees**                                                    | 36 |
| **Foreign   Operations**                                         | 36 |
| **DIRECTORS AND EXECUTIVE OFFICERS**                             | 37 |
| **AUDIT   COMMITTEE**                                            | 41 |
| **DESCRIPTION OF CAPITAL STRUCTURE**                             | 43 |
| **DIVIDENDS**                                                    | 45 |
| **MARKET   FOR SECURITIES**                                      | 46 |
| **RISK   FACTORS**                                               | 46 |
| **LEGAL PROCEEDINGS AND REGULATORY ACTIONS**                     | 55 |
| **INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL   TRANSACTIONS** | 55 |
| **MATERIAL   CONTRACTS**                                         | 56 |
| **TRANSFER AGENTS AND REGISTRARS**                               | 56 |
| **ADDITIONAL   INFORMATION**                                     | 56 |
| **ABBREVIATIONS AND CONVERSIONS**                                | 57 |

 

 
| APPENDIX A - | Report on Reserves   Data by Independent Qualified Reserves Evaluators      |
|--------------|-----------------------------------------------------------------------------|
| APPENDIX B - | Report of   Management and Directors on Reserves Data and Other Information |
| APPENDIX C - | Audit Committee   Mandate                                                   |

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | i |
|----------------------------------------------------------------------------------------------|---|

 

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**FORWARD-LOOKING INFORMATION**

 

This Annual Information Form (“AIF”) contains forward-looking statements and other information (collectively “forward-looking information”) about our current expectations, estimates and projections, made in light of our experience and perception of historical trends. This forward-looking information is identified by words such as “anticipate”, “believe”, “expect”, “plan”, “forecast”, “target”, “project”, “could”, “focus”, “vision”, “goal”, “proposed”, “scheduled”, “outlook”, “potential”, “may” or similar expressions and includes suggestions of future outcomes, including statements about our growth strategy and related schedules, projected future value or net asset value, forecast operating and financial results, planned capital expenditures, expected future production, including the timing, stability or growth thereof, anticipated finding and development costs, expected reserves and contingent and prospective resources estimates, potential dividends and dividend growth strategy, anticipated timelines for future regulatory, partner or internal approvals, forecasted commodity prices, future use and development of technology and projected increasing shareholder value. Readers are cautioned not to place undue reliance on forward-looking information as our actual results may differ materially from those expressed or implied.

 

Developing forward-looking information involves reliance on a number of assumptions and consideration of certain risks and uncertainties, some of which are specific to Cenovus and others that apply to the industry in general.

 

The factors or assumptions on which the forward-looking information is based include: assumptions inherent in our current guidance, available at www.cenovus.com; our projected capital investment levels, the flexibility of capital spending plans and the associated source of funding; estimates of quantities of oil, bitumen, natural gas and liquids from properties and other sources not currently classified as proved; our ability to obtain necessary regulatory and partner approvals; the successful and timely implementation of capital projects; our ability to generate sufficient cash flow from operations to meet our current and future obligations; and other risks and uncertainties described from time to time in the filings we make with securities regulatory authorities.

 

The risk factors and uncertainties that could cause our actual results to differ materially, include: volatility of and assumptions regarding oil and gas prices; the effectiveness of our risk management program, including the impact of derivative financial instruments and our access to various sources of capital; accuracy of cost estimates; fluctuations in commodity prices, currency and interest rates; fluctuations in product supply and demand; market competition, including from alternative energy sources; risks inherent in our marketing operations, including credit risks; maintaining desirable ratios of debt to adjusted earnings before interest, taxes, depreciation and amortization and debt to capitalization; our ability to access external sources of debt and equity capital; success of our hedging strategies; accuracy of reserves, resources and future production estimates; our ability to replace and expand oil and gas reserves; our ability to maintain our relationship with ConocoPhillips (or any successor thereof) and to successfully manage and operate our integrated heavy oil business; reliability of our assets; potential disruption or unexpected technical difficulties in developing new products and manufacturing processes; refining and marketing margins; potential failure of new products to achieve acceptance in the market; unexpected cost increases or technical difficulties in constructing or modifying manufacturing or refining facilities; unexpected difficulties in manufacturing, transporting or refining of crude oil into petroleum and chemical products at two refineries; risks associated with technology and its application to our business; the timing and the costs of well and pipeline construction; our ability to secure adequate product transportation; changes in the regulatory framework in any of the locations in which we operate, including changes to the regulatory approval process and land-use designations, royalty, tax, environmental, greenhouse gas, carbon and other laws or regulations, or changes to the interpretation of such laws and regulations, as adopted or proposed, the impact thereof and the costs associated with compliance; the expected impact and timing of various accounting pronouncements, rule changes and standards on our business, our financial results and our Consolidated Financial Statements; changes in the general economic, market and business conditions; the political and economic conditions in the locations in which we operate; the occurrence of unexpected events such as war, terrorist threats and the instability resulting therefrom; and risks associated with existing and potential future lawsuits and regulatory actions against us.

 

Readers are cautioned that the foregoing lists are not exhaustive and are made as at the date hereof. For a full discussion of our material risk factors, see “Risk Factors” in this AIF. Readers should also refer to “Risk Management” in our current Management’s Discussion and Analysis and to the risk factors described in other documents we file from time to time with securities regulatory authorities, available at www.sedar.com, www.sec.gov and on our website at www.cenovus.com.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 1 |
|----------------------------------------------------------------------------------------------|---|

 

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**CORPORATE STRUCTURE**

 

Cenovus Energy Inc. was formed under the *Canada Business Corporations Act* (“CBCA”) by amalgamation of 7050372 Canada Inc. and Cenovus Energy Inc. (formerly Encana Finance Ltd. and referred to as “Subco”) on November 30, 2009 pursuant to an arrangement under the CBCA (the “Arrangement”) involving, among others, 7050372 Canada Inc., Subco and Encana Corporation (“Encana”). On January 1, 2011, we amalgamated with our wholly owned subsidiary, Cenovus Marketing Holdings Ltd., through a plan of arrangement approved by the Alberta Court of Queen’s Bench.

 

Unless otherwise specified or the context otherwise requires, reference to “we”, “us”, “our”, “its”, “Company” or “Cenovus” includes reference to subsidiaries of, and partnership interests held by, Cenovus Energy Inc. and its subsidiaries and, when in reference to prior period information, as held by Encana prior to the closing of the Arrangement.

 

Our principal and registered office is located at #4000, 421 – 7 Avenue S.W., Calgary, Alberta, Canada T2P 4K9.

 

**Intercorporate****Relationships**

 

The following table summarizes our principal subsidiaries and partnerships at December 31, 2011:

 

 
| **Subsidiaries & Partnerships** | ** ** | **Percentage   Owned**(1) | ** ** | **Jurisdiction of   Incorporation,   Continuance, Formation   or Organization** |
|-----------------------------------------------|------------|---------------------------|------------|------------------------------------------------------------------------------------------------|
| Cenovus   FCCL Ltd.                           |       | 100                       |       | Alberta                                                                                        |
| Cenovus US   Refinery Holdings(2)             |       | 100                       |       | Delaware                                                                                       |
| FCCL   Partnership (“FCCL”)(3)      |       | 50                        |       | Alberta                                                                                        |
| WRB   Refining LP(“WRB”) (4)        |       | 50                        |       | Delaware                                                                                       |

Notes:

(1)    Includes direct and indirect ownership.

(2)    A Delaware partnership.

(3)    Cenovus interest held through Cenovus FCCL Ltd., the operator and managing partner of FCCL Partnership.

(4)    Cenovus interest held indirectly through Cenovus US Refinery Holdings.

 

The above table includes our subsidiaries and partnerships which have total assets that exceed 10 percent of our total consolidated assets, or revenues which exceed 10 percent of our total consolidated revenues. The assets and revenues of our unidentified subsidiaries and partnerships did not exceed 20 percent of our total consolidated assets or total consolidated revenues at and for the year ended December 31, 2011.

 

** **

**GENERAL DEVELOPMENT OF OUR BUSINESS**

 

Cenovus is a Canadian oil company headquartered in Calgary, Alberta. Our operations include oil sands properties and established crude oil and natural gas production in Alberta and Saskatchewan. We also have ownership interests in two refineries in Illinois and Texas, U.S.A.

 

We began independent operations on December 1, 2009 following the split of Encana into two independent publicly traded energy companies, Cenovus and Encana.

 

**Our Business**

 

Our reportable segments are as follows:

 

·        **Oil Sands**, which consists of Cenovus’s producing bitumen assets at Foster Creek and Christina Lake, heavy oil assets at Pelican Lake, new resource play assets such as Narrows Lake, Grand Rapids and Telephone Lake, and the Athabasca natural gas assets. Certain of the Company’s operated oil sands properties, notably Foster Creek, Christina Lake and Narrows Lake, are jointly owned with ConocoPhillips, an unrelated U.S. public company.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 2 |
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·        **Conventional**, which includes the development and production of conventional crude oil, natural gas and NGLs in Alberta and Saskatchewan, notably the carbon dioxide enhanced oil recovery project at Weyburn, and the Bakken and Lower Shaunavon crude oil properties.

 

·        **Refining and Marketing**, which is focused on the refining of crude oil products into petroleum and chemical products at two refineries located in the U.S. The refineries are jointly owned with and operated by ConocoPhillips. This segment also markets Cenovus’s crude oil and natural gas, as well as third-party purchases and sales of product that provide operational flexibility for transportation commitments, product type, delivery points and customer diversification.

 

·        **Corporate and Eliminations**, which primarily includes unrealized gains and losses recorded on derivative financial instruments, gains and losses on divestiture of assets, as well as other Cenovus-wide costs for general and administrative and financing activities. As financial instruments are settled, the realized gains and losses are recorded in the operating segment to which the derivative instrument relates. Eliminations relate to sales and operating revenues and purchased product between segments recorded at transfer prices based on current market prices and to unrealized intersegment profits in inventory.

 

**Three Year History**

 

The following describes the significant events of the last three years in respect of our business:

 

***2011***

 

·        In the second quarter, we updated our 10 year strategic plan, identifying oil sands production of more than 400,000 bbls/d net and total oil production of approximately 500,000 bbls/d net, by the end of 2021.

 

·        In the second quarter, we received regulatory approval for Christina Lake phases E, F and G. Planned gross production capacity for each expansion phase is 40,000 bbls/d for a total of 120,000 bbls/d of bitumen. Also in the second quarter, partner approval was received for phase E.

 

·        In the second quarter, we received approval from the Alberta Department of Energy (“ADOE”) to include all previous capital investment for Foster Creek expansion phases F, G and H as part of our existing Foster Creek royalty calculation.

 

·        In the second quarter, we announced plans to increase gross production capacity at each of Foster Creek phases F, G and H from 30,000 to 35,000 bbls/d and received partner approval for each phase. Planned gross production capacity for each expansion phase was further increased to 40,000 bbls/d for phases G and H and to 45,000 bbls/d for phase F, due to the success of our Wedge WellTM technology and plant optimization. Total gross production capacity for these three phases at completion is expected to be 125,000 bbls/d of bitumen.

 

·        In the third quarter, phase C of Christina Lake achieved first production ahead of schedule and with capital expenditures below budget for the entire phase. Net production at Christina Lake during 2011 averaged 11,665 bbls/d and ended 2011 at approximately 23,000 bbls/d.

 

·        In the fourth quarter, we completed coker construction and start up activities of the Coker and Refinery Expansion (“CORE”) project, at the Wood River Refinery. CORE project capital expenditures were within 10 percent of its original budget. Test runs of the CORE project, which will continue through the first quarter of 2012, have been successful to date and have resulted in a five percent increase to clean product yield. Upon completion of testing, the Wood River Refinery’s total processing capability of heavy crude oil will be dependent on the quality of heavy Canadian crude oil that is economically available, and is expected to increase to 200,000 to 220,000 bbls/d.

 

·        In the fourth quarter, Cenovus filed a joint application and Environmental Impact Assessment (“EIA”) for a commercial SAGD operation at Grand Rapids with a gross production capacity of 180,000 bbls/d.

 

·        In the fourth quarter, progressing the Telephone Lake project, we filed a revised joint regulatory application and EIA. This application updates the expected gross production capacity to 90,000 bbls/d from the original 35,000 bbls/d application that was filed in 2007.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 3 |
|----------------------------------------------------------------------------------------------|---|

 

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·        In the fourth quarter, we applied for an amendment to the existing Christina Lake regulatory approval to add cogeneration facilities and increasing expected total gross production capacity by 10,000 bbls/d at each of phase F and phase G.

 

***2010***

 

·        In the second quarter, an application for the Narrows Lake project in the Christina Lake Region was submitted to the Energy Resources Conservation Board (“ERCB”) and Alberta Environment. The project is jointly owned with ConocoPhillips and is expected to be developed in three phases with a total gross production capacity of 130,000 bbls/d of bitumen.

 

·        In the third quarter, regulatory approval was received for Foster Creek phases F, G and H. Planned gross production capacity for each expansion phase is 30,000 bbls/d for a total gross production capacity of 90,000 bbls/d of bitumen.

 

·        In the fourth quarter, we started up our Grand Rapids pilot project after receiving project approval from Alberta Environment. We had previously received project approval from the ERCB in the second quarter of 2010.

 

***2009***

 

·        In the first quarter, two new expansion phases at Foster Creek were commissioned. Phases D and E added gross capacity of 60,000 bbls/d of bitumen, increasing gross production capacity of Foster Creek to approximately 120,000 bbls/d of bitumen.

 

·        In the second quarter, a joint regulatory application for Foster Creek phases F, G and H was submitted to the ERCB and Alberta Environment.

 

·        In the fourth quarter, FCCL sanctioned the next phase, phase D, of expansion at Christina Lake, which is expected to increase gross production capacity by 40,000 bbls/d of bitumen in 2013.

 

·        In the fourth quarter, a joint regulatory application for Christina Lake phases E, F and G was submitted to the ERCB and Alberta Environment. Each phase is expected to increase gross production capacity by 40,000 bbls/d of bitumen.

 

·        On December 1, 2009, we began independent operations as a publicly traded company having completed the Arrangement with Encana. In connection with the Arrangement, Encana shareholders received one Cenovus common share and one new Encana common share for each Encana common share held.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 4 |
|----------------------------------------------------------------------------------------------|---|

 

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**NARRATIVE DESCRIPTION OF OUR BUSINESS**

 

The following map outlines the location of our upstream and refining assets as at December 31, 2011.

 

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 5 |
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**Overview**

 

All of our reserves and production are located in Canada, primarily within the provinces of Alberta and Saskatchewan. At December 31, 2011, we had a land base of approximately 7.4 million net acres and Company Interest Before Royalties proved reserves of approximately 1,455 million barrels of bitumen, 175 million barrels of heavy crude oil, 115 million barrels of light and medium crude oil and NGLs and 1,203 billion cubic feet of natural gas. The estimated proved reserves life index based on working interest production at December 31, 2011 was approximately 22 years. We also had Company Interest Before Royalties probable reserves of approximately 490 million barrels of bitumen, 109 million barrels of heavy crude oil, 51 million barrels of light and medium crude oil and NGLs and 391 billion cubic feet of natural gas at December 31, 2011.

 

The following narrative describes our operations in greater detail.

 

**Oil Sands**

 

Oil Sands includes our producing bitumen assets at Foster Creek and Christina Lake, as well as heavy crude oil assets at Pelican Lake, new resource play assets including Narrows Lake, Grand Rapids and Telephone Lake, and the Athabasca natural gas assets. The Foster Creek and Christina Lake operations as well as the Narrows Lake property are jointly owned with ConocoPhillips, an unrelated U.S. public company, through the FCCL Partnership (“FCCL”).

 

FCCL owns the Foster Creek, Christina Lake and Narrows Lake properties, as well as other bitumen interests. Cenovus FCCL Ltd., our wholly owned subsidiary, is the operator and managing partner of FCCL, and owns 50 percent of FCCL. FCCL has a management committee, which is composed of three Cenovus representatives and three ConocoPhillips representatives, with each company holding equal voting rights.

 

In 2011, our Oil Sands capital investment was $1,415 million, and was primarily related to the expansion of the production capacity of FCCL’s assets. FCCL plans to increase gross production capacity to approximately 218,000 bbls/d of bitumen following the completion of Christina Lake phase D, which is expected in the fourth quarter of 2012. Pelican Lake capital investment for 2011 was primarily related to infill drilling to progress polymer flood, drilling of stratigraphic test wells, facilities expansions and maintenance capital. Oil Sands also continued to assess the potential of our new resource play assets during 2011 with our large stratigraphic test well program.

 

Plans for 2012 include the continued development of expansion phases at both Foster Creek and Christina Lake, additional capital investment at our Pelican Lake property, the continuation of an active stratigraphic test well program on our new resource play assets and progressing pilot projects at our Grand Rapids and Telephone Lake properties.

 

At December 31, 2011, we held bitumen rights of approximately 1,227,000 gross acres (889,000 net acres) within the Athabasca and Cold Lake areas, as well as the exclusive rights to lease an additional 544,000 net acres on our behalf and/or our assignee’s behalf on the Cold Lake Air Weapons Range.

 

The following table summarizes our landholdings at December 31, 2011:

 
| **Landholdings – Oil Sands** | ** ** | **Developed** | ** ** | **Undeveloped** | ** ** | **Total** | ** ** | **Average   Working** |
|--------------------------------------------------|------------|---------------|------------|-----------------|------------|-----------|------------|-----------------------|
| (thousands of acres)                   | ** ** | **Gross**     | ** ** | **Net**         | ** ** | **Gross** | ** ** | **Net**               | ** ** | **Gross** | ** ** | **Net** | ** ** | **Interest** |
| Foster Creek                                     |       | 12            |       | 6               |       | 130       |       | 65                    |   | 142 |   | 71 |   | 50% |
| Christina Lake                                   |       | 6             |       | 3               |       | 33        |       | 16                    |   | 39 |   | 19 |   | 50% |
| Pelican Lake                                     |       | 105           |       | 105             |       | 287       |       | 283                   |   | 392 |   | 388 |   | 99% |
| Telephone Lake                                   |       | 4             |       | 4               |       | 142       |       | 142                   |   | 146 |   | 146 |   | 100% |
| Athabasca                                        |       | 445           |       | 370             |       | 426       |       | 355                   |   | 871 |   | 725 |   | 83% |
| Other                                            |       | 49            |       | 31              |       | 956       |       | 691                   |   | 1,005 |   | 722 |   | 72% |
| Total                                            |       | 621           |       | 519             |       | 1,974     |       | 1,552                 |   | 2,595 |   | 2,071 |   | 80% |

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 6 |
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The following table sets forth our share of daily average production for the periods indicated:

 
| **Production – Oil Sands** | ** ** | **Crude Oil   and NGLs   (bbls/d)** | ** ** | **Natural Gas   (MMcf/d)** | ** ** | **Total   Production   (BOE/d)** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
| (annual average)                          | ** ** | **2011**                                      | ** ** | **2010**                        | ** ** | **2011**                         | ** ** | **2010** | ** ** | **2011** | ** ** | **2010** | ** ** |
| Foster Creek                                   |       | 54,868                                        |       | 51,147                          |       | -                                |       | - |   | 54,868 |   | 51,147 |   |
| Christina Lake                                 |       | 11,665                                        |       | 7,898                           |       | -                                |       | - |   | 11,665 |   | 7,898 |   |
| Pelican Lake                                   |       | 20,424                                        |       | 22,966                          |       | -                                |       | - |   | 20,424 |   | 22,966 |   |
| Athabasca                                      |       | -                                             |       | -                               |       | 34                               |       | 40 |   | 5,667 |   | 6,667 |   |
| Other                                          |       | -                                             |       | -                               |       | 3                                |       | 3 |   | 500 |   | 500 |   |
| Total                                          |       | 86,957                                        |       | 82,011                          |       | 37                               |       | 43 |   | 93,124 |   | 89,178 |   |

 

The following table summarizes our interests in producing wells at December 31, 2011. These figures exclude wells which were capable of producing, but that were not producing as of December 31, 2011:

 
| **Producing Wells – Oil Sands** | ** ** | **Producing   Oil Wells** | ** ** | **Producing   Gas Wells** | ** ** | **Total   Producing Wells** | ** ** |
|----------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| (number of wells)                              | ** ** | **Gross**                      | ** ** | **Net**                        | ** ** | **Gross**                        | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| Foster Creek                                             |       | 204                            |       | 102                            |       | -                                |       | - |   | 204 |   | 102 |   |
| Christina Lake                                           |       | 38                             |       | 19                             |       | -                                |       | - |   | 38 |   | 19 |   |
| Pelican Lake                                             |       | 444                            |       | 444                            |       | 5                                |       | 5 |   | 449 |   | 449 |   |
| Athabasca                                                |       | -                              |       | -                              |       | 416                              |       | 394 |   | 416 |   | 394 |   |
| Other                                                    |       | 1                              |       | 1                              |       | 17                               |       | 17 |   | 18 |   | 18 |   |
| Total                                                    |       | 687                            |       | 566                            |       | 438                              |       | 416 |   | 1,125 |   | 982 |   |

 

*Foster Creek*

 

We have a 50 percent interest in Foster Creek, an oil sands property in northeast Alberta that uses steam-assisted gravity drainage (“SAGD”) technology and produces from the McMurray formation. We hold surface access rights from the Governments of Canada and Alberta and bitumen rights from the Government of Alberta for exploration, development and transportation from areas within the Cold Lake Air Weapons Range. In addition, we hold exclusive rights to lease several hundred thousand acres of bitumen rights in other areas on the Cold Lake Air Weapons Range on our behalf and/or our assignee’s behalf.

 

We have successfully piloted and implemented our Wedge WellTM technology at Foster Creek whereby an additional well is drilled between two producing well pairs to produce bitumen that is heated by proximity to a steam chamber, but is not recoverable by the adjacent production wells. This technology requires minimal additional steam, thus it helps reduce the overall steam to oil ratio. In 2011, we drilled 10 wells (2010 – 20 wells) using this technology, and at December 31, 2011 there were 41 wells of this type producing.

 

We operate an 80 megawatt natural gas-fired cogeneration facility in conjunction with the SAGD operation at Foster Creek. The steam and power generated by the facility is presently being used within the SAGD operation and any excess power generated is being sold into the Alberta Power Pool.

 

*Christina Lake*

 

We have a 50 percent interest in Christina Lake, an oil sands property in northeast Alberta that uses SAGD technology and produces from the McMurray formation. The phase C expansion, completed in 2011, increased gross production capacity to approximately 58,000 bbls/d of bitumen. In 2011, we received regulatory approval for phases E, F and G which are expected to add a total of approximately 140,000 bbls/d of gross bitumen production capacity. In the fourth quarter of 2011, we applied for an amendment to our existing application to add cogeneration facilities at Christina Lake and increasing total gross production capacity by 10,000 bbls/d at each of phase F and phase G. In 2011, we drilled three wells (2010 – four wells) at Christina Lake using our Wedge WellTM technology and at December 31, 2011 there were four wells of this type producing.

 

Several innovations to SAGD technology have been undertaken at Christina Lake over the past several years. One major project that started in 2009 is a new Solvent Aided Process (“SAP”) pilot. This SAP pilot utilizes a mixture of steam and solvent to enhance recovery of the bitumen by reducing the steam to oil ratio and increasing the overall recovery of the bitumen. Business cases are currently being evaluated for the potential use of this technology in the Christina Lake and Narrows Lake development plans.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 7 |
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In 2011, we applied steam dilation technology as part of the Christina Lake phase C start up. As steam is injected into the injector and producer wells at high pressure, the force of the steam rearranges the sand grains and creates gaps, which are filled with water. This increases both porosity and water mobility, allowing fluid flow between the wells. Steam dilation requires minimal additional costs or surface facility modifications, takes less than one month and results in more uniform start up along the full length of the well pairs. This allows the well to reach peak production rates more quickly. Steam benefits include a faster start up time, a reduction in steam circulation time and a decrease in cumulative steam to oil ratio.

 

*Narrows Lake*

 

We hold a 50 percent interest in Narrows Lake, an oil sands property within the Christina Lake Region in northeast Alberta. In the first quarter of 2010, we initiated the regulatory approval process for Narrows Lake by filing proposed terms of reference for an EIA and began public consultation for the project. In the second quarter of 2010, final terms of reference were issued by Alberta Environment and a joint application and EIA was filed. The project includes gross production capacity of 130,000 bbls/d of bitumen to be developed in up to three phases, with the first phase expected to have production capacity of approximately 40,000 bbls/d of bitumen. Our submitted application includes the option to implement the SAP technology at Narrows Lake which would allow the project to be developed in two phases of 65,000 bbls/d, rather than three phases. The project is expected to begin producing in 2016, subject to receiving regulatory approval.

 

*Pelican Lake*

 

Using a pattern, horizontal well polymer flood, we produce heavy crude oil from the Cretaceous Wabiskaw formation at our Pelican Lake property, which is located within the Greater Pelican Region in northeast Alberta. In 2011, our capital investment primarily related to infill drilling to progress the polymer flood, drilling of stratigraphic test wells, facilities expansions and maintenance programs. In 2011 we drilled 31 heavy oil wells.

 

We hold a 38 percent non-operated interest in a 110-kilometre, 20-inch diameter crude oil pipeline which connects the Pelican Lake area to a major pipeline that transports crude oil from northern Alberta to crude oil markets.

 

*New Resource Play Assets*

 

Our new resource play assets include our emerging oil sands properties.

 

Our Grand Rapids property is located in the Greater Pelican Region in northeast Alberta, where large deposits of bitumen have been identified in the Cretaceous Grand Rapids formation. During 2011, we executed a pilot project at Grand Rapids which will continue to be operated during 2012. In the fourth quarter of 2011, we filed a joint application and EIA for a commercial operation with production capacity of 180,000 bbls/d.

 

Our Telephone Lake property is located in the Borealis Region in northeast Alberta. A joint application and EIA was submitted in 2007 to the ERCB and Alberta Environment for the development of the property, including the construction of a facility with bitumen production capacity of 35,000 bbls/d. In the fourth quarter of 2011, we submitted a revised joint application and EIA, which increases the planned production capacity to 90,000 bbls/d. Portions of the Telephone Lake reservoir are overlain with non-saline water. To improve SAGD performance, this water should be removed in advance of SAGD operations. In the first quarter of 2012, a significant test will be carried out to dewater a confined area and the results will be monitored throughout the year.

 

The Steepbank and East McMurray properties are also located in the Borealis Region, southwest of Telephone Lake. An active exploration program is being carried out at these properties. In 2011, 44 stratigraphic wells were drilled and 210 km of 2D seismic was shot. A comparable sized program is underway in 2012.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 8 |
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*Athabasca Gas*

 

We produce natural gas from the Cold Lake Air Weapons Range and several surrounding landholdings located in northeast Alberta and hold surface access and natural gas rights for exploration, development and transportation from areas within the Cold Lake Air Weapons Range that were granted by the Governments of Canada and Alberta. The majority of our natural gas production in the area is processed through wholly owned and operated compression facilities.

 

Natural gas production continues to be impacted by ERCB decisions made between 2003 and 2009 to shut-in natural gas production from the McMurray, Wabiskaw and Clearwater formations that may put at risk the recovery of bitumen resources in the area. The decisions resulted in a decrease in our annualized natural gas production of approximately 21 million cubic feet per day in 2011 (2010 - 23 million cubic feet per day). The ADOE is providing financial assistance in the form of a royalty credit, which can equal up to approximately 50 percent of the cash flow lost as a result of the shut-in wells but is dependant on natural gas prices.

 

**Conventional**

 

We have conventional crude oil and natural gas operations in Alberta and Saskatchewan. Conventional operations include crude oil properties in southern Alberta, the Weyburn CO2 enhanced oil recovery project as well as our Bakken and Lower Shaunavon properties.

 

At December 31, 2011, we had an established land position of approximately 5.5 million gross acres (5.3 million net acres), of which approximately 3.7 million gross acres (3.6 million net acres) are developed. The mineral rights on approximately 59 percent of our net landholdings are owned in fee title by Cenovus, which means that production is subject to a mineral tax that is generally less than the Crown royalty imposed on production from land where the government owns the mineral rights. We may lease out a portion of our fee lands in areas where the land is not consistent with our long range business plan. We lease Crown lands in some areas in Alberta, mainly in the Early Cretaceous geological formations, primarily in the Suffield and Wainwright areas. In Saskatchewan, the majority of our current production comes from lands leased from the Province of Saskatchewan.

 

In 2011, our Conventional capital investment was $788 million and primarily focused on crude oil properties, including drilling and facility work at Weyburn and in southern Alberta as well as drilling in the Bakken and Lower Shaunavon areas.

 

Plans for 2012 include additional capital investment in our Weyburn, Bakken and Lower Shaunavon properties as well as our Alberta crude oil properties. The investment is expected to include additional drilling, well optimizations, well recompletions and investment in facility infrastructure necessary for continued development of our assets.

 

The following table summarizes our landholdings at December 31, 2011:

 
| **Landholdings – Conventional** | ** ** | **Developed** | ** ** | **Undeveloped** | ** ** | **Total** | ** ** | ** ** | **Average   Working** |
|------------------------------------------------|------------|---------------|------------|-----------------|------------|-----------|------------|------------|-----------------------|
| (thousands of acres)                 | ** ** | **Gross**     | ** ** | **Net**         | ** ** | **Gross** | ** ** | **Net**    | ** **            | ** ** | **Gross** | ** ** | **Net** | ** ** | ** ** | **Interest** |
| Alberta                                        |       |          |       |            |       |      |       |       |                  |   |   |   |   |   |   |   |
| Suffield                                       |       | 915           |       | 906             |       | 106       |       | 103        |                  |   | 1,021 |   | 1,009 |   |   | 99% |
| Brooks   North                                 |       | 571           |       | 569             |       | 8         |       | 8          |                  |   | 579 |   | 577 |   |   | 100% |
| Langevin                                       |       | 730           |       | 691             |       | 244       |       | 226        |                  |   | 974 |   | 917 |   |   | 94% |
| Drumheller                                     |       | 402           |       | 390             |       | 45        |       | 42         |                  |   | 447 |   | 432 |   |   | 97% |
| Wainwright                                     |       | 354           |       | 332             |       | 208       |       | 203        |                  |   | 562 |   | 535 |   |   | 95% |
| Boyer                                          |       | 590           |       | 558             |       | 204       |       | 164        |                  |   | 794 |   | 722 |   |   | 91% |
| Saskatchewan                                   |       |          |       |            |       |      |       |       |                  |   |   |   |   |   |   |   |
| Weyburn                                        |       | 108           |       | 95              |       | 368       |       | 348        |                  |   | 476 |   | 443 |   |   | 93% |
| Shaunavon   / Bakken                           |       | 26            |       | 24              |       | 370       |       | 367        |                  |   | 396 |   | 391 |   |   | 99% |
| Other                                          |       | 9             |       | 6               |       | 19        |       | 19         |                  |   | 28 |   | 25 |   |   | 87% |
| Manitoba                                       |       | 3             |       | 3               |       | 261       |       | 261        |                  |   | 264 |   | 264 |   |   | 100% |
| Total                                          |       | 3,708         |       | 3,574           |       | 1,833     |       | 1,741      |                  |   | 5,541 |   | 5,315 |   |   | 96% |

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 9 |
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The following table summarizes our share of daily average production for the periods indicated:

 
| **Production – Conventional** | ** ** | **Crude Oil   and NGLs   (bbls/d)** | ** ** | **Natural Gas   (MMcf/d)** | ** ** | **Total   Production   (BOE/d)** |
|----------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------|------------|----------------------------------|
| (annual average)                        | ** ** | **2011**                                      | ** ** | **2010**                        | ** ** | **2011**                         | ** ** | **2010** | ** ** | **2011** | ** ** | **2010** |
| Alberta                                      |       |                                          |       |                            |       |                             |   |   |   |   |   |   |
| Suffield                                     |       | 11,505                                        |       | 12,742                          |       | 182                              |   | 200 |   | 41,838 |   | 46,075 |
| Brooks North                                 |       | 2,064                                         |       | 1,637                           |       | 236                              |   | 240 |   | 41,397 |   | 41,637 |
| Langevin                                     |       | 7,361                                         |       | 7,728                           |       | 118                              |   | 152 |   | 27,028 |   | 33,062 |
| Drumheller                                   |       | 2,298                                         |       | 2,109                           |       | 61                               |   | 72 |   | 12,465 |   | 14,109 |
| Wainwright                                   |       | 4,251                                         |       | 4,414                           |       | -                                |   | 3 |   | 4,251 |   | 4,914 |
| Boyer                                        |       | 9                                             |       | 13                              |       | 22                               |   | 24 |   | 3,676 |   | 4,013 |
| Saskatchewan                                 |       |                                          |       |                            |       |                             |   |   |   |   |   |   |
| Weyburn                                      |       | 16,178                                        |       | 16,537                          |       | -                                |   | - |   | 16,178 |   | 16,537 |
| Shaunavon / Bakken                           |       | 3,616                                         |       | 1,996                           |       | -                                |   | 3 |   | 3,616 |   | 2,496 |
| Total                                        |       | 47,282                                        |       | 47,176                          |       | 619                              |   | 694 |   | 150,449 |   | 162,843 |

 

The following table summarizes our interests in producing wells at December 31, 2011. These figures exclude wells which were capable of producing, but that were not producing, at December 31, 2011:

 
| **Producing Wells – Conventional** | ** ** | **Producing   Oil Wells** | ** ** | **Producing   Gas Wells** | ** ** | **Total   Producing Wells** | ** ** |
|--------------------------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|----------------------------------|------------|
| ** **                                             | ** ** | **Gross**                      | ** ** | **Net**                        | ** ** | **Gross**                        | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| Alberta                                                |       |                           |       |                           |       |                             |       |   |   |   |   |   |   |
| Suffield                                               |       | 746                            |       | 746                            |       | 10,649                           |       | 10,631 |   | 11,395 |   | 11,377 |   |
| Brooks North                                           |       | 111                            |       | 111                            |       | 7,520                            |       | 7,411 |   | 7,631 |   | 7,522 |   |
| Langevin                                               |       | 243                            |       | 240                            |       | 4,842                            |       | 4,826 |   | 5,085 |   | 5,066 |   |
| Drumheller                                             |       | 169                            |       | 165                            |       | 1,615                            |       | 1,555 |   | 1,784 |   | 1,720 |   |
| Wainwright                                             |       | 442                            |       | 400                            |       | 19                               |       | 5 |   | 461 |   | 406 |   |
| Boyer                                                  |       | 7                              |       | 1                              |       | 1,079                            |       | 1,078 |   | 1,086 |   | 1,079 |   |
| Saskatchewan                                           |       |                           |       |                           |       |                             |       |   |   |   |   |   |   |
| Weyburn                                                |       | 712                            |       | 448                            |       | -                                |       | - |   | 712 |   | 448 |   |
| Shaunavon / Bakken                                     |       | 96                             |       | 93                             |       | -                                |       | - |   | 96 |   | 93 |   |
| Total                                                  |       | 2,526                          |       | 2,204                          |       | 25,724                           |       | 25,506 |   | 28,250 |   | 27,710 |   |

 

*Crude Oil Properties*

 

We hold interests in multiple zones in the Suffield, Brooks North, Langevin, Drumheller, and Wainwright areas in southern Alberta with a mix of medium and heavy crude oil production. Development in these areas focuses on infill drilling, optimization of existing wells and other specialized oil recovery methods. We operate water handling facilities to effectively manage oil production.

 

In the unitized portion of the Weyburn crude oil field in southeast Saskatchewan we have a 62 percent working interest. However, after taking into consideration a net royalty interest obligation to a third party, our economic interest is 50 percent. The Weyburn unit produces light and medium sour crude oil from the Mississippian Midale formation and covers 78 sections of land. Cenovus is the operator and we are increasing ultimate recovery of crude oil with a CO2 miscible flood project. At December 31, 2011, approximately 87 percent of the approved CO2 flood pattern development at the Weyburn unit was complete. Since the inception of the project, approximately 18 million tonnes of CO2 have been injected as part of the program. The CO2 is delivered by pipeline directly to the Weyburn facility from a coal gasification project in North Dakota, U.S.A.

 

In 2011, we continued developing our medium and light crude oil prospects in the Bakken and Lower Shaunavon zones in Saskatchewan, where we drilled 81 wells and increased production to approximately 3,581 bbls/d of crude oil. Most of the sections of land that we hold in these areas are Crown land.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 10 |
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The following table summarizes net oil wells drilled and daily average oil production figures for the periods indicated:

 
| ** **                                               | ** ** | ** **                   | ** ** | ** **       | ** ** | **Average   Production (bbls/d)** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|------------------|------------|----------------------------------------|------------|
| ** **                                               | ** ** | **Net   Wells Drilled** | ** ** | **Light/Medium** | ** ** | **Heavy**                              | ** ** |
| ** **                                               | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net Wells Drilled and Production** | ** ** | **2011**                     | ** ** | **2010**         | ** ** | **2011**                               | ** ** | **2010** | ** ** | **2011** | ** ** | **2010** | ** ** |
| Alberta                                                  |       |                         |       |             |       |                                   |       |   |   |   |   |   |   |
| Suffield                                                 |       | 45                           |       | 43               |       | -                                      |       | - |   | 11,484 |   | 12,717 |   |
| Brooks North                                             |       | 42                           |       | 41               |       | 1,898                                  |       | 1,458 |   | - |   | - |   |
| Langevin                                                 |       | 68                           |       | 22               |       | 7,172                                  |       | 7,529 |   | - |   | - |   |
| Drumheller                                               |       | 49                           |       | 30               |       | 1,617                                  |       | 1,403 |   | - |   | - |   |
| Wainwright                                               |       | 29                           |       | 3                |       | 67                                     |       | 452 |   | 4,173 |   | 3,942 |   |
| Boyer                                                    |       | -                            |       | -                |       | 9                                      |       | 12 |   | - |   | - |   |
| Saskatchewan                                             |       |                         |       |             |       |                                   |       |   |   |   |   |   |   |
| Weyburn                                                  |       | 6                            |       | 3                |       | 16,180                                 |       | 16,534 |   | - |   | - |   |
| Shaunavon / Bakken                                       |       | 81                           |       | 36               |       | 3,581                                  |       | 1,958 |   | - |   | - |   |
| Other                                                    |       | 5                            |       | 2                |       | -                                      |       | - |   | - |   | - |   |
| Total                                                    |       | 325                          |       | 180              |       | 30,524                                 |       | 29,346 |   | 15,657 |   | 16,659 |   |

 

*Natural Gas Properties*

 

We hold interests in multiple zones in the Suffield, Brooks North, Langevin and Drumheller areas in southern Alberta. Development in these areas focuses on recompletions and optimization of existing wells.

 

The following table summarizes net gas wells drilled and daily average gas production for the periods indicated:

 

 
| ** **                                               | ** ** | **Net   Wells Drilled** | ** ** | **Average Production   (MMcf/d)** | ** ** |
|----------------------------------------------------------|------------|------------------------------|------------|----------------------------------------|------------|
| **Net Wells Drilled and Production** | ** ** | **2011**                     | ** ** | **2010**                               | ** ** | **2011** | ** ** | **2010** | ** ** |
| Suffield                                                 |       | -                            |       | 292                                    |       | 182 |   | 200 |   |
| Brooks   North                                           |       | 65                           |       | 149                                    |       | 236 |   | 240 |   |
| Langevin                                                 |       | -                            |       | 24                                     |       | 118 |   | 152 |   |
| Drumheller                                               |       | -                            |       | 29                                     |       | 61 |   | 72 |   |
| Other                                                    |       | -                            |       | 1                                      |       | 22 |   | 30 |   |
| Total                                                    |       | 65                           |       | 495                                    |       | 619 |   | 694 |   |

 

Suffield is one of the core areas of our crude oil and natural gas production in Alberta. The Suffield area is largely made up of the Suffield Block, where operations are carried out pursuant to an agreement among Cenovus, the Government of Canada and the Province of Alberta governing surface access to Canadian Forces Base (“CFB”) Suffield. In 1999, the parties agreed to permit access to the Suffield military training area to additional operators. Our predecessor companies, Alberta Energy Company Ltd. and Encana, have operated at CFB Suffield for over 30 years. On October 6, 2008, pursuant to the Canadian *Environmental Assessment Act*, a joint review panel (“JRP”), made up of provincial and federal regulators, heard our application for a shallow gas infill development in the National Wildlife Area (“NWA”) at CFB Suffield. The hearing was completed in late October 2008. On January 27, 2009, the JRP released its recommendations, concluding that the proposed project could proceed provided two key pre-conditions were met: first, critical habitat assessments for certain specific species of plants and animals must be finalized by Environment Canada within the NWA; and second, the role of the Suffield Environmental Advisory Committee (“SEAC”) must be clarified by the parties to the surface access agreement, and SEAC must be resourced adequately to provide proper environmental oversight of the project. The JRP also concluded that other mitigations and recommendations should be followed once the two key pre-conditions were met. We are working with necessary interested parties to proceed with this project.

 

Natural gas assets are an important component of our financial foundation, generating operating cash flow well in excess of their ongoing capital investment requirements. The natural gas business also acts as an economic hedge against price fluctuations, because natural gas fuels the Company’s oil sands and refining operations.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 11 |
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We plan to manage declines in natural gas volumes, targeting a long-term production level that will match Cenovus’s future anticipated internal usage at its oil sands and refining facilities.

 

**Refining and Marketing**

 

*Refining*

 

Through WRB Refining LP (“WRB”) we have a 50 percent ownership interest in both the Wood River and Borger Refineries located in Roxana, Illinois and Borger, Texas respectively. ConocoPhillips is the operator and managing partner of WRB. WRB has a management committee, which is composed of three Cenovus representatives and three ConocoPhillips representatives, with each company holding equal voting rights. Throughout 2011, on a 100 percent basis, our refineries had a capacity of approximately 452,000 bbls/d of crude oil and approximately 45,000 bbls/d of NGLs, including processing capability of up to 145,000 bbls/d of heavy crude oil. As plant test runs proceed, maximum demonstrated refining capacity increases attributable to the CORE project at the Wood River Refinery, including expanded coking and heavy crude oil processing capabilities, will be reflected in our 2012 operations.

 

*Wood River Refinery*

 

Throughout 2011, the Wood River Refinery had a processing capability of approximately 306,000 bbls/d, including approximately 110,000 bbls/d of heavy crude oil. It processes light low-sulphur and heavy high-sulphur crude oil that it receives from North American crude oil pipelines to produce gasoline, diesel and jet fuel, petrochemical feedstocks and asphalt. The gasoline and diesel are transported via pipelines to markets in the upper U.S. Midwest. Other products are transported via pipeline, truck, barge and railcar to markets in the U.S. Midwest.

 

Test runs of the CORE project, which will continue through the first quarter of 2012, have been successful to date and have resulted in a five percent increase to clean product yield.  Upon completion of testing, the Wood River Refinery’s total processing capability of heavy crude oil will be dependent on the quality of heavy Canadian crude oil that is economically available, and is expected to increase to 200,000 to 220,000 bbls/d. 

 

*Borger Refinery*

 

At December 31, 2011, the Borger Refinery had a processing capacity of approximately 146,000 bbls/d of crude oil, including approximately 35,000 bbls/d of heavy crude oil, and approximately 45,000 bbls/d of NGLs. It processes mainly medium and heavy high-sulphur crude oil, and NGLs that it receives from North American pipeline systems to produce gasoline, diesel and jet fuel along with NGLs and solvents. The refined products are transported via pipelines to markets in Texas, New Mexico, Colorado and the U.S. Mid-Continent.

 

The following table summarizes the key operational results for our refineries in the periods indicated:

*** ***
| **Refinery Operations**(1) | ** ** | **2011** | ** ** | **2010** |
|---------------------------------|------------|----------|------------|----------|
| Crude Oil Capacity (Mbbls/d)    |       | 452      |       | 452      |
| Crude Oil Runs (Mbbls/d)        |       | 401      |       | 386      |
| Crude Utilization (%)           |       | 89       |       | 86       |
| Refined Products (Mbbls/d)      |       |     |       |     |
| Gasoline                        |       | 207      |       | 204      |
| Distillates                     |       | 132      |       | 123      |
| Other                           |       | 80       |       | 78       |
| Total                           |       | 419      |       | 405      |

Note:

(1)  Represents 100 percent of the Wood River and Borger Refinery operations.

 

*Marketing*

 

Our Marketing group is focused on enhancing the netback price of our production. As part of these activities, the group also carries out third-party purchases and sales of product to provide operational flexibility for transportation commitments, product quality, delivery points and customer diversification.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 12 |
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We also seek to mitigate the market risk associated with future cash flows by entering into various risk management contracts relating to produced products. Details of transactions related to our various risk management positions for crude oil, natural gas and power are found in the notes to our audited Consolidated Financial Statements for the year ended December 31, 2011.

 

*Crude Oil Marketing*

 

We manage the transportation and marketing of crude oil for our upstream operations. Our objective is to sell production to achieve the best price within the constraints of a diverse sales portfolio, as well as to obtain and manage condensate supply, inventory and storage to meet diluent requirements. Our portfolio of transportation commitments includes feeder pipelines from our production areas to the Edmonton and Hardisty trade centres and major pipeline alternatives to markets downstream of these hubs. Other transportation commitments are primarily related to the reliable supply of diluent, as well as tankage, terminalling and railcar transportation of both blend and condensate volumes.

 

*Natural Gas Marketing*

 

We also manage the marketing of our natural gas, which is primarily sold to industrials, other producers and energy marketing companies. Prices received by us are based primarily upon prevailing index prices for natural gas. Prices are impacted by competing fuels in such markets and by North American regional supply and demand for natural gas.

 

 

**RESERVES DATA AND OTHER OIL AND GAS INFORMATION**

 

As a Canadian issuer, we are subject to the reporting requirements of Canadian securities regulatory authorities, including the reporting of our reserves in accordance with National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (“NI 51-101”).

 

Our reserves are primarily located in Alberta and Saskatchewan, Canada. We retain two independent qualified reserves evaluators (“IQREs”), McDaniel and Associates Consultants Ltd. (“McDaniel”) and GLJ Petroleum Consultants Ltd. (“GLJ”), to evaluate and prepare reports on 100 percent of our bitumen, heavy oil, light and medium oil, NGLs, natural gas, and coalbed methane (“CBM”) reserves annually. McDaniel evaluated approximately 95 percent of our total proved reserves, located throughout Alberta and Saskatchewan, and GLJ evaluated approximately five percent of our total proved reserves, located at Boyer and Weyburn. We also engaged McDaniel to evaluate 100 percent of our contingent and prospective bitumen resources.

 

The Reserves Committee of our Board of Directors (“Board”), composed of independent Board members, reviews the qualifications and appointment of the IQREs, the procedures relating to the disclosure of information with respect to oil and gas activities and the procedures for providing information to the IQREs. The Reserves Committee meets with management and each IQRE to determine whether any restrictions affect the ability of the IQRE to report on the reserves data without reservation, to review the reserves data and the report of the IQRE thereon, and to provide a recommendation approval of the reserves and resources disclosure to the Board.

 

The majority of our bitumen reserves will be recovered and produced using SAGD technology. SAGD involves injecting steam into horizontal wells drilled into the bitumen formation and recovering heated bitumen and water from producing wells located below the injection wells. This technique has a surface footprint comparable to conventional oil production. We have no bitumen reserves that require mining techniques to recover the bitumen.

 

Classifications of reserves as proved or probable are only attempts to define the degree of certainty associated with the estimates. There are numerous uncertainties inherent in estimating quantities of bitumen, oil and natural gas reserves. It should not be assumed that the estimates of future net revenues presented in the tables below represent the fair market value of the reserves. There is no assurance that the forecast prices and costs assumptions will be attained and variances could be material. Readers should review the definitions and information contained in “Additional Notes to Reserves Data Tables”, “Definitions” and “Pricing Assumptions” in conjunction with the disclosure. The reserves estimates provided herein are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual reserves may be greater than or less than the estimates disclosed. See “Risk Factors – Uncertainty of Reserves, Resources and Future Net Revenue Estimates” in this AIF for additional information.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 13 |
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The reserves data and other oil and gas information contained in this AIF is dated February 13, 2012, with an effective date of December 31, 2011. McDaniel’s preparation date of the information is February 13, 2012, and GLJ’s preparation date is January 9, 2012.

 

**Disclosure of Reserves Data**

 

The reserves data presented summarizes our bitumen, heavy oil, light and medium oil plus NGLs, and natural gas plus CBM reserves and the net present values of future net revenue for these reserves. The reserves data uses forecast prices and costs prior to provision for interest, general and administrative expenses, costs associated with environmental regulations, the impact of any hedging activities or the liability associated with certain abandonment and all well, pipeline, facilities and reclamation costs. Future net revenues have been presented on a before and after tax basis.

 

We hold significant fee title rights which generate production for our account from third parties leasing those lands (“Royalty Interest Production”). At December 31, 2011, approximately 2.4 million acres throughout southeastern Alberta and southern Saskatchewan and Manitoba were leased out to third parties.****In accordance with NI 51-101, only the After Royalties volumes presented herein include reserves associated with this Royalty Interest Production (“Royalty Interest Reserves”).

 

 

**Summary of Company Interest Oil and Gas Reserves at December 31, 2011**

**(Forecast Prices and Costs)**

 
| **Before Royalties****(1)**

** ** | ** ** | ** **             | ** ** | ** **                    | ** ** | ** **                                                             | ** ** | ** **                                    |
|----------------------------------------------|------------|------------------------|------------|-------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------|
| **Reserves Category**                   |       | **Bitumen   (MMbbls)** | ** ** | **Heavy Oil   (MMbbls)** | ** ** | **Light & Medium   Oil & NGLs   (MMbbls)** | ** ** | **Natural Gas   & CBM   (Bcf)** |
| **Proved Reserves**                          |       |                   |       |                          |       |                                                                   |       |                                          |
| Developed   Producing                        |       | 162                    |       | 105                           |       | 82                                                                     |       | 1,145                                         |
| Developed   Non-Producing                    |       | 6                      |       | 15                            |       | 8                                                                      |       | 34                                            |
| Undeveloped                                  |       | 1,287                  |       | 55                            |       | 25                                                                     |       | 24                                            |
| **Total Proved Reserves**                    |       | 1,455                  |       | 175                           |       | 115                                                                    |       | 1,203                                         |
| Probable Reserves                            |       | 490                    |       | 109                           |       | 51                                                                     |       | 391                                           |
| **Total Proved plus   Probable Reserves**    |       | 1,945                  |       | 284                           |       | 166                                                                    |       | 1,594                                         |

 
| **After Royalties****(2)**

** ** | ** ** | ** **             | ** ** | ** **                    | ** ** | ** **                                                             | ** ** |                                          |
|---------------------------------------------|------------|------------------------|------------|-------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------|
| **Reserves Category**                  | ** ** | **Bitumen   (MMbbls)** | ** ** | **Heavy Oil   (MMbbls)** | ** ** | **Light & Medium   Oil & NGLs   (MMbbls)** | ** ** | **Natural Gas   & CBM   (Bcf)** |
| **Proved Reserves**                         |       |                   |       |                          |       |                                                                   |       |                                          |
| Developed   Producing                       |       | 121                    |       | 86                            |       | 70                                                                     |       | 1,152                                         |
| Developed   Non-Producing                   |       | 5                      |       | 12                            |       | 5                                                                      |       | 34                                            |
| Undeveloped                                 |       | 953                    |       | 44                            |       | 20                                                                     |       | 23                                            |
| **Total Proved Reserves**                   |       | 1,079                  |       | 142                           |       | 95                                                                     |       | 1,209                                         |
| Probable Reserves                           |       | 357                    |       | 81                            |       | 42                                                                     |       | 375                                           |
| **Total Proved plus****Probable Reserves**  |       | 1,436                  |       | 223                           |       | 137                                                                    |       | 1,584                                         |

 
| **Royalty Interest**

** **      | ** ** | ** **             | ** ** | ** **                    | ** ** | ** **                                                             | ** ** | ** **                                    |
|--------------------------------------------|------------|------------------------|------------|-------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------|
| **Reserves Category**                 | ** ** | **Bitumen   (MMbbls)** | ** ** | **Heavy Oil   (MMbbls)** | ** ** | **Light & Medium   Oil & NGLs   (MMbbls)** | ** ** | **Natural Gas   & CBM   (Bcf)** |
| **Proved Reserves**                        |       |                   |       |                          |       |                                                                   |       |                                          |
| Developed   Producing                      |       | -                      |       | 2                             |       | 4                                                                      |       | 45                                            |
| Developed   Non-Producing                  |       | -                      |       | -                             |       | -                                                                      |       | -                                             |
| Undeveloped                                |       | -                      |       | -                             |       | -                                                                      |       | -                                             |
| **Total Proved Reserves**                  |       | -                      |       | 2                             |       | 4                                                                      |       | 45                                            |
| Probable Reserves                          |       | -                      |       | -                             |       | 2                                                                      |       | 15                                            |
| **Total Proved plus****Probable Reserves** |       | -                      |       | 2                             |       | 6                                                                      |       | 60                                            |

Notes:

(1)             Does not include Royalty Interest Reserves.

(2)             Includes Royalty Interest Reserves.

 

 
| Cenovus Energy Inc. Annual   Information Form for the year ended December 31, 2011 | 14 |
|----------------------------------------------------------------------------------------------|----|

 

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Table of Contents

 

**Summary of Net Present Value of Future Net Revenue at December 31, 2011**

**(Forecast Prices and Costs)**

** **
| **Before Income Taxes**

** **          | ** **                                 | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|--------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|------------|
| ** **                                   | **Discounted at %/year ($ millions)** | ** ** | **Unit Value**

**Discounted at**

**10%**(1) |
| **Reserves Category**                        | **0%**                                     | **5%**     | **10%**                                       | **15%**    | **20%**    | ** ** | **$/BOE**  |
| **Proved Reserves**                          |                                       |       |                                          |       |       |       |       |
|      Developed Producing           | 16,704                                     | 13,539     | 11,404                                        | 9,883      | 8,747      |       | 24.28      |
|    Developed   Non-Producing       | 1,119                                      | 760        | 568                                           | 452        | 374        |       | 20.98      |
|      Undeveloped                   | 45,721                                     | 19,864     | 10,121                                        | 5,677      | 3,352      |       | 9.91       |
| **Total Proved Reserves**                    | 63,544                                     | 34,163     | 22,093                                        | 16,012     | 12,473     |       | 14.56      |
| Probable Reserves                            | 25,192                                     | 12,571     | 6,881                                         | 4,169      | 2,746      |       | 12.68      |
| **Total Proved plus**

**Probable Reserves** | 88,736                                     | 46,734     | 28,974                                        | 20,181     | 15,219     |       | 14.06      |

Note:

(1)             Unit values have been calculated using Company Interest After Royalties reserves.

 
| **After Income Taxes****(1)**

         | ** **                                 | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------------|--------------------------------------------|------------|------------|------------|------------|
| ** **                                   | **Discounted at %/year ($ millions)** |
| **Reserves Category**                        | **0%**                                     | **5%**     | **10%**    | **15%**    | **20%**    |
| **Proved Reserves**                          |                                       |       |       |       |       |
|      Developed Producing           | 13,094                                     | 10,668     | 9,017      | 7,837      | 6,954      |
|      Developed Non-Producing       | 834                                        | 567        | 425        | 340        | 282        |
|      Undeveloped                   | 34,237                                     | 14,747     | 7,434      | 4,110      | 2,379      |
| **Total Proved Reserves**                    | 48,165                                     | 25,982     | 16,876     | 12,287     | 9,615      |
| Probable Reserves                            | 18,705                                     | 9,294      | 5,057      | 3,042      | 1,989      |
| **Total Proved plus**

**Probable Reserves** | 66,870                                     | 35,276     | 21,933     | 15,329     | 11,604     |

Note:

(1)             Values are calculated by considering existing tax pools and tax circumstances for Cenovus and its subsidiaries in the consolidated evaluation of Cenovus’s oil and gas properties, and take into account current federal tax regulations. Values do not represent an estimate of the value at the business entity level, which may be significantly different. For information at the business entity level, please see our Consolidated Financial Statements and Management’s Discussion and Analysis for the year ended December 31, 2011.

 

**Total Future Net Revenue (undiscounted) at December 31, 2011**

**(Forecast Prices and Costs) ($ millions)**

 
| **Reserves**

**Category**             | **Revenue** | **Royalties** | **Operating**

**Costs** | **Development**

**Costs** | **Abandonment**

**Costs****(1)** | **Future**

**Net**

**Revenue**

**Before**

**Income**

**Taxes** | **Future**

**Income**

**Taxes** | **Future**

**Net**

**Revenue**

**After**

**Income**

**Taxes** |
|----------------------------------------|-------------|---------------|--------------------------|----------------------------|-----------------------------------|---------------------------------------------------------------------|-----------------------------------|--------------------------------------------------------------------|
| **Proved**

**Reserves**               | 151,861     | 35,574        | 40,130                   | 11,563                     | 1,050                             | 63,544                                                              | 15,379                            | 48,165                                                             |
| **Proved plus**

**Probable Reserves** | 209,399     | 49,813        | 53,882                   | 15,769                     | 1,199                             | 88,736                                                              | 21,866                            | 66,870                                                             |

Note:

(1)             The abandonment costs only include downhole abandonment costs for the wells considered in the IQREs’ evaluation of reserves. Abandonment of other wells, surface reclamation, asset recovery and facility site reclamation costs are not included.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 |   | 15

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Table of Contents

 

**Future Net Revenue by Production Group at December 31, 2011**

**(Forecast Prices and Costs)**

 
| **Reserves Category** | **Production Group**                | **Future Net**

**Revenue Before**

**Income Taxes**

**(discounted at**

**10%/year)**

**($ millions)** | **Unit Value**

**(Company Interest**

**After Royalties   Reserves)**

**($/BOE)** |
|-----------------------|-------------------------------------|----------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------|
| **Proved Reserves**   | Bitumen                             | 13,897                                                                                                         | 12.88                                                                               |
|                  | Heavy Oil                           | 3,008                                                                                                          | 21.19                                                                               |
|                  | Light and Medium Crude Oil and NGLs | 2,986                                                                                                          | 31.30                                                                               |
|                  | Natural Gas                         | 2,202                                                                                                          | 10.94                                                                               |
|                  | Total                               | 22,093                                                                                                         | 14.56                                                                               |
|                  |                                |                                                                                                           |                                                                                |
| **Proved plus**       | Bitumen                             | 17,490                                                                                                         | 12.18                                                                               |
| **Probable Reserves** | Heavy Oil                           | 4,533                                                                                                          | 20.31                                                                               |
|                  | Light and Medium Crude Oil and NGLs | 4,053                                                                                                          | 29.51                                                                               |
|                  | Natural Gas                         | 2,898                                                                                                          | 10.98                                                                               |
|                  | Total                               | 28,974                                                                                                         | 14.06                                                                               |

 

***Additional Notes to Reserves Data Tables***

*** ***

·                  The estimates of future net revenue presented do not represent fair market value.

 

·                  Future net revenue from reserves excludes cash flows related to our risk management activities.

 

·                  For disclosure purposes, we have included NGLs with light and medium oil, and CBM gas with natural gas, as the reserves of each are not material relative to the other reported product types.

** **

·                  Numbers presented are rounded to the nearest whole number and tables may not add due to rounding.

** **

**Definitions**

** **

1.              **After Royalties** means volumes after deduction of royalties and includes Royalty Interests.

 

2.              **Before Royalties** means volumes before deduction of royalties and excludes Royalty Interests.

 

3.              **Company Interest** means, in relation to production, reserves, resources and property, the interest (operating or non-operating) held by us.

 

4.              **Gross** means:

 

(a)         in relation to wells, the total number of wells in which we have an interest; and

(b)         in relation to properties, the total area of properties in which we have an interest.

 

5.              **Net** means:

 

(a)         in relation to wells, the number of wells obtained by aggregating our working interest in each of our gross wells; and

(b)         in relation to our interest in a property, the total area in which we have an interest multiplied by the working interest owned by us.

 

6.              **Reserves** are estimated remaining quantities anticipated to be recoverable from known accumulations, from a given date forward, based on analysis of drilling, geological, geophysical and engineering data, the use of established technology and specified economic conditions.

 

Reserves are classified according to the degree of certainty associated with the estimates:

 

·                  **Proved reserves** are those reserves that can be estimated with a high degree of certainty to be recoverable. It is likely that the actual remaining quantities recovered will exceed the estimated proved reserves.

 

·                  **Probable reserves** are those additional reserves that are less certain to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of the estimated proved plus probable reserves.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 |   | 16

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Table of Contents

 

Each of the reserves categories may be divided into developed and undeveloped categories:

 

·                  **Developed****reserves** are those reserves that are expected to be recovered from existing wells and installed facilities or, if facilities have not been installed, that would involve a low expenditure (e.g., when compared to the cost of drilling a well) to put the reserves on production. The developed category may be subdivided as follows:

 

o                 **Developed producing reserves** are those reserves that are expected to be recovered from completion intervals open at the time of the estimate. These reserves may be currently producing or, if shut-in, they must have previously been on production, and the date of resumption of production must be known with reasonable certainty.

 

o                 **Developed non-producing reserves** are those reserves that either have not been on production, or have previously been on production, but are shut-in, and the date of resumption of production is unknown.

 

·                  **Undeveloped reserves** are those reserves expected to be recovered from known accumulations where a significant expenditure (e.g. similar to the cost of drilling a well) is required to render them capable of production. They must fully meet the requirements of the reserves classification (proved, probable) to which they are assigned.

 

7.              **Royalty Interest Reserves** means those reserves related to our royalty entitlement on lands to which we hold fee title and which have been leased to third parties, plus any reserves related to other royalty interests, such as overriding royalties, to which we are entitled.

 

8.              **Royalty Interest Production** means the production related to our royalty entitlement on lands to which we hold fee title and which have been leased to third parties, plus any production related to other royalty interests, such as overriding royalties, to which we are entitled.

 

***Pricing Assumptions***

*** ***

The forecast price and cost assumptions assume the continuance of current laws and take into account inflation with respect to future operating and capital costs. The forecast prices are provided in the table below and reflect McDaniel’s January 1, 2012 price forecast as referred to in the McDaniel & Associates Consultants Ltd. Summary of Price Forecasts dated January 1, 2012. For historical prices realized during 2011, see “Production History” in this AIF.

 
|          | **Oil**                                           | ** **                                                 | **Natural**

**Gas**                               | ** **                                        |                                                |       |
|---------------|---------------------------------------------------|------------------------------------------------------------|----------------------------------------------------|---------------------------------------------------|-----------------------------------------------------|------------|
| **Year**      | **WTI**

**Cushing**

**Oklahoma**

**($US/bbl)** | **Edmonton**

**Par**

**Price**

**40 API**

**($C/bbl)** | **Cromer**

**Medium**

**29.3 API**

**($C/bbl)** | **Hardisty**

**Heavy**

**12 API**

**($C/bbl)** | **Western**

**Canadian**

**Select**

**($C/bbl)** | ** ** | **AECO**

**Gas**

**Price**

**($C/MMBtu)** | ** ** | **Inflation**

**Rate**

**(%/year)** | **Exchange**

**Rate**

**($US/$C)** |
| 2012          | 97.50                                             | 99.00                                                      | 91.00                                              | 74.00                                             | 80.50                                               |       | 3.50 |   | 2.0 | 0.975 |
| 2013          | 97.50                                             | 99.00                                                      | 91.00                                              | 74.00                                             | 80.50                                               |       | 4.20 |   | 2.0 | 0.975 |
| 2014          | 100.00                                            | 101.50                                                     | 93.30                                              | 75.90                                             | 82.50                                               |       | 4.70 |   | 2.0 | 0.975 |
| 2015          | 100.80                                            | 102.30                                                     | 94.10                                              | 76.50                                             | 83.20                                               |       | 5.10 |   | 2.0 | 0.975 |
| 2016          | 101.70                                            | 103.20                                                     | 94.90                                              | 77.10                                             | 83.90                                               |       | 5.55 |   | 2.0 | 0.975 |
| 2017          | 102.70                                            | 104.20                                                     | 95.80                                              | 77.90                                             | 84.70                                               |       | 5.90 |   | 2.0 | 0.975 |
| 2018          | 103.60                                            | 105.10                                                     | 96.60                                              | 78.60                                             | 85.50                                               |       | 6.25 |   | 2.0 | 0.975 |
| 2019          | 104.50                                            | 106.00                                                     | 97.50                                              | 79.20                                             | 86.20                                               |       | 6.45 |   | 2.0 | 0.975 |
| 2020          | 105.40                                            | 106.90                                                     | 98.30                                              | 79.90                                             | 86.90                                               |       | 6.70 |   | 2.0 | 0.975 |
| 2021          | 107.60                                            | 109.20                                                     | 100.30                                             | 81.60                                             | 88.70                                               |       | 6.85 |   | 2.0 | 0.975 |
| There-

after | +2%/yr                                            | +2%/yr                                                     | +2%/yr                                             | +2%/yr                                            | +2%/yr                                              |       | +2%/yr |   | 2.0 | 0.975 |

** **

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 |   | 17

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Table of Contents

 

***Future Development Costs***

*** ***

The following table outlines undiscounted development costs deducted in the estimation of future net revenue calculated utilizing forecast prices and costs for the years indicated:

** **
| **Reserves Category**

**($ millions)** | **2012** | **2013** | **2014** | **2015** | **2016** | **Remainder** | **Total** |
|----------------------------------------------|----------|----------|----------|----------|----------|---------------|-----------|
| Proved Reserves                              | 1,413    | 928      | 527      | 595      | 334      | 7,766         | 11,563    |
| Proved plus Probable Reserves                | 1,582    | 1,247    | 859      | 854      | 518      | 10,709        | 15,769    |

 

We believe that internally generated cash flows, existing credit facilities and access to capital markets will be sufficient to fund our future development costs. However, there can be no guarantee that the necessary funds will be available or that we will allocate funding to develop all of our reserves. Failure to develop those reserves would have a negative impact on our future net revenue.

 

The interest or other costs of external funding are not included in the reserves and future net revenue estimates and would reduce future net revenue depending upon the funding sources utilized. We do not believe that interest or other funding costs would make development of any property uneconomic.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 |   | 18

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Table of Contents

 

**Reserves Reconciliation**

 

The following tables provide a reconciliation of our Company Interest Before Royalties reserves for bitumen, heavy oil, light and medium oil and NGLs, and natural gas for the year ended December 31, 2011, presented using forecast prices and costs. All reserves are located in Canada.

 

**Company Interest Before Royalties**

**Reserves Reconciliation by Principal Product Type and Reserves Category**

**(Forecast Prices and Costs)**

** **
| **Proved**                         |                      |                        |                                                          |                                      |
|------------------------------------|---------------------------|-----------------------------|---------------------------------------------------------------|-------------------------------------------|
|                               | **Bitumen**

**(MMbbls)** | **Heavy Oil**

**(MMbbls)** | **Light &**

**Medium**

**Oil & NGLs**

**(MMbbls)** | **Natural**

**Gas & CBM**

**(Bcf)** |
| **December 31, 2010**              | 1,154                     | 169                         | 111                                                           | 1,390                                     |
| Extensions   and Improved Recovery | 256                       | 16                          | 13                                                            | 50                                        |
| Discoveries                        | -                         | -                           | -                                                             | -                                         |
| Technical   Revisions              | 69                        | 2                           | 1                                                             | 29                                        |
| Economic   Factors                 | -                         | 1                           | -                                                             | (28)                                      |
| Acquisitions                       | -                         | -                           | -                                                             | -                                         |
| Dispositions                       | -                         | -                           | -                                                             | -                                         |
| Production(1)                      | (24)                      | (13)                        | (10)                                                          | (238)                                     |
| **December 31, 2011**              | 1,455                     | 175                         | 115                                                           | 1,203                                     |
|                               |                      |                        |                                                          |                                      |
| **Probable**                       | ** **                | ** **                  | ** **                                                    | ** **                                |
|                               | **Bitumen**

**(MMbbls)** | **Heavy Oil**

**(MMbbls)** | **Light &**

**Medium**

**Oil & NGLs**

**(MMbbls)** | **Natural**

**Gas & CBM**

**(Bcf)** |
| **December 31, 2010**              | 523                       | 97                          | 49                                                            | 410                                       |
| Extensions   and Improved Recovery | 32                        | 14                          | 3                                                             | 11                                        |
| Discoveries                        | -                         | -                           | -                                                             | -                                         |
| Technical   Revisions              | (65)                      | (2)                         | (1)                                                           | (27)                                      |
| Economic   Factors                 | -                         | -                           | -                                                             | (3)                                       |
| Acquisitions                       | -                         | -                           | -                                                             | -                                         |
| Dispositions                       | -                         | -                           | -                                                             | -                                         |
| Production(1)                      | -                         | -                           | -                                                             | -                                         |
| **December 31, 2011**              | 490                       | 109                         | 51                                                            | 391                                       |
|                               |                      |                        |                                                          |                                      |
| **Proved plus Probable**           |                      |                        |                                                          |                                      |
|                               | **Bitumen**

**(MMbbls)** | **Heavy Oil**

**(MMbbls)** | **Light &**

**Medium**

**Oil & NGLs**

**(MMbbls)** | **Natural**

**Gas & CBM**

**(Bcf)** |
| **December 31, 2010**              | 1,677                     | 266                         | 160                                                           | 1,800                                     |
| Extensions   and Improved Recovery | 288                       | 30                          | 16                                                            | 61                                        |
| Discoveries                        | -                         | -                           | -                                                             | -                                         |
| Technical   Revisions              | 4                         | -                           | -                                                             | 2                                         |
| Economic   Factors                 | -                         | 1                           | -                                                             | (31)                                      |
| Acquisitions                       | -                         | -                           | -                                                             | -                                         |
| Dispositions                       | -                         | -                           | -                                                             | -                                         |
| Production(1)                      | (24)                      | (13)                        | (10)                                                          | (238)                                     |
| **December 31, 2011**              | 1,945                     | 284                         | 166                                                           | 1,594                                     |

 

Note:

(1)             Production used for the reserves reconciliation differs from publicly reported production. In accordance with NI 51-101, Company Interest Before Royalties production used for the reserves reconciliation above includes our share of gas volumes provided to the FCCL partnership for steam generation, but does not include Royalty Interest Production.

 

Proved and proved plus probable bitumen reserves increased by approximately 26 and 16 percent respectively. Increases at Christina Lake were primarily a result of receiving regulatory approval to expand the development area and from positive delineation results. Increases at Foster Creek were primarily due to positive revisions from delineation drilling, increased recovery resulting from wells using our Wedge WellTM technology and improved steam chamber recovery.

 

 
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Proved heavy oil reserves increased by approximately four percent primarily as a result of expanding polymer flood areas and their successful performance in the Greater Pelican Region. Probable heavy oil reserves increased by approximately 12 percent also based on expansion and performance. Proved plus probable reserves increased by approximately seven percent.

 

Proved light and medium oil and NGLs reserves increased by approximately four percent, primarily as a result of expanding waterflood and CO2 flood areas and their successful performance at Weyburn. Probable light and medium oil and NGLs reserves increased by approximately four percent as a result of continued strong performance. Overall, proved plus probable reserves increased by approximately four percent.

 

Proved natural gas reserves declined by approximately 13 percent as extensions and technical revisions did not offset production. Probable natural gas reserves and proved plus probable reserves declined by approximately five percent and 11 percent respectively.

 

**Undeveloped Reserves**

** **

Undeveloped reserves are those reserves expected to be recovered from known accumulations where a significant expenditure is required to render them capable of production.

 

Proved and probable undeveloped reserves have been estimated by the IQREs in accordance with procedures and standards contained in the Canadian Oil and Gas Evaluation (“COGE”) Handbook.******In general, undeveloped reserves are scheduled to be developed within the next one to 43 years.

 
|                                                              |                      |                        |                                                 |                                 |              |               |              |               |
|-------------------------------------------------------------------|---------------------------|-----------------------------|------------------------------------------------------|--------------------------------------|-------------------|--------------------|-------------------|--------------------|
| **Company Interest Proved Undeveloped – Before Royalties**   |                      |                        |                                                 |                                 |              |
|                                                              | **Bitumen**

**(MMbbls)** | **Heavy Oil**

**(MMbbls)** | **Light and Medium**

**Oil and NGLs**

**(MMbbls)** | **Natural Gas & CBM**

**(Bcf)** |
|                                                              | First

Attributed         | Total at

Year-End          | First

Attributed                                    | Total at

Year-End                   | First

Attributed | Total at

Year-End | First

Attributed | Total at

Year-End |
| Prior                                                             | 623                       | 560                         | 47                                                   | 45                                   | 38                | 29                 | 272               | 150                |
| 2009                                                              | 190                       | 734                         | 8                                                    | 46                                   | 7                 | 28                 | 10                | 35                 |
| 2010                                                              | 295                       | 1,008                       | 5                                                    | 45                                   | 5                 | 27                 | 18                | 36                 |
| 2011                                                              | 325                       | 1,287                       | 13                                                   | 55                                   | 3                 | 25                 | -                 | 24                 |
|                                                              |                      |                        |                                                 |                                 |              |               |              |               |
| **Company Interest Probable Undeveloped – Before Royalties** |                      |                        |                                                 |                                 |              |
|                                                              | **Bitumen**

**(MMbbls)** | **Heavy Oil**

**(MMbbls)** | **Light and Medium**

**Oil and NGLs**

**(MMbbls)** | **Natural Gas & CBM**

**(Bcf)** |
|                                                              | First

Attributed         | Total at

Year-End          | First

Attributed                                    | Total at

Year-End                   | First

Attributed | Total at

Year-End | First

Attributed | Total at

Year-End |
| Prior                                                             | 628                       | 625                         | -(1)                                                 | -(1)                                 | -(1)              | -(1)               | -(1)              | -(1)               |
| 2009                                                              | 5                         | 467                         | 43                                              | 43                              | 26           | 26            | 38           | 38            |
| 2010                                                              | 171                       | 506                         | -                                               | 37                              | 2            | 21            | 16           | 30            |
| 2011                                                              | 113                       | 467                         | 14                                              | 47                              | 1            | 22            | -            | 35            |
|                                                                   |                           |                             |                                                      |                                      |                   |                    |                   |                    |  |  |  |  |  |

 

Note:

(1)             Historical information is not available.

 

**Development of Proved Undeveloped Reserves**

** **

*Bitumen*

* *

At the end of 2011, we had proved undeveloped bitumen reserves of 1,287 million barrels Before Royalties, or approximately 88 percent of our total proved bitumen reserves. Of our 490 million barrels of probable bitumen reserves, 467 million barrels, or approximately 95 percent are undeveloped. For this evaluation, it is assumed that these reserves will be recovered using SAGD technology.

 

Typical SAGD project development involves the initial installation of a steam generation facility, at a cost much greater than drilling a production/injection well pair, and then progressively drilling sufficient SAGD wells to fully utilize the available steam.

 

Bitumen reserves can be classified as proved when there is sufficient stratigraphic drilling to have demonstrated to a high degree of certainty the presence of the bitumen in commercially recoverable volumes. Our IQRE standard for sufficient drilling is a minimum eight wells per section with 3D seismic, or 16 wells per section with no seismic. Additionally, all requisite legal and regulatory approvals must have been obtained, operator and partner funding approvals must be in place, and a reasonable development timetable must be established. Proved developed bitumen reserves are differentiated from proved undeveloped bitumen reserves by the presence of drilled production/injection well pairs at the reserves estimation effective date. Because a steam plant has a long life relative to well pairs, in the early stages of a SAGD project, only a small portion of proved reserves will be developed as the number of well pairs drilled will be limited by the available steam capacity.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 |   | 20

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Development of probable reserves requires sufficient drilling of stratigraphic wells to establish reservoir suitability for SAGD. Reserves will be classified as probable if the number of wells drilled falls between the stratigraphic well requirements for proved reserves and for probable reserves, or if the reserves are not located within an approved development plan area. The IQRE standard for probable reserves is a minimum of four stratigraphic wells per section. If reserves lie outside the approved development area, approval to include those reserves in the development plan area must be obtained before development drilling of SAGD well pairs can commence.

 

Development of the proved undeveloped reserves will take place in an orderly manner as additional well pairs are drilled to utilize the available steam when existing well pairs reach the end of their steam injection phase. The forecast production of Cenovus’s proved bitumen reserves extends approximately 43 years, based on existing facilities. Production of the current proved developed portion is estimated to take about 10 years.

 

*Oil*

* *

We have a significant medium oil CO2 enhanced oil recovery (“EOR”) project at Weyburn and a significant heavy oil waterflood/polymer flood EOR project at Pelican Lake. These projects occur in large, well-developed reservoirs, where undeveloped reserves are not necessarily defined by the absence of drilling, but by anticipated improved recovery associated with development of the EOR schemes. Extending both EOR schemes within the projects requires intensive capital investment in infrastructure development and will occur over many years.

 

At Weyburn, investment in undeveloped reserves is projected to continue for well over 40 years, with drilling of supplementary wells taking place over the next seven years, and CO2 flood advancement continuing many years beyond that. At Pelican Lake, investment in undeveloped reserves is projected to continue for eight years, with a combination of infill drilling and polymer flood advancement.

** **

**Significant Factors or Uncertainties Affecting Reserves Data**

** **

The evaluation of reserves is a continuous process, one that can be significantly impacted by a variety of internal and external influences. Revisions are often required resulting from changes in pricing, economic conditions, regulatory changes, and historical performance. While these factors can be considered and potentially anticipated, certain judgments and assumptions are always required. As new information becomes available these areas are reviewed and revised accordingly. For a discussion of the risk factors and uncertainties affecting reserves data, see “Risk Factors – Operational Risks - Uncertainty of Reserves and Future Net Revenue Estimates.

 

**Contingent and Prospective Resources**

** **

We retain McDaniel to evaluate and prepare reports on all of our contingent and prospective bitumen resources. The evaluations by McDaniel are conducted from the fundamental petrophysical, geological, engineering, financial and accounting data. Processes and procedures are in place to ensure that McDaniel is in receipt of all relevant information. Contingent and prospective resources are estimated using volumetric calculations of the in-place quantities, combined with performance from analog reservoirs. The existing SAGD projects that are producing from the McMurray-Wabiskaw formations at Foster Creek and Christina Lake are used as performance analogs at Foster Creek and Christina Lake. Other regional analogs are used for contingent and prospective resources estimation in the Cretaceous Grand Rapids formation at Grand Rapids property in the Greater Pelican Region, in the McMurray formation at the Telephone Lake property in the Borealis Region and in the Clearwater formation in the Foster Creek Region. McDaniel also tests contingent resources for economic viability using the same forecast prices and costs used for our reserves (refer to “Pricing Assumptions” in this AIF).

 

This evaluation assumes that the majority of our bitumen resources****will be recovered and produced using SAGD or cyclic steam stimulation (“CSS”) established technologies. SAGD involves injecting steam into horizontal wells drilled into the bitumen formation and recovering heated bitumen and water from producing wells located below the injection wells. CSS involves injecting steam into a well and then producing water and heated bitumen from the same wellbore. Such alternating injection and production cycles are repeated a number of times for a given wellbore. Both of these techniques have a surface footprint comparable to conventional oil production. We have no bitumen resources that require mining techniques for recovery.

 

 
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All of our current contingent and prospective resources are associated with clastic or sandstone formations. We have also identified significant amounts of bitumen in the Grosmont carbonate formation for which we have extensive mineral rights. Pilot testing of the SAGD recovery process in carbonates is currently underway in the Grosmont carbonate formation several miles away from Cenovus’s lands but commercial viability has yet to be established. Cenovus has commenced work on its own pilot for bitumen production from the Grosmont carbonate formation.

 

In addition to the reserve definitions provided in the preceding sections, the following terminology, consistent with the COGE Handbook and guidance from Canadian securities regulatory authorities, was used to prepare the disclosure that follows.

 

**Contingent Resources**are those quantities of bitumen estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingencies may include such factors as economic, legal, environmental, political and regulatory matters or a lack of markets. It is also appropriate to classify as contingent resources the estimated discovered recoverable quantities associated with a project in the early evaluation stage. Contingent resources are further classified in accordance with the level of certainty associated with the estimates and may be subclassified based on project maturity and/or characterized by their economic status. The McDaniel estimates of contingent resources have not been adjusted for risk based on the chance of development.

 

**Economic Contingent Resources**are those contingent resources that are currently economically recoverable based on specific forecasts of commodity prices and costs. All of Cenovus’s bitumen contingent resources were evaluated using the same economic assumptions that were used for the 2011 reserves evaluation.

 

**Contingencies** which must be overcome to enable the reclassification of contingent resources as reserves can be categorized as economic, non-technical and technical. The COGE Handbook identifies non-technical contingencies as legal, environmental, political and regulatory matters or a lack of markets. The contingent resources disclosed by us are not contingent due to economic factors. Our bitumen contingent resources are located in four general regions: Christina Lake, Foster Creek, Borealis, and the Greater Pelican Region.

 

At Christina Lake and Foster Creek we have economic contingent resources located outside the currently approved development project areas. Regulatory approval of development project area expansion is necessary to enable the reclassification of these economic contingent resources as reserves. The rate at which we submit applications for development area expansion is dependent on the rate of development drilling, which ties to an orderly development plan that maximizes utilization of steam generation facilities and ultimately optimizes production, capital utilization and value.

 

In the Borealis Region we have submitted an application for a development project of the Telephone Lake property, which, if approved, would enable the reclassification of certain economic contingent resources in the area to reserves. Other areas in the Borealis Region require additional delineation drilling and seismic in order to submit regulatory applications for development projects.  Stratigraphic drilling and seismic is continuing in these areas to bring them to project readiness. Currently, sufficient pipeline take-away capacity is also considered a contingency.

 

In the Greater Pelican Region we submitted an application in the fourth quarter of 2011 for development project approval at the Grand Rapids property. Provided all regulatory requirements are met, we anticipate receiving regulatory approval in 2013.  Pilot project work is underway to examine optimal development strategies.

 

 
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**Prospective Resources** are those quantities of bitumen petroleum estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development. Prospective resources are further subdivided in accordance with the level of certainty associated with recoverable estimates assuming their discovery and development and may be subclassified based on project maturity. The estimate of prospective resources has not been adjusted for risk based on the chance of discovery or the chance of development.

 

**Best Estimate** is considered to be the best estimate of the quantity of resources that will actually be recovered. It is equally likely that the actual remaining quantities recovered will be greater or less than the best estimate. Those resources that fall within the best estimate have a 50 percent confidence level that the actual quantities recovered will equal or exceed the estimate.

 

**Low Estimate**is considered to be a conservative estimate of the quantity of resources that will actually be recovered. It is likely that the actual remaining quantities recovered will exceed the low estimate. Those resources at the low end of the estimate range have the highest degree of certainty - a 90 percent confidence level – that the actual quantities recovered will equal or exceed the estimate.

 

**High Estimate**is considered to be an optimistic estimate of the quantity of resources that will actually be recovered. It is unlikely that the actual remaining quantities of resources recovered will meet or exceed the high estimate. Those resources at the high end of the estimate range have a lower degree of certainty - a 10 percent confidence level - that the actual quantities recovered will equal or exceed the estimate.

 

The economic contingent resources were estimated on a project level. The high and low estimates are arithmetic sums of multiple estimates which statistical principles indicate may be misleading as to volumes that may actually be recovered. The aggregated low estimate results shown may have a higher level of confidence than the individual projects, and the aggregated high estimate results shown may have a lower level of confidence than the individual projects.

 
| **Economic Contingent and Prospective Resources**        |                       |                       |
|----------------------------------------------------------|----------------------------|----------------------------|
| Company Interest   Before Royalties, Billions of barrels | **December 31,**

**2011** | **December 31,**

**2010** |
| Economic   Contingent Resources(1)                       |                       |                       |
| Low Estimate                                             | 6.0                        | 4.4                        |
| Best Estimate                                            | 8.2                        | 6.1                        |
| High Estimate                                            | 10.8                       | 8.0                        |
| Prospective   Resources(2)                               |                       |                       |
| Low Estimate                                             | 5.7                        | 7.3                        |
| Best Estimate                                            | 10.0                       | 12.3                       |
| High Estimate                                            | 17.9                       | 21.7                       |

Notes:

(1)             There is no certainty that it will be commercially viable to produce any portion of the contingent resources.

(2)             There is no certainty that any portion of the prospective resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the prospective resources. Prospective resources are not screened for economic viability.

 

Best estimate economic contingent resources increased 2.1 billion barrels or 34 percent compared to 2010. This increase is primarily due to successful stratigraphic well drilling resulting in the conversion of prospective resources to contingent resources, and to positive technical revisions to volumetric and recovery factor estimates.

 

Best estimate prospective resources declined 2.3 billion barrels or approximately 19 percent compared to 2010, primarily as a result of the reclassification of prospective resources to contingent resources resulting from stratigraphic well drilling.

 

 
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A more detailed annual reconciliation is shown in the following table:

 
| **Bitumen Proved plus Probable   Reserves, Contingent Resources and Prospective Resources** |
|---------------------------------------------------------------------------------------------|
| **Reconciliation and Category   Movements**                                                 |

 
| Company Interest Before Royalties, Billions of barrels | ** ** | **Proved plus   Probable   Reserves** | ** ** | **Best Estimate   Contingent   Resources****(1)** | ** ** | **Best Estimate   Prospective   Resources****(2)** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|--------------------------------------------------------|------------|---------------------------------------------------------|------------|
| December 31, 2010                                                               |       | 1.677                                      |       | 6.1                                                    |       | 12.3                                                    |       |
| Transfers between Categories                                                         |       |                                       |       |                                                   |       |                                                    |       |
| Additions from other resource   categories                                           |       | 0.142                                      |       | 2.0                                                    |       | (2.0                                                    | )          |
| Reductions to other resource   categories                                            |       | -                                          |       | (0.1                                                   | )          | -                                                       |       |
| Additions and Revisions Net of   Transfers                                           |       | 0.150                                      |       | 0.2                                                    |       | (0.3                                                    | )          |
| Net Acquisitions and Dispositions                                                    |       | -                                          |       | -                                                      |       | -                                                       |       |
| Production                                                                           |       | (0.024                                     | )          | -                                                      |       | -                                                       |       |
| December 31, 2011                                                               |       | 1.945                                      |       | 8.2                                                    |       | 10.0                                                    |       |

 

Notes:
| (1) | There is no certainty that it will be   commercially viable to produce any portion of the contingent resources.                                                                                                                                                                            |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | There is no certainty that any portion of the prospective   resources will be discovered. If discovered, there is no certainty that it   will be commercially viable to produce any portion of the prospective   resources. Prospective resources are not screened for economic viability. |

 

We are systematically progressing the classification of our bitumen prospective resources to contingent resources and then to reserves, and ultimately to production. For example, approval for expansion of the Christina Lake development area resulted in the movement of some contingent resources to proved and probable reserves. Similarly, the stratigraphic well drilling program in the Borealis and the Greater Pelican Regions moved some prospective resources to contingent resources. The overall reduction of prospective resources is the expected outcome of a successful stratigraphic well drilling program, which converts undiscovered resources to discovered resources.

 

Bitumen reserves and resources increased in part because of improvements in SAGD performance at our Foster Creek and Christina Lake properties resulting from improved operating performance and the use of wells drilled using our Wedge WellTM technology. Analysis of core data in the steamed portions of the reservoir has revealed that the efficiency of the SAGD process in extracting bitumen from the reservoir is greater than previously anticipated. We expect to continue to improve overall recovery from our bitumen assets as technology develops.

 

**Other Oil and Gas Information**

 

***Oil and Gas Properties and Wells***

 

The following tables summarize our interests in producing and non-producing wells, at December 31, 2011:

 
| **Producing Wells**(1)(2) |
|---------------------------|

 
| ** **    | ** ** | **Oil**   | **Gas**    | **Total** |
|---------------|------------|-----------|------------|-----------|
| ** **    | ** ** | **Gross** | ** ** | **Net**   | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| Alberta       |       |      |       |      |   |   |   |   |   |   |   |   |   |
| Oil Sands     |       | 687       |       | 566       |   | 438 |   | 416 |   | 1,125 |   | 982 |   |
| Conventional  |       | 1,718     |       | 1,663     |   | 25,724 |   | 25,506 |   | 27,442 |   | 27,169 |   |
| Total Alberta |       | 2,405     |       | 2,229     |   | 26,162 |   | 25,922 |   | 28,567 |   | 28,151 |   |
| Saskatchewan  |       | 808       |       | 541       |   | - |   | - |   | 808 |   | 541 |   |
| Total         |       | 3,213     |       | 2,770     |   | 26,162 |   | 25,922 |   | 29,375 |   | 28,692 |   |

Notes:

(1)                   Cenovus also has varying royalty interests in 7,076 natural gas wells and 3,495 crude oil wells which are producing.

(2)                   Includes wells containing multiple completions as follows: 22,836 gross natural gas wells (22,633 net wells) and 1,227 gross crude oil wells (1,119 net wells).

 

 
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| **Non-Producing Wells**(1) |
|----------------------------|

 
| ** **    | ** ** | **Oil**   | **Gas**    | **Total** |
|---------------|------------|-----------|------------|-----------|
| ** **    | ** ** | **Gross** | ** ** | **Net**   | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| Alberta       |       |      |       |      |   |   |   |   |   |   |   |   |   |
| Oil Sands     |       | 81        |       | 67        |   | 615 |   | 564 |   | 696 |   | 631 |   |
| Conventional  |       | 734       |       | 709       |   | 879 |   | 857 |   | 1,613 |   | 1,566 |   |
| Total Alberta |       | 815       |       | 776       |   | 1,494 |   | 1,421 |   | 2,309 |   | 2,197 |   |
| Saskatchewan  |       | 137       |       | 100       |   | 38 |   | 38 |   | 175 |   | 138 |   |
| Total         |       | 952       |       | 876       |   | 1,532 |   | 1,459 |   | 2,484 |   | 2,335 |   |

Note:
| (1) | Non-producing   wells include wells which are capable of producing, but which are currently   not producing. Non-producing wells do not include other types of wells such   as stratigraphic test wells, service wells, or wells that have been   abandoned. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

***Exploration and Development Activity***

 

The following tables summarize our gross participation and net interest in wells drilled for the periods indicated:

*** ***
| **Exploration Wells Drilled** |
|-------------------------------|

 
| ** **   | ** ** | **Oil**    | **Gas**    | **Dry &   Abandoned** | **Total Working   Interest** | **Royalty** | **Total**  |
|--------------|------------|------------|------------|--------------------------------|-----------------------------------|-------------|------------|
| ** **   | ** ** | **Gross**  | ** ** | **Net**                        | ** **                        | **Gross**   | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| **2011:**    | ** ** | ** ** | ** ** | ** **                     | ** **                        | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Oil Sands    |       | -          |       | -                              |                              | -           |       | - |   | - |   | - |   | - |   | - |   | - |   | - |   | - |   |
| Conventional |       | 24         |       | 22                             |                              | -           |       | - |   | 2 |   | 2 |   | 26 |   | 24 |   | 40 |   | 66 |   | 24 |   |
| Total Canada |       | 24         |       | 22                             |                              | -           |       | - |   | 2 |   | 2 |   | 26 |   | 24 |   | 40 |   | 66 |   | 24 |   |
| **2010:**    |       |       |       |                           |                              |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands    |       | -          |       | -                              |                              | -           |       | - |   | - |   | - |   | - |   | - |   | - |   | - |   | - |   |
| Conventional |       | 26         |       | 26                             |                              | -           |       | - |   | 1 |   | 1 |   | 27 |   | 27 |   | 21 |   | 48 |   | 27 |   |
| Total Canada |       | 26         |       | 26                             |                              | -           |       | - |   | 1 |   | 1 |   | 27 |   | 27 |   | 21 |   | 48 |   | 27 |   |
| **2009:**    |       |       |       |                           |                              |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands    |       | -          |       | -                              |                              | -           |       | - |   | - |   | - |   | - |   | - |   | - |   | - |   | - |   |
| Conventional |       | 4          |       | 4                              |                              | -           |       | - |   | - |   | - |   | 4 |   | 4 |   | 8 |   | 12 |   | 4 |   |
| Total Canada |       | 4          |       | 4                              |                              | -           |       | - |   | - |   | - |   | 4 |   | 4 |   | 8 |   | 12 |   | 4 |   |

 
| **Development Wells Drilled** |
|-------------------------------|

 
| ** **   | ** ** | **Oil**   | **Gas**    | **Dry &   Abandoned** | **Total   Working   Interest** | **Royalty** | **Total**  |
|--------------|------------|-----------|------------|--------------------------------|--------------------------------|-------------|------------|
| ** **   | ** ** | **Gross** | ** ** | **Net**                        | ** **                     | **Gross**   | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| **2011:**    |       |      |       |                           |                           |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands    |       | 71        |       | 51                             |                           | 3           |       | 3 |   | - |   | - |   | 74 |   | 54 |   | 87 |   | 161 |   | 54 |   |
| Conventional |       | 312       |       | 303                            |                           | 66          |       | 65 |   | 4 |   | 4 |   | 382 |   | 372 |   | 156 |   | 538 |   | 372 |   |
| Total Canada |       | 383       |       | 354                            |                           | 69          |       | 68 |   | 4 |   | 4 |   | 456 |   | 426 |   | 243 |   | 699 |   | 426 |   |
| **2010:**    |       |      |       |                           |                           |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands    |       | 82        |       | 47                             |                           | -           |       | - |   | - |   | - |   | 82 |   | 47 |   | 8 |   | 90 |   | 47 |   |
| Conventional |       | 160       |       | 154                            |                           | 499         |       | 495 |   | - |   | - |   | 659 |   | 649 |   | 204 |   | 863 |   | 649 |   |
| Total Canada |       | 242       |       | 201                            |                           | 499         |       | 495 |   | - |   | - |   | 741 |   | 696 |   | 212 |   | 953 |   | 696 |   |
| **2009:**    |       |      |       |                           |                           |        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands    |       | 50        |       | 29                             |                           | 8           |       | 8 |   | 8 |   | 8 |   | 66 |   | 45 |   | 10 |   | 76 |   | 45 |   |
| Conventional |       | 102       |       | 101                            |                           | 555         |       | 502 |   | 2 |   | 2 |   | 659 |   | 605 |   | 261 |   | 920 |   | 605 |   |
| Total Canada |       | 152       |       | 130                            |                           | 563         |       | 510 |   | 10 |   | 10 |   | 725 |   | 650 |   | 271 |   | 996 |   | 650 |   |

 

During the year ended December 31, 2011, Oil Sands drilled 480 gross stratigraphic test wells (344 net wells) and Conventional drilled 11 gross stratigraphic test wells (11 net wells).

 

During the year ended December 31, 2011, Oil Sands drilled 62 gross service wells (50 net wells) and Conventional drilled 30 gross service wells (20 net wells).

 

For all types of wells except stratigraphic test wells, the calculation of the number of wells is based on the number of surface locations. For stratigraphic test wells, the calculation is based on the number of bottomhole locations.

 

 
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***Interest in Material Properties***

 

The following table summarizes our landholdings at December 31, 2011:

 
| **Landholdings**               | ** ** | **Developed** | **Undeveloped****(1)** | **Total****(2)** |
|--------------------------------|------------|---------------|------------------------|------------------|
| (thousands of acres) | ** ** | **Gross**     | ** **             | **Net**          | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| Alberta:                       |       |          |                   |             |   |   |   |   |   |   |   |   |   |
| Oil Sands                      |       |          |                   |             |   |   |   |   |   |   |   |   |   |
| – Crown(3)                |       | 621           |                   | 519              |   | 1,974 |   | 1,552 |   | 2,595 |   | 2,071 |   |
| Conventional                   |       |          |                   |             |   |   |   |   |   |   |   |   |   |
| – Fee(4)                  |       | 1,936         |                   | 1,936            |   | 436 |   | 436 |   | 2,372 |   | 2,372 |   |
| – Crown(3)                |       | 1,567         |                   | 1,461            |   | 350 |   | 283 |   | 1,917 |   | 1,744 |   |
| – Freehold(5)             |       | 59            |                   | 49               |   | 29 |   | 27 |   | 88 |   | 76 |   |
| Total Alberta                  |       | 4,183         |                   | 3,965            |   | 2,789 |   | 2,298 |   | 6,972 |   | 6,263 |   |
| Saskatchewan:                  |       |          |                   |             |   |   |   |   |   |   |   |   |   |
| Conventional                   |       |          |                   |             |   |   |   |   |   |   |   |   |   |
| – Fee(4)                  |       | 75            |                   | 75               |   | 431 |   | 431 |   | 506 |   | 506 |   |
| – Crown(3)                |       | 54            |                   | 40               |   | 310 |   | 289 |   | 364 |   | 329 |   |
| – Freehold(5)             |       | 14            |                   | 10               |   | 16 |   | 14 |   | 30 |   | 24 |   |
| Total Saskatchewan             |       | 143           |                   | 125              |   | 757 |   | 734 |   | 900 |   | 859 |   |
| Manitoba:                      |       |          |                   |             |   |   |   |   |   |   |   |   |   |
| Conventional – Fee(4)     |       | 3             |                   | 3                |   | 261 |   | 261 |   | 264 |   | 264 |   |
| Total Manitoba                 |       | 3             |                   | 3                |   | 261 |   | 261 |   | 264 |   | 264 |   |
| Total                          |       | 4,329         |                   | 4,093            |   | 3,807 |   | 3,293 |   | 8,136 |   | 7,386 |   |

 

Notes:
| (1) | Undeveloped includes land that has not yet been drilled,   as well as land with wells that have never produced hydrocarbons or that do   not currently allow for the production of hydrocarbons.                                                                                                                                                                  |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | This table excludes approximately 2.4 million gross acres   under lease or sublease, reserving to us, royalties or other interests.                                                                                                                                                                                                                               |
| (3) | Crown/Federal lands are those lands owned by the federal   or provincial government or the First Nations, in which we have purchased a   working interest lease.                                                                                                                                                                                                  |
| (4) | Fee lands are those lands in which we have a fee simple   interest in the mineral rights and have either: (i) not leased out all   of the mineral zones; or (ii) retained a working interest. The current   fee lands summary includes all freehold titles owned by us that have one or   more zones that remain unleased or available for development. |
| (5) | Freehold lands are those lands owned by individuals (other   than a government or Cenovus) in which Cenovus holds a working interest   lease.                                                                                                                                                                                                                     |

 

***Properties With No Attributed Reserves***

 

We have approximately 5.4 million gross acres (4.8 million net acres) of properties to which no reserves have been specifically attributed. These properties are planned for current and future development in both our oil sands and conventional oil and gas operations. There are currently no work commitments on these properties.

 

We have rights to explore, develop, and exploit approximately 31,000 net acres that could potentially expire by December 31, 2012, which relate entirely to Crown and freehold land.

 

For areas where we hold interests in different formations under the same surface area through separate leases, we have calculated our gross and net acreage on the basis of each individual lease.

 

***Additional Information Concerning Abandonment & Reclamation Costs***

 

The estimated total future abandonment and reclamation costs is based on management’s estimate of costs to remediate, reclaim and abandon wells and facilities having regard to our working interest and the estimated timing of the costs to be incurred in future periods. We have developed a process to calculate these estimates, which considers applicable regulations, actual and anticipated costs, type and size of the well or facility and the geographic location.

 

We have estimated the undiscounted future cost of abandonment and reclamation costs at approximately $7 billion (approximately $599 million, discounted at 10 percent) at December 31, 2011, of which we expect to pay approximately $79 million in the next three financial years. We expect to incur these costs on approximately 34,000 net wells.

 

Of the undiscounted future abandonment and reclamation costs to be incurred over the life of our proved reserves, approximately $1 billion has been deducted in estimating the future net revenue, which only represents our abandonment obligations for wells within reserves.

 

 
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***Tax Horizon***

 

We expect to pay income tax in 2012.

 

***Costs Incurred***

 
| ($ millions)    | ** ** | **2011** | ** ** |
|----------------------|------------|----------|------------|
| Acquisitions         |       |     |       |
| – Unproved      |       | 69       |       |
| – Proved        |       | -        |       |
| Total acquisitions   |       | 69       |       |
| Exploration costs    |       | 240      |       |
| Development costs    |       | 1,935    |       |
| Total costs incurred |       | 2,244    |       |

 

***Forward Contracts***

 

We may use financial derivatives to manage our exposure to fluctuations in commodity prices. A description of such instruments is provided in the notes to our annual audited Consolidated Financial Statements for the year ended December 31, 2011.

 

***Production Estimates***

 

The following table summarizes the estimated 2012 average daily volume of Company Interest Before Royalties and Royalty Interest Production reflected in the reserves reports for all properties held on December 31, 2011 using forecast prices and costs, all of which will be produced in Canada. These estimates assume certain activities take place, such as the development of undeveloped reserves, and that there are no divestitures.

 
| **2012 Estimated Production** |
|-------------------------------|

 
| Forecast Prices and Costs                                           | ** ** | **Proved** | ** ** | **Proved plus   Probable** | ** ** |
|------------------------------------------------------------------------------------|------------|------------|------------|---------------------------------|------------|
| Bitumen (bbls/d)(1)                                                                |       | 80,554     |       | 81,427                          |       |
| Light and Medium Crude Oil (bbls/d)                                                |       | 31,623     |       | 33,951                          |       |
| Heavy Oil (bbls/d)                                                                 |       | 39,301     |       | 42,423                          |       |
| Natural Gas (MMcf/d)                                                               |       | 567        |       | 590                             |       |
| Natural Gas Liquids (bbls/d)                                                       |       | 648        |       | 699                             |       |
| Company Interest Before Royalties Production (BOE/d)                               |       | 246,626    |       | 256,900                         |       |
| Royalty Interest Production (BOE/d)                                                |       | 7,197      |       | 7,701                           |       |
| Total Company Interest Before Royalties Plus Royalty   Interest Production (BOE/d) |       | 253,823    |       | 264,601                         |       |

Note:

(1)                   Includes Foster Creek production of 54,925 bbls/d for both Proved and Proved plus Probable.

 

***Production History***

 
| **Average Before Royalties Daily Production Volumes – 2011** |
|-------------------------------------------------------------------|
| ** **                                                        | ** ** | **Year** | ** ** | **Q4** | ** ** | **Q3** | ** ** | **Q2** | ** ** | **Q1** | ** ** |
| Crude Oil and Natural Gas Liquids   (bbls/d)                      |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands                                                         |   |   |   |   |   |   |   |   |   |   |   |
| Foster Creek (Bitumen)                                            |   | 54,868 |   | 55,045 |   | 56,322 |   | 50,373 |   | 57,744 |   |
| Christina Lake (Bitumen)                                          |   | 11,665 |   | 19,531 |   | 10,067 |   | 7,880 |   | 9,084 |   |
| Pelican Lake (Heavy Oil)                                          |   | 20,424 |   | 20,558 |   | 20,363 |   | 19,427 |   | 21,360 |   |
|                                                              |   | 86,957 |   | 95,134 |   | 86,752 |   | 77,680 |   | 88,188 |   |
| Conventional Liquids                                              |   |   |   |   |   |   |   |   |   |   |   |
| Heavy Oil                                                         |   | 14,397 |   | 14,275 |   | 14,191 |   | 14,038 |   | 15,096 |   |
| Light and Medium Oil                                              |   | 26,513 |   | 29,011 |   | 26,470 |   | 23,361 |   | 27,190 |   |
| Natural Gas Liquids (1)                                           |   | 935 |   | 915 |   | 897 |   | 934 |   | 994 |   |
| Total Crude Oil and Natural Gas   Liquids                         |   | 128,802 |   | 139,335 |   | 128,310 |   | 116,013 |   | 131,468 |   |
| Natural Gas (MMcf/d)                                              |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands                                                         |   | 37 |   | 38 |   | 39 |   | 37 |   | 32 |   |
| Conventional                                                      |   | 596 |   | 597 |   | 597 |   | 595 |   | 593 |   |
| Total Natural Gas                                                 |   | 633 |   | 635 |   | 636 |   | 632 |   | 625 |   |
| Total (BOE/d)                                                     |   | 234,302 |   | 245,168 |   | 234,310 |   | 221,346 |   | 235,635 |   |

Note:

(1)  Natural gas liquids include condensate volumes.

 

 
| Cenovus   Energy Inc. Annual Information Form for the year ended December 31,   2011 | 27

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|------------------------------------------------------------------------------------------------|------------|

 

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Table of Contents

 
| **Average Royalty Interest Daily Production Volumes - 2011** |
|--------------------------------------------------------------|
| ** **                                                   | ** ** | **Year** | ** ** | **Q4** | ** ** | **Q3** | ** ** | **Q2** | ** ** | **Q1** | ** ** |
| Crude Oil and Natural Gas Liquids   (bbls/d)                 |   |   |   |   |   |   |   |   |   |   |   |
| Conventional Liquids                                         |   |   |   |   |   |   |   |   |   |   |   |
| Heavy Oil                                                    |   | 1,260 |   | 1,237 |   | 1,114 |   | 1,340 |   | 1,351 |   |
| Light and Medium Oil                                         |   | 4,011 |   | 3,519 |   | 3,929 |   | 4,256 |   | 4,349 |   |
| Natural Gas Liquids (1)                                      |   | 166 |   | 182 |   | 143 |   | 153 |   | 187 |   |
| Total Crude Oil and Natural Gas   Liquids                    |   | 5,437 |   | 4,938 |   | 5,186 |   | 5,749 |   | 5,887 |   |
| Natural Gas (MMcf/d)                                         |   |   |   |   |   |   |   |   |   |   |   |
| Conventional                                                 |   | 23 |   | 25 |   | 20 |   | 22 |   | 27 |   |
| Total (BOE/d)                                                |   | 9,270 |   | 9,105 |   | 8,519 |   | 9,416 |   | 10,387 |   |

Note:

(1)  Natural gas liquids include condensate volumes.

 
| **Average Before Royalties + Royalty Interest Daily Production Volumes    - 2010** |
|------------------------------------------------------------------------------------|
| ** **                                                                         | ** ** | **Year** | ** ** | **Q4** | ** ** | **Q3** | ** ** | **Q2** | ** ** | **Q1** | ** ** |
| Crude Oil and Natural Gas Liquids   (bbls/d)                                       |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands                                                                          |   |   |   |   |   |   |   |   |   |   |   |
| Foster Creek (Bitumen)                                                             |   | 51,147 |   | 52,183 |   | 50,269 |   | 51,010 |   | 51,126 |   |
| Christina Lake (Bitumen)                                                           |   | 7,898 |   | 8,606 |   | 7,838 |   | 7,716 |   | 7,420 |   |
| Pelican Lake (Heavy Oil)                                                           |   | 22,966 |   | 21,738 |   | 23,259 |   | 23,319 |   | 23,565 |   |
|                                                                               |   | 82,011 |   | 82,527 |   | 81,366 |   | 82,045 |   | 82,111 |   |
| Conventional Liquids                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Heavy Oil                                                                          |   | 16,659 |   | 16,553 |   | 16,921 |   | 16,205 |   | 16,962 |   |
| Light and Medium Oil                                                               |   | 29,346 |   | 29,323 |   | 28,608 |   | 29,150 |   | 30,320 |   |
| Natural Gas Liquids (1)                                                            |   | 1,171 |   | 1,190 |   | 1,172 |   | 1,166 |   | 1,156 |   |
| Total Crude Oil and Natural Gas   Liquids                                          |   | 129,187 |   | 129,593 |   | 128,067 |   | 128,566 |   | 130,549 |   |
| Natural Gas (MMcf/d)                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands                                                                          |   | 43 |   | 39 |   | 44 |   | 46 |   | 45 |   |
| Conventional                                                                       |   | 694 |   | 649 |   | 694 |   | 705 |   | 730 |   |
| Total Natural Gas                                                                  |   | 737 |   | 688 |   | 738 |   | 751 |   | 775 |   |
| Total (BOE/d)                                                                      |   | 252,020 |   | 244,260 |   | 251,067 |   | 253,733 |   | 259,716 |   |

Note:

(1)  Natural gas liquids include condensate volumes.

 
| **Average Before Royalties + Royalty Interest Daily Production Volumes    - 2009** |
|------------------------------------------------------------------------------------|
| ** **                                                                         | ** ** | **Year** | ** ** | **Q4** | ** ** | **Q3** | ** ** | **Q2** | ** ** | **Q1** | ** ** |
| Crude Oil and Natural Gas Liquids   (bbls/d)                                       |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands                                                                          |   |   |   |   |   |   |   |   |   |   |   |
| Foster Creek (Bitumen)                                                             |   | 37,725 |   | 47,017 |   | 40,367 |   | 34,729 |   | 28,554 |   |
| Christina Lake (Bitumen)                                                           |   | 6,698 |   | 7,319 |   | 6,305 |   | 6,530 |   | 6,635 |   |
| Pelican Lake (Heavy Oil)                                                           |   | 24,870 |   | 23,804 |   | 25,671 |   | 23,989 |   | 26,029 |   |
| Senlac (Bitumen)(1)                                                                |   | 3,057 |   | 2,221 |   | 5,080 |   | 2,574 |   | 2,334 |   |
|                                                                               |   | 72,350 |   | 80,361 |   | 77,423 |   | 67,822 |   | 63,552 |   |
| Conventional Liquids                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Heavy Oil                                                                          |   | 17,888 |   | 17,127 |   | 18,073 |   | 18,074 |   | 18,290 |   |
| Light and Medium Oil                                                               |   | 30,394 |   | 30,644 |   | 29,749 |   | 30,189 |   | 31,004 |   |
| Natural Gas Liquids (2)                                                            |   | 1,206 |   | 1,183 |   | 1,242 |   | 1,184 |   | 1,213 |   |
| Total Crude Oil and Natural Gas   Liquids                                          |   | 121,838 |   | 129,315 |   | 126,487 |   | 117,269 |   | 114,059 |   |
| Natural Gas (MMcf/d)                                                               |   |   |   |   |   |   |   |   |   |   |   |
| Oil Sands                                                                          |   | 53 |   | 47 |   | 55 |   | 57 |   | 52 |   |
| Conventional                                                                       |   | 784 |   | 750 |   | 775 |   | 799 |   | 814 |   |
| Total Natural Gas                                                                  |   | 837 |   | 797 |   | 830 |   | 856 |   | 866 |   |
| Total (BOE/d)                                                                      |   | 261,338 |   | 262,148 |   | 264,820 |   | 259,936 |   | 258,392 |   |

 

Notes:

(1)    Senlac property sold November 2009.

(2)    Natural gas liquids include condensate volumes.

 

 
| Cenovus   Energy Inc. Annual Information Form for the year ended December 31,   2011 | 28

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|------------------------------------------------------------------------------------------------|------------|

 

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Table of Contents

 

***Per-Unit Results***

*** ***

The following tables summarize our per-unit results, as well as the impact of realized financial hedging, on a quarterly basis, before deduction of royalties, for the periods indicated:

 
| **Per-Unit Results – 2011**                | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
|                                            | **Year**   | **Q4**     | **Q3**     | **Q2**     | **Q1**     |
| Heavy Oil – Foster Creek ($/bbl) (1) (3)   |       |       |       |       |       |
| Price                                           | 67.38      | 75.96      | 62.68      | 72.23      | 59.50      |
| Royalties                                       | 10.82      | 15.81      | 12.38      | 2.30       | 11.92      |
| Transportation   and blending                   | 3.04       | 3.20       | 2.73       | 2.82       | 3.41       |
| Operating                                       | 11.34      | 11.31      | 11.11      | 11.57      | 11.40      |
| Netback                                         | 42.18      | 45.64      | 36.46      | 55.54      | 32.77      |
| Heavy Oil – Christina Lake ($/bbl) (1) (3) |       |       |       |       |       |
| Price                                           | 61.86      | 66.69      | 54.52      | 67.06      | 54.67      |
| Royalties                                       | 3.03       | 2.97       | 2.87       | 3.98       | 2.44       |
| Transportation   and blending                   | 3.53       | 2.98       | 4.54       | 3.51       | 3.69       |
| Operating                                       | 20.20      | 17.96      | 23.01      | 23.41      | 19.09      |
| Netback                                         | 35.10      | 42.78      | 24.10      | 36.16      | 29.45      |
| Heavy Oil – Pelican Lake ($/bbl) (1)       |       |       |       |       |       |
| Price                                           | 73.07      | 88.67      | 66.76      | 78.26      | 64.66      |
| Royalties                                       | 7.91       | 6.98       | 8.23       | 7.40       | 8.63       |
| Transportation   and blending                   | 4.14       | 12.19      | 1.87       | 2.02       | 2.44       |
| Operating                                       | 14.86      | 16.49      | 14.31      | 13.40      | 15.35      |
| Netback                                         | 46.16      | 53.01      | 42.35      | 55.44      | 38.24      |
| Heavy Oil - Oil Sands ($/bbl) (1)               |       |       |       |       |       |
| Price                                           | 67.99      | 76.39      | 62.93      | 73.02      | 60.35      |
| Royalties                                       | 9.17       | 11.72      | 10.46      | 3.65       | 10.08      |
| Transportation   and blending                   | 3.36       | 4.75       | 2.68       | 2.71       | 3.18       |
| Operating                                       | 13.27      | 13.54      | 13.02      | 13.27      | 13.23      |
| Netback                                         | 42.19      | 46.38      | 36.77      | 53.39      | 33.86      |
| Heavy Oil - Conventional ($/bbl) (1)            |       |       |       |       |       |
| Price                                           | 74.17      | 81.49      | 67.96      | 78.47      | 69.17      |
| Royalties                                       | 10.75      | 11.85      | 11.33      | 10.98      | 9.04       |
| Transportation   and blending                   | 1.27       | 1.34       | 1.80       | 0.91       | 1.05       |
| Operating                                       | 13.77      | 16.34      | 12.40      | 13.66      | 12.78      |
| Production   and mineral taxes                  | 0.32       | 0.34       | 0.17       | 0.22       | 0.51       |
| Netback                                         | 48.06      | 51.62      | 42.26      | 52.70      | 45.79      |
| Total Heavy Oil ($/bbl) (1)                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Price                                           | 68.98      | 77.16      | 63.69      | 73.98      | 61.80      |
| Royalties                                       | 9.42       | 11.74      | 10.59      | 4.93       | 9.91       |
| Transportation   and blending                   | 3.02       | 4.23       | 2.55       | 2.40       | 2.83       |
| Operating                                       | 13.35      | 13.96      | 12.93      | 13.34      | 13.16      |
| Production   and mineral taxes                  | 0.05       | 0.05       | 0.03       | 0.04       | 0.08       |
| Netback                                         | 43.14      | 47.18      | 37.59      | 53.27      | 35.82      |
| Light and Medium Oil ($/bbl)                    |       |       |       |       |       |
| Price                                           | 85.40      | 90.90      | 79.57      | 94.30      | 77.39      |
| Royalties                                       | 11.54      | 12.12      | 10.74      | 12.82      | 10.58      |
| Transportation   and blending                   | 2.00       | 1.99       | 1.90       | 2.22       | 1.92       |
| Operating                                       | 14.38      | 15.12      | 14.37      | 12.96      | 14.86      |
| Production   and mineral taxes                  | 2.27       | 2.63       | 2.40       | 2.77       | 1.32       |
| Netback                                         | 55.21      | 59.04      | 50.16      | 63.53      | 48.71      |
| Total Crude Oil ($/bbl)                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Price                                           | 72.80      | 80.49      | 67.37      | 78.71      | 65.32      |
| Royalties                                       | 9.92       | 11.83      | 10.62      | 6.77       | 10.06      |
| Transportation   and blending                   | 2.78       | 3.69       | 2.40       | 2.35       | 2.63       |
| Operating                                       | 13.59      | 14.24      | 13.26      | 13.25      | 13.54      |
| Production   and mineral taxes                  | 0.57       | 0.67       | 0.58       | 0.67       | 0.36       |
| Netback                                         | 45.94      | 50.06      | 40.51      | 55.67      | 38.73      |
| Natural Gas Liquids ($/bbl)                     |       |       |       |       |       |
| Price                                           | 76.84      | 82.26      | 74.38      | 80.32      | 70.67      |
| Royalties                                       | 1.34       | 1.51       | 1.06       | 1.87       | 0.93       |
| Netback                                         | 75.50      | 80.75      | 73.32      | 78.45      | 69.74      |

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 |   | 29

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Table of Contents

 
| **Per-Unit Results – 2011** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|------------|------------|
|                             | **Year**   | **Q4**     | **Q3**     | **Q2**     | **Q1**     |
| Total Liquids   ($/bbl)          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Price                            | 72.84      | 80.50      | 67.43      | 78.72      | 65.37      |
| Royalties                        | 9.84       | 11.75      | 10.55      | 6.72       | 9.98       |
| Transportation   and blending    | 2.76       | 3.66       | 2.38       | 2.33       | 2.60       |
| Operating                        | 13.47      | 14.13      | 13.16      | 13.13      | 13.43      |
| Production   and mineral taxes   | 0.56       | 0.67       | 0.57       | 0.67       | 0.36       |
| Netback                          | 46.21      | 50.29      | 40.77      | 55.87      | 39.00      |
| Total Natural Gas ($/Mcf)        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Price                            | 3.65       | 3.35       | 3.72       | 3.71       | 3.82       |
| Royalties                        | 0.06       | 0.06       | 0.05       | 0.04       | 0.08       |
| Transportation   and blending    | 0.15       | 0.14       | 0.15       | 0.14       | 0.17       |
| Operating                        | 1.10       | 1.22       | 0.99       | 0.98       | 1.19       |
| Production   and mineral taxes   | 0.04       | 0.01       | 0.03       | 0.05       | 0.06       |
| Netback                          | 2.30       | 1.92       | 2.50       | 2.50       | 2.32       |
| Total ($/BOE)                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Price                            | 49.75      | 53.48      | 46.97      | 51.81      | 46.83      |
| Royalties                        | 5.55       | 6.65       | 5.91       | 3.64       | 5.85       |
| Transportation   and blending    | 1.91       | 2.39       | 1.70       | 1.61       | 1.92       |
| Operating(2)                     | 10.35      | 11.09      | 9.88       | 9.69       | 10.68      |
| Production   and mineral taxes   | 0.41       | 0.40       | 0.39       | 0.49       | 0.36       |
| Netback                          | 31.53      | 32.95      | 29.09      | 36.38      | 28.02      |

Notes:
| (1) | The heavy oil price and   transportation and blending for the full year has been reduced by the cost of   condensate purchases which are blended with the heavy oil, as follows: Foster   Creek - $41.74/bbl; Christina Lake - $47.07/bbl; Pelican Lake - $16.32/bbl;   Heavy Oil – Oil Sands - $36.57/bbl; Heavy Oil – Conventional - $12.73/bbl and   Total Heavy Oil - $32.76/bbl. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Operating costs for the year   include costs related to long-term incentives of $0.17/BOE.                                                                                                                                                                                                                                                                                                      |
| (3) | Foster Creek and Christina Lake are   bitumen properties.                                                                                                                                                                                                                                                                                                                                       |

 
| **Impact of Realized Financial Hedging – 2011** | **Year** | **Q4** | **Q3** | **Q2** | **Q1** |
|------------------------------------------------------|----------|--------|--------|--------|--------|
| Liquids ($/bbl)                                      | (2.79)   | (3.15) | 0.75   | (6.44) | (2.67) |
| Natural Gas ($/Mcf)                                  | 0.87     | 1.10   | 0.76   | 0.74   | 0.89   |
| Total ($/BOE)                                        | 0.86     | 1.22   | 2.49   | (1.25) | 0.83   |

 

 
| **Per-Unit Results – 2010**(1)             | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|------------|------------|------------|------------|
|                                            | **Year**   | **Q4**     | **Q3**     | **Q2**     | **Q1**     |
| Heavy Oil – Foster Creek ($/bbl) (2) (4)   |       |       |       |       |       |
| Price                                           | 58.76      | 58.76      | 58.51      | 54.75      | 63.33      |
| Royalties                                       | 9.08       | 11.41      | 9.56       | 9.38       | 5.76       |
| Transportation   and blending                   | 2.42       | 2.54       | 2.40       | 2.40       | 2.33       |
| Operating                                       | 10.40      | 9.93       | 10.32      | 10.36      | 11.04      |
| Netback                                         | 36.86      | 34.88      | 36.23      | 32.61      | 44.20      |
| Heavy Oil – Christina Lake ($/bbl) (2) (4) |       |       |       |       |       |
| Price                                           | 57.96      | 58.42      | 56.45      | 54.99      | 62.27      |
| Royalties                                       | 2.14       | 2.05       | 2.04       | 2.19       | 2.28       |
| Transportation   and blending                   | 3.54       | 1.54       | 3.69       | 4.52       | 4.47       |
| Operating                                       | 16.47      | 17.16      | 15.88      | 16.59      | 16.26      |
| Netback                                         | 35.81      | 37.67      | 34.84      | 31.69      | 39.26      |
| Heavy Oil – Pelican Lake ($/bbl) (2)       |       |       |       |       |       |
| Price                                           | 62.65      | 61.38      | 58.93      | 62.05      | 68.04      |
| Royalties                                       | 12.96      | 12.76      | 10.62      | 14.06      | 14.34      |
| Transportation   and blending                   | 1.42       | 1.04       | 1.77       | 1.52       | 1.30       |
| Operating                                       | 12.71      | 13.44      | 13.05      | 13.34      | 11.13      |
| Netback                                         | 35.56      | 34.14      | 33.49      | 33.13      | 41.27      |
| Heavy Oil - Oil Sands ($/bbl) (2)               |       |       |       |       |       |
| Price                                           | 59.76      | 59.35      | 58.41      | 56.83      | 64.61      |
| Royalties                                       | 9.53       | 10.79      | 9.30       | 10.03      | 7.94       |
| Transportation   and blending                   | 2.25       | 2.08       | 2.35       | 2.35       | 2.23       |
| Operating                                       | 11.66      | 11.49      | 11.74      | 11.82      | 11.57      |
| Netback                                         | 36.32      | 34.99      | 35.02      | 32.63      | 42.87      |

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 |   | 30

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Table of Contents

 
| **Per-Unit Results – 2010**(1)    | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
|                                   | **Year**   | **Q4**     | **Q3**     | **Q2**     | **Q1**     |
| Heavy Oil -   Conventional ($/bbl) (2) |       |       |       |       |       |
| Price                                  | 63.18      | 60.45      | 59.40      | 61.35      | 71.16      |
| Royalties                              | 9.01       | 8.01       | 7.29       | 9.65       | 10.99      |
| Transportation   and blending          | 0.56       | 0.45       | 0.60       | 0.60       | 0.59       |
| Operating                              | 12.20      | 13.17      | 11.41      | 13.00      | 11.34      |
| Production   and mineral taxes         | 0.19       | 0.05       | 0.17       | 0.10       | 0.44       |
| Netback                                | 41.22      | 38.77      | 39.93      | 38.00      | 47.80      |
| Total Heavy Oil ($/bbl) (2)            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Price                                  | 60.33      | 59.53      | 58.59      | 57.57      | 65.76      |
| Royalties                              | 9.44       | 10.36      | 8.95       | 9.97       | 8.48       |
| Transportation   and blending          | 1.97       | 1.83       | 2.04       | 2.06       | 1.94       |
| Operating                              | 11.75      | 11.75      | 11.68      | 12.02      | 11.53      |
| Production   and mineral taxes         | 0.03       | 0.01       | 0.03       | 0.02       | 0.08       |
| Netback                                | 37.14      | 35.58      | 35.89      | 33.50      | 43.73      |
| Light and Medium Oil ($/bbl)           |       |       |       |       |       |
| Price                                  | 71.63      | 72.98      | 68.37      | 66.14      | 78.78      |
| Royalties                              | 9.30       | 7.69       | 9.32       | 10.17      | 10.05      |
| Transportation   and blending          | 1.66       | 1.89       | 1.81       | 1.51       | 1.45       |
| Operating                              | 12.18      | 12.69      | 12.00      | 12.87      | 11.18      |
| Production   and mineral taxes         | 2.55       | 2.45       | 2.44       | 3.08       | 2.25       |
| Netback                                | 45.94      | 48.26      | 42.80      | 38.51      | 53.85      |
| Total Crude Oil ($/bbl)                | ** ** | ** ** | ** ** | ** ** | ** ** |
| Price                                  | 62.98      | 62.75      | 60.86      | 59.51      | 68.87      |
| Royalties                              | 9.41       | 9.72       | 9.03       | 10.01      | 8.85       |
| Transportation   and blending          | 1.90       | 1.84       | 1.99       | 1.94       | 1.83       |
| Operating                              | 11.85      | 11.98      | 11.75      | 12.21      | 11.44      |
| Production   and mineral taxes         | 0.62       | 0.59       | 0.59       | 0.71       | 0.59       |
| Netback                                | 39.20      | 38.62      | 37.50      | 34.64      | 46.16      |
| Natural Gas Liquids ($/bbl)            |       |       |       |       |       |
| Price                                  | 61.00      | 63.60      | 54.43      | 58.71      | 67.42      |
| Royalties                              | 1.12       | 0.75       | 1.29       | 1.16       | 1.39       |
| Netback                                | 59.88      | 62.85      | 53.14      | 57.55      | 66.03      |
| Total Liquids ($/bbl)                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Price                                  | 62.96      | 62.75      | 60.80      | 59.50      | 68.85      |
| Royalties                              | 9.33       | 9.63       | 8.96       | 9.93       | 8.78       |
| Transportation   and blending          | 1.88       | 1.82       | 1.97       | 1.94       | 1.83       |
| Operating                              | 11.74      | 11.82      | 11.64      | 12.10      | 11.34      |
| Production   and mineral taxes         | 0.62       | 0.59       | 0.59       | 0.71       | 0.59       |
| Netback                                | 39.39      | 38.89      | 37.64      | 34.82      | 46.31      |
| Total Natural Gas ($/Mcf)              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Price                                  | 4.09       | 3.55       | 3.68       | 3.78       | 5.27       |
| Royalties                              | 0.07       | (0.04)     | 0.08       | 0.07       | 0.14       |
| Transportation   and blending          | 0.17       | 0.16       | 0.15       | 0.15       | 0.21       |
| Operating                              | 0.95       | 1.02       | 0.93       | 0.92       | 0.93       |
| Production   and mineral taxes         | 0.02       | 0.02       | 0.03       | (0.04)     | 0.07       |
| Netback                                | 2.88       | 2.39       | 2.49       | 2.68       | 3.92       |
| Total ($/BOE)                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Price                                  | 44.01      | 42.82      | 41.49      | 41.46      | 50.16      |
| Royalties                              | 4.93       | 4.90       | 4.73       | 5.26       | 4.81       |
| Transportation   and blending          | 1.45       | 1.40       | 1.42       | 1.43       | 1.53       |
| Operating(3)                           | 8.76       | 9.07       | 8.63       | 8.87       | 8.46       |
| Production   and mineral taxes         | 0.37       | 0.35       | 0.38       | 0.24       | 0.52       |
| Netback                                | 28.50      | 27.10      | 26.33      | 25.66      | 34.84      |

Notes:
| (1) | The per-unit results for 2010 have   been re-presented on an IFRS basis. Further explanations are provided under   Accounting Matters in the Additional Information section.                                                                                                                                                                                                            |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The heavy oil price and   transportation and blending for the full year has been reduced by the cost of   condensate purchases which are blended with the heavy oil, as follows: Foster   Creek - $35.43/bbl; Christina Lake - $36.66/bbl; Pelican Lake - $14.69/bbl;   Heavy Oil – Oil Sands - $29.80/bbl; Heavy Oil - Conventional - $11.08/bbl;   Total Heavy Oil - $26.66/bbl. |
| (3) | Operating costs for the year   include costs related to long-term incentives of $0.16/BOE.                                                                                                                                                                                                                                                                                              |
| (4) | Foster Creek and Christina Lake are   bitumen properties.                                                                                                                                                                                                                                                                                                                               |

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 |   | 31

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| **Impact of Realized    Financial Hedging - 2010** | **Year** | **Q4** | **Q3** | **Q2** | **Q1** |
|----------------------------------------------------|----------|--------|--------|--------|--------|
| Liquids ($/bbl)                                    | (0.36)   | (1.29) | 1.01   | (0.40) | (0.78) |
| Natural Gas ($/Mcf)                                | 1.07     | 1.50   | 1.09   | 1.22   | 0.53   |
| Total ($/BOE)                                      | 2.99     | 3.65   | 3.77   | 3.37   | 1.20   |

 

 
| **Per-Unit Results – 2009**(1)             | **(Prepared following previous GAAP)** |
|-------------------------------------------------|----------------------------------------|
|                                            | **Year**                               | **Q4** | **Q3** | **Q2** | **Q1** |
| Heavy Oil – Foster Creek ($/bbl) (2) (4)   |                                   |   |   |   |   |
| Price                                           | 55.55                                  | 63.60 | 62.20 | 54.43 | 33.44 |
| Royalties                                       | 1.42                                   | 2.31 | 1.85 | 0.66 | 0.22 |
| Transportation   and blending                   | 2.51                                   | 1.71 | 2.50 | 3.45 | 2.69 |
| Operating                                       | 11.87                                  | 10.43 | 10.85 | 11.81 | 15.91 |
| Netback                                         | 39.75                                  | 49.15 | 47.00 | 38.51 | 14.62 |
| Heavy Oil – Christina Lake ($/bbl) (2) (4) |                                   |   |   |   |   |
| Price                                           | 53.45                                  | 57.07 | 64.85 | 57.32 | 32.44 |
| Royalties                                       | 1.24                                   | 2.04 | 1.72 | 0.83 | 0.23 |
| Transportation   and blending                   | 3.09                                   | 0.96 | 5.36 | 2.83 | 3.38 |
| Operating                                       | 16.31                                  | 18.06 | 15.31 | 13.69 | 18.21 |
| Netback                                         | 32.81                                  | 36.01 | 42.46 | 39.97 | 10.62 |
| Heavy Oil – Pelican Lake ($/bbl) (2)       |                                   |   |   |   |   |
| Price                                           | 54.77                                  | 62.73 | 61.87 | 55.39 | 38.66 |
| Royalties                                       | 10.98                                  | 12.08 | 12.27 | 10.93 | 8.57 |
| Transportation   and blending                   | 0.30                                   | (0.02) | 0.67 | 0.06 | 0.45 |
| Operating                                       | 9.59                                   | 11.64 | 7.03 | 9.74 | 10.15 |
| Netback                                         | 33.90                                  | 39.03 | 41.90 | 34.66 | 19.49 |
| Heavy Oil - Oil Sands ($/bbl) (2)               |                                   |   |   |   |   |
| Price                                           | 55.09                                  | 62.75 | 62.23 | 55.18 | 35.47 |
| Royalties                                       | 4.98                                   | 5.37 | 5.66 | 4.86 | 3.69 |
| Transportation   and blending                   | 1.81                                   | 1.14 | 2.15 | 2.16 | 1.85 |
| Operating                                       | 11.49                                  | 11.41 | 9.69 | 11.53 | 13.89 |
| Production   and mineral taxes                  | 0.04                                   | 0.02 | 0.07 | 0.06 | -      |
| Netback                                         | 36.77                                  | 44.81 | 44.66 | 36.57 | 16.04 |
| Heavy Oil - Conventional ($/bbl) (2)            |                                   |   |   |   |   |
| Price                                           | 55.29                                  | 62.09 | 64.62 | 56.00 | 37.71 |
| Royalties                                       | 5.47                                   | 8.61 | 8.39 | 4.13 | 0.61 |
| Transportation   and blending                   | 1.91                                   | 1.59 | 1.22 | 2.75 | 2.11 |
| Operating                                       | 9.47                                   | 12.06 | 9.31 | 9.72 | 6.91 |
| Production   and mineral taxes                  | 0.14                                   | 0.13 | (0.04) | 0.44 | 0.02 |
| Netback                                         | 38.30                                  | 39.70 | 45.74 | 38.96 | 28.06 |
| Total Heavy Oil ($/bbl) (2)                     | ** **                             | ** ** | ** ** | ** ** | ** ** |
| Price                                           | 55.14                                  | 62.63 | 62.72 | 55.36 | 35.99 |
| Royalties                                       | 5.08                                   | 5.95 | 6.22 | 4.70 | 2.98 |
| Transportation   and blending                   | 1.83                                   | 1.22 | 1.96 | 2.28 | 1.91 |
| Operating                                       | 11.07                                  | 11.52 | 9.61 | 11.13 | 12.27 |
| Production   and mineral taxes                  | 0.06                                   | 0.04 | 0.04 | 0.14 | -      |
| Netback                                         | 37.10                                  | 43.90 | 44.89 | 37.11 | 18.83 |
| Light and Medium Oil ($/bbl)                    |                                   |   |   |   |   |
| Price                                           | 63.34                                  | 71.82 | 68.15 | 65.28 | 48.09 |
| Royalties                                       | 7.39                                   | 11.72 | 8.09 | 6.56 | 3.14 |
| Transportation   and blending                   | 0.98                                   | 0.70 | 0.83 | 1.18 | 1.21 |
| Operating                                       | 9.93                                   | 9.53 | 10.00 | 9.53 | 10.67 |
| Production   and mineral taxes                  | 2.40                                   | 1.70 | 2.57 | 1.98 | 3.37 |
| Netback                                         | 42.64                                  | 48.17 | 46.66 | 46.03 | 29.70 |
| Total Crude Oil ($/bbl)                         | ** **                             | ** ** | ** ** | ** ** | ** ** |
| Price                                           | 57.22                                  | 64.85 | 64.00 | 57.95 | 39.40 |
| Royalties                                       | 5.67                                   | 7.34 | 6.66 | 5.18 | 3.03 |
| Transportation   and blending                   | 1.61                                   | 1.10 | 1.69 | 2.00 | 1.71 |
| Operating                                       | 10.78                                  | 11.04 | 9.70 | 10.72 | 11.82 |
| Production   and mineral taxes                  | 0.65                                   | 0.44 | 0.64 | 0.62 | 0.95 |
| Netback                                         | 38.51                                  | 44.93 | 45.31 | 39.43 | 21.89 |

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 |   | 32

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Table of Contents

 
| **Per-Unit Results – 2009**(1) | **(Prepared following previous GAAP)** |
|-------------------------------------|----------------------------------------|
|                                | **Year**                               | **Q4** | **Q3** | **Q2** | **Q1** |
| Natural Gas   Liquids ($/bbl)       |                                   |   |   |   |   |
| Price                               | 49.08                                  | 59.06 | 49.17 | 44.65 | 43.42 |
| Royalties                           | 0.81                                   | 0.96 | 1.00 | 0.82 | 0.46 |
| Netback                             | 48.27                                  | 58.10 | 48.17 | 43.83 | 42.96 |
| Total Liquids ($/bbl)               |                                   |   |   |   |   |
| Price                               | 57.14                                  | 64.79 | 63.85 | 57.81 | 39.45 |
| Royalties                           | 5.62                                   | 7.28 | 6.60 | 5.14 | 3.00 |
| Transportation   and blending       | 1.60                                   | 1.09 | 1.67 | 1.98 | 1.69 |
| Operating                           | 10.67                                  | 10.94 | 9.61 | 10.61 | 11.69 |
| Production   and mineral taxes      | 0.65                                   | 0.44 | 0.63 | 0.61 | 0.94 |
| Netback                             | 38.60                                  | 45.04 | 45.34 | 39.47 | 22.13 |
| Total Natural Gas ($/Mcf)           |                                   |   |   |   |   |
| Price                               | 4.15                                   | 4.17 | 3.14 | 3.80 | 5.47 |
| Royalties                           | 0.08                                   | 0.16 | 0.02 | 0.01 | 0.15 |
| Transportation   and blending       | 0.15                                   | 0.12 | 0.16 | 0.16 | 0.18 |
| Operating                           | 0.86                                   | 0.81 | 0.84 | 0.83 | 0.94 |
| Production   and mineral taxes      | 0.05                                   | 0.03 | 0.04 | 0.07 | 0.05 |
| Netback                             | 3.01                                   | 3.05 | 2.08 | 2.73 | 4.15 |
| Total ($/BOE)                       |                                   |   |   |   |   |
| Price                               | 39.88                                  | 44.54 | 40.43 | 38.65 | 35.71 |
| Royalties                           | 2.87                                   | 4.05 | 3.22 | 2.35 | 1.81 |
| Transportation   and blending       | 1.24                                   | 0.91 | 1.29 | 1.41 | 1.34 |
| Operating(3)                        | 7.71                                   | 7.85 | 7.24 | 7.52 | 8.27 |
| Production   and mineral taxes      | 0.46                                   | 0.30 | 0.43 | 0.52 | 0.58 |
| Netback                             | 27.60                                  | 31.43 | 28.25 | 26.85 | 23.71 |

Notes:
| (1) | The per-unit results for 2009 are   presented following previous GAAP and have not been re-presented on an IFRS   basis. Further explanations are provided under Accounting Matters in the   Additional Information section.                                                                                                                                                           |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | The heavy oil price and   transportation and blending for the full year has been reduced by the cost of   condensate purchases which are blended with the heavy oil, as follows: Foster   Creek - $27.45/bbl; Christina Lake - $28.90/bbl; Pelican Lake - $13.16/bbl;   Heavy Oil – Oil Sands - $22.37/bbl; Heavy Oil - Conventional - $9.36/bbl;   Total Heavy Oil - $19.68/bbl. |
| (3) | Operating costs for the year   include costs related to long-term incentives of $0.09/BOE.                                                                                                                                                                                                                                                                                             |
| (4) | Foster Creek and Christina Lake are   bitumen properties.                                                                                                                                                                                                                                                                                                                              |

 

 
| **Impact of Realized    Financial Hedging - 2009** | **Year** | **Q4** | **Q3** | **Q2** | **Q1** |
|----------------------------------------------------|----------|--------|--------|--------|--------|
| Liquids ($/bbl)                                    | 1.10     | (0.05) | (0.01) | 1.54   | 3.29   |
| Natural Gas ($/Mcf)                                | 3.63     | 2.27   | 4.41   | 4.33   | 3.43   |
| Total ($/BOE)                                      | 12.16    | 6.92   | 13.77  | 14.91  | 13.06  |

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 |   | 33

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***Capital Expenditures, Acquisitions and Divestitures***

 

We have a large inventory of internal growth opportunities and continue to examine select acquisition opportunities to develop and expand our oil and gas properties. Acquisition opportunities may include corporate or asset acquisitions. We may finance any such acquisitions with debt, equity, cash generated from operations, proceeds from asset divestitures or a combination of these sources.

 

We also have an active program to divest of non-core assets, in order to increase our focus on our long range business plan as well as generate proceeds to partially fund our capital investment.

 

The following table summarizes our net capital investment for 2011 and 2010:

 
| **Net Capital Investment**($ millions) | ** ** | **2011** | ** ** | **2010** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|
| Capital   Investment                        |       |     |       |     |       |
| Upstream                                    |       |     |       |     |       |
| Foster   Creek                              |       | 429      |       | 277      |       |
| Christina   Lake                            |       | 472      |       | 346      |       |
| Total                                       |       | 901      |       | 623      |       |
| Pelican   Lake                              |       | 317      |       | 104      |       |
| Other Oil   Sands                           |       | 197      |       | 130      |       |
| Conventional                                |       | 788      |       | 526      |       |
|                                        |       | 2,203    |       | 1,383    |       |
| Refining   and Marketing                    |       | 393      |       | 656      |       |
| Corporate                                   |       | 127      |       | 76       |       |
| Capital   Investment                        |       | 2,723    |       | 2,115    |       |
| Acquisitions                                |       | 71       |       | 86       |       |
| Divestitures                                |       | (173     | )          | (307     | )          |
| Net   Acquisition and Divestiture Activity  |       | (102     | )          | (221     | )          |
| Net Capital   Investment                    |       | 2,621    |       | 1,894    |       |

** **

** **

**OTHER INFORMATION**

** **

**Competitive Conditions**

** **

All aspects of the oil and gas industry are highly competitive. Refer to “Risk Factors – Competition” for further information on the competitive conditions affecting Cenovus.

 

**Environmental Considerations**

** **

Our operations are subject to laws and regulations concerning protection of the environment, pollution and the handling and transport of hazardous materials. These laws and regulations generally require us to remove or remedy the effect of our activities on the environment at present and former operating sites, including dismantling production facilities and remediating damage caused by the use or release of specified substances. The Safety, Environment and Responsibility Committee of our Board reviews and recommends policies pertaining to corporate responsibility, including the environment, and oversees compliance with government laws and regulations. Monitoring and reporting programs for environmental, health and safety performance in day-to-day operations, as well as inspections and assessments, have been designed to provide assurance that environmental and regulatory standards are met. Contingency plans have been put in place for a timely response to an environmental event and remediation/reclamation programs have been put in place and utilized to restore the environment.

 

We recognize that there is a cost associated with carbon emissions and we believe that greenhouse gas (“GHG”) regulations and the cost of carbon at various price levels can be adequately accounted for as part of business planning. As part of our future planning, management and the Board review the impact of a variety of carbon constrained scenarios on our strategy, with a current price range from US$15 to US$65 per tonne of emissions applied across a range of regulatory policy options. A major benefit of applying a range of carbon prices at the strategic level is that it can provide direct guidance to the capital allocation process. Although uncertainty remains regarding potential future emissions regulation, we will continue to assess and evaluate the cost of carbon relative to our investments across a range of scenarios. For a discussion of the risks associated with this uncertainty, see “Risk Factors – Climate Change Regulations”.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 | 34 |
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We also examine the impact of carbon regulation on our major projects, including both our oil sands operations and refining assets. We continue to closely monitor potential GHG legislation developments in the U.S. The state of California has implemented climate change regulation in the form of a Low Carbon Fuel Standard that requires the reduction of life cycle carbon emissions from transportation fuels. This regulation currently differentiates oil sands crudes as high carbon intensity crude oils. As an oil sands producer, Cenovus is not directly regulated and will not have a compliance obligation. Refiners in California will be required to comply with the legislation. A number of studies produced on the subject, including one that was conducted by an organization that advised on the legislation, suggest a wide range of carbon intensity values for oil sands crudes. Cenovus is well positioned within the sector given its typically low steam to oil ratio. This legislation has many complexities that are currently being addressed and in December 2011 the U.S. District Court for the Eastern District of California temporarily suspended the enforcement of the legislation due to several pending federal lawsuits challenging its implementation. We continue to monitor this development.

 

We expect to incur abandonment and site reclamation costs as existing oil and gas properties are abandoned and reclaimed. In 2011, expenditures beyond normal compliance with environmental regulations were not material. We do not anticipate making material expenditures beyond amounts paid in respect of normal compliance with environmental regulations in 2012. Refer to “Risk Factors – Environmental Regulations” for further information on environmental protection matters affecting Cenovus.

*** ***

**Corporate Responsibility Practice**

** **

Our operations are guided by a Corporate Responsibility (“CR”) Policy that clearly outlines accountabilities for all staff, including our leadership and the vendors and suppliers who work with Cenovus. Our CR Policy was officially launched on November 30, 2010. It was developed through an award-winning process focused on engagement with employees, external stakeholders and industry experts. The policy commits us to conduct our business in a responsible, transparent and respectful way while complying with all relevant and applicable laws, regulations and industry standards. The revisions made to the policy were approved by both our executive team and our Board. Our CR Policy is available on our website at www.cenovus.com.

 

Our CR Policy focuses on six commitment areas: (i) Leadership; (ii) Corporate Governance and Business Practices; (iii) People; (iv) Environmental Performance; (v) Stakeholder and Aboriginal Engagement; and (vi) Community Involvement and Investment. We will continue to externally report on our performance in these areas through our annual CR report. Our first comprehensive CR report was released in July 2011 and involved a limited assurance engagement with PricewaterhouseCoopers LLP on a select number of quantitative indicators. This report was aligned with the Global Reporting Initiative guidelines and the standards set by the Canadian Association of Petroleum Producers in its Responsible Canadian Energy program. The CR Policy emphasizes our commitment to protect the health and safety of all individuals affected by our activities, including our workforce and the communities where we operate. We will not compromise the health and safety of any individual in the conduct of our activities. We will strive to provide a safe and healthy work environment and we expect our workers to comply with the health and safety practices established for their protection. Additionally, the policy includes reference to emergency response management, investment in efficiency projects, new technologies and research, and support of the principles of the Universal Declaration of Human Rights.

 

In 2011, we rolled out the CR Policy across the Company to ensure the commitments articulated are understood and embedded throughout the organization. This rollout included: (i) an interactive e-learning training tool mandatory for employees and contractors to complete; (ii) a Company-wide video emphasizing the six different commitment areas of the revised CR Policy; (iii) a presentation delivered at the Cenovus Innovation Forum; (iv) bi-weekly on-boarding presentations delivered to more than 600 new hires; (v) a news feed called the “R” Factor, highlighting related employee stories; (vi) two lunch and learn events; and (vii) two bulletins on our internal Company webpage.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 | 35 |
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In addition, the CR Policy was included as a component in the implementation of the new Cenovus Operating Management System, which was introduced across the Company in 2011. Current steps that we already have in place to ensure the successful integration of the Policy include: (i) a security program to regularly assess security threats to business operations and to manage the associated risks; (ii) CR performance metrics to track our progress; (iii) an energy efficiency program that focuses on reducing energy use at our operations and supports initiatives at the community level and provides incentives for employees to reduce energy use in their homes; (iv) an Investigations Practice and an Investigations Committee to review and resolve potential violations of Cenovus’s policies or practices or other regulations; (v) an Integrity Helpline that provides an additional avenue for our stakeholders to raise their concerns; (vi) the CR website which allows people to write to Cenovus about non-financial issues of concern; (vii) related policies and practices such as an Alcohol and Drug Policy, a Code of Business Conduct & Ethics and guidelines for behaviours with respect to the acceptance of gifts, conflicts of interest and the appropriate use of Cenovus equipment and technology in a manner that is consistent with leading ethical business practices; and (viii) a requirement for acknowledgement and sign-off on key policies and practices by our Board and employees. Our Board approved the CR Policy on recommendation of the Safety, Environment and Responsibility Committee. The Board is also advised of significant policy contraventions and receives updates on trends, issues or events which could impact Cenovus.

 

In 2011, Cenovus was included on the Dow Jones Sustainability Index – North America for the second year in a row. Cenovus was also included on the Jantzi Social Index for the first time. The two indexes track the financial performance of the leading companies worldwide with regards to CR performance.

 

**Employees**

** **

The following table summarizes our full-time equivalent (“FTE”) employees at December 31, 2011:

 
|                     | ** ** | **FTE Employees** | ** ** |
|--------------------------|------------|-------------------|------------|
| Oil Sands                |       | 1,019             |       |
| Conventional             |       | 580               |       |
| Refining   and Marketing |       | 74                |       |
| Cenovus-wide             |       | 1,137             |       |
| Total                    |       | 2,810             |       |

 

We also engage a number of contractors and service providers. Refer to “Risk Factors – Personnel” for further information on employee matters affecting Cenovus.

** **

**Foreign Operations**

** **

One hundred percent of our reserves, production and assets are located in North America, which limits our exposure to risks and uncertainties in countries considered politically and economically unstable. Any future operations and related assets outside North America may be adversely affected by changes in government policy, social instability or other political or economic developments which are not within our control, including the expropriation of property, the cancellation or modification of contract rights and restrictions on repatriation of cash. Refer to “Risk Factors – Foreign Exchange Rates” for further information on foreign exchange rate matters affecting Cenovus.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 | 36 |
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** **

**DIRECTORS AND EXECUTIVE OFFICERS**

** **

**Directors**

** **

The following individuals presently serve as directors of Cenovus until the end of the next annual meeting of shareholders:

 
| **Name and     Residence**                                   | ** ** | **Director    Since****(1)** | ** ** | **Principal Occupation During the Past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------------------------------------------------------------|------------|------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                         |       |                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Ralph S. Cunningham(2,4,5,7)

Houston, Texas,

United States |       | 2009                         |       | Mr. Cunningham is Chairman of   Enterprise Products Holdings, LLC, the successor general partner of   Enterprise Products Partners L.P. From August 2007 to November 2010,   Mr. Cunningham served as a director and President & Chief Executive   Officer of EPE Holdings, LLC, the sole general partner of Enterprise GP   Holdings L.P., a publicly traded midstream energy holding company. From   December 2005 to June 2007, Mr. Cunningham served as Group Executive   Vice President & Chief Operating Officer of Enterprise Products GP, LLC,   the general partner of Enterprise Products Partners, L.P., and as Interim   President & Chief Executive Officer from June 2007 to July 2007.   Mr. Cunningham served as a director with the same entity from December   2005 to May 2010. From December 2009 to November 2010 he served as a director   of LE GP, LLC, the general partner of Energy Transfer Equity, L.P. He is   currently a director of Agrium Inc. and a director and Chairman of TETRA   Technologies, Inc. He is also a member of the Auburn University Chemical   Engineering Advisory Council and the Auburn University Engineering Advisory   Council. |
|                                                         |       |                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Patrick D. Daniel(2,3,4,5)

Calgary, Alberta,   Canada       |       | 2009                         |       | Mr. Daniel is a director and   President & Chief Executive Officer of Enbridge Inc., a publicly   traded energy delivery company. He is a director of Canadian Imperial Bank of   Commerce and a member of the North American Review Board of American Air   Liquide Holdings, Inc. He is also a member of the National Petroleum Council   (an oil and natural gas advisory committee to the U.S. Secretary of   Energy), a director of the American Petroleum Institute, Chairman of   energy4everyone Foundation and a member of the Association of Professional   Engineers, Geologists and Geophysicists of Alberta.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                         |       |                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| Ian   W. Delaney(2,4,5,7)

Toronto,   Ontario,   Canada      |       | 2009                         |       | Mr. Delaney is Chairman of   Sherritt International Corporation, a publicly traded diversified natural   resource company that produces nickel, cobalt, thermal coal, oil and gas and   electricity. Mr. Delaney was President and Chief Executive Officer of   Sherritt International Corporation from 2009****through   2011. He is also Chairman of The Westaim Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 | 37 |
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| **Name and     Residence**                                 | ** ** | **Director    Since****(1)** | ** ** | **Principal Occupation During the Past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|------------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                       |       |                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Brian C. Ferguson(8)

Calgary, Alberta,   Canada           |       | 2009

                  |       | Mr. Ferguson became President   & Chief Executive Officer when Cenovus was formed on November 30,   2009. Mr. Ferguson is responsible for the overall leadership of Cenovus’s   strategic and operational performance. Mr. Ferguson joined a predecessor   company in 1984 and became a member of the management team in 1994. Prior to   leading Cenovus, Mr. Ferguson was Executive Vice-President & Chief   Financial Officer of Encana. His business experience includes a variety of   areas in finance, business development, reserves, strategic planning,   evaluations and communications. Mr. Ferguson is currently serving on the   board of the Canadian Association of Petroleum Producers. Mr. Ferguson   is a Fellow of the Institute of Chartered Accountants of Alberta, a member of   the Canadian Institute of Chartered Accountants (CICA), a member of the   Canadian Council of Chief Executives and Chair of the Calgary Police   Foundation. He previously served as Chairman of CICA's Risk Oversight and   Governance Board. |
|                                                       |       |                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Michael A. Grandin(2,5,9)

Calgary, Alberta,   Canada      |       | 2009 (Chair)                 |       | Mr. Grandin is the Chair of   our Board. He is also director of BNS Split Corp. II and HSBC Bank Canada. He   was Chairman and Chief Executive Officer of Fording Canadian Coal Trust from   February 2003 to October 2008 when it was acquired by Teck Cominco Limited.   He was President of PanCanadian Energy Corporation from October 2001 to April   2002 when it merged with Alberta Energy Company Ltd. to form Encana   Corporation. Mr. Grandin served as Dean of the Haskayne School of   Business, University of Calgary from April 2004 to January 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                       |       |                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Valerie A.A. Nielsen(2,3,5,6)

Calgary, Alberta,   Canada  |       | 2009                         |       | Ms. Nielsen is a director of   Wajax Corporation. She was a member and past chair of an advisory group on   the General Agreement on Tariffs and Trade (GATT), the North America Free   Trade Agreement (NAFTA) regarding international trade matters pertaining to   energy, chemicals and plastics from 1986 to 2002. Ms. Nielsen is also a   past director of the Bank of Canada and of the Canada Olympic Committee.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                                                       |       |                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Charles M. Rampacek(5,6,7)

Dallas, Texas,   United States |       | 2009                         |       | Mr. Rampacek is a director of   Flowserve Corporation and Pilko & Associates L.P. and a director and   Chairman of the Board of Ardent Holdings, LLC. Mr. Rampacek also serves   on the Engineering Advisory Council for the University of Texas and the College   of Engineering Leadership Board for the University of Alabama.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                                       |       |                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Colin   Taylor(3,4,5)

Toronto,   Ontario,   Canada        |       | 2009                         |       | Mr. Taylor served two   consecutive four-year terms as Chief Executive & Managing Partner of   Deloitte & Touche LLP and then acted as Senior Counsel until his   retirement in May 2008. Mr. Taylor is also a member of the Canadian   Institute of Chartered Accountants and Fellow of the Institute of Chartered   Accountants of Ontario.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

 
| Cenovus Energy Inc. Annual Information Form for the year ended   December 31, 2011 | 38 |
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| **Name and     Residence**                            | ** ** | **Director    Since****(1)** | ** ** | **Principal Occupation During the Past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-------------------------------------------------------|------------|------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                  |       |                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| Wayne G. Thomson(2,5,6,7)

Calgary, Alberta,   Canada |       | 2009                         |       | Mr. Thomson is a director   & Chief Executive Officer of Iskander Energy Corp., a private   international oil and gas company. He is Chairman and President of Enviro   Valve Inc., a private company manufacturing proprietary pressure relief   valves. He is also a director of Virgin Resources Limited and TVI Pacific   Inc. Mr. Thomson is a member of the Association of Professional   Engineers, Geologists and Geophysicists of Alberta and the World Presidents’   Organization. |
|                                                  |       |                         |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |

 

Notes:
| (1) | Each of the directors became members of our Board pursuant   to the Arrangement.                                                                                                                                                        |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | Former director of Encana.                                                                                                                                                                                                              |
| (3) | Member of the Audit Committee.                                                                                                                                                                                                          |
| (4) | Member of the Human Resources and Compensation Committee.                                                                                                                                                                               |
| (5) | Member of the Nominating and Corporate Governance   Committee.                                                                                                                                                                          |
| (6) | Member of the Reserves Committee.                                                                                                                                                                                                       |
| (7) | Member of the Safety, Environment and Responsibility   Committee.                                                                                                                                                                       |
| (8) | As an officer and a non-independent director,   Mr. Ferguson is not a member of any of the committees of our Board.                                                                                                                |
| (9) | Ex-officio, by standing invitation, non-voting member of   all other committees of our Board. As an ex-officio non-voting member,   Mr. Grandin attends as his schedule permits and may vote when necessary   to achieve a quorum. |

 

 

**Executive Officers**

** **

The following individuals currently serve as executive officers of Cenovus.

 
| **Name and Residence**                        | ** ** | **Office Held and Principal Occupation During the    Past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|-----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Brian C. Ferguson

Calgary, Alberta,   Canada |       | President & Chief Executive   Officer

 

Mr. Ferguson’s biographical   information is included under “Directors”.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                                          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| Ivor   M. Ruste

Calgary,   Alberta,   Canada |       | Executive Vice-President &   Chief Financial Officer

 

Mr. Ruste became Executive   Vice-President & Chief Financial Officer on November 30, 2009. From   May 2006 to November 2009, Mr. Ruste held the following positions with   Encana: Executive Vice-President, Corporate Responsibility & Chief   Risk Officer effective May 2009; Executive Vice-President & Chief   Risk Officer effective January 2008; Vice-President, Finance for the   Integrated Oil Division effective January 2007; and Vice-President, Finance   of the Corporate Finance Group effective May 2006. From February 2003 to   April 2006, he was a partner and the Office Managing Partner for the   Edmonton, Alberta office of KPMG LLP, as well as the Alberta Region Managing   Partner for KPMG LLP. During this period, he was also a member of the Board   of Directors of KPMG Canada and, from December 2003 to March 2006, he was   Vice Chair of the Board of Directors for KPMG Canada. |
|                                          |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| John K. Brannan

Calgary, Alberta,   Canada   |       | Executive Vice-President &   Chief Operating Officer

 

Mr. Brannan became Executive   Vice-President & Chief Operating Officer on December 1, 2010. From   November 2009 to November 2010, Mr. Brannan was our Executive   Vice-President (President, Integrated Oil Division). Prior to November 2009,   Mr. Brannan held the following positions with Encana: Executive   Vice-President (President, Integrated Oil Division) effective January 2007;   Managing Director, Frontier and International New Ventures effective July   2005; and from November 2003 to June 2005, Managing Director, International   & New Ventures.                                                                                                                                                                                                                                                                                                                                                             |

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 | 39 |
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| **Name and Residence**                             | ** ** | **Office Held and Principal Occupation During the    Past Five Years**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|----------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Harbir   S. Chhina

Calgary,   Alberta,   Canada   |       | Executive Vice-President, Oil Sands

 

Mr. Chhina became Executive   Vice-President, Oil Sands on December 1, 2010. From November 2009 to   November 2010, Mr. Chhina was our Executive Vice-President, Enhanced Oil   Development & New Resource Plays. Prior to November 2009,   Mr. Chhina held the following positions with Encana: Vice-President,   Upstream Operations, Integrated Oil Sands Division effective January 2007;   and from April 2002 to December 2006, Vice-President, Oil Recovery Business   Unit.                                                                                                                                            |
|                                               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Kerry   D. Dyte

Calgary,   Alberta,   Canada      |       | Executive Vice-President, General   Counsel & Corporate Secretary

 

Mr. Dyte became Executive   Vice-President, General Counsel & Corporate Secretary on November 30,   2009. Prior to November 2009, Mr. Dyte held the following positions with   Encana: from January 2007 to November 2009, Vice-President, General   Counsel & Corporate Secretary; and from December 2002 to December   2006, General Counsel & Corporate Secretary.                                                                                                                                                                                                                |
|                                               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Judy A. Fairburn

Calgary, Alberta,   Canada       |       | Executive Vice-President,   Environment & Strategic Planning

 

Ms. Fairburn became Executive   Vice-President, Environment & Strategic Planning on November 30,   2009. Prior to November 2009, Ms. Fairburn held the following positions   with Encana: Vice-President, Environment & Corporate Responsibility   effective May 2009; Vice-President, Environment & Strategic Planning   effective December 2008; Vice-President, Downstream Operations effective   January 2007; and Vice-President, Weyburn Business Unit effective July 2004.                                                                                                    |
|                                               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Sheila   M. McIntosh

Calgary,   Alberta,   Canada |       | Executive Vice-President,   Communications & Stakeholder Relations

 

Ms. McIntosh became Executive   Vice-President, Communications & Stakeholder Relations on   November 30, 2009. Prior to November 2009, Ms. McIntosh held the following   positions with Encana: Executive Vice-President, Corporate Communications   effective January 2007; and from April 2002 to December 2006, Vice-President,   Investor Relations.                                                                                                                                                                                                                                         |
|                                               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Donald T. Swystun

Calgary, Alberta,   Canada      |       | Executive Vice-President, Refining,   Marketing, Transportation & Development

 

Mr. Swystun became Executive   Vice-President, Refining, Marketing, Transportation & Development on   December 1, 2010. From November 2009 to November 2010, Mr. Swystun   was our Executive Vice-President (President, Canadian Plains Division). Prior   to November 2009, Mr. Swystun held the following positions with Encana:   Executive Vice-President, (President, Canadian Plains Division) effective   January 2007; Executive Vice-President, Corporate Development effective March   2006; and from September 2001 to February 2006, President, Ecuador Region. |
|                                               |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| Hayward J. Walls

Calgary, Alberta,   Canada       |       | Executive Vice-President,   Organization & Workplace Development

 

Mr. Walls became Executive   Vice-President, Organization & Workplace Development on   November 30, 2009. Prior to November 2009, Mr. Walls held the   following positions with Encana: Executive Vice-President, Corporate Services   effective January 2006; and effective November 2003, Vice-President,   Information Services & Chief Information Officer.                                                                                                                                                                                                                      |

 

As of December 31, 2011, all of our directors and executive officers, as a group, beneficially owned or exercised control or direction over, directly or indirectly, 1,185,268 Common Shares or approximately 0.16 percent of the number of Common Shares that were outstanding as of such date.

 

 
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Investors should be aware that some of our directors and officers are directors and officers of other private and public companies. Some of these private and public companies may, from time to time, be involved in business transactions or banking relationships which may create situations in which conflicts might arise. Any such conflicts shall be resolved in accordance with the procedures and requirements of the relevant provisions of the CBCA, including the duty of such directors and officers to act honestly and in good faith with a view to the best interests of Cenovus.

 

**Cease Trade Orders, Bankruptcies, Penalties or Sanctions**

** **

To our knowledge, other than as described below, none of our current directors or executive officers is, as at the date of this AIF, or has been, within 10 years before the date of this AIF, a director, chief executive officer or chief financial officer of any company that:

 

(a)                                 was subject to a cease trade order, an order similar to a cease trade order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than 30 consecutive days (collectively, an “Order”) and that was issued while that person was acting in the capacity as director, chief executive officer or chief financial officer; or

 

(b)                                 was subject to an Order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer of the company being the subject of such an Order and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer.

 

To our knowledge, other than as described below, none of our directors or executive officers:

 

(a)                                 is, at the date of this AIF, or has been within 10 years before the date of this AIF, a director or executive officer of any company that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to its own bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or

 

(b)                                 has, within 10 years before the date of this AIF, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director or executive officer.

 

Mr. Delaney was a director of OPTI Canada Inc. (“OPTI”) when it commenced proceedings for creditor protection under the Companies’ Creditors Arrangement Act (Canada) (“CCAA”) on July 13, 2011. Ernst & Young Inc. was appointed as monitor of OPTI. On November 28, 2011, OPTI announced that it had closed a transaction whereby a subsidiary of CNOOC Limited acquired all of the outstanding securities of OPTI pursuant to a plan of arrangement under the CCAA and the Canada Business Corporations Act.

 

Mr. Rampacek was the Chairman and President & Chief Executive Officer of Probex Corporation (“Probex”) in 2003 when it filed a petition seeking relief under Chapter 7 of the Bankruptcy Code (United States). In 2005, as a result of the bankruptcy, two complaints seeking recovery of certain alleged losses were filed against former Probex officers and directors, including Mr. Rampacek. These complaints were defended by American International Group, Inc. (“AIG”) in accordance with the Probex director and officer insurance policy and settlement was reached and paid by AIG, with bankruptcy court approval, in 2006. An additional complaint was filed in 2005 against noteholders of certain Probex debt, of which Mr. Rampacek was a party. A settlement of $2,000 was reached, with bankruptcy court approval, in 2006.

 

 

**AUDIT COMMITTEE**

 

*The Audit Committee mandate is included as Appendix C to this AIF.*

* *

**Composition of the Audit Committee**

** **

The Audit Committee consists of three members, each of whom is independent and financially literate in accordance with National Instrument 52-110 *Audit Committees* (“NI 52-110”). The relevant education and experience of each of the members of the Audit Committee is outlined below.

 

 
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***Patrick D. Daniel***

*** ***

Mr. Daniel holds a Bachelor of Science (University of Alberta) and a Master of Science (University of British Columbia), both in chemical engineering. He also completed Harvard University’s Advanced Management Program. He is President and Chief Executive Officer and a director of Enbridge Inc., a publicly traded energy delivery company, as well as a director of a number of Enbridge subsidiaries. He is a past director and member of the audit committee of Enerflex Systems Income Fund, a compression systems manufacturer. He is also a past director and Chair of the finance committee of Synenco Energy Inc., an oil sands mining company which was acquired by Total E&P Canada Ltd. in August 2008.

 

***Valerie A.A. Nielsen***

*** ***

Ms. Nielsen holds a holds a Bachelor of Science (Hon.) (Dalhousie University). She is a professional geophysicist who has held management positions and provided consulting services to the oil and gas industry for over 30 years. She has also completed several finance and accounting courses at the university level. Ms. Nielsen was a member and past chair of an advisory group on the General Agreement on Tariffs and Trade (GATT), the North America Free Trade Agreement (NAFTA) and international trade matters pertaining to energy, chemicals and plastics from 1986 to 2002. She is currently a director and serves on the audit committee of Wajax Corporation, a publicly traded company engaged in the sale and after-sales parts and service support of mobile equipment, diesel engines and industrial components. She is a past director of the Bank of Canada and of the Canada Olympic Committee.

 

***Colin Taylor (Financial Expert and Audit Committee Chair)***

*** ***

Mr. Taylor is a chartered accountant, a member and Fellow of the Institute of Chartered Accountants of Ontario and a member of the Canadian Institute of Chartered Accountants. He also completed Harvard University’s Advanced Management Program. Mr. Taylor served two consecutive four-year terms (June 1996 to May 2004) as Chief Executive and Managing Partner of Deloitte & Touche LLP and continued as Senior Counsel until his retirement in May 2008. He has held a number of international management and governance responsibilities throughout his professional career. Mr. Taylor also served as Advisory Partner to a number of public and private company clients of Deloitte & Touche LLP.

 

The above list does not include Michael A. Grandin who is, by standing invitation, an ex-officio member of our Audit Committee.

 

**Pre-Approval Policies and Procedures**

** **

We have adopted policies and procedures with respect to the pre-approval of audit and permitted non-audit services to be provided by PricewaterhouseCoopers LLP. The Audit Committee has established a budget for the provision of a specified list of audit and permitted non-audit services that the Audit Committee believes to be typical, recurring or otherwise likely to be provided by PricewaterhouseCoopers LLP. Subject to the Audit Committee’s discretion, the budget generally covers the period between the adoption of the budget and the next meeting of the Audit Committee. The list of permitted services is sufficiently detailed to ensure that: (i) the Audit Committee knows precisely what services it is being asked to pre-approve; and (ii) it is not necessary for any member of management to make a judgment as to whether a proposed service fits within the pre-approved services.

 

Subject to the following paragraph, the Audit Committee has delegated authority to the Chair of the Audit Committee (or if the Chair is unavailable, any other member of the Audit Committee) to pre-approve the provision of permitted services by PricewaterhouseCoopers LLP which are not otherwise pre-approved by the Audit Committee, including the fees and terms of the proposed services (“Delegated Authority”). Any required determination about the Chair’s unavailability will be required to be made by the good faith judgment of the applicable other member(s) of the Audit Committee after considering all facts and circumstances deemed by such member(s) to be relevant. All pre-approvals granted pursuant to Delegated Authority must be presented by the member(s) who granted the pre-approvals to the full Audit Committee at its next meeting.

 

The fees payable in connection with any particular service to be provided by PricewaterhouseCoopers LLP that has been pre-approved pursuant to Delegated Authority: (i) may not exceed $200,000, in the case of pre-approvals granted by the Chair of the Audit Committee, and (ii) may not exceed $50,000, in the case of pre-approvals granted by any other member of the Audit Committee.

 

 
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All proposed services or the fees payable in connection with such services that have not already been pre-approved must be pre-approved by either the Audit Committee or pursuant to Delegated Authority. Prohibited services may not be pre-approved by the Audit Committee or pursuant to Delegated Authority.

 

**External Auditor Service Fees**

** **

The following table provides information about the fees billed to Cenovus for professional services rendered by PricewaterhouseCoopers LLP in the years ended December 31, 2011 and 2010:

 
| ($ thousands)            | ** ** | **2011** | ** ** | **2010** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Audit Fees(1)            |       | 2,682    |       | 1,996    |       |
| Audit-Related   Fees(2)  |       | 8        |       | 47       |       |
| Tax Fees(3)              |       | 714      |       | 157      |       |
| All Other   Fees(4)      |       | 66       |       | 18       |       |
| Total                         |       | 3,470    |       | 2,218    |       |

 

Notes:

(1)               Audit Fees consist of fees for the audit of our annual financial statements or services that are normally provided in connection with statutory and regulatory filings or engagements.

(2)               Audit-Related Fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and are not reported as Audit Fees. During 2011, the services provided in this category included review of reserves and Director and Executive Compensation disclosures.

(3)               Tax Fees consist of fees for tax compliance services, tax advice and tax planning. During 2011, the services provided in this category primarily included support of SR&ED claims for Cenovus Energy Inc. and FCCL Partnership.

(4)               During 2011, the services provided in this category included the payment of maintenance fees associated with a research tool that grants access to a comprehensive library of financial reporting and assurance literature.

 

 

**DESCRIPTION OF CAPITAL STRUCTURE**

** **

The following is a summary of the rights, privileges, restrictions and conditions which are attached to common shares (“Common Shares”) and our first and second preferred shares (collectively the “Preferred Shares”). We are authorized to issue an unlimited number of Common Shares and an unlimited number of First Preferred Shares and Second Preferred Shares. As of December 31, 2011, there were approximately 754 million Common Shares and no Preferred Shares outstanding.

 

**Common Shares**

** **

The holders of Common Shares are entitled: (i) to receive dividends if, as and when declared by our Board; (ii) to receive notice of, to attend, and to vote on the basis of one vote per Common Share held, at all meetings of shareholders; and (iii) to participate in any distribution of our assets in the event of liquidation, dissolution or winding up or other distribution of our assets among our shareholders for the purpose of winding up our affairs.

 

**Preferred Shares**

** **

Preferred Shares may be issued in one or more series. Our Board may determine the designation, rights, privileges, restrictions and conditions attached to each series of Preferred Shares before the issue of such series. Holders of Preferred Shares are not entitled to vote at any meeting of shareholders, but may be entitled to vote if we fail to pay dividends on that series of Preferred Shares. The First Preferred Shares are entitled to priority over the Second Preferred Shares and the Common Shares with respect to the payment of dividends and the distribution of assets in the event of any liquidation, dissolution or winding up our affairs. Our Board is restricted from issuing First Preferred Shares or Second Preferred Shares if by doing so the aggregate amount payable to holders of such class, as a return of capital in the event of liquidation, dissolution or winding up or any other distribution of assets among shareholders for the purpose of winding up, would exceed $500 million.

 

 
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**Shareholder Rights Plan**

** **

We have a Shareholder Rights Plan that was adopted in 2009 to ensure, to the extent possible, that all our shareholders are treated fairly in connection with any take-over bid for Cenovus. The Shareholder Rights Plan creates a right that attaches to each issued Common Share. Until the separation time, which typically occurs at the time of an unsolicited take-over bid, whereby a person acquires or attempts to acquire 20 percent or more of our Common Shares, the rights are not separable from the Common Shares, are not exercisable and no separate rights certificates are issued. Each right entitles the holder, other than the 20 percent acquiror, from and after the separation time (unless delayed by our Board) and before certain expiration times, to acquire Common Shares at 50 percent of the market price at the time of exercise. The Shareholder Rights Plan must be reconfirmed by our shareholders at every third annual shareholder meeting, commencing in 2012.

 

**Dividend Reinvestment Plan**

** **

In 2010, the Board approved a dividend reinvestment plan, which permits holders of Common Shares to automatically reinvest all or any portion of the cash dividends paid on their Common Shares in additional Common Shares. At the discretion of the Company, the additional Common Shares may be issued from treasury at the average market price or purchased on the market.

 

**Employee Stock Option Plan**

** **

Our Employee Stock Option Plan provides employees with the opportunity to exercise options to purchase Common Shares. Option exercise prices approximate the market price for the Common Shares on the date the options were issued. Options granted are exercisable at 30 percent of the number granted after one year, an additional 30 percent of the number granted after two years, and are fully exercisable after three years. Options granted prior to February 17, 2010 expire after five years while options granted on or after February 17, 2010 expire after seven years. Each option granted prior to February 24, 2011 has an associated tandem stock appreciation right which gives the option holder the right to elect to receive a cash payment equal to the excess of the market price of the Common Shares at the time of exercise over the exercise price of the option in exchange for surrendering the option. Options granted on or after February 24, 2011 have associated net settlement rights. In lieu of exercising the option, the net settlement right grants the option holder the right to receive the number of common shares that could be acquired with the excess value of the market price of the Common Shares at the time of exercise over the exercise price of the option.

 

**Ratings**

** **

The following information relating to our credit ratings is provided as it relates to our financing costs and liquidity. Specifically, credit ratings affect our ability to obtain short-term and long-term financing and the cost of such financing. A reduction in the current rating on our debt by our rating agencies or a negative change in our ratings outlook could adversely affect our cost of financing and our access to sources of liquidity and capital. See “Risk Factors” in this AIF for further information.

 

The following table outlines the ratings and outlooks of Cenovus’s debt as of December 31, 2011:

 
|                                                  | **Standard & Poor’s**

**Ratings Services**

**(“S&P”)** | **Moody’s Investors**

**Service**

**(“Moody’s”)** | **DBRS Limited**

**(“DBRS”)** |
|-------------------------------------------------------|---------------------------------------------------------------------------------|-------------------------------------------------------------------------|------------------------------------------|
| Senior unsecured

   Long-Term Rating  | BBB+/Stable                                                                     | Baa2/Stable                                                             | A(low)/Stable                            |
| Commercial Paper

   Short-Term Rating | A1(low)/Stable                                                                  | P-2/Stable                                                              | R-1(low)/Stable                          |

 

Credit ratings are intended to provide an independent measure of the credit quality of an issue of securities. The credit ratings assigned by the rating agencies are not recommendations to purchase, hold or sell the securities nor do the ratings comment on market price or suitability for a particular investor. A rating may not remain in effect for any given period of time, at any time, and may be revised or withdrawn entirely by a rating agency in the future if, in its judgment, circumstances so warrant.

 

 
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S&P’s long-term credit ratings are on a rating scale that ranges from AAA to D, which represents the range from highest to lowest quality of such securities rated. A rating of BBB+ by S&P is within the fourth highest of 10 categories and indicates that the obligation exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. The addition of a plus (+) or minus (-) designation after a rating indicates the relative standing within the major rating categories. S&P’s Canadian commercial paper ratings scale ranges from A-1(High) to D, which represents the range from highest to lowest quality. A rating of A-1(Low) is the third highest of eight categories and indicates that the obligor has satisfactory capacity to meet its financial commitments. A ratings outlook gives the potential direction of a short- or long-term rating and the “stable” designation indicates that a rating is not likely to change.

 

Moody’s long-term credit ratings are on a rating scale that ranges from Aaa to C, which represents the range from highest to lowest quality of such securities rated. A rating of Baa2 by Moody’s is within the fourth highest of nine categories and is assigned to debt securities which are considered medium-grade (i.e., they are subject to moderate credit risk). Such debt securities may possess certain speculative characteristics. The addition of a 1, 2 or 3 modifier after a rating indicates the relative standing within a particular rating category. The modifier 1 indicates that the issue ranks in the higher end of its generic rating category, the modifier 2 indicates a mid-range ranking and the modifier 3 indicates a ranking in the lower end of that generic rating category. Moody’s short-term credit ratings are on a scale that ranges from P-1 (highest quality) to NP (lowest quality). A rating of P-2 is the second highest of four categories and indicates that the issuer has a strong ability to repay short-term debt obligations.

 

DBRS’s long-term credit ratings are on a rating scale that ranges from AAA to D, which represents the range from highest to lowest quality of such securities rated. A rating of A(low) by DBRS is within the third highest of 10 categories and is assigned to debt securities considered to be of good credit quality. The capacity for payment of financial obligations is substantial, but of lesser credit quality than that of higher rated securities. Entities in the A category may be vulnerable to future events, but qualifying negative factors are considered manageable. The assignment of a “(high)” or “(low)” modifier within each rating category indicates relative standing within such category. DBRS’s short-term credit ratings are on a scale ranging from R-1(high) to D, which represents the range from highest to lowest quality. A rating of R-1(low) is the third highest of 10 categories and indicates that the short-term debt is of good credit quality. The capacity for the payment of short-term financial obligations as they fall due is substantial but overall strength is not as favourable as higher rating categories. Cenovus may be vulnerable to future events but qualifying negative factors are considered manageable.

 

**DIVIDENDS**

** **

The declaration of dividends is at the sole discretion of our Board and is considered each quarter.

 

The Board has approved a 10 percent increase in the first quarter dividend to $0.22 per share payable on March 30, 2012 to holders of Common Shares of record as of March 15, 2012. In each of the four quarters in 2011, Cenovus paid a dividend of $0.20 per share ($0.80 per share annually).

 

 
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**MARKET FOR SECURITIES**

** **

All of the outstanding Common Shares are listed and posted for trading on the Toronto Stock Exchange (“TSX”) and the New York Stock Exchange (“NYSE”) under the symbol CVE. The following table outlines the share price trading range and volume of shares traded by month in 2011:

 
| **2011**  |   | **TSX**                     |   | **NYSE**    |   |
|-----------|--------|-----------------------------|--------|-------------|--------|
|      |   | Share Price   Trading Range |   |        |   | Share Price   Trading Range |   |   |   |
|      |   |                        |   |        |   |   |   | Share |   |   |   |   |   |   |   | Share |   |
|      |   | High                        |   | Low         |   | Close |   | Volume |   | High |   | Low |   | Close |   | Volume |   |
|      |   | ($ per share)          |   | (thousands) |   | (US$ per share) |   | (thousands) |   |
|      |   |                        |   |        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| January   |   | 34.83                       |   | 31.15       |   | 34.60 |   | 32,816 |   | 34.78 |   | 31.11 |   | 34.61 |   | 26,480 |   |
| February  |   | 38.36                       |   | 33.54       |   | 37.75 |   | 38,526 |   | 39.28 |   | 33.62 |   | 38.91 |   | 32,385 |   |
| March     |   | 38.90                       |   | 33.95       |   | 38.30 |   | 39,544 |   | 40.06 |   | 34.25 |   | 39.38 |   | 34,901 |   |
| April     |   | 38.98                       |   | 34.50       |   | 36.38 |   | 33,639 |   | 40.73 |   | 35.63 |   | 38.40 |   | 29,366 |   |
| May       |   | 37.34                       |   | 31.73       |   | 35.80 |   | 34,622 |   | 39.36 |   | 32.48 |   | 37.09 |   | 33,621 |   |
| June      |   | 36.45                       |   | 32.03       |   | 36.40 |   | 49,122 |   | 37.80 |   | 32.62 |   | 37.66 |   | 35,915 |   |
| July      |   | 38.38                       |   | 35.25       |   | 36.73 |   | 30,558 |   | 40.61 |   | 36.38 |   | 38.35 |   | 28,291 |   |
| August    |   | 37.01                       |   | 31.42       |   | 35.40 |   | 50,680 |   | 39.57 |   | 31.54 |   | 36.08 |   | 46,066 |   |
| September |   | 36.51                       |   | 29.87       |   | 32.27 |   | 51,442 |   | 37.43 |   | 29.02 |   | 30.71 |   | 32,811 |   |
| October   |   | 37.11                       |   | 28.85       |   | 34.14 |   | 44,119 |   | 37.35 |   | 27.15 |   | 34.20 |   | 40,191 |   |
| November  |   | 35.53                       |   | 29.83       |   | 34.11 |   | 37,497 |   | 35.08 |   | 28.68 |   | 33.39 |   | 27,372 |   |
| December  |   | 34.76                       |   | 30.70       |   | 33.83 |   | 36,976 |   | 34.29 |   | 29.64 |   | 33.20 |   | 27,100 |   |

** **

** **

**RISK FACTORS**

** **

Our operations are exposed to a number of risks, some that impact the oil and gas industry as a whole and others that are unique to our operations. We have identified risks in three main categories: financial, operational and regulatory. The impact of any risk or a combination of risks in these three categories may adversely affect our business, reputation, financial condition, results of operations and cash flow, which may reduce or restrict our ability to pay a dividend to our shareholders and may materially affect the market price of our securities.

 

Our approach to risk management includes compliance with our Board approved Enterprise Risk Management Policy and the related enterprise risk management program and practice, an annual review of our principal and emerging risks, an analysis of the severity and likelihood of each principal risk, an evaluation of the effectiveness of our current mitigation procedures and the further mitigation or treatment of risks. In addition, we continuously monitor our risk profile as well as industry best practices.

 

**Financial Risks**

** **

Financial risks include, but are not limited to: fluctuations in commodity prices; royalty regimes and tax laws; volatile financial and credit markets; development and operating costs; availability of credit and access to sufficient liquidity; fluctuations in foreign exchange and interest rates; risks related to our hedging activities; and risks related to our ability to pay a dividend to shareholders. Some of these risks have intensified in recent years due to difficult market conditions caused by global economic challenges. These risks have impacted and may continue to impact our customers and suppliers and may alter our spending and operating plans. There may be unexpected business impacts due to general market uncertainty. Continued economic uncertainty means that oil and gas producers, including Cenovus, may face the risk of restricted access to capital and increased borrowing costs.

 

***Commodity Price Volatility***

*** ***

Our financial performance is substantially dependent on the prevailing prices of crude oil, natural gas and refined products. Crude oil prices are impacted by a number of factors including, but not limited to: global economic conditions; the actions of the Organization of Petroleum Exporting Countries; government regulation; political stability; the supply of and demand for crude oil; the ability to transport crude to markets; the availability of alternate fuel sources; and weather conditions. Our natural gas price realizations are impacted by a number of factors including, but not limited to: North American supply and demand; developments related to the market for liquefied natural gas; weather conditions and prices of alternate sources of energy. Our refined products prices are impacted by a number of factors including, but not limited to: market competitiveness; weather; industry planned and unplanned refinery maintenance; and global supply and demand for refined products. All of these factors are beyond our control and can result in a high degree of price volatility. Fluctuations in currency exchange rates further compound this volatility when the commodity prices, which are generally set in U.S. dollars, are stated in Canadian dollars.

 

 
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Our financial performance also depends on revenues from the sale of commodities which differ in quality and location from underlying commodity prices quoted on financial exchanges. Of particular importance are the price differentials between our light/medium oil, heavy oil (in particular the light/heavy differential) and bitumen and quoted market prices. Not only are these discounts influenced by regional supply and demand factors, they are also influenced by other factors such as transportation costs, capacity and interruptions; refining demand; the availability and cost of diluent used to blend and transport product; and the quality of the oil produced, all of which are beyond our control.

 

The financial performance of our refining operations is impacted by the relationship, or margin, between refined product prices and the prices of refinery feedstock. Margin volatility is impacted by numerous conditions including, but not limited to: fluctuations in the supply and demand for refined products; market competitiveness; crude oil costs and weather. Refining margins are subject to seasonal factors as production changes to match seasonal demand. Sales volumes, prices, inventory levels and inventory values will fluctuate accordingly. Future refining margins are uncertain and decreases in refining margins may have a negative impact on our business.

 

Fluctuations in the price of commodities, associated price differentials and refining margins may impact the value of our assets, our ability to maintain our business and to fund growth projects including, but not limited to, the continued development of our oil sands properties. Prolonged periods of commodity price volatility may also negatively impact our ability to meet guidance targets and the amount of our borrowings. Any substantial or extended decline in these commodity prices may result in a delay or cancellation of existing or future drilling, development or construction programs, curtailment in production, unutilized long-term transportation commitments and/or low utilization levels at our refineries.

 

We conduct an annual assessment of the carrying value of our assets in accordance with International Financial Reporting Standards. If crude oil and natural gas prices decline significantly and remain at low levels for an extended period of time, the carrying value of our assets may be subject to impairment.

 

***Development and Operating Costs***

 

Our financial performance is significantly affected by the cost of developing and operating our assets. Development and operating costs are affected by a number of factors including, but not limited to: inflationary price pressure; scheduling delays; failure to maintain quality construction and manufacturing standards; project delays; and supply chain disruptions, including access to skilled labour, leading to scheduling delays or repetition of work. Electricity, water, diluent, chemicals, supplies, reclamation, abandonment and labour costs are examples of operating costs that are susceptible to significant fluctuation.

 

***Hedging Activities***

*** ***

Our Market Risk Mitigation Policy, which has been approved by the Board, allows management to use derivative instruments to hedge the price risk of our crude oil and natural gas production, as well as refining margins. We also use derivative instruments in various operational markets to optimize our supply or production chain. We may utilize derivative financial instruments and physical delivery contracts, when considered appropriate, to help mitigate the potential impact of changes in interest rates and foreign exchange rates. Management may elect to use derivative instruments to mitigate our net exposure to Canadian dollar operating costs.

 

The use of such hedging activities exposes us to risks which may cause significant loss. These risks include, but are not limited to, changes in the price of the hedge instrument that are not reflected in the price of the products we sell; failure by a counterparty to perform an obligation; human error or deficiency in our systems or controls or the unenforceability of our contracts.

 

 
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Additionally, the consequences of hedging to protect against downside price risk may limit the benefit to us of commodity price increases or changes in interest rates and foreign exchange rates. We may also suffer financial loss due to hedging arrangements if we are unable to produce oil, natural gas or refined products to fulfill our delivery obligations.

 

***Credit, Liquidity and Availability of Future Financing***

*** ***

The future development of our business may be dependant on our ability to obtain additional capital including, but not limited to, debt and equity financing. Unpredictable financial markets and the associated credit impacts may impede our ability to secure and maintain cost effective financing and limit our ability to achieve timely access to capital markets on acceptable terms and conditions. An inability to access capital could affect our ability to make future capital expenditures and to fund our capital and operating commitments. Our ability to obtain additional capital is dependent on, among other things, interest in investments in the energy industry in general and interest in our securities in particular.

 

In September 2009, we issued US$3.5 billion in debt securities, all of which were subsequently exchanged for debt securities registered under the Securities Act of 1933, as amended, with the same terms and conditions as the original issued securities. On September 15, 2014, the first tranche of this debt matures in the amount of US$800 million. We have a $3.0 billion committed credit facility, with a maturity of November 30, 2015, of which the entire amount was available at December 31, 2011 to meet operating and capital requirements.****Despite the current state of our liquidity, an inability to access the credit markets, a sustained downturn in the prices of crude oil or refined products or the continued downturn in the price of natural gas or significant unanticipated expenses related to development and maintenance of our existing properties could significantly impact our liquidity, may impact our credit ratings and may negatively impact our ability to access existing and/or additional sources of capital. We are also required to comply with financial and operating covenants under our credit facilities and indenture governing our debt securities. We routinely review the covenants and may make changes to our development plans or dividend policy to ensure compliance. In the event that we do not comply with such covenants, our access to capital could be restricted or repayment could be required. If external sources of capital become limited or unavailable, or if repayment is required before maturity, our ability to make capital investments, continue our business plan and maintain existing properties may be impaired.

 

***Foreign Exchange Rates***

** **

Fluctuations in foreign exchange rates may affect our results as global prices for crude oil, natural gas and refined products are set in U.S. dollars, while many of our operating and capital costs as well as our Consolidated Financial Statements are denominated in Canadian dollars. An increase in the value of the Canadian dollar relative to the U.S. dollar will decrease the revenues received from the sale of our oil, natural gas and refined products. Fluctuations in the exchange rate between the U.S. dollar and the Canadian dollar creates uncertainty and impacts our capital expenditures and expenses.

 

***Interest Rates***

*** ***

We are exposed to fluctuations in interest rates as a result of the use of floating rate credit facilities and commercial paper. An increase in interest rates could increase our net interest expense and negatively impact our financial results. Additionally, we are exposed to changes in interest rates upon the refinancing of maturing long-term debt at prevailing interest rates.

 

***Royalty Regimes***

*** ***

Our cash flow may be directly affected by changes to royalty regimes.****The Governments of Alberta and Saskatchewan receive royalties on the production of hydrocarbons from lands in which they respectively own the mineral rights. The royalty rate that we are charged on our oil sands production is determined based on the Canadian dollar equivalent price of WTI, and therefore increases in WTI or decreases in the CDN$/US$ exchange rate could significantly increase our royalties, which may have a material adverse effect on our business, financial conditions, results of operations and cash flow. There is also a mineral tax in each province levied on hydrocarbon production from lands which the Crown does not own the mineral rights. Recent changes to the Alberta royalty and mineral tax regime, as well as the potential for changes in the royalty and mineral tax regimes applicable in other provinces, have created uncertainty relating to the ability of producers to accurately estimate future Crown burdens. An increase in the royalty or mineral tax rates applicable in one or both provinces would reduce our earnings and could make, in the respective province, future capital expenditures or existing operations uneconomic. A material increase in royalties or mineral taxes may reduce the value of our associated assets.

 

 
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***Tax Laws***

*** ***

Income tax laws, other laws or government incentive programs may in the future be changed or interpreted in a manner that adversely affects us and our shareholders. Tax authorities having jurisdiction over us or our shareholders may disagree with the manner in which we calculate our tax liabilities or could change their administrative practices to our detriment or the detriment of our shareholders.

 

***Ability to Pay Dividends***

*** ***

The payment of dividends is at the discretion of our Board. All dividends will be reviewed by the Board and may be increased, reduced or suspended from time to time. Our ability to pay dividends and the actual amount of such dividends is dependent upon, among other things, our financial performance, our debt covenants and obligations, our ability to refinance our debt obligations on similar terms and at similar interest rates, our working capital requirements, our future tax obligations, our future capital requirements and the risk factors set forth in this AIF.

 

**Operational Risks**

** **

Operational risks are those risks that affect our ability to continue operations in the ordinary course of business. In general, our operations are subject to general risks affecting the oil and gas industry. Our operational risks include, but are not limited to: uncertainty of reserves and resources estimates; operational and safety considerations; pipeline transportation and interruptions; phased growth execution; partner risks; competition; technology; third-party claims; land claims; key personnel; and information systems.

 

***Uncertainty of Reserves and Future Net Revenue Estimates***

*** ***

The reserves estimates included in this AIF are estimates only. There are numerous uncertainties inherent in estimating quantities of reserves, including many factors beyond our control. In general, estimates of economically recoverable crude oil and natural gas reserves and the future net cash flows derived therefrom are based upon a number of variable factors and assumptions, including but not limited to: product prices; future operating and capital costs; historical production from the properties and the assumed effects of regulation by governmental agencies, including with respect to royalty payments and taxes; initial production rates; production decline rates; and the availability, proximity and capacity of oil and gas gathering systems, pipelines and processing facilities, all of which may vary considerably from actual results.

 

All such estimates are to some degree uncertain and classifications of reserves are only attempts to define the degree of uncertainty involved. For those reasons, estimates of the economically recoverable crude oil and natural gas reserves attributable to any particular group of properties, classification of such reserves based on risk of recovery and estimates of future net revenues expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. Our actual production, revenues, taxes and development and operating expenditures with respect to our reserves may vary from current estimates and such variances may be material.

 

Estimates with respect to reserves that may be developed and produced in the future are often based upon volumetric calculations and upon analogy to similar types of reserves, rather than upon actual production history. Subsequent evaluation of the same reserves based upon production history will result in variations, which may be material, in the estimated reserves.

 

If we fail to acquire, develop or find additional crude oil and natural gas reserves, our reserves and production will decline materially from their current levels and therefore our business, financial condition, results of operations and cash flows are highly dependent upon successfully producing current reserves and acquiring, discovering or developing additional reserves.

 

***Uncertainty of Contingent and Prospective Resource Estimates***

*** ***

The contingent resources and prospective resources results included in this AIF are estimates only. The same uncertainties inherent in estimating quantities of reserves apply to estimating quantities of contingent and prospective resources. In addition, there are contingencies that prevent resources from being classified as reserves. There is no certainty that it will be commercially viable to produce any portion of the contingent resources. Prospective resources are subject to similar contingencies and are also undiscovered, meaning that subsequent drilling may demonstrate actual results which may vary significantly from projected results. There is no certainty that any portion of the prospective resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the prospective resources. Actual results may vary significantly from these estimates and such variances could be material. For additional information on resources and their associated contingencies, see “Contingent and Prospective Resources” in this AIF.

 

 
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***Operational, Health and Safety Considerations***

*** ***

The operation of our properties is subject to hazards of recovering, transporting and processing hydrocarbons, including but not limited to: blowouts; fires; explosions; gaseous leaks; migration of harmful substances; oil spills; corrosion; and acts of vandalism and terrorism, any of which can interrupt operations, cause loss of or damage to equipment, loss of or injury to life and damage to the environment, property and informational technology systems and related data and control systems.

 

Our crude oil and natural gas operations are subject to all of the risks normally incidental to: (i) the storing, transporting, processing, refining and marketing of crude oil, natural gas and other related products; (ii) drilling and completion of crude oil and natural gas wells; and (iii) the operation and development of crude oil and natural gas properties, including, but not limited to: encountering unexpected formations or pressures; premature declines of reservoir pressure or productivity; blowouts; equipment failures and other accidents; sour gas releases; uncontrollable flows of crude oil; natural gas or well fluids; adverse weather conditions; pollution; and other environmental risks.

 

Producing and refining oil requires high levels of investment and involves particular risks and uncertainties. Our oil operations are susceptible to loss of production, slowdowns, shutdowns, or restrictions on our ability to produce higher value products due to the interdependence of our component systems. Delineation of the resources, the costs associated with production, including drilling wells for SAGD operations, and the costs associated with refining oil can entail significant capital outlays. The operating costs associated with oil production are largely fixed in the short-term and, as a result, operating costs per unit are largely dependent on levels of production.

 

Our refining and marketing business is subject to all of the risks inherent in the operation of refineries, terminals, pipelines and other transportation and distribution facilities including, but not limited to: loss of product; slowdowns due to equipment or transportation failures; disruptions; weather; fires, and explosions; unavailability of feedstock; and price and quality of feedstock.

 

We do not insure against all potential occurrences and disruptions****and it cannot be guaranteed that our insurance will be sufficient to cover any such occurrences or disruptions. Our operations could also be interrupted by natural disasters or other events beyond our control.

 

***Pipeline Transportation and Interruptions***

*** ***

Our production is transported through various pipelines and our refineries are reliant on various pipelines to receive feedstock. Disruptions in, or restricted availability of pipeline service, could adversely affect our crude oil and natural gas sales, refining operations and our cash flow. Interruptions or restrictions in the availability of these pipeline systems may limit the ability to deliver production volumes and could adversely impact commodity prices, sales volumes or the prices received for our products. These interruptions and restrictions may be caused by the inability of the pipeline to operate, or they can be related to capacity constraints as the supply of feedstock into the system exceeds the infrastructure capacity. There can be no certainty that investments in pipelines which would result in excess long-term take-away capacity will be made by applicable third party pipeline providers. There is also no certainty that short-term operational constraints on the pipeline system, arising from pipeline interruption and/or increased supply of crude oil, will not occur. In addition, planned or unplanned shutdowns or closures of our refinery customers may limit our ability to deliver product with negative implications on sales and cash from operating activities.

 

***Growth Execution***

*** ***

There are certain risks associated with the execution of both our upstream and refining projects. These risks include, but are not limited to: our ability to obtain the necessary environmental and regulatory approvals; risks relating to schedule, resources and costs, including the availability and cost of materials, equipment and qualified personnel; the impact of general economic, business and market conditions; the impact of weather conditions; the accuracy of project cost estimates; our ability to finance growth; our ability to source or complete strategic transactions; and the effect of changing government regulation and public expectations in relation to the impact of oil sands development on the environment. The commissioning and integration of new facilities within our existing asset base could cause delays in achieving targets and objectives.

 

 
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***Partner Risks***

*** ***

Some of our assets are not operated by us or are held in partnership with others. Therefore, our results of operations may be affected by the actions of third-party operators or partners.

 

Interests in certain of our upstream assets are held in a partnership with ConocoPhillips, an unrelated U.S. public company, and are operated by us. Our refining assets are held in a partnership with ConocoPhillips and operated by ConocoPhillips. The success of our refining operations is dependant on the ability of ConocoPhillips to successfully operate this business and maintain the refining assets. We rely on the judgment and operating expertise of ConocoPhillips in respect of the operation of such refining assets and we also rely on ConocoPhillips to provide us with information on the status of such refining assets and related results of operations.

 

ConocoPhillips, as an unrelated third party, may have objectives and interests that do not coincide with and may conflict with our interests. Major capital decisions affecting these upstream and refining assets require agreement between us and ConocoPhillips, while certain operational decisions may be made by the operator of the applicable assets. While Cenovus and ConocoPhillips generally seek consensus with respect to major decisions concerning the direction and operation of these upstream and refining assets, no assurance can be provided that the future demands or expectations of either party relating to such assets will be satisfactorily met or met in a timely manner or at all. Unmet demands or expectations by either party or demands and expectations which are not satisfactorily met may affect our participation in the operation of such assets, our ability to obtain or maintain necessary licenses or approvals or affect the timing of undertaking various activities. For additional information on the proposed split of ConocoPhillips into two separate companies, see “Additional Information”.

 

Other companies operate a portion of the assets in which we have interests. We have limited ability to exercise influence over operations of these assets or their associated costs. The success and timing of our activities on assets operated by others therefore will depend upon a number of factors that are outside of our control, including the timing and amount of capital expenditures, timing and amount of operating and maintenance expenditures, the operator’s expertise and financial resources, approval of other participants, selection of technology and risk management practices.

 

***Competition***

*** ***

The Canadian and international petroleum industry is highly competitive in all aspects, including the exploration for, and the development of, new and existing sources of supply, the acquisition of crude oil and natural gas interests and the distribution and marketing of petroleum products. We compete with other producers and refiners, some of which may have lower operating costs and greater resources than we do. Competing producers may develop and implement recovery techniques and technologies which are superior to those we employ. The petroleum industry also competes with other industries in supplying energy, fuel and related products to consumers.

 

Several companies have announced plans to enter the oil sands business, to begin production or to expand existing operations. Expansion of existing operations and development of new projects could materially increase the supply of crude oil in the marketplace and increase our input costs for skilled labour and materials.

 

***Technology***

*** ***

Current SAGD technologies for the recovery of bitumen are energy intensive, requiring significant consumption of natural gas and other fuels in the production of steam that is used in the recovery process. The amount of steam required in the production process varies and therefore impacts costs. The performance of the reservoir can also affect the timing and levels of production using this technology. A large increase in recovery costs could cause certain projects that rely on SAGD technology to become uneconomical, which could have a negative effect on our business, financial condition, results of operations and cash flow. There are risks associated with growth and other capital projects that rely largely or partly on new technologies and the incorporation of such technologies into new or existing operations. The success of projects incorporating new technologies cannot be assured.

 

 
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***Third-Party Claims***

*** ***

From time to time, we may be the subject of litigation arising out of our operations. Claims under such litigation may be material or may be indeterminate. The outcome of such litigation may materially impact our financial condition or results of operations. We may be required to incur significant expenses or devote significant resources in defence against any such litigation.

 

***Land Claims***

*** ***

In Western Canada, aboriginal groups have historically filed claims in respect of their aboriginal rights and treaty rights against the Governments of Canada and Alberta, and other government bodies. No certainty exists that any lands currently unaffected by claims brought by aboriginal groups will remain unaffected by future claims.

 

***Personnel***

*** ***

Our success is dependent upon our management and the quality of our personnel. Failure to retain current personnel or to attract and retain new personnel with the necessary skills could have a material adverse effect on our growth and profitability.

** **

***Information Systems***

*** ***

We depend on a variety of information systems to operate effectively. A failure of certain business critical information systems could result in operational difficulties, damage or loss of data, productivity losses or result in unauthorized knowledge and use of information.

 

**Regulatory Risks**

** **

Our industry is generally subject to regulation and intervention under federal, provincial, state and municipal legislation in Canada and the U.S. in matters such as land tenure; permitting of production projects; royalties; taxes (including income taxes); government fees; production rates; environmental protection controls; the reduction of GHG and other emissions; the export of crude oil; natural gas and other products; the awarding or acquisition of exploration and production, oil sands or other interests; the imposition of specific drilling obligations; control over the development and abandonment of fields (including restrictions on production); and possibly expropriation or cancellation of contract rights.

 

***Regulatory Approvals***

*** ***

All of our operations are subject to regulation and intervention by governments that can affect or prohibit the drilling, completion and tie-in of wells, production, the construction or expansion of facilities and refineries and the operation and abandonment of fields. Contract rights can be cancelled or expropriated in certain circumstances. Changes to government regulation could impact our existing and planned projects.

 

Our operations require us to obtain approvals from various regulatory authorities and there are no guarantees that we will be able to obtain all necessary licenses, permits and other approvals that may be required to carry out certain exploration and development activities on our properties. In addition, obtaining certain approvals from regulatory authorities can involve, among other things, stakeholder and aboriginal consultation, environmental impact assessments and public hearings. Regulatory approvals obtained may be subject to the satisfaction of certain conditions, including, but not limited to: security deposit obligations; regulatory oversight of projects by third parties; mitigating or avoiding project impacts; habitat assessments; and other commitments or obligations. Failure to obtain applicable regulatory approvals or satisfy any of the conditions thereto on a timely basis on satisfactory terms could result in delays, abandonment or restructuring of projects and increased costs.

 

***Environmental Regulations***

*** ***

All phases of the crude oil, natural gas and refining operations are subject to environmental regulation pursuant to a variety of Canadian, U.S. and other federal, provincial, territorial, state and municipal laws and regulations (collectively, “environmental regulations”). Environmental regulations require that wells, facility sites, refineries and other properties associated with our operations be constructed, operated, maintained, abandoned and reclaimed to the satisfaction of applicable regulatory authorities. In addition, certain types of operations, including exploration and development projects and changes to certain existing projects, may require the submission and approval of environmental impact assessments or permit applications. 

 

 
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Environmental legislation imposes, among other things, restrictions, liabilities and obligations in connection with the generation, handling, use, storage, transportation, treatment and disposal of hazardous substances and waste and in connection with spills, releases and emissions of various substances to the environment. It also imposes restrictions, liabilities and obligations in connection with the management of fresh or potable water sources that are being used, or whose use is contemplated, in connection with oil and gas operations. Compliance with environmental regulations can require significant expenditures, including expenditures for clean up costs and damages arising out of contaminated properties and failure to comply with environmental regulations may result in the imposition of fines and penalties. Although it is not expected that the costs of complying with environmental legislation will have a material adverse effect on our financial condition or results of operations, no assurance can be made that the costs of complying with environmental regulations in the future will not have such an effect. The implementation of new regulations or the modification of existing regulations affecting the crude oil and natural gas industry generally could reduce demand for crude oil and natural gas and increase our costs.

 

***Climate Change Regulations***

*** ***

The Canadian federal government and various provincial and United States federal and state governments have announced intentions to regulate GHG emissions and other air pollutants. These regulations are in various phases of review, discussion or implementation in the U.S. and Canada. Uncertainties exist relating to the timing and effects of these proposed regulations. Additionally, lack of certainty regarding how any future federal legislation will harmonize with provincial or state regulations makes it difficult to accurately determine the cost estimate of climate change legislation compliance with certainty, including the effects of compliance with such initiatives on our suppliers and service providers.

 

Adverse impacts to our business if comprehensive GHG legislation is enacted in any jurisdiction in which we operate or conduct business, may include, but are not limited to: increased compliance costs; permitting delays and/or substantial costs to generate or purchase emission credits or allowances adding costs to the products we produce; and reduced demand for crude oil and certain refined products. Emission allowances or offset credits may not be available for acquisition by our projects or may not be available on an economic basis. Required emission reductions may not be technically or economically feasible to implement, in whole or in part, and failure to meet such emission reduction requirements or other compliance mechanisms may have a material adverse effect on our business by resulting in, among other things, fines, permitting delays, penalties and the suspension of operations. Consequently, no assurances can be given that the effect of future federal climate change regulations will not be significant to us.

 

Beyond existing legal requirements, the extent and magnitude of any adverse impacts of any of these additional programs cannot be reliably or accurately estimated at this time because specific legislative and regulatory requirements have not been finalized and uncertainty exists with respect to the additional measures being considered and the time frames for compliance.

 

***Carbon Fuel Standards***

*** ***

Existing and proposed environmental legislation in certain U.S. states and Canadian provinces regulating carbon fuel standards could result in increased costs and/or reduced revenue. The potential regulation may negatively affect the marketing of our bitumen, crude oil or refined products, or require us to purchase emissions credits in order to affect sales in such jurisdictions.

 

Beyond existing legal requirements, the extent and magnitude of any adverse impacts of such additional programs cannot be reliably or accurately estimated at this time because specific legislative and regulatory requirements have not been finalized and uncertainty exists with respect to the additional measures being considered and the time frames for compliance.

 

***Alberta’s Land-Use Framework***

*** ***

Alberta’s Land-Use Framework is to be implemented under the Alberta Land Stewardship Act (“ALSA”) which sets out the Government of Alberta’s approach to managing Alberta’s land and natural resources to achieve long-term economic, environmental and social goals. ALSA contemplates the amendment or extinguishment of previously issued consents such as regulatory permits, licenses, approvals and authorizations in order to achieve or maintain an objective or policy resulting from the implementation of a regional plan.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 | 53 |
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On April 5, 2011, the Government of Alberta released their draft of the Lower Athabasca Regional Plan (“LARP”). The LARP identifies management frameworks for air, land and water that will incorporate cumulative limits and triggers, as well as identifying areas related to conservation, tourism and recreation. An updated draft of the LARP was released on August 29, 2011 after public consultation and stakeholder feedback was obtained. No substantial changes were made to the LARP from these consultations and the LARP is now awaiting provincial cabinet approval prior to being implemented.

*** ***

If the land use designations for conservation, tourism and recreation areas are approved in their current form, some of our oil sands tenures may be cancelled, subject to compensation negotiations with the Government of Alberta. Access to some parts of our current resource properties may be restricted, limiting the pace of development due to environmental limits and thresholds that may adversely affect the market price of our securities and the payment of dividends to our shareholders. The areas identified have no direct impact on our 2011 strategic plan, on our current operations at Foster Creek and Christina Lake, or any of our filed applications.

 

***Alberta’s Regulatory Enhancement Project***

*** ***

As part of the Government of Alberta’s competitiveness review, a comprehensive review of Alberta’s regulatory system called the Regulatory Enhancement Project (the “Project”) was initiated in March 2010. The Project's goal is to create an effective regulatory system that will contribute to Alberta’s overall competitiveness while protecting the environment, ensuring public safety and conservation of resources. The Project involved engagement with a broad range of stakeholders, including industry, and led to a recommendation to the Minister of Energy, in the fourth quarter of 2010, for adoption of a coordinated policy framework and an integrated regulatory system for the upstream oil and gas sector. The Government of Alberta has accepted the Project team's recommendations and is proceeding to implement those recommendations.

 

***Alberta Environment Water******Licences***

*** ***

We currently rely on fresh water, which is obtained under licenses from Alberta Environment to provide domestic and utility water at our SAGD facilities and for our bitumen delineation programs. There can be no assurance that the licenses to withdraw water will not be rescinded or that additional conditions will not be added to these licenses. There can be no assurance that we will not have to pay a fee for the use of water in the future or that any such fees will be reasonable. In addition, the expansion of our projects rely on securing licenses for additional water withdrawal, and there can be no assurance that these licenses will be granted on terms favourable to us, or at all, or that****such additional water will in fact be available to divert under such licenses.

 

***Public Perception and Influence on Regulatory Regime***

*** ***

Development of the Alberta oil sands has received considerable attention in recent public commentary on the subjects of environmental impact, climate change and GHG emissions. Despite the fact that much of the focus is on bitumen mining operations and not in-situ production, public concerns about GHG emissions and water and land use practices in oil sands developments may, directly or indirectly, impair the profitability of our current oil sands projects, and the viability of future oil sands projects by creating significant regulatory uncertainty leading to uncertain economic modeling of current and future projects and delays relating to the sanctioning of future projects.

 

Negative consequences which could arise as a result of changes to the current regulatory environment include, but are not limited to, extraordinary environmental and emissions regulation of current and future projects by governmental authorities, which could result in changes to facility design and operating requirements, thereby potentially increasing the cost of construction, operation and abandonment. In addition, legislation or policies that limit the purchase of crude oil or bitumen produced from the oil sands may be adopted in domestic and/or foreign jurisdictions, which, in turn, may limit the world market for this crude oil and reduce its price.

 

**Other Risk Factors**

** **

***Arrangement Related Risk***

*** ***

Pursuant to the separation and transition agreement (“Separation Agreement”) dated November 30, 2009 involving, among others, Encana, 7050372 Canada Inc. and Subco, Encana and Cenovus have each agreed to cooperate fully with each other and our respective counsels in the investigation, prosecution, defense and resolution of certain litigation matters, including, without limitation, certain judicial actions relating to coal bed methane involving Encana (collectively, the “Joint Litigation”). The possible impacts and effects of such agreement are uncertain. Our obligation to cooperate fully with Encana and its counsel in respect of the Joint Litigation and the limitation this may place on the position that Cenovus may otherwise wish to take with respect to these matters may have an adverse effect on Cenovus. The outcome of any of the Joint Litigation matters cannot be predicted and may materially impact our financial condition or results of operations. In addition, the existence of such agreement and our obligations thereunder may have an effect on the manner in which we determine to conduct our business or operations until such time that all of the Joint Litigation is resolved.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 | 54 |
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We have certain post-Arrangement indemnification and other obligations under each of the arrangement agreement relating to the Arrangement (the “Arrangement Agreement”) and the Separation Agreement. Encana and Cenovus have agreed to indemnify each other for certain liabilities and obligations associated with, among other things, in the case of Encana’s indemnity, the business and assets retained by Encana, and in the case of our indemnity, the Cenovus business and assets. At the present time, we cannot determine whether we will have to indemnify Encana for any substantial obligations under the terms of the Arrangement. We also cannot assure that if Encana has to indemnify Cenovus and our affiliates for any substantial obligations, Encana will be able to satisfy such obligations.

 

The Arrangement Agreement contains a number of representations, warranties and covenants, including agreement by each of Cenovus and Encana to indemnify and hold harmless each other against any loss suffered or incurred resulting from a breach of certain tax-related covenants. One of these covenants was that each party would not take any action, omit to take any action or enter into any transaction that could adversely impact the advance income tax rulings and opinions received from the Canada Revenue Agency, and the private letter ruling received from the U.S. Internal Revenue Service, all with respect to income tax consequences of certain aspects of the Arrangement and certain other transactions. With respect to Canadian income taxation, there are a variety of transactions that the parties were or are prohibited from undertaking prior to and after the implementation of the Arrangement. One of these is that no party is permitted to dispose of or exchange property having a fair market value greater than 10 percent of the fair market value of its property, net of liabilities, or undergo an acquisition of control where such disposition or control acquisition is for Canadian tax purposes part of the “series of transactions or events” that includes the Arrangement, except in limited circumstances.

 

A discussion of additional risks which may impact our business, prospects, financial condition, results of operation and cash flows, and in some cases our reputation, can be found in our Management’s Discussion and Analysis for the year ended December 31, 2011, available at www.sedar.com, www.sec.gov and www.cenovus.com.

 

 

**LEGAL PROCEEDINGS AND REGULATORY ACTIONS**

** **

There are no legal proceedings to which we are or were a party, or that any of our property is or was the subject of, which is or was, or can be reasonably considered to be, material to us or any of our properties and we are not aware of any such legal proceedings that are contemplated.

 

There have not been any penalties or sanctions imposed against us by a court relating to provincial and territorial securities legislation or by a securities regulatory authority, nor have there been any other penalties or sanctions imposed by a court or regulatory body against us that would likely be considered important to a reasonable investor in making an investment decision, and we have not entered into any settlement agreements before a court relating to provincial and territorial securities legislation or with a securities regulatory authority.

 

 

**INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS**

** **

None of our directors or executive officers or any person or company that beneficially owns, or controls or directs, directly or indirectly, more than 10 percent of any class or series of our outstanding voting securities, of which there are none that we are aware, or any associate or affiliate of any of the foregoing persons, in each case, as at the date of this AIF, has or has had any material interest, direct or indirect, in any past transaction or any proposed transaction that has materially affected or is reasonably expected to materially affect us.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 | 55 |
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**MATERIAL CONTRACTS**

** **

During the year ended December 31, 2011, we have not entered into any contracts, nor are there any contracts still in effect, that are material to our business, other than contracts entered into in the ordinary course of business, and each of the Arrangement Agreement and the Separation Agreement, as described under “Risk Factors – Other Risk Factors – Arrangement Related Risk”.

 

 

**INTERESTS OF EXPERTS**

** **

Our independent auditors are PricewaterhouseCoopers LLP, Chartered Accountants, who have issued an independent auditors’ report dated February 15, 2012 in respect of our Consolidated Financial Statements which comprise the consolidated balance sheets as at December 31, 2011, December 31, 2010 and January 1, 2010, and the consolidated statements of earnings and comprehensive income, shareholders’ equity and cash flows for the years ended December 31, 2011 and 2010 and Cenovus’s internal control over financial reporting as at December 31, 2011. PricewaterhouseCoopers LLP has advised that they are independent with respect to Cenovus within the meaning of the Rules of Professional Conduct of the Institute of Chartered Accountants of Alberta and the rules of the SEC.

 

Information relating to reserves and resources in this AIF has been calculated by GLJ Petroleum Consultants Ltd. and McDaniel & Associates Consultants Ltd. as independent qualified reserves evaluators. The principals of each of GLJ Petroleum Consultants Ltd. and McDaniel & Associates Consultants Ltd., in each case, as a group own beneficially, directly or indirectly, less than one percent of any class of our securities.

 

 

**TRANSFER AGENTS AND REGISTRARS**

*** ***
| In Canada:                                                                             |   | In the United States:                                                          |   |
|----------------------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|--------|
| CIBC Mellon Trust   Company*

P.O. Box 700   Station B

Montreal, QC H3B   3K3

Canada |   | Computershare

480 Washington   Blvd.

Jersey City, New   Jersey 07310

U.S.A. |   |

 

Tel: 1-866-332-8898  Website: www.canstockta.com/investorServices.do

**On November 1, 2010, CIBC Mellon sold its issuer services business to Canadian Stock Transfer Company Inc. which is currently operating in the name of CIBC Mellon Trust Company during a transition period.*

 

 

**ADDITIONAL INFORMATION**

** **

Additional information relating to Cenovus is available on SEDAR at www.sedar.com, EDGAR at www.sec.gov******and on our website at www.cenovus.com. Information contained in or otherwise accessible through our website does not form a part of this AIF and is not incorporated by reference into this AIF. Additional financial information is contained in our audited Consolidated Financial Statements and MD&A for the year ended December 31, 2011. Additional disclosure, including directors’ and officers’ remuneration, principal holders of our securities, securities authorized for issuance under our equity-based compensation plans and our statement of governance practices, is included in our management proxy circular for our most recent annual meeting of shareholders.

 

The corporate governance rules of the NYSE are generally not applicable to non-U.S. companies; however we are required to disclose the significant differences between our corporate governance practices and the requirements applicable to U.S. companies listed on the NYSE. Except as summarized on our website at www.cenovus.com, we are in compliance with the NYSE corporate governance standards in all significant respects.

 

Certain historical information in this AIF has been provided by, or derived from information provided by, certain third parties, including Encana. Although we have no knowledge that would indicate that any such information is untrue or incomplete, we assume no responsibility for the completeness or accuracy of such information or the failure by third parties to disclose events which may have occurred or may affect the completeness or accuracy of such information, but which are unknown to us.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 | 56 |
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In July 2011, ConocoPhillips announced its intention to split its Refining and Marketing and its Exploration and Production businesses into two stand-alone companies. If the split is completed, we expect our partnership with ConocoPhillips to be amended to accommodate the separation and holding of the upstream assets and refining assets in two separate companies.

 

**Accounting Matters**

** **

Unless otherwise specified, all dollar amounts are expressed in Canadian dollars. All references to “dollars”, “C$” or to “$” are to Canadian dollars and all references to “US$” are to U.S. dollars. The information contained in this AIF is dated as at December 31, 2011 unless otherwise indicated. Numbers presented are rounded to the nearest whole number and tables may not add due to rounding.

 

Unless otherwise indicated, all financial information included in this AIF has been prepared in accordance with International Financial Reporting Standards (“IFRS”), which are also generally accepted accounting principles for publicly accountable enterprises in Canada. For all periods up to and including the year ended December 31, 2010, we prepared our Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles (“previous GAAP”). In accordance with the standard related to the first time adoption of IFRS (“IFRS 1”), our transition date to IFRS was January 1, 2010 and therefore the 2011 and 2010 information has been prepared in accordance with IFRS. The 2009 financial information contained within this AIF has been prepared following previous GAAP and, as allowed by IFRS 1, has not been re-presented in accordance with IFRS. Certain amounts in prior years have been reclassified to conform to the current year’s IFRS presentation format.

 

 

**ABBREVIATIONS****AND CONVERSIONS**

 
| Oil and Natural Gas Liquids | Natural Gas                                |
|-----------------------------|--------------------------------------------|
| bbl                         | Barrel                                     | Bcf | billion cubic feet |
| bbls/d                      | barrels per day                            | Mcf | thousand cubic feet |
| Mbbls/d                     | thousand barrels per day                   | MMcf | million cubic feet |
| MMbbls                      | million barrels                            | MMcf/d | million cubic feet per day |
| NGLs                        | natural gas liquids                        | MMBtu | million British thermal units |
| BOE                         | barrel of oil equivalent                   | CBM | Coalbed Methane |
| BOE/d                       | barrels of oil equivalent per day          |   |   |
| MBOE                        | thousand barrels of oil equivalent         |   |   |
| MBOE/d                      | thousand barrels of oil equivalent per day |   |   |
| WTI                         | West Texas Intermediate                    |   |   |
| TM                          | Trademark of Cenovus Energy Inc.           |   |   |

 

 

In this AIF, certain natural gas volumes have been converted to BOE or MBOE on the basis of six Mcf to one bbl. BOE and MBOE may be misleading, particularly if used in isolation. A conversion ratio of six Mcf to one bbl is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent value equivalency at the wellhead.

 

 
| Cenovus Energy Inc. Annual Information Form for the year   ended December 31, 2011 | 57 |
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**APPENDIX A**

 

**REPORT ON RESERVES DATA**

**BY INDEPENDENT QUALIFIED RESERVES EVALUATORS**

 

To the Board of Directors of Cenovus Energy Inc. (the “Corporation”):

 
| 1.     | We have evaluated the Corporation’s reserves data as at   December 31, 2011. The reserves data are estimates of proved reserves   and probable reserves and related future net revenue as at December 31,   2011, estimated using forecast prices and costs.                                                                                       |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                              |
| 2.     | The reserves data are the responsibility of the   Corporation’s management. Our responsibility is to express an opinion on the   reserves data based on our evaluation.                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                              |
|   | We carried out our evaluation in accordance with standards   set out in the Canadian Oil and Gas Evaluation Handbook (the “COGE Handbook”)   prepared jointly by the Society of Petroleum Evaluation Engineers (Calgary   Chapter) and the Canadian Institute of Mining, Metallurgy &   Petroleum (Petroleum Society).                         |
|   |                                                                                                                                                                                                                                                                                                                                                              |
| 3.     | Those standards require that we plan and perform an   evaluation to obtain reasonable assurance as to whether the reserves data are   free of material misstatement. An evaluation also includes assessing whether   the reserves data are in accordance with principles and definitions presented   in the COGE Handbook.                                        |
|   |                                                                                                                                                                                                                                                                                                                                                              |
| 4.     | The following table sets forth the estimated future net   revenue (before deduction of income taxes) attributed to proved plus probable   reserves, estimated using forecast prices and costs and calculated using a   discount rate of 10 percent, included in the reserves data of the Corporation   evaluated by us for the year ended December 31, 2011. |

 
| **Independent Qualified   Reserves Evaluator** | ** ** | **Description and   Preparation Date of   Evaluation Report**                                     | ** ** | **Location of   Reserves** | ** ** | **Net Present Value   of Future Net   Revenue   (before income   taxes, 10%    discount rate)   $ millions** |
|-----------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                |       |                                                                                                                  |       |                            |       |                                                                                                                                                      |
| McDaniel & Associates   Consultants Ltd.   |       | Cenovus   Energy Inc.   Evaluation of a Portion of the Canadian Oil & Gas Reserves 

January 12,   2012 |       | Canada                          |       | 26,316                                                                                                                                                    |
|                                                |       |                                                                                                                  |       |                            |       |                                                                                                                                                      |
| GLJ Petroleum Consultants Ltd.                      |       | Cenovus   Energy Inc.   Corporate Evaluation 

January 9,   2012                                                 |       | Canada                          |       | 2,658                                                                                                                                                     |
|                                                |       |                                                                                                                  |       |                            |       |                                                                                                                                                      |
|                                                |       |                                                                                                                  |       |                            |       | 28,974                                                                                                                                                    |

 
| 5.     | In our   opinion, the reserves data respectively evaluated by us have, in all material   respects, been determined and are in accordance with the COGE Handbook,   consistently applied. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                     |
| 6.     | We have no   responsibility to update our reports referred to in paragraph 4 for events   and circumstances occurring after their respective preparation dates.                          |
|   |                                                                                                                                                                                     |
| 7.     | Because the   reserves data are based on judgments regarding future events, actual results   will vary and the variations may be material.                                               |

 

Executed as to our report referred to above:

 

 

 
|   | /s/ P.A. Welsh                                    |   | /s/ Keith Braaten                |
|--------|---------------------------------------------------|--------|----------------------------------|
|   | McDaniel &   Associates Consultants Ltd. |   | GLJ   Petroleum Consultants Ltd. |
|   | Calgary,   Alberta, Canada                        |   | Calgary,   Alberta, Canada       |

 

February 13, 2012

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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**APPENDIX B**

 

**REPORT OF MANAGEMENT AND DIRECTORS**

**ON RESERVES DATA AND OTHER INFORMATION**

 

Management and directors of Cenovus Energy Inc. (the “Corporation”) are responsible for the preparation and disclosure of information with respect to the Corporation’s oil and gas activities in accordance with securities regulatory requirements. This information includes reserves data which are estimates of proved reserves and probable reserves and related future net revenue as at December 31, 2011, estimated using forecast prices and costs.

 

Independent qualified reserves evaluators have evaluated the Corporation’s reserves data. A report from the independent qualified reserves evaluators will be filed with securities regulatory authorities concurrently with this report.

 

The Reserves Committee of the Board of Directors of the Corporation has:

 

(a)                          reviewed the Corporation’s procedures for providing information to the independent qualified reserves evaluators;

 

(b)                          met with the independent qualified reserves evaluators to determine whether any restrictions affected the ability of the independent qualified reserves evaluators to report without reservation; and

 

(c)                          reviewed the reserves data with management and each of the independent qualified reserves evaluators.

 

The Board of Directors of the Corporation has reviewed the Corporation’s procedures for assembling and reporting other information associated with oil and gas activities and has reviewed that information with management. The Board of Directors has approved:

 

(a)                          the content and filing with securities regulatory authorities of the reserves data and other oil and gas activity information;

 

(b)                          the filing of the report of the independent qualified reserves evaluators on the reserves data; and

 

(c)                          the content and filing of this report.

 

Because the reserves data are based on judgments regarding future events, actual results will vary and the variations may be material.

 

 

 
|   | /s/ Brian C. Ferguson                          |   | /s/ Judy A. Fairburn                                           |
|--------|------------------------------------------------|--------|----------------------------------------------------------------|
|   | Brian C. Ferguson                              |   | Judy A. Fairburn                                               |
|   | President & Chief   Executive Officer |   | Executive Vice-President,   Environment and Strategic Planning |
|   |                                           |   |                                                           |
|   |                                           |   |                                                           |
|   | /s/ Michael A. Grandin                         |   | /s/ Wayne G. Thomson                                           |
|   | Michael A. Grandin                             |   | Wayne G. Thomson                                               |
|   | Director and Chair of the Board                |   | Director and Chair of the Reserves   Committee                 |

 

 

February 14, 2012

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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**APPENDIX C**

 

**AUDIT COMMITTEE MANDATE**

 

**I.****                                         ****PURPOSE**

 

The Audit Committee (the “Committee”) is a committee of the Board of Directors of Cenovus Energy Inc. (“Cenovus” or the “Corporation”) appointed to assist the Board in fulfilling its oversight responsibilities.

 

The Committee’s primary duties and responsibilities are to:

 
| · | Oversee and   monitor the effectiveness and integrity of the Corporation’s accounting and   financial reporting processes, financial statements and system of internal   controls regarding accounting and financial reporting compliance. |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                            |
| · | Oversee   audits of the Corporation’s financial statements.                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                            |
| · | Review and   evaluate the Corporation’s risk management framework and related processes   including the supporting guidelines and practice documents.                                                                                      |
|   |                                                                                                                                                                                                                                            |
| · | Review and   approve management’s identification of principal financial risks and monitor   the process to manage such risks.                                                                                                              |
|   |                                                                                                                                                                                                                                            |
| · | Oversee and   monitor the Corporation’s compliance with legal and regulatory requirements.                                                                                                                                                 |
|   |                                                                                                                                                                                                                                            |
| · | Oversee and   monitor the qualifications, independence and performance of the Corporation’s   external auditors and internal auditing group.                                                                                               |
|   |                                                                                                                                                                                                                                            |
| · | Provide an   avenue of communication among the external auditors, management, the internal   auditing group, and the Board of Directors.                                                                                                        |
|   |                                                                                                                                                                                                                                            |
| · | Report to   the Board of Directors regularly.                                                                                                                                                                                                   |

 

The Committee has the authority to conduct any review or investigation appropriate to fulfilling its responsibilities. The Committee shall have unrestricted access to personnel and information, and any resources necessary to carry out its responsibility. In this regard, the Committee may direct internal audit personnel to particular areas of examination.

 

**II.****                                      ****COMPOSITION AND MEETINGS**

 

**Composition**

 

The Committee shall consist of not less than three and not more than eight directors as determined by the Board, all of whom shall qualify as independent directors pursuant to National Instrument 52-110 Audit Committees (as implemented by the Canadian Securities Administrators (“CSA”) and as amended from time to time) (“NI 52-110”).

 

All members of the Committee shall be financially literate, as defined in NI 52-110, and at least one member shall have accounting or related financial managerial expertise. In particular, at least one member shall have, through (i) education and experience as a principal financial officer, principal accounting officer, controller, public accountant or auditor or experience in one or more positions that involve the performance of similar functions; (ii) experience actively supervising a principal financial officer, principal accounting officer, controller, public accountant, auditor or person performing similar functions; (iii) experience overseeing or assessing the performance of companies or public accountants with respect to the preparation, auditing or evaluation of financial statements; or (iv) other relevant experience:

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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| · | An   understanding of accounting principles and financial statements;                                                                                                                                                                                                                                                                                                                                              |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| · | The ability   to assess the general application of such principles in connection with the   accounting for estimates, accruals and reserves;                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| · | Experience   preparing, auditing, analyzing or evaluating financial statements that   present a breadth and level of complexity of accounting issues that are   generally comparable to the breadth and complexity of issues that can   reasonably be expected to be raised by the Corporation’s financial   statements, or experience actively supervising one or more persons engaged in   such activities; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| · | An understanding of internal   controls and procedures for financial reporting; and                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                               |
| · | An understanding of audit committee   functions.                                                                                                                                                                                                                                                                                                                                                                   |

 

Committee members may not, other than in their respective capacities as members of the Committee, the Board or any other committee of the Board, accept directly or indirectly any consulting, advisory or other compensatory fee from the Corporation or any subsidiary of the Corporation, or be an “affiliated person” (as such term is defined in the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules, if any, adopted by the U.S. Securities and Exchange Commission (“SEC”) thereunder) of the Corporation or any subsidiary of the Corporation. For greater certainty, directors’ fees and fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the Corporation that are not contingent on continued service should be the only compensation an Audit Committee member receives from the Corporation.

 

At least one member shall have experience in the oil and gas industry.

 

Committee members shall not simultaneously serve on the audit committees of more than two other public companies, unless the Board first determines that such simultaneous service will not impair the ability of the relevant members to effectively serve on the Committee, and required public disclosure is made.

 

The non-executive Board Chair shall be a non-voting member of the Committee. See “Quorum” for further details.

 

**Appointment of Committee Members**

 

Committee members shall be appointed by the Board, effective after the election of directors at the annual meeting of shareholders, provided that any member may be removed or replaced at any time by the Board and shall, in any event, cease to be a member of the Committee upon ceasing to be a member of the Board.

 

**Vacancies**

 

Where a vacancy occurs at any time in the membership of the Committee, it may be filled by the Board.

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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**Chair**

 

The Nominating and Corporate Governance Committee will recommend for approval to the Board an unrelated Director to act as Chair of the Committee. The Board shall appoint the Chair of the Committee.

 

If unavailable or unable to attend a meeting of the Committee, the Chair shall ask another member to chair the meeting, failing which a member of the Committee present at the meeting shall be chosen to preside over the meeting by a majority of the members of the Committee present at such meeting.

 

The Chair presiding at any meeting of the Committee shall not have a casting vote.

 

The items pertaining to the Chair in this section should be read in conjunction with the Committee Chair section of the Chair of the Board of Directors and Committee Chair General Guidelines.

 

**Secretary**

 

The Committee shall appoint a Secretary who need not be a member of the Committee. The Secretary shall keep minutes of the meetings of the Committee.

 

**Meetings**

 

The Committee shall meet at least quarterly. The Chair of the Committee may call additional meetings as required. In addition, a meeting may be called by the non-executive Board Chair, the President & Chief Executive Officer, or any member of the Committee or by the external auditors.

 

Committee meetings may, by agreement of the Chair of the Committee, be held in person, by video conference, by means of telephone or by a combination of any of the foregoing.

 

**Notice of Meeting**

 

Notice of the time and place of each Committee meeting may be given orally, or in writing, or by facsimile, or by electronic means to each member of the Committee at least 24 hours prior to the time fixed for such meeting. Notice of each meeting shall also be given to the external auditors of the Corporation.

 

A member and the external auditors may, in any manner, waive notice of the Committee meeting. Attendance of a member at a meeting shall constitute waiver of notice of the meeting except where a member attends a meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting was not lawfully called.

 

**Quorum**

 

A majority of Committee members, present in person, by video conference, by telephone, or by a combination thereof, shall constitute a quorum. In addition, if an ex officio, non-voting member’s presence is required to attain a quorum of the Committee, then the said member shall be allowed to cast a vote at the meeting.

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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Table of Contents

 

**Attendance at Meetings**

 

The President & Chief Executive Officer, the Executive Vice-President & Chief Financial Officer, the Comptroller and the head of internal audit are expected to be available to attend the Committee’s meetings or portions thereof.

 

The Committee may, by specific invitation, have other resource persons in attendance.

 

The Committee shall have the right to determine who shall, and who shall not, be present at any time during a meeting of the Committee.

 

Directors, who are not members of the Committee, may attend Committee meetings, on an ad hoc basis, upon prior consultation and approval by the Committee Chair or by a majority of the members of the Committee.

 

**Minutes**

 

Minutes of each Committee meeting should be succinct yet comprehensive in describing substantive issues discussed by the Committee. However, they should clearly identify those items of responsibilities scheduled by the Committee for the meeting that have been discharged by the Committee and those items of responsibilities that are outstanding.

 

Minutes of Committee meetings shall be sent to all Committee members and to the external auditors. The full Board of Directors shall be kept informed of the Committee’s activities by a report following each Committee meeting.

 

**III.****                                   ****RESPONSIBILITIES**

 

**Review Procedures**

 

Review and update the Committee’s mandate annually, or sooner if the Committee deems it appropriate to do so. Review the summary of the Committee’s composition and responsibilities in the Corporation’s annual report, annual information form or other public disclosure documentation.

 

Review the summary of all approvals by the Committee of the provision of audit, audit-related, tax and other services by the external auditors for inclusion in the Corporation’s annual report and Annual Information Form filed with the CSA and the SEC.

 

**Annual Financial Statements**

 
| 1.     | Discuss and   review with management and the external auditors the Corporation’s and any   subsidiary with public securities’ annual audited financial statements and   related documents prior to their filing or distribution. Such review shall   include: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                    |
|   | (a)                                                                                                                                                                                                                                                                     | The annual   financial statements and related notes including significant issues regarding   accounting principles, practices and significant management estimates and   judgments, including any significant changes in the Corporation’s selection   or application of accounting principles, any major issues as to the adequacy   of the Corporation’s internal controls and any special steps adopted in light   of material control deficiencies. |
|   |                                                                                                                                                                                                                                                                    |   |
|   | (b)                                                                                                                                                                                                                                                                     | Management’s   Discussion and Analysis. |
|   |                                                                                                                                                                                                                                                                    |   |
|   | (c)                                                                                                                                                                                                                                                                     | The use of   off-balance sheet financing including management’s risk assessment and   adequacy of disclosure. |

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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|   | (d)                                                                                                                                                                                                                                                                                              | The   external auditors’ audit examination of the financial statements and their   report thereon.                                                                                                               |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |
|   | (e)                                                                                                                                                                                                                                                                                              | Any   significant changes required in the external auditors’ audit plan.                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |
|   | (f)                                                                                                                                                                                                                                                                                              | Any serious   difficulties or disputes with management encountered during the course of the   audit, including any restrictions on the scope of the external auditors’ work   or access to required information. |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |
|   | (g)                                                                                                                                                                                                                                                                                              | Other   matters related to the conduct of the audit, which are to be communicated to   the Committee under generally accepted auditing standards.                                                                     |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |
| 2.     | Review and formally recommend   approval to the Board of the Corporation’s:                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |
|   | (a)                                                                                                                                                                                                                                                                                              | Year-end   audited financial statements. Such review shall include discussions with   management and the external auditors as to:                                                                                     |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                             | (i)                                                                                                                                                                                                                   | The accounting policies of the Corporation and any   changes thereto. |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |   |
|   |                                                                                                                                                                                                                                                                                             | (ii)                                                                                                                                                                                                                  | The effect of significant judgments, accruals and   estimates. |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |   |
|   |                                                                                                                                                                                                                                                                                             | (iii)                                                                                                                                                                                                                 | The manner of presentation of significant accounting   items. |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |   |
|   |                                                                                                                                                                                                                                                                                             | (iv)                                                                                                                                                                                                                  | The consistency of disclosure. |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |
|   | (b)                                                                                                                                                                                                                                                                                              | Management’s   Discussion and Analysis.                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |
|   | (c)                                                                                                                                                                                                                                                                                              | Annual   Information Form as to financial information.                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |
|   | (d)                                                                                                                                                                                                                                                                                              | All   prospectuses and information circulars as to financial information.                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                  |
|   | The review   shall include a report from the external auditors about the quality of the   most critical accounting principles upon which the Corporation’s financial   status depends, and which involve the most complex, subjective or significant   judgmental decisions or assessments. |

 

**Quarterly Financial Statements**

 
| 3.     | Review with   management and the external auditors and either approve (such approval to   include the authorization for public release) or formally recommend for   approval to the Board the Corporation’s: |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                              |
|   | (a)                                                                                                                                                                                                               | Quarterly   unaudited financial statements and related documents, including Management’s   Discussion and Analysis. |
|   |                                                                                                                                                                                                              |   |
|   | (b)                                                                                                                                                                                                               | Any   significant changes to the Corporation’s accounting principles. |
|   |                                                                                                                                                                                                              |   |
|   | Review   quarterly unaudited financial statements prior to their distribution of any   subsidiary of the Corporation with public securities.                                                                      |

 

**Other Financial Filings and Public Documents**

 
| 4. | Review and   discuss with management financial information, including earnings press   releases, the use of “pro forma” or non-GAAP financial information and   earnings guidance, contained in any filings with the CSA or SEC or news   releases related thereto, and consider whether the information is consistent   with the information contained in the financial statements of the Corporation   or any subsidiary with public securities. |
|----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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Table of Contents

 

**Internal Control Environment**

 
| 5.     | Receive and   review from management, the external auditors and the internal auditors an   annual report on the Corporation’s control environment as it pertains to the   Corporation’s financial reporting process and controls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 6.     | Review and   discuss significant financial risks or exposures and assess the steps   management has taken to monitor, control, report and mitigate such risk to   the Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 7.     | Review in   consultation with the internal auditors and the external auditors the degree   of coordination in the audit plans of the internal auditors and the external   auditors and enquire as to the extent the planned scope can be relied upon to   detect weaknesses in internal controls, fraud, or other illegal acts. The   Committee will assess the coordination of audit effort to assure completeness   of coverage and the effective use of audit resources. Any significant   recommendations made by the auditors for the strengthening of internal   controls shall be reviewed and discussed with management.                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 8.     | Review with   the President & Chief Executive Officer, the Executive   Vice-President & Chief Financial Officer of the Corporation and the   external auditors: (i) all significant deficiencies and material   weaknesses in the design or operation of the Corporation’s internal controls   and procedures for financial reporting which could adversely affect the   Corporation’s ability to record, process, summarize and report financial   information required to be disclosed by the Corporation in the reports that   it files or submits under the Exchange Act or applicable Canadian federal and   provincial legislation and regulations within the required time periods, and   (ii) any fraud, whether or not material, that involves management of the   Corporation or other employees who have a significant role in the   Corporation’s internal controls and procedures for financial reporting. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 9.     | Review   significant findings prepared by the external auditors and the internal   auditing department together with management’s responses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

 

**Risk Oversight**

 
| 10. | Review and   evaluate the Corporation’s risk management framework and related processes   including the supporting guidelines and practice documents. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Other Review Items**

 
| 11.    | Review   policies and procedures with respect to officers’ and directors’ expense   accounts and perquisites, including their use of corporate assets, and   consider the results of any review of these areas by the internal auditor or   the external auditors.                                                                                                                   |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 12.    | Review all   related party transactions between the Corporation and any executive officers   or directors, including affiliations of any executive officers or directors.                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 13.    | Review with   the General Counsel, the head of internal audit and the external auditors the   results of their review of the Corporation’s monitoring compliance with each   of the Corporation’s published codes of business conduct and applicable legal   requirements.                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                           |
| 14.    | Review   legal and regulatory matters, including correspondence with and reports   received from regulators and government agencies, that may have a material impact   on the interim or annual financial statements and related corporate   compliance policies and programs. Members from the Legal and Tax groups   should be at the meeting in person to deliver their respective reports. |

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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| 15.    | Review   policies and practices with respect to off-balance sheet transactions and   trading and hedging activities, and consider the results of any review of   these areas by the internal auditors or the external auditors.                                                                                                                                  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 16.    | Ensure that   the Corporation’s presentation of reserves has been reviewed with the   Reserves Committee of the Board.                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 17.    | Review   management’s processes in place to prevent and detect fraud.                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 18.    | Review   (a) procedures for the receipt, retention and treatment of complaints   received by the Corporation, including confidential, anonymous submissions by   employees of the Corporation, regarding accounting, internal accounting   controls, or auditing matters and (b) a summary of any significant   investigations regarding such matters. |
|   |                                                                                                                                                                                                                                                                                                                                                             |
| 19.    | Meet on a   periodic basis separately with management.                                                                                                                                                                                                                                                                                                           |

 

**External Auditors**

 
| 20.    | Be directly   responsible, in the Committee’s capacity as a committee of the Board and   subject to the rights of shareholders and applicable law, for the   appointment, compensation, retention and oversight of the work of the   external auditors (including resolution of disagreements between management and   the external auditors regarding financial reporting) for the purpose of   preparing or issuing an audit report, or performing other audit, review or   attest services for the Corporation. The external auditors shall report   directly to the Committee. |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 21.    | Meet on a   regular basis with the external auditors (without management present) and   have the external auditors be available to attend Committee meetings or   portions thereof at the request of the Chair of the Committee or by a   majority of the members of the Committee.                                                                                                                                                                                                                                                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 22.    | Review and   discuss a report from the external auditors at least quarterly regarding:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | All   critical accounting policies and practices to be used; |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | All   alternative treatments within accounting principles for policies and practices   related to material items that have been discussed with management, including   the ramifications of the use of such alternative disclosures and treatments,   and the treatment preferred by the external auditors; and |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Other   material written communications between the external auditors and management,   such as any management letter or schedule of unadjusted differences. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 23.    | Obtain and   review a report from the external auditors at least annually regarding:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | The   external auditors’ internal quality-control procedures. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Any   material issues raised by the most recent internal quality-control review, or   peer review, of the external auditors, or by any inquiry or investigation by   governmental or professional authorities, within the preceding five years, respecting   one or more independent audits carried out by the external auditors, and any   steps taken to deal with those issues. |

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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|   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | To the   extent contemplated in the following paragraph, all relationships between the   external auditors and the Corporation.                                                                                                                                                                                                                |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                           |
| 24.    | Review and   discuss with the external auditors all relationships that the external   auditors and their affiliates have with the Corporation and its affiliates in   order to determine the external auditors’ independence, including, without   limitation, (i) receiving and reviewing, as part of the report described   in the preceding paragraph, a formal written statement from the external   auditors delineating all relationships that may reasonably be thought to bear   on the independence of the external auditors with respect to the Corporation   and its affiliates, (ii) discussing with the external auditors any   disclosed relationships or services that the external auditors believe may   affect the objectivity and independence of the external auditors, and   (iii) recommending that the Board take appropriate action in response to   the external auditors’ report to satisfy itself of the external auditors’   independence. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 25.    | Review and   evaluate:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                           |
|   | (a)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The   external auditors’ and the lead partner of the external auditors’ team’s   performance, and make a recommendation to the Board of Directors regarding   the reappointment of the external auditors at the annual meeting of the   Corporation’s shareholders or regarding the discharge of such external   auditors. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                           |
|   | (b)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The terms   of engagement of the external auditors together with their proposed fees.                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                           |
|   | (c)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | External   audit plans and results.                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                           |
|   | (d)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Any other   related audit engagement matters.                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                           |
|   | (e)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The   engagement of the external auditors to perform non-audit services, together   with the fees therefor, and the impact thereof, on the independence of the   external auditors.                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                           |
| 26.    | Upon   reviewing and discussing the information provided to the Committee in   accordance with paragraphs 22 through 25, evaluate the external auditors’   qualifications, performance and independence, including whether or not the external   auditors’ quality controls are adequate and the provision of permitted   non-audit services is compatible with maintaining auditor independence,   taking into account the opinions of management and the head of internal   audit. The Committee shall present to the Board its conclusions in this   respect.                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 27.    | Review the   rotation of partners on the audit engagement team in accordance with   applicable law. Consider whether, in order to assure continuing external   auditor independence, it is appropriate to adopt a policy of rotating the   external auditing firm on a regular basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 28.    | Set clear   hiring policies for the Corporation’s hiring of employees or former employees   of the external auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 29.    | Consider   with management and the external auditors the rationale for employing audit   firms other than the principal external auditors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| 30.    | Consider   and review with the external auditors, management and the head of internal   audit:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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|   | (a)    | Significant   findings during the year and management’s responses and follow-up thereto.                                                                                              |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                       |
|   | (b)    | Any   difficulties encountered in the course of their audits, including any   restrictions on the scope of their work or access to required information,   and management’s response. |
|   |   |                                                                                                                                                                                       |
|   | (c)    | Any   significant disagreements between the external auditors or internal auditors   and management.                                                                                       |
|   |   |                                                                                                                                                                                       |
|   | (d)    | Any changes   required in the planned scope of their audit plan.                                                                                                                           |
|   |   |                                                                                                                                                                                       |
|   | (e)    | The   resources, budget, reporting relationships, responsibilities and planned   activities of the internal auditors.                                                                      |
|   |   |                                                                                                                                                                                       |
|   | (f)    | The internal   audit department mandate.                                                                                                                                                   |
|   |   |                                                                                                                                                                                       |
|   | (g)    | Internal   audit’s compliance with the Institute of Internal Auditors’ standards.                                                                                                |

 

**Internal Audit Group and Independence**

 
| 31.    | Meet on a   periodic basis separately with the head of internal audit.                                                         |
|--------|--------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                           |
| 32.    | Review and   concur in the appointment, compensation, replacement, reassignment, or   dismissal of the head of internal audit. |
|   |                                                                                                                           |
| 33.    | Confirm and   assure, annually, the independence of the internal audit group and the   external auditors.                      |

 

**Approval of Audit and Non-Audit Services**

 
| 34.    | Review and,   where appropriate, approve the provision of all permitted non-audit services   (including the fees and terms thereof) in advance of the provision of those   services by the external auditors (subject to the de minimus exception for non-audit   services described in the Exchange Act or applicable CSA and SEC legislation   and regulations, which services are approved by the Committee prior to the   completion of the audit). |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 35.    | Review and,   where appropriate and permitted, approve the provision of all audit services   (including the fees and terms thereof) in advance of the provision of those   services by the external auditors.                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 36.    | If the   pre-approvals contemplated in paragraphs 34 and 35 are not obtained, approve,   where appropriate and permitted, the provision of all audit and non-audit   services promptly after the Committee or a member of the Committee to whom   authority is delegated becomes aware of the provision of those services.                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 37.    | Delegate,   if the Committee deems necessary or desirable, to subcommittees consisting of   one or more members of the Committee, the authority to grant the   pre-approvals and approvals described in paragraphs 34 through 36. The   decision of any such subcommittee to grant pre-approval shall be presented to   the full Committee at the next scheduled Committee meeting.                                                                     |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 38.    | Establish   policies and procedures for the pre-approvals described in paragraphs 34 and   35 so long as such policies and procedures are detailed as to the particular   service, the Committee is informed of each service and such policies and   procedures do not include delegation to management of the Committee’s   responsibilities under the Exchange Act or applicable CSA and SEC legislation   and regulations.                      |

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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Table of Contents

 

**Other Matters**

 
| 39.    | Review and   concur in the appointment, replacement, reassignment, or dismissal of the   Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                       |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 40.    | Upon a   majority vote of the Committee outside resources may be engaged where and if   deemed advisable.                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 41.    | Report   Committee actions to the Board of Directors with such recommendations as the   Committee may deem appropriate.                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 42.    | Conduct or   authorize investigations into any matters within the Committee’s scope of   responsibilities. The Committee shall be empowered to retain, obtain advice   or otherwise receive assistance from independent counsel, accountants, or   others to assist it in the conduct of any investigation as it deems necessary   and the carrying out of its duties.                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 43.    | Determine   the appropriate funding for payment by the Corporation (i) of   compensation to the external auditors for the purpose of preparing or issuing   an audit report or performing other audit, review or attest services for the   Corporation, (ii) of compensation to any advisors employed by the   Committee, and (iii) of ordinary administrative expenses of the   Committee that are necessary or appropriate in carrying out its duties. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 44.    | Obtain   assurance from the external auditors that no disclosure to the Committee is   required pursuant to the provisions of the Exchange Act regarding the   discovery of illegal acts by the external auditors.                                                                                                                                                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 45.    | Review and   reassess the adequacy of this Mandate annually and recommend any proposed   changes to the Board for approval.                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 46.    | Consider   for implementation any recommendations of the Nominating and Corporate   Governance Committee of the Board with respect to the Committee’s   effectiveness, structure, processes or mandate.                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 47.    | Perform   such other functions as required by law, the Corporation’s by-laws or the   Board of Directors.                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 48.    | Consider   any other matters referred to it by the Board of Directors.                                                                                                                                                                                                                                                                                                                                                                                                  |

 

Revised Effective:  February 14, 2012

 

 

Cenovus Energy Inc. Annual Information Form for the year ended December 31, 2011

 

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Management’s Discussion and Analysis

For the Year Ended December 31, 2011

 

 

*This Management’s Discussion and Analysis (“MD&A”) for Cenovus Energy Inc., dated February 15, 2012, should be read with our audited Consolidated Financial Statements and accompanying notes for the year ended December 31, 2011 (“Consolidated Financial Statements”). This MD&A contains forward-looking information about our current expectations, estimates and projections. For information on the risk factors that could cause actual results to differ materially and the assumptions underlying our forward-looking information, as well as definitions used in this MD&A, see the Advisory.*

 

*Management is responsible for preparing the MD&A, while the Audit Committee of the Cenovus Board of Directors (the “Board”) reviews the MD&A and recommends its approval by the Board.*

 

*This MD&A and the Consolidated Financial Statements and comparative information have been prepared in Canadian dollars, except where another currency has been indicated. Effective January 1, 2011, we adopted International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. For all periods up to and including the year ended December 31, 2010, we prepared our Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles (“previous GAAP”). In accordance with the standard related to the first time adoption of IFRS (“IFRS 1”), our transition date to IFRS was January 1, 2010 and therefore the 2011 and 2010 information has been prepared in accordance with IFRS. The 2009 financial information contained within this MD&A has been prepared following previous GAAP and, as allowed by IFRS 1, has not been re-presented in accordance with IFRS. Production volumes are presented on a before royalties basis. Certain amounts in prior years have been reclassified to conform to the current year’s IFRS presentation format.*

** **

** **

**WHERE TO FIND**:

 
| INTRODUCTION AND OVERVIEW OF CENOVUS ENERGY | 2  |
|---------------------------------------------|----|
| OVERVIEW OF 2011                            | 3  |
| FINANCIAL   INFORMATION                     | 7  |
| RESULTS   OF OPERATIONS                     | 14 |
| REPORTABLE   SEGMENTS                       | 16 |
| OIL SANDS                                   | 16 |
| CONVENTIONAL                                | 20 |
| REFINING AND MARKETING                      | 24 |
| CORPORATE   AND ELIMINATIONS                | 25 |
| QUARTERLY   INFORMATION                     | 28 |
| OIL AND GAS RESERVES AND RESOURCES          | 29 |
| LIQUIDITY AND CAPITAL RESOURCES             | 32 |
| RISK   MANAGEMENT                           | 35 |
| TRANSPARENCY AND CORPORATE RESPONSIBILITY   | 40 |
| ACCOUNTING POLICIES AND ESTIMATES           | 41 |
| OUTLOOK                                     | 45 |
| ADVISORY                                    | 46 |
| ABBREVIATIONS                               | 48 |

 

 

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**INTRODUCTION AND OVERVIEW OF CENOVUS ENERGY**

 

We are a Canadian oil company headquartered in Calgary, Alberta, with our shares trading on the Toronto and New York stock exchanges. On December 31, 2011, we had a market capitalization of approximately $26 billion. We are in the business of developing, producing and marketing crude oil, natural gas and natural gas liquids (“NGLs”) in Canada with refining operations in the United States. Our total 2011 average crude oil and NGLs production was in excess of 134,000 barrels per day and our average natural gas production was in excess of 650 MMcf per day. Our operations include oil sands projects in northern Alberta, including Foster Creek and Christina Lake. These two properties, which we operate and have a 50 percent ownership interest in, are located in the Athabasca Region and use steam-assisted gravity drainage (“SAGD”) to extract crude oil. Also located within the Athabasca Region is our wholly owned Pelican Lake property, where we have an enhanced oil recovery project using polymer flood technology, as well as our emerging Grand Rapids SAGD project. In southern Saskatchewan, we inject carbon dioxide to enhance oil recovery at our Weyburn operation and are also developing our Bakken and Lower Shaunavon tight oil plays. We also have established conventional crude oil and natural gas production in Alberta. In addition to our upstream assets, we have 50 percent ownership in two refineries located in Illinois and Texas, U.S., enabling us to partially integrate our operations from crude oil production through to refined products such as gasoline, diesel and jet fuel, to mitigate the volatility associated with commodity price movements.

 

Our operational focus is to increase crude oil production, predominantly from Foster Creek, Christina Lake, Pelican Lake and our tight oil opportunities in Saskatchewan, and to continue the assessment of our emerging resource base. We have proven our expertise and low cost oil sands development approach. Our conventional natural gas production base is expected to generate reliable production and cash flow which will enable further development of our crude oil assets. In all of our operations, whether crude oil or natural gas, technology plays a key role in improving the way we extract the resources, increasing the amount recovered and reducing costs. Cenovus has a knowledgeable, experienced team committed to innovation. We embed environmental considerations into our business with the objective to ultimately lessen our environmental impact. We are advancing technologies that reduce the amount of water, natural gas and electricity consumed in our operations and minimize surface land disturbance.

 

Our strategy is to focus on the development of our substantial crude oil resources in Alberta and Saskatchewan. Our future opportunities are primarily based on the development of the land position that we hold in the Athabasca region in northern Alberta and we plan to continue assessing our emerging resource base by drilling approximately 450 stratigraphic test wells each year for the next five years. In addition to our Foster Creek and Christina Lake oil sands projects, the next three emerging projects that we expect to develop in this area as well as our current ownership interests are as follows:

 
|           | Ownership Interest |
|----------------|--------------------|
| Narrows Lake   | 50 percent         |  (1) |
| Grand Rapids   | 100 percent        |   |
| Telephone Lake | 100 percent        |   |

 

(1) Approximate ownership interest

 

In June 2010, we submitted a joint application and Environmental Impact Assessment (“EIA”) for our Narrows Lake property, which is located within the Christina Lake Region. This project is expected to have a gross production capacity of 130,000 barrels per day and be developed in up to three phases. Provided all regulatory requirements are met we anticipate receiving regulatory approval in the middle of 2012 with first production expected in 2016.

 

At our 100 percent owned Grand Rapids property, located within the Greater Pelican Region, a SAGD pilot project is underway. In December 2011, we filed a joint application and EIA for a commercial SAGD operation. The proposed project is expected to have a gross production capacity of 180,000 barrels per day.

 

Our 100 percent owned Telephone Lake property is located within the Borealis Region and in December 2011, we submitted a revised joint application and EIA. The Telephone Lake project is now expected to have an initial gross production capacity of 90,000 barrels per day.

 

We have a number of opportunities to deliver shareholder value, predominantly through production growth from our resource position in the oil sands and tight oil opportunities. Our business plan targets growing our net oil sands production to approximately 400,000 barrels per day by the end of 2021. By the end of 2016, we are also targeting crude oil production from Pelican Lake of 55,000 barrels per day as well as 65,000 to 75,000 barrels per day from our conventional oil operations in Saskatchewan and southern Alberta. In addition, we plan to assess the potential of new crude oil projects on our existing lands and new regions with a focus on tight oil opportunities. We are targeting total net crude oil production of approximately 500,000 barrels per day by the end of 2021.

 

To achieve these production targets, we expect our total annual capital investment to average between $3.0 and $3.5 billion for the next decade. This capital investment is expected to be primarily internally funded through cash flow generated from our crude oil, natural gas and refining operations as well as prudent use of balance sheet capacity.

 

 
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Our natural gas production provides a reliable stream of operating cash flow and acts as an economic hedge for the natural gas required as a fuel source at both our upstream and refining operations. Our refineries, which are operated by ConocoPhillips, an unrelated U.S. public company, enable us to moderate commodity price cycles by processing heavy oil, thus economically integrating our oil sands production. As part of our risk management program, we employ commodity hedging to enhance cash flow certainty. In addition to our strategy of growing net asset value, we expect to continue to pay meaningful and growing dividends as part of delivering a strong total shareholder return over the long-term.

 

**OUR BUSINESS STRUCTURE**

 

Our reportable segments are as follows:

 

·         **Oil Sands**, which consists of Cenovus’s producing bitumen assets at Foster Creek and Christina Lake, heavy oil assets at Pelican Lake, new resource play assets such as Narrows Lake, Grand Rapids and Telephone Lake, and the Athabasca natural gas assets. Certain of the Company’s operated oil sands properties, notably Foster Creek, Christina Lake and Narrows Lake, are jointly owned with ConocoPhillips.

 

·         **Conventional**, which includes the development and production of conventional crude oil, natural gas and NGLs in Alberta and Saskatchewan, notably the carbon dioxide enhanced oil recovery project at Weyburn, and the Bakken and Lower Shaunavon crude oil properties.

 

·         **Refining and Marketing**, which is focused on the refining of crude oil products into petroleum and chemical products at two refineries located in the U.S. The refineries are jointly owned with and operated by ConocoPhillips. This segment also markets Cenovus’s crude oil and natural gas, as well as third-party purchases and sales of product that provide operational flexibility for transportation commitments, product type, delivery points and customer diversification.

 

·         **Corporate and Eliminations**,****which primarily includes unrealized gains and losses recorded on derivative financial instruments, gains and losses on divestiture of assets, as well as other Cenovus-wide costs for general and administrative, and financing activities. As financial instruments are settled, the realized gains and losses are recorded in the operating segment to which the derivative instrument relates. Eliminations relate to sales and operating revenues and purchased product between segments recorded at transfer prices based on current market prices and to unrealized intersegment profits in inventory.

 

 

**OVERVIEW OF 2011**

 

In 2011, we achieved the milestones that we set for the year. We completed our planned capital programs, met or exceeded our production targets, kept our capital and operating costs in line with expectations and ended the year in a stronger financial position than we started. In the third quarter, phase C at Christina Lake achieved first production ahead of schedule and capital expenditures below budget for the entire phase. We have accelerated planned first production from phases D and E at Christina Lake to commence in the fourth quarters of 2012 and 2013, respectively each about six months earlier than originally expected. This acceleration results from a combination of capital execution efficiencies at both the Nisku module yard and at the construction site, as well as the application of new start up technologies and well design. Construction of the coker and start up activities of the Coker and Refinery Expansion (“CORE”) project at the Wood River Refinery were completed with total capital costs of US$3.8 billion (US$1.9 billion net to Cenovus), within 10 percent of its original budget. Demonstrating our strong resource base, our total bitumen, crude oil and NGLs proved reserves increased 22 percent to over 1.7 billion barrels and our best estimate bitumen economic contingent resources increased 34 percent to 8.2 billion barrels. Our operational performance in 2011 and consistent crude oil growth have increased our net asset value and we expect to reach our goal of doubling our December 2009 net asset value by the end of 2015.

 

**OPERATIONAL RESULTS**

Our average crude oil and NGLs production increased four percent to 134,239 barrels per day compared to 2010, primarily due to the start of production from phase C at Christina Lake in the third quarter of 2011, improved well performance and plant efficiency at Foster Creek as well as increased production from our Lower Shaunavon tight oil play. These production increases were partially offset by operational challenges including wet weather and flooding in southern Saskatchewan and Alberta and wild fires in northern Alberta which temporarily curtailed production at Pelican Lake. Our December 2011 average crude oil and NGLs production was 150,977 barrels per day, up 18 percent from the prior year.

 

At Christina Lake we received regulatory approval from the Alberta Energy Resources Conservation Board (“ERCB”) for expansion phases E, F and G. This expansion approval, as well as the positive delineation results, added 270 million barrels of proved bitumen reserves.

 

 
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Our best estimate bitumen economic contingent resources increased 2.1 billion barrels or approximately 34 percent from 2010. The substantial increase was primarily due to successful stratigraphic test well drilling, resulting in the conversion of prospective resources to contingent resources.

 

In the fourth quarter of 2011, we completed coker construction and start up activities of the CORE project at the Wood River Refinery. CORE capital expenditures were approximately US$3.8 billion (US$1.9 billion net to Cenovus), 10 percent higher than originally budgeted. Structured test runs undertaken to date have been successful, and a five percent increase to clean product yield has been achieved. Testing will continue through the first quarter of 2012, and the Wood River Refinery’s total heavy crude oil processing capacity is expected to increase to between 200,000 to 220,000 barrels per day, enhancing our ability to integrate our growing bitumen production.

 

Other significant 2011 operational results compared to 2010 include:
| · | Foster   Creek production averaging 54,868 barrels per day, an increase of seven   percent from 2010;                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Christina   Lake production averaging 11,665 barrels per day, an increase of 48 percent   from 2010 and ended 2011 producing approximately 23,000 barrels per day;                                                                                                                                                                                                                                                                                                                                                                          |
| · | Lower   Shaunavon average production more than doubling to 2,041 barrels per day;                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| · | Pelican   Lake production averaging 20,424 barrels per day, a decrease of 11 percent   partly due to the temporary curtailment of production due to wild fires in   the area which decreased production by approximately 500 barrels per day, a   scheduled turnaround which reduced production by approximately 300 barrels   per day and expected natural declines;                                                                                                                                                                       |
| · | Drilling   491 gross stratigraphic test wells, mainly in the first quarter, to support   the next phases of expansion at Foster Creek and Christina Lake, gather data   on the quality of our emerging projects and support regulatory applications;                                                                                                                                                                                                                                                                                        |
| · | Commencing   the regulatory approval process for two of our emerging projects with the   filing of a regulatory application for a commercial SAGD operation at our   Grand Rapids property with an expected gross production capacity of 180,000   barrels per day and filing a revised regulatory application for Telephone   Lake with an expected initial gross production capacity of 90,000 barrels per   day. With these applications filed we have 400,000 barrels per day of gross   production capacity in the regulatory process; |
| · | Applying   for an amendment to the existing Christina Lake regulatory approval to add   cogeneration facilities and increasing expected total gross production   capacity by 10,000 barrels per day at each of phase F and phase G;                                                                                                                                                                                                                                                                                                         |
| · | Receiving   approval from the Alberta Department of Energy (“ADOE”) to include all   previous capital investment for Foster Creek expansion phases F, G and H as   part of our existing Foster Creek royalty calculation;                                                                                                                                                                                                                                                                                                         |
| · | Receiving   partner approval for expansion phases F, G and H at Foster Creek and   expansion phase E at Christina Lake; and                                                                                                                                                                                                                                                                                                                                                                                                                 |
| · | Effectively   managing the expected natural declines in our natural gas assets resulting in   an absolute year over year production decline of 11 percent and a seven   percent decrease, excluding the 2010 dispositions. While year over year   production was down, production throughout 2011 remained relatively flat with   low levels of capital investment.                                                                                                                                                                         |

 

**FINANCIAL RESULTS**

Throughout 2011, our financial results benefited from higher crude oil prices and a significant increase in refining crack spreads when compared to 2010. As a result of the increased crack spreads, we saw substantially improved operating cash flow from our Refining and Marketing segment. The higher average crude oil prices improved operating cash flow from our crude oil and NGLs operations, although price had a negative impact on our royalty expense as the Canadian dollar WTI price is used to calculate the royalty rates at our Oil Sands operations.

 

The financial highlights for 2011 compared to 2010 include:
| · | Revenues   increasing $3,055 million, or 24 percent, primarily due to increased crude   oil and NGLs production, improved refined product prices, a 16 percent   increase in the average sales price for crude oil and NGLs, excluding financial   hedging, higher condensate prices and volumes used for blending partially   offset by decreased natural gas volumes and average sales prices; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Operating   cash flow of $981 million from Refining and Marketing, an increase of $905   million, primarily due to higher refining margins that resulted from both   higher refined product pricing and discounted crude oil feedstock costs;                                                                                                                                                    |
| · | Cash flow   of $3,276 million, increasing 36 percent, primarily due to the significant   increase in operating cash flow from Refining and Marketing and improved   crude oil and NGLs production and average sales price;                                                                                                                                                                       |
| · | Our   Conventional natural gas operations generating $623 million of operating cash   flow in excess of the related capital investment, which partially funded the   further development of our crude oil projects;                                                                                                                                                                              |
| · | Operating   earnings increasing 55 percent or $440 million, primarily due to higher   operating cash flow partially offset by increased general and administrative   and income tax expenses (excluding deferred tax on the gains and losses on   unrealized risk management, non-operating foreign exchange and divestitures);                                                                  |
| · | Receiving   approval from the ADOE to include all previous capital investment for Foster   Creek expansion phases F, G and H as part of our existing Foster Creek royalty   calculation resulting in a one-time reduction in royalty expense of   approximately $65 million; and                                                                                                                 |
| · | Paying a   quarterly dividend of $0.20 per share.                                                                                                                                                                                                                                                                                                                                                |

 

 
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**STRATEGIC PLAN UPDATE**

In 2011, we provided an update to our 10 year strategic plan with a focus on doubling our net asset value between 2010 and 2015. To achieve this goal our 10 year strategic plan now targets:

 
| · | Expected   gross production capacity at Foster Creek, including phases F, G and H as   well as future phases, of between 290,000 to 310,000 barrels per day, an   increase of 55,000 to 75,000 barrels per day from the original estimate;                                                                                                       |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Accelerating   the timelines for production at Foster Creek phases G and H by approximately   one year, to 2015 and 2016 respectively, and for production at Christina Lake   phases D and E by approximately six months with production now expected at   phase D in the fourth quarter of 2012 and at phase E in the fourth quarter of   2013; |
| · | Increasing   expected production from Pelican Lake to 55,000 barrels per day by the end of   2016;                                                                                                                                                                                                                                               |
| · | Increasing   Conventional crude oil production in Saskatchewan and southern Alberta to   approximately 65,000 to 75,000 barrels per day by the end of 2016; and                                                                                                                                                                                  |
| · | Assessing   the potential of new oil projects on our existing properties and in new   regions with a focus on light oil opportunities.                                                                                                                                                                                                           |

 

**OUR BUSINESS ENVIRONMENT**

 

Key performance drivers for our financial results include commodity prices, price differentials, refining crack spreads as well as the U.S./Canadian dollar exchange rate. The following table shows selected market benchmark prices and the U.S./Canadian dollar average exchange rate to assist in understanding our financial results.

 

*Selected Benchmark Prices and Exchange Rates*

 
|                                                          | ** ** | **2011**   | ** ** | **Q4**     | ** ** | **Q3**     | ** ** | **Q2**     | ** ** | **Q1**     |   |   | 2010   |   | Q4     |   | Q3     |   | Q2     |   | Q1     |   |   | 2009   |   |
|---------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| ** **                                                    |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Crude Oil Prices*****(US$/bbl)*                             |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| West Texas   Intermediate (WTI)                               |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average                                                       | ** ** | **95.11**  | ** ** | **94.06**  | ** ** | **89.54**  | ** ** | **102.34** | ** ** | **94.60**  |   |   | 79.61  |   | 85.24  |   | 76.21  |   | 78.05  |   | 78.88  |   |   | 62.09  |   |
| End of period                                                 | ** ** | **98.83**  | ** ** | **98.83**  | ** ** | **79.20**  | ** ** | **95.42**  | ** ** | **106.72** |   |   | 91.38  |   | 91.38  |   | 79.97  |   | 75.63  |   | 83.45  |   |   | 79.36  |   |
| Western Canadian   Select (WCS)                               |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average                                                       | ** ** | **77.96**  | ** ** | **83.58**  | ** ** | **71.92**  | ** ** | **84.70**  | ** ** | **71.74**  |   |   | 65.38  |   | 67.12  |   | 60.56  |   | 63.96  |   | 69.84  |   |   | 52.43  |   |
| End of period                                                 | ** ** | **84.37**  | ** ** | **84.37**  | ** ** | **69.38**  | ** ** | **75.32**  | ** ** | **91.37**  |   |   | 72.87  |   | 72.87  |   | 64.97  |   | 61.38  |   | 70.25  |   |   | 71.84  |   |
| Average   Differential WTI-WCS                                | ** ** | **17.15**  | ** ** | **10.48**  | ** ** | **17.62**  | ** ** | **17.64**  | ** ** | **22.86**  |   |   | 14.23  |   | 18.12  |   | 15.65  |   | 14.09  |   | 9.04   |   |   | 9.66   |   |
| Average   Condensate (C5 @ Edmonton)                          | ** ** | **105.34** | ** ** | **108.74** | ** ** | **101.48** | ** ** | **112.33** | ** ** | **98.90**  |   |   | 81.91  |   | 85.24  |   | 74.53  |   | 82.87  |   | 84.98  |   |   | 61.35  |   |
| Average   Differential WTI-Condensate (premium)/discount      | ** ** | **(10.23** | **)**      | **(14.68** | **)**      | **(11.94** | **)**      | **(9.99**  | **)**      | **(4.30**  | **)**  |   | (2.30  | )      | -      |   | 1.68   |   | (4.82  | )      | (6.10  | )      |   | 0.74   |   |
| **Refining Margin 3-2-1   Average Crack Spreads *(US$/bbl)*** |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |
| Chicago                                                       | ** ** | **24.55**  | ** ** | **19.23**  | ** ** | **33.35**  | ** ** | **29.00**  | ** ** | **16.62**  |   |   | 9.33   |   | 9.25   |   | 10.34  |   | 11.60  |   | 6.11   |   |   | 8.54   |   |
| Midwest Combined   (Group 3)                                  | ** ** | **25.26**  | ** ** | **20.75**  | ** ** | **34.04**  | ** ** | **27.19**  | ** ** | **19.04**  |   |   | 9.48   |   | 9.12   |   | 10.60  |   | 11.38  |   | 6.82   |   |   | 8.09   |   |
| **Natural Gas Average   Prices**                              |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| AECO *($/GJ)*                                                 | ** ** | **3.48**   | ** ** | **3.29**   | ** ** | **3.53**   | ** ** | **3.54**   | ** ** | **3.58**   |   |   | 3.91   |   | 3.39   |   | 3.52   |   | 3.66   |   | 5.08   |   |   | 3.92   |   |
| NYMEX *(US$/MMBtu)*                                           | ** ** | **4.04**   | ** ** | **3.55**   | ** ** | **4.19**   | ** ** | **4.31**   | ** ** | **4.11**   |   |   | 4.39   |   | 3.80   |   | 4.38   |   | 4.09   |   | 5.30   |   |   | 3.99   |   |
| Basis   Differential NYMEX-AECO (*US$/MMBtu)*                 | ** ** | **0.31**   | ** ** | **0.17**   | ** ** | **0.34**   | ** ** | **0.42**   | ** ** | **0.29**   |   |   | 0.40   |   | 0.28   |   | 0.78   |   | 0.32   |   | 0.19   |   |   | 0.40   |   |
| **U.S./Canadian Dollar   Exchange Rate**                      |       |       |       |       |       |       |       |       |       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average                                                       | ** ** | **1.012**  | ** ** | **0.978**  | ** ** | **1.020**  | ** ** | **1.033**  | ** ** | **1.015**  |   |   | 0.971  |   | 0.987  |   | 0.962  |   | 0.973  |   | 0.961  |   |   | 0.876  |   |

 

**Crude Oil Benchmarks**

WTI is an important benchmark for Canadian crude oil since it reflects onshore North American prices and its Canadian dollar equivalent is the basis for determining royalties for a number of our crude oil properties. In 2011, the volatility in the price of WTI was mainly due to the economic conditions of the European Union and the Libyan geopolitical conflict. At their peak in April 2011, WTI prices rose to over US$110.00 per barrel, primarily due to the loss of Libyan supply to the global market. With the resolution of the Libyan conflict, production from the country resumed at the end of the third quarter and is expected to gradually increase in 2012. Concern over the economic health and solvency of several countries within the European Union as well as inland U.S. crude oil market congestion at the end of September dropped WTI to under US$80.00 per barrel, its lowest point in 2011. In the fourth quarter of 2011, WTI improved and ended the year at US$98.83 per barrel on optimism of a strengthening U.S. economy and the announcement of the Seaway Pipeline reversal which more than offset the continued economic concerns in the European Union and OPEC’s announcement to increase its 2012 production ceiling. The 2011 average price of WTI also benefited from increased Asian demand, primarily from China.

 

 
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WCS is a blended heavy oil which consists of both conventional heavy oil and unconventional diluted bitumen. This blended heavy oil is usually traded at a discount to the light oil benchmark, WTI. In 2011, the average WTI-WCS differential was impacted by pipeline restrictions in the first quarter which widened the average differential to over US$22.00 per barrel. These pipeline restrictions were resolved and new delivery capacity to Cushing, Oklahoma was added in the second quarter which helped to narrow the average WTI-WCS differential to under US$18.00 per barrel for the second and third quarters. In the fourth quarter, the WTI-WCS differential further narrowed to under US$11.00 per barrel due to overall stronger refining industry utilizations and increased demand for heavy crude oil partly due to advanced purchases for the CORE project at our Wood River Refinery. When compared to 2010, the average WTI-WCS differential widened as increased production of Canadian heavy crude oil supply and pipeline outages were only partially offset by increased coking capacity and refining industry utilization.

 

 

Blending condensate with bitumen enables our bitumen and heavy oil production to be transported. Our blending ratios range from 10 percent to 30 percent. The cost of condensate purchases impacts our revenues and our transportation and blending costs. The WTI-Condensate differential is the benchmark price of condensate relative to the price of WTI. The differentials for WTI-WCS and WTI-Condensate are independent of one another and tend not to move in tandem. Throughout 2011, WTI discounts to offshore light crudes increased and condensate premiums to WTI grew since the marginal barrel of condensate in Alberta markets was sourced from markets tied to global, rather than inland U.S. prices, and do not include an embedded inland U.S. discount included in the WTI benchmark price. However, in the fourth quarter of the 2011, the WTI discount to offshore light crude oils began to decrease with the announcement of the planned flow reversal of crude oil on the Seaway Pipeline in the middle of 2012. This planned flow reversal will supply crude oil to refineries on the U.S. Gulf Coast from the Cushing, Oklahoma hub. With the planned access to Gulf of Mexico markets, WTI prices strengthened in relation to offshore light oil benchmarks.

 

**Refining 3-2-1 Crack Spread Benchmarks**

The 3-2-1 crack spread is an indicator of the refining margin generated by converting three barrels of crude oil into two barrels of regular unleaded gasoline and one barrel of ultra-low sulphur diesel. Average crack spreads in the U.S. inland Chicago and Group 3 markets improved significantly from the same periods in 2010, benefiting from inland crude oil discounts and refined product prices that continued to be tied to global market prices which increased substantially in 2011. In the fourth quarter of 2011, crack spreads decreased compared to the previous quarter with the announcement that the flow of crude oil on the Seaway Pipeline will be reversed in the middle of 2012, increasing the price of crude oil feedstocks and narrowing the differential to global market prices. The Seaway Pipeline currently moves crude oil from the Gulf of Mexico to Cushing, Oklahoma. When reversed, it will help reduce surplus crude oil supply in the Cushing market by supplying heavy crude oil to the U.S. Gulf Coast refineries.

 

 

 
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| Cenovus   Energy Inc. |   | 2011 Management’s Discussion and Analysis |

 

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Benchmark crack spreads are a simplified view of the market based on last-in, first-out accounting, and reflect the current month WTI price as the crude oil feedstock price. Our realized crack spreads are affected by many other factors such as the variety of feedstock crude oil inputs, refinery configuration and product output, and purchased product costs based on first-in, first-out accounting.

 

**Other Benchmarks**

 

Natural gas prices remained low during 2011. The low prices reflect the continued strong growth in supply from liquids-rich natural gas basins and the slow response of demand to lower natural gas prices. We do not expect prices to improve significantly in 2012 as demand growth is not expected to respond quickly enough to absorb the current supply surplus.

 

During 2011, the Canadian dollar strengthened relative to the U.S. dollar. An increase in the value of the Canadian dollar compared to the U.S. dollar has a negative impact on our revenues as the sales prices of our crude oil and refined products are determined by reference to U.S. benchmarks. Similarly, our refining results are in U.S. dollars and therefore a strengthened Canadian dollar reduces our reported results, although a stronger Canadian dollar reduces our current period’s refining capital investment.

 

 

**FINANCIAL INFORMATION**

 

In 2011 we began reporting our financial results in accordance with IFRS. In accordance with IFRS 1, our transition date to IFRS was January 1, 2010 and therefore the comparative information for 2010 has been re-presented in accordance with IFRS. The 2009 financial information contained within this MD&A has been prepared following previous GAAP and, as allowed under IFRS 1, has not been re-presented. Further information regarding our IFRS accounting policies can be found in the Accounting Policies and Estimates section of this MD&A as well as in the notes to the Consolidated Financial Statements.

 

**SELECTED CONSOLIDATED FINANCIAL RESULTS**

 
|                                        | ** ** | ** ** | ** **   | **2011   vs** |     |     |     | 2010 vs  |     |                                   |   |
|---------------------------------------------|------------|------------|--------------|---------------|----------|----------|----------|----------|----------|----------------------------------------|--------|
| ($ millions, except per share amounts) | ** ** | **2011**   | ** **   | **2010**      |     | 2010     |     | 2009     |     | 2009                                   |   |
| * *                                    | * *   | * *   | *** *** | *** ***  | * * | * * | * * | * * | * * | *(Prepared following   previous GAAP)* |
|                                        | ** ** | ** ** | ** **   | ** **    |     |     |     |     |     |                                   |   |
| Revenues (1)                                | ** ** | **15,696** | ** **   | **24%**       |     | 12,641   |     | 15%      |     | 11,031                                 |   |
| Operating Cash   Flow (2)                   | ** ** | **3,862**  | ** **   | **30%**       |     | 2,981    |     | -29%     |     | 4,189                                  |   |
| Cash Flow (2)                               | ** ** | **3,276**  | ** **   | **36%**       |     | 2,412    |     | -15%     |     | 2,845                                  |   |
| - per share –   diluted (3)            | ** ** | **4.32**   | ** **   | **35%**       |     | 3.20     |     | -16%     |     | 3.79                                   |   |
| Operating Earnings   (2)                    | ** ** | **1,239**  | ** **   | **55%**       |     | 799      |     | -48%     |     | 1,522                                  |   |
| - per share –   diluted (3)            | ** ** | **1.64**   | ** **   | **55%**       |     | 1.06     |     | -48%     |     | 2.03                                   |   |
| Net Earnings                                | ** ** | **1,478**  | ** **   | **37%**       |     | 1,081    |     | 32%      |     | 818                                    |   |
| - per share –   basic (3)              | ** ** | **1.96**   | ** **   | **36%**       |     | 1.44     |     | 32%      |     | 1.09                                   |   |
| - per share –   diluted (3)            | ** ** | **1.95**   | ** **   | **36%**       |     | 1.43     |     | 31%      |     | 1.09                                   |   |
|                                        | ** ** | ** ** | ** **   | ** **    |     |     |     |     |     |                                   |   |
| Total Assets                                | ** ** | **22,194** | ** **   | **12%**       |     | 19,840   |     | -9%      |     | 21,755                                 |   |
| Total Long-Term   Debt                      | ** ** | **3,527**  | ** **   | **3%**        |     | 3,432    |     | -6%      |     | 3,656                                  |   |
| Other Long-Term   Obligations               | ** ** | **5,873**  | ** **   | **7%**        |     | 5,503    |     | -15%     |     | 6,507                                  |   |
|                                        | ** ** | ** ** | ** **   | ** **    |     |     |     |     |     |                                   |   |
| Capital Investment   (4)                    | ** ** | **2,723**  | ** **   | **29%**       |     | 2,115    |     | -2%      |     | 2,162                                  |   |
| Cash Dividends (5)                          | ** ** | **603**    | ** **   | ** **    |     | 601      |     |     |     | 159                                    |   |
| - per share (5)                             | ** ** | **0.80**   | ** **   | ** **    |     | 0.80     |     |     |     | US$0.20                                |   |

 

(1)       The 2009 revenue component of realized and unrealized financial hedging net gains of $486 million have been reclassified to (gain) loss on risk management to conform to the current year’s IFRS presentation.

(2)       Financial measure without standardized meaning as prescribed by IFRS (“non-GAAP”) and defined within this MD&A.

(3)       Any per share amounts prior to December 1, 2009 have been calculated using Encana Corporation’s (“Encana”) common share balances based on the Arrangement which is further explained in the Advisory.

(4)       Includes expenditures on property, plant and equipment (“PP&E”) and exploration and evaluation (“E&E”) assets.

(5)       The fourth quarter 2009 dividend reflected an amount determined in connection with the Arrangement based on carve-out earnings and cash flow.

 

 
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**REVENUES VARIANCE**

 
|                          | ** ** | **Years   Ended December 31,**                   | ** ** |
|-------------------------------|------------|-------------------------------------------------------|------------|
|                          | ** ** | ** **                                            |       |   |   |
| ($ millions)        | ** ** | **2011 vs 2010**                                      |       | 2010 vs   2009 (1) |   |
| Beginning period              |       | $       12,641     |       | $       11,031 |   |
| Increase   (decrease) due to: |       |                                                  |       |   |   |
| Oil Sands                     |       | 584                                                   |       | 428 |   |
| Conventional                  |       | 9                                                     |       | (110 | ) |
| Refining and   Marketing      |       | 2,397                                                 |       | 1,306 |   |
| Corporate and   Eliminations  |       | 65                                                    |       | (14 | ) |
|                          |       |                                                  |       |   |   |
| Ending period                 |       | $       **15,696** |       | $       12,641 |   |

 

(1)    The 2009 revenue component of realized and unrealized financial hedging gains of $486 million have been reclassified to (gain) loss on risk management to conform to the current year’s IFRS presentation.

 

Oil Sands revenues for 2011 increased primarily due to higher average crude oil sales prices, increased crude oil production, as well as higher condensate prices.

 

Conventional revenues increased slightly in 2011 as higher average crude oil sales prices and light and medium crude oil production were almost completely offset by decreased natural gas average sales prices and expected declines in natural gas production.

 

Refining and Marketing revenues in 2011 increased primarily due to improved refined product prices and volumes as well as higher revenues related to operational third party sales undertaken by the marketing group.

 

Further information regarding our revenues can be found in the Reportable Segments section of this MD&A.

 

**OPERATING CASH FLOW**

 
| ($ millions)        | ** ** | **2011**   |       | 2010       |     | 2009                                   |   |
|--------------------------|------------|------------|------------|------------|----------|----------------------------------------|--------|
|                     | ** ** | ** ** | ** ** | ** ** | * * | *(Prepared following   previous GAAP)* |
| Oil Sands                | ** ** | ** ** | ** ** | ** ** |     |                                   |   |
| Crude Oil and NGLs       | ** ** | **$**      | **1,210**  |       | $        | 1,047                                  |   | $          1,002 |   |
| Natural Gas              | ** ** | **52**     |       | 77         |     | 181                                    |   |
| Other                    | ** ** | **6**      |       | 7          |     | (2                                     | )      |
| Conventional             | ** ** | ** ** |       |       |     |                                   |   |
| Crude Oil and NGLs       | ** ** | **881**    |       | 758        |     | 753                                    |   |
| Natural Gas              | ** ** | **725**    |       | 1,007      |     | 1,880                                  |   |
| Other                    | ** ** | **7**      |       | 9          |     | 7                                      |   |
| Refining and   Marketing | ** ** | **981**    |       | 76         |     | 368                                    |   |
|                     | ** ** | ** ** |       |       |     |                                   |   |
| Operating Cash   Flow    | ** ** | **$**      | **3,862**  |       | $        | 2,981                                  |   | $          4,189 |   |

 

Operating cash flow is a non-GAAP measure that is used to provide a consistent measure of the cash generating performance of our assets and improves the comparability of our underlying financial performance between years. Operating cash flow is defined as revenues less purchased product, transportation and blending, operating expenses and production and mineral taxes plus realized gains less losses on risk management activities. Operating cash flow excludes unrealized gains and losses on risk management activities, which are included in the Corporate and Eliminations segment.

 

 
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***Operating Cash Flow Variance for the Year Ended December 31, 2011 compared to December 31, 2010***

 

 

Overall, operating cash flow in 2011 increased $881 million primarily due to an increase of $905 million from Refining and Marketing as a result of improved refining margins. Operating cash flow from crude oil and NGLs increased $286 million due to an increase in average sales prices and sales volumes. The $307 million reduction from natural gas was due to decreased volumes, partly due to the divestiture of non-core natural gas properties at the end of the third quarter in 2010 and decreased average sales prices.

 

***Operating Cash Flow of $3,862 million for the Year Ended December 31, 2011***

 
| The percentage of our operating cash flow generated   from Refining and Marketing increased substantially in 2011 primarily due to   improved refining margins. Crude oil and NGLs generated $2,091 million of   operating cash flow in 2011 (2010 - $1,805 million; 2009 - $1,755 million),   an increase of $286 million, from 2010. Despite this increase, the percentage   of operating cash flow from crude oil and NGLs decreased to approximately 54   percent. The natural gas percentage of operating cash flow decreased from   2010 with the expected declines in our production and reduced sales prices. |   |  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--|

 

Additional details explaining the changes in operating cash flow can be found in the Reportable Segments section of this MD&A.

 

**CASH FLOW**

 
| ($ millions)                            |       | **2011**   |       | 2010   |   | 2009                                   |   |
|----------------------------------------------|------------|------------|------------|--------|--------|----------------------------------------|--------|
|                                         |       |       |       |   |   | *(Prepared following   previous GAAP)* |
|                                         |       | ** ** | ** ** |   |   |                                   |   |   |   |
| Cash From   Operating Activities             |       | **$**      | **3,273**  |   | $      | 2,591                                  |   | $         3,039 |   |
| (Add back) deduct:                           |       |       |       |   |   |                                   |   |
| Net change in   other assets and liabilities | ** ** | **(82**    | **)**      | (55    | )      | (26                                    | )      |
| Net change in   non-cash working capital     | ** ** | **79**     |       | 234    |   | 220                                    |   |
|                                         | ** ** | ** ** |       |   |   |                                   |   |
| Cash Flow                                    |       | **$**      | **3,276**  |   | $      | 2,412                                  |   | $         2,845 |   |

 

Cash flow is a non-GAAP measure defined as cash from operating activities excluding net change in other assets and liabilities and net change in non-cash working capital. Cash flow is commonly used in the oil and gas industry to assist in measuring a company’s ability to finance its capital programs and meet its financial obligations.

 

 
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***Cash Flow Variance for the Year Ended December 31, 2011 compared to December 31, 2010***

 

 

In 2011 our cash flow increased $864 million primarily due to:

 
| ·                                                              | A   significant increase in operating cash flow from Refining and Marketing of   $905 million, mainly due to improved refining margins;                                                                                                                                                                                                                                                                                                                                                      |
|---------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ·                                                              | A 16 percent   increase in the average sales price of crude oil and NGLs to $72.84 per   barrel;                                                                                                                                                                                                                                                                                                                                                                                             |
| ·                                                              | A four   percent increase in our crude oil and NGLs sales volumes consistent with   increased production primarily from Christina Lake, Foster Creek and   conventional light and medium crude oil; and                                                                                                                                                                                                                                                                                      |
| ·                                                              | Lower   interest expense with a stronger average Canadian dollar in 2011 decreasing   interest on our U.S. dollar denominated long-term debt and partnership   contribution payable as well as decreased interest on our partnership contribution   payable as principal repayments are made quarterly.                                                                                                                                                                                      |
|                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| The increases in our cash flow for 2011 were   partially offset by: |
| ·                                                              | Realized   risk management gains before tax, excluding Refining and Marketing, of $82   million compared to gains of $268 million in 2010;                                                                                                                                                                                                                                                                                                                                                   |
| ·                                                              | Increased   operating expenses, primarily from crude oil and NGLs production, with   additional personnel at Foster Creek, Christina Lake and Pelican Lake,   increased repairs and maintenance and scheduled turnarounds activity, higher   electricity costs and increased production from Bakken and Lower Shaunavon   areas where production has been predominantly from single well batteries and   resulted in increased trucking, fluid hauling and equipment rentals;                |
| ·                                                              | Natural gas   production declining 11 percent, as a result of the divestiture of non-core   properties in 2010, lower capital investment and expected natural declines;                                                                                                                                                                                                                                                                                                                      |
| ·                                                              | An 11   percent decrease in the average natural gas sales price to $3.65 per Mcf;                                                                                                                                                                                                                                                                                                                                                                                                            |
| ·                                                              | A $59   million increase in current income tax expense, excluding current tax on   divestitures, as a result of the substantial utilization in 2010 of certain   Canadian tax pools acquired at our inception which lowered current income tax   expense for 2010;                                                                                                                                                                                                                           |
| ·                                                              | Realized   foreign exchange losses of $68 million in 2011 compared to losses of $18   million in 2010 primarily on the quarterly settlements of the partnership   contribution receivable; and                                                                                                                                                                                                                                                                                               |
| ·                                                              | An increase   in royalties of $40 million primarily as a result of the higher Canadian   dollar WTI prices used to calculate royalty rates and improved crude oil   production partially offset by decreased natural gas production and receiving   approval from the ADOE to include all previous capital investment for Foster   Creek expansion phases F, G and H as part our existing Foster Creek royalty   calculation resulting in a one-time reduction of approximately $65 million. |

 

 
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**OPERATING EARNINGS**

 
| ($ millions)                                              | ** ** | **2011**   |       | 2010   |     | 2009                                   |   |
|----------------------------------------------------------------|------------|------------|------------|--------|----------|----------------------------------------|--------|
|                                                           | ** ** | ** ** |       |   | * * | *(Prepared following   previous GAAP)* |
|                                                           | ** ** | ** ** | ** ** |   |     |                                   |   |   |   |
| Net Earnings                                                   | ** ** | **$**      | **1,478**  |   | $        | 1,081                                  |   | $         818 |   |
| (Add back) deduct:                                             | ** ** | ** ** |       |   |     |                                   |   |
| Unrealized risk   management gains (losses), after-tax (1)     | ** ** | **134**    |       | 34     |     | (494                                   | )      |
| Non-operating   foreign exchange gains (losses), after-tax (2) | ** ** | **14**     |       | 153    |     | (210                                   | )      |
| Gain (loss) on   divestiture of assets, after-tax              | ** ** | **91**     |       | 83     |     | -                                      |   |
| Gain on bargain   purchase, after-tax                          | ** ** | **-**      |       | 12     |     | -                                      |   |
|                                                           | ** ** | ** ** |       |   |     |                                   |   |
| Operating Earnings                                             | ** ** | **$**      | **1,239**  |   | $        | 799                                    |   | $       1,522 |   |

 

(1)     The unrealized risk management gains (losses), after-tax includes the reversal of unrealized gains (losses) recognized in prior periods.

(2)     After-tax unrealized foreign exchange gains (losses) on translation of U.S. dollar denominated notes issued from Canada and the partnership contribution receivable, after-tax foreign exchange gains (losses) on settlement of intercompany transactions and deferred income tax on foreign exchange recognized for tax purposes only related to U.S. dollar intercompany debt.

 

Operating earnings is a non-GAAP measure defined as net earnings excluding the after-tax gain (loss) on discontinuance; after-tax gain on bargain purchase; after-tax effect of unrealized risk management gains (losses) on derivative instruments; after-tax gains (losses) on non-operating foreign exchange; after-tax effect of gains (losses) on divestiture of assets; and the effect of changes in statutory income tax rates. We believe that these non-operating items reduce the comparability of our underlying financial performance between periods. The above reconciliation of operating earnings has been prepared to provide information that is more comparable between periods.

 

The increase in operating earnings in 2011 is consistent with higher operating cash flow partially offset by higher general and administrative costs and income tax expense (excluding deferred tax on the gains and losses on unrealized risk management, non-operating foreign exchange and divestitures).

 

**NET EARNINGS VARIANCE**

 
| ($ millions)                                                                   | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|
| Net Earnings for   the Year Ended December 31, 2010                            |       | $          | 1,081      |   |
| Increase   (decrease) due to:                                                       |       |       |       |
| Operating Cash   Flow                                                               |       | 881        |       |
| Corporate and   Eliminations                                                        |       |       |       |
| Unrealized risk   management gains (losses), after-tax                              |       | 100        |       |
| Unrealized foreign   exchange gains (losses)                                        |       | (27        | )          |
| Gain (loss) on   divestiture of assets                                              |       | (9         | )          |
| Expenses (1)                                                                        |       | (86        | )          |
| Depreciation,   depletion and amortization                                          |       | 7          |       |
| Exploration   expense                                                               |       | 3          |       |
| Income taxes,   excluding income taxes on unrealized risk management gains (losses) |       | (472       | )          |
|                                                                                |       |       |       |
| **Net   Earnings for the Year Ended December 31, 2011**                        | ** ** | **$**      | **1,478**  | ** ** |

 

(1)     Includes general and administrative, finance costs, interest income, realized foreign exchange (gains) losses, other (income) loss, net and Corporate and Eliminations operating expenses.

 

 
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In 2011, our net earnings increased $397 million compared to 2010. The factors discussed above that increased our operating cash flow in 2011 also increased our net earnings. Other significant factors that impacted our net earnings in 2011 include:

·                   Unrealized risk management gains, after-tax, of $134 million, compared to gains of $34 million in 2010;

·                   Unrealized foreign exchange gains of $42 million compared to gains of $69 million in 2010 consistent with the decrease of the Canadian dollar exchange rate at December 31, 2011 on the translation of our U.S. dollar long-term debt partially offset by the translation of our U.S. dollar denominated partnership contribution receivable;

·                   An increase of $49 million for general and administrative expenses primarily due to increases in salaries and benefits and office support costs, as well as higher long-term incentive costs;

·                   Lower gains on the divestiture of assets, as we recognized gains of $107 million in 2011 compared to gains of $116 million in 2010 on the sale of non-core properties;

·                   A decrease of $7 million in Depletion, Depreciation and Amortization (“DD&A”) expense as increased crude oil production and a $45 million impairment of a refining asset were partially offset by the addition of proved reserves at Foster Creek at the end of 2010 and decreased natural gas production; and

·                   Income tax expense, excluding the impact of unrealized risk management gains and losses, increasing to $683 million, compared to $211 million in 2010.

 

**NET CAPITAL INVESTMENT**

 
| ($ millions)           | ** ** | **2011**   |       | 2010   |     | 2009                                   |   |
|-----------------------------|------------|------------|------------|--------|----------|----------------------------------------|--------|
|                        | ** ** | ** ** |       |   | * * | *(Prepared following   previous GAAP)* |
|                        | ** ** | ** ** | ** ** |   |     |                                   |   |   |   |
| Oil Sands                   | ** ** | **$**      | **1,415**  |   | $        | 857                                    |   | $                629 |   |
| Conventional                | ** ** | **788**    |       | 526    |     | 466                                    |   |
| Refining and   Marketing    | ** ** | **393**    |       | 656    |     | 1,033                                  |   |
| Corporate                   | ** ** | **127**    |       | 76     |     | 34                                     |   |
|                        | ** ** | ** ** |       |   |     |                                   |   |
| Capital Investment          | ** ** | **2,723**  |       | 2,115  |     | 2,162                                  |   |
| Acquisitions                | ** ** | **71**     |       | 86     |     | 3                                      |   |
| Divestitures                | ** ** | **(173**   | **)**      | (307   | )        | (222                                   | )      |
|                        | ** ** | ** ** | ** ** |   |     |                                   |   |
| Net Capital   Investment(1) | ** ** | **$**      | **2,621**  |   | $        | 1,894                                  |   | $             1,943 |   |

 

 

(1)     Includes expenditures on PP&E and E&E. For purposes of managing our capital program, we do not differentiate between PP&E and E&E expenditures, and therefore we have not split our capital investment within this MD&A.

 

Oil Sands capital investment in 2011 included site construction, facility engineering and procurement spending at Foster Creek for expansion phases F, G and H. At Christina Lake, capital investment included site preparation and facility construction for expansion phases D, E and F and completion of phase C construction. Pelican Lake capital investment included infill drilling for polymer flooding and facility expansion and maintenance. We also drilled 480 gross stratigraphic test wells in 2011, of which 440 were drilled during the first quarter of 2011 which was our largest program to date. The results of these stratigraphic test wells will be used to support the expansion and development of our Oil Sands projects.

 

Conventional capital investment in 2011 was primarily focused on the development of our crude oil properties including drilling, completion and facilities work in the Lower Shaunavon and Bakken areas. Our Conventional capital investment increased compared to 2010 and was on plan for 2011 despite flooding in the second quarter of 2011 in southern Saskatchewan which restricted access to our properties.

 

Refining and Marketing capital investment in 2011 was primarily focused on construction of the CORE project at the Wood River Refinery. Further information regarding our capital investment can be found in the Reportable Segments section of this MD&A.

 

Corporate capital investment in 2011 was for tenant improvements and information technology costs.

 

*Acquisitions and Divestitures*

 

The acquisitions in 2011 were primarily related to purchases of exploration and evaluation lands located contiguous to our existing core areas. Divestitures included the sale of marine terminal facilities in Kitimat, British Columbia and certain undeveloped land.

 

 
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**CAPITAL INVESTMENT DECISIONS**

 

The table below reflects the outcome of our capital allocation process since the inception of Cenovus. It is important to understand that our disciplined approach to capital allocation includes prioritizing our uses of cash flow in the following manner:

 
| · | First,   to committed capital, which is the capital spending required for continued   progress on approved expansions at our multi-phase projects, and capital for   our existing business operations; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Second,   to paying a meaningful dividend as part of providing strong total shareholder   return; and                                                                                                  |
| · | Third,   for growth capital, which is the capital spending for projects beyond our   committed capital projects.                                                                                       |

 

This capital allocation process includes evaluating all opportunities using specific rigorous criteria as well as achieving our objectives of maintaining a prudent and flexible capital structure and strong balance sheet metrics which allow us to be financially resilient in times of lower cash flow.

 
| ($ millions)                           | ** ** | **2011**   |       | 2010   |     | 2009                                   |   |
|---------------------------------------------|------------|------------|------------|--------|----------|----------------------------------------|--------|
|                                        | ** ** | ** ** |       |   | * * | *(Prepared following   previous GAAP)* |
|                                        | ** ** | ** ** | ** ** |   |     |                                   |   |   |   |
| Cash Flow                                   | ** ** | **$**      | **3,276**  |   | $        | 2,412                                  |   | $             2,845 |   |
| Capital Investment   (Committed and Growth) | ** ** | **2,723**  |       | 2,115  |     | 2,162                                  |   |
| Free Cash Flow (1)                          | ** ** | **553**    |       | 297    |     | 683                                    |   |
| Dividends paid (2)                          | ** ** | **603**    |       | 601    |     | 159                                    |   |
|                                        | ** ** | ** ** |       |   |     |                                   |   |
|                                        | ** ** | **$**      | **(50**    | **)**  | $        | (304                                   | )      | $                524 |   |

 

 

(1)     Free cash flow is a non-GAAP measure defined as cash flow less capital investment.

(2)     The 2009 dividend represents the fourth quarter dividend determined in connection with the Arrangement based on carve-out earnings and cash flow.

 

**RISK MANAGEMENT ACTIVITIES**

 

Our risk management strategy is to use financial instruments to protect and provide certainty on a portion of our cash flows. The financial instrument agreements are recorded at the date of the financial statements based on mark-to-market accounting. Changes in mark-to-market gains or losses on these financial instruments affect our net earnings until these contracts are settled and are the result of volatility in the forward commodity prices and changes in the balance of unsettled contracts. This program increases cash flow certainty and historically has provided a net financial benefit, however, there is no certainty that we will continue to derive such benefits in the future.

 

The realized risk management amounts in the tables below impact our operating cash flow, cash flow, operating earnings and net earnings. Unrealized risk management amounts are a non-cash item included in net earnings and affects the Corporate and Eliminations segment’s financial results. Additional information regarding financial instruments can be found in the notes to the Consolidated Financial Statements.

 

*Financial Impact of Risk Management Activities*

 
|                                           | ** ** | **2011** |       |       | 2010        |    | 2009       |   |
|------------------------------------------------|------------|----------|------------|------------|-------------|---------|------------|--------|
|                                           |       |     |       |       |        |    |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| ($ millions)                              |       | Realized |       | Unrealized |        | Total   |       |   | Realized |   | Unrealized |   | Total |   | Realized |   | Unrealized |   | Total |   |
| Crude Oil                                      | ** ** | **$**    | **(135**   | **)**      | ** $** | **106** | ** ** | **$**  | **(29** | **)** |   | $ | (17 | ) |  $ | (92 | ) | $ | (109 | ) | $ | 49 |   |  $ | (102 | ) | $ | (53 | ) |
| Natural Gas                                    | ** ** | **210**  | ** ** | **38**     | ** **  | **248** |       |   | 289 |   | 152 |   | 441 |   | 1,105 |   | (566 | ) | 539 |   |
| Refining                                       | ** ** | **(14**  | **)**      | **7**      | ** **  | **(7**  | **)**      |   | 10 |   | (8 | ) | 2 |   | (34 | ) | (10 | ) | (44 | ) |
| Power                                          | ** ** | **7**    | ** ** | **29**     | ** **  | **36**  |       |   | (4 | ) | (6 | ) | (10 | ) | (4 | ) | (20 | ) | (24 | ) |
| Gains   (Losses) on Risk Management            | ** ** | **68**   | ** ** | **180**    | ** **  | **248** |       |   | 278 |   | 46 |   | 324 |   | 1,116 |   | (698 | ) | 418 |   |
| Income Tax   Expense(Recovery)                 | ** ** | **17**   | ** ** | **46**     | ** **  | **63**  |       |   | 79 |   | 12 |   | 91 |   | 312 |   | (204 | ) | 108 |   |
| Gains   (Losses) on Risk Management, after-tax | ** ** | **$**    | **51**     | ** ** | ** $** | **134** | ** ** | **$**  | **185** |   |   | $ | 199 |   |  $ | 34 |   | $ | 233 |   | $ | 804 |   |  $ | (494 | ) | $ | 310 |   |

 

In 2011, our risk management strategy resulted in realized losses on our crude oil financial instruments and realized gains on our natural gas financial instruments. These results are consistent with our contract prices compared to the current business environment of low benchmark natural gas prices and increased WTI benchmark crude oil prices which ended 2011 at a higher price than in 2010. 

 

 
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We also recognized unrealized gains on our crude oil and natural gas financial instruments as a result of the decrease in forward commodity prices at the end of 2011 compared to our contract prices. Details of contract volumes and prices are found in the notes to the Consolidated Financial Statements.

 

**RESULTS OF OPERATIONS**

 

**CRUDE OIL and NGLs PRODUCTION VOLUMES**

 
| (barrels per day)             | ** ** | **2011**    | ** ** | **2011 vs   2010** |       | 2010    |   | 2010 vs   2009 |   | 2009    |   |
|-------------------------------|------------|-------------|------------|--------------------|------------|---------|--------|----------------|--------|---------|--------|
| Oil Sands                     |       |        |       |               |       |    |   |           |   |    |   |
| Foster   Creek                | ** ** | **54,868**  | ** ** | **7%**             |       | 51,147  |   | 36%            |   | 37,725  |   |
| Christina   Lake              | ** ** | **11,665**  | ** ** | **48%**            |       | 7,898   |   | 18%            |   | 6,698   |   |
| Pelican   Lake                | ** ** | **20,424**  | ** ** | **-11%**           |       | 22,966  |   | -8%            |   | 24,870  |   |
| Senlac                        | ** ** | **-**       | ** ** | **-**              |       | -       |   | -              |   | 3,057   |   |
| Conventional                  |       |        |       |               |       |    |   |           |   |    |   |
| Heavy Oil                     | ** ** | **15,657**  | ** ** | **-6%**            |       | 16,659  |   | -7%            |   | 17,888  |   |
| Light &   Medium Oil | ** ** | **30,524**  | ** ** | **4%**             |       | 29,346  |   | -3%            |   | 30,394  |   |
| NGLs (1)                      | ** ** | **1,101**   | ** ** | **-6%**            |       | 1,171   |   | -3%            |   | 1,206   |   |
|                          | ** ** | ** **  | ** ** | ** **         | ** ** |    |   |           |   |    |   |
|                          | ** ** | **134,239** | ** ** | **4%**             |       | 129,187 |   | 6%             |   | 121,838 |   |

 

(1) NGLs include condensate volumes.

 

In 2011, our crude oil and NGLs production increased four percent primarily due to higher production at Christina Lake, Foster Creek and Conventional light and medium crude oil. These increases were partially offset by the temporary curtailment of production at Pelican Lake from wild fires which restricted pipeline transportation in the second quarter and the scheduled turnarounds at Foster Creek, Christina Lake and Pelican Lake. Conventional production was impacted by natural declines at our heavy oil operations, flooding and wet weather in southern Saskatchewan and Alberta in the second quarter, poor winter weather in the first quarter and the divestiture of non-core assets in the second quarter of 2010. Our average crude oil and NGLs production for December 2011 was 150,977 barrels per day, an increase of 22,971 barrels per day or 18 percent from December 2010 and was primarily due to increased production from Christina Lake and Conventional light and medium oil. Further information on the changes in our crude oil and NGLs production can be found in the Reportable Segments section of this MD&A.

 

**NATURAL GAS PRODUCTION VOLUMES**

 
| (MMcf per day) | ** ** | **2011**   | ** ** | **2011 vs   2010** |       | 2010   |   | 2010 vs   2009 |   | 2009   |   |
|----------------|------------|------------|------------|--------------------|------------|--------|--------|----------------|--------|--------|--------|
| Conventional   |       | **619**    | ** ** | **-11%**           |       | 694    |   | -11%           |   | 784    |   |
| Oil Sands      | ** ** | **37**     | ** ** | **-14%**           |       | 43     |   | -19%           |   | 53     |   |
|           | ** ** | ** ** | ** ** | ** **         | ** ** |   |   |           |   |   |   |
|           | ** ** | **656**    | ** ** | **-11%**           |       | 737    |   | -12%           |   | 837    |   |

 

The decrease in our 2011 natural gas production compared to 2010 was due to our strategic decision to restrict capital spending on our natural gas assets over the prior two years in favour of increasing investment in crude oil projects. In 2010, we also divested of non-core natural gas properties which had produced approximately four percent of our 2010 production. Weather related issues, including extreme cold in the first quarter and wet weather in the second quarter of 2011, also reduced our natural gas production. While year over year natural gas production decreased, 2011 natural gas production remained consistent during the year despite low levels of capital investment. Further information on the changes in our natural gas production can be found in the Reportable Segments section of this MD&A.

 

 
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**OPERATING NETBACKS**

 
|                                         | ** ** | **2011**   |                        | 2010       |              | 2009       |                   |
|----------------------------------------------|------------|------------|-----------------------------|------------|-------------------|------------|------------------------|
|                                         | ** ** | ** ** | **Crude Oil****& NGLs** | ** ** | **Natural   Gas** |       | Crude Oil   & NGLs |   | Natural   Gas |   | Crude Oil   & NGLs |   | Natural   Gas |
|                                         |       |       |                        |       |              |       |                   |   |   |   |   |   |   |   |
|                                         |       |       | ($/bbl)                     |       | ($/Mcf)           |       | ($/bbl)                |   | ($/Mcf) |   | ($/bbl) |   | ($/Mcf) |
|                                         | * *   | * *   |                        |       |              |       |                   |   |   |   | *      (Prepared   following*

*      previous   GAAP)* |
|                                         | ** ** | ** ** | ** **                  | ** ** | ** **        | ** ** | ** **             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Price (1)                                    | ** ** | ** ** | **$**                       | **72.84**  | ** **        | **$**      | **3.65**               |   | $ | 62.96 |   | $ | 4.09 |   | $ | 57.14 |   | $ | 4.15 |   |
| Royalties                                    | ** ** | ** ** | **9.84**                    | ** ** | **0.06**          |       | 9.33                   |   | 0.07 |   | 5.62 |   | 0.08 |   |
| Transportation and   blending (1)            | ** ** | ** ** | **2.76**                    | ** ** | **0.15**          |       | 1.88                   |   | 0.17 |   | 1.60 |   | 0.15 |   |
| Operating expenses                           | ** ** | ** ** | **13.47**                   | ** ** | **1.10**          |       | 11.74                  |   | 0.95 |   | 10.67 |   | 0.86 |   |
| Production and   mineral taxes               | ** ** | ** ** | **0.56**                    | ** ** | **0.04**          |       | 0.62                   |   | 0.02 |   | 0.65 |   | 0.05 |   |
|                                         | ** ** | ** ** | ** **                  | ** ** | ** **        |       |                   |   |   |   |   |   |   |   |
| Netback excluding   Realized Risk Management | ** ** | ** ** | **46.21**                   | ** ** | **2.30**          |       | 39.39                  |   | 2.88 |   | 38.60 |   | 3.01 |   |
| Realized Risk   Management Gains (Losses)    | ** ** | ** ** | **(2.79**                   | **)**      | **0.87**          |       | (0.36)                 |   | 1.07 |   | 1.10 |   | 3.63 |   |
|                                         | ** ** | ** ** | ** **                  | ** ** | ** **        |       |                   |   |   |   |   |   |   |   |
| Netback including   Realized Risk Management | ** ** | ** ** | **$**                       | **43.42**  | ** **        | **$**      | **3.17**               |   | $ | 39.03 |   | $ | 3.95 |   | $ | 39.70 |   | $ | 6.64 |   |
|                                              |            |            |                             |            |                   |            |                        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(1)   The crude oil and NGLs price and transportation and blending costs exclude $24.91 per barrel (2010 - $20.36 per barrel; 2009 - $14.55 per barrel) of condensate purchases which is blended with heavy crude oil.

 

In 2011, our average netback for crude oil and NGLs, excluding realized risk management gains and losses, increased by $6.82 per barrel primarily due to increased sales prices consistent with higher benchmark prices. Increased benchmark pricing also increased royalties. The increased sales prices were partially offset by higher operating expenses and transportation and blending costs. The increase in operating expenses was primarily due to higher staffing levels and increased repairs and maintenance activity at Foster Creek, Christina Lake and Pelican Lake. Transportation costs increased as a result of pursuing new markets for our increasing crude oil production.

 

Our average netback for natural gas, excluding realized risk management gains and losses, decreased $0.58 per Mcf primarily due to lower sales prices and increased operating expenses.

 

Further discussion on the items included in our operating netbacks is included in the Reportable Segments section of this MD&A. Further information on our risk management strategy can be found in the Risk Management section of this MD&A and in the notes to the Consolidated Financial Statements.

 

 
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**REPORTABLE SEGMENTS**

 

**OIL SANDS**

 

In northeast Alberta, we are a 50 percent partner in the Foster Creek and Christina Lake oil sands projects and also produce heavy oil from our wholly owned Pelican Lake operations. We have several new resource plays in the early stages of assessment, including Narrows Lake, Grand Rapids and Telephone Lake. The Oil Sands assets also include the Athabasca natural gas property from which a portion of the natural gas production is used as fuel at the adjacent Foster Creek operations.

 

Significant factors that impacted our Oil Sands segment in 2011 include:

 
| · | A 270   million barrel increase in proved reserve volumes primarily due to receiving   regulatory approval for Christina Lake phases E, F and G;                                                                                                                                                                                                                             |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Foster   Creek adding 56 million barrels of proved reserves with the positive results   from delineation drilling, improved recovery from wells using our Wedge WellTM technology   and improved steam chamber recovery;                                                                                                                                                     |
| · | Achieving   first production at Christina Lake phase C in August ahead of schedule.   Capital expenditures for the entire phase were below budget. Net production   at Christina Lake was approximately 23,000 barrels per day at the end of the   year;                                                                                                                |
| · | Implementing   steam dilation as part of Christina Lake phase C start up which accelerated   the initial start-up of production from well pairs;                                                                                                                                                                                                                             |
| · | Foster   Creek average production increasing seven percent to 54,868 barrels per day   and Christina Lake production increasing 48 percent to an average of 11,665   barrels per day;                                                                                                                                                                                        |
| · | Completing   scheduled turnarounds at Foster Creek, Christina Lake and Pelican Lake on   time and on budget;                                                                                                                                                                                                                                                                 |
| · | Receiving   ADOE approval for the inclusion of Foster Creek expansion phases F, G and H   capital investment from inception to June 30, 2011 as part of our   existing Foster Creek royalty calculation resulting in a one-time reduction   of about $65 million in our royalty expense;                                                                                |
| · | Receiving approval   from the ERCB for Christina Lake expansion phases E, F and G;                                                                                                                                                                                                                                                                                           |
| · | Receiving   partner approval for Foster Creek expansion phases F, G and H and Christina   Lake phase E;                                                                                                                                                                                                                                                                      |
| · | Successfully   completing a large winter stratigraphic test well program with 480 gross   wells drilled mainly in the first quarter to further progress our Oil Sands   projects and address potential Pelican Lake lease expiries;                                                                                                                                          |
| · | Our best   estimate bitumen contingent resources increasing by 2.1 billion barrels or   approximately 34 percent primarily on transfers from prospective resources   based on the results of our 2011 stratigraphic test well program;                                                                                                                                       |
| · | Pelican   Lake production decreasing 11 percent to an average of 20,424 barrels per   day, primarily due to the temporary curtailment of production due to wild   fires in the area which decreased production by approximately 500 barrels per   day, a scheduled turnaround which reduced production by approximately 300   barrels per day and expected natural declines; |
| · | Applying   for an amendment to the existing Christina Lake regulatory approval to add   cogeneration facilities and increasing expected total gross production   capacity by 10,000 barrels per day at each of phase F and phase G; and                                                                                                                                      |
| · | Updating   our strategic plan which targets:                                                                                                                                                                                                                                                                                                                                 |

 

o      Increasing our expected total gross production capacity from Foster Creek phases F, G and H and future phases by 55,000 to 75,000, barrels per day from the original estimate;

o      Accelerating the timelines for first production at Foster Creek phases G and H by approximately one year;

o      Expected first production at Christina Lake phase D and phase E in the fourth quarters of 2012 and 2013 respectively, approximately six months earlier than initially planned. This acceleration results from a combination of capital execution efficiencies at both the Nisku module yard and at the construction site, as well as the application of new start up technologies and well design; and

o      Increasing expected production from Pelican Lake to 55,000 barrels per day by the end of 2016.

 

 
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**OIL SANDS - CRUDE OIL**

 

*Financial Results*

 
| ($ millions)                                                         | ** ** | **2011**   |      | 2010   |     | 2009(1)                                |   |
|---------------------------------------------------------------------------|------------|------------|-----------|--------|----------|----------------------------------------|--------|
|                                                                      | ** ** | ** ** |      |   | * * | *(Prepared following   previous GAAP)* |
|                                                                      | ** ** | ** ** |      |   | * * | * *                               |
| Gross Sales                                                               | ** ** | **$**      | **3,217** |   | $        | 2,610                                  |   | $ | 2,008 |   |
| Less: Royalties                                                           | ** ** | **282**    |      | 276    |     | 129                                    |   |
| Revenues                                                                  | ** ** | **2,935**  |      | 2,334  |     | 1,879                                  |   |
| Expenses                                                                  | ** ** | ** ** |      |   |     |                                   |   |
| Transportation and   blending                                             | ** ** | **1,229**  |      | 934    |     | 626                                    |   |
| Operating                                                                 | ** ** | **409**    |      | 339    |     | 297                                    |   |
| Production and   mineral tax                                              | ** ** | **-**      |      | -      |     | 1                                      |   |
| (Gains) losses on   risk management                                       | ** ** | **87**     |      | 14     |     | (47                                    | )      |
|                                                                      | ** ** | ** ** |      |   |     |                                   |   |
| Operating Cash   Flow                                                     | ** ** | **1,210**  |      | 1,047  |     | 1,002                                  |   |
| Capital Investment                                                        | ** ** | **1,401**  |      | 850    |     | 629                                    |   |
| Operating Cash   Flow in Excess (Deficient) of Related Capital Investment | ** ** | **$**      | **(191**  | **)**  | $        | 197                                    |   | $ | 373 |   |

 

(1)   In 2009, realized financial hedging gains in revenue of $48 million and realized financial hedging losses in operating costs of $1 million have been reclassified to (gain) loss on risk management to conform to the current year’s IFRS presentation.

 

*Revenues Variances*

 
| ($ millions) | Year Ended

December 31,   2010       |      | **Year Ended**

**December 31, 2011** |
|-------------------|--------------------------------------------|-----------|--------------------------------------------|
| Price             | Volume                                     | Royalties | Condensate(1)                              |
|              | $      2,334 | 253       | 97                                         | (6) |     257 | **$       2,935** |

 

(1)   Revenues include the value of condensate sold as bitumen blend. Condensate costs are recorded in transportation and blending expense.

 

*Production Volumes*

 
| Crude   oil (barrels per day) | **2011**   | **2011 vs   2010** | 2010   | 2010 vs

2009 | 2009   |
|-------------------------------|------------|--------------------|--------|---------------|--------|
| Foster Creek                  | **54,868** | **7%**             | 51,147 | 36%           | 37,725 |
| Christina Lake                | **11,665** | **48%**            | 7,898  | 18%           | 6,698  |
| Subtotal                      | **66,533** | **13%**            | 59,045 | 33%           | 44,423 |
| Pelican Lake                  | **20,424** | **-11%**           | 22,966 | -8%           | 24,870 |
| Senlac                        | **-**      | **-**              | -      | -             | 3,057  |
|                          | **86,957** | **6%**             | 82,011 | 13%           | 72,350 |

 

*Foster Creek and Christina Lake Production Volumes by Quarter*

 

**

 

 
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In 2011, our average crude oil sales price increased 14 percent to $67.99 per barrel compared to 2010, consistent with the increase in the WCS benchmark price partially offset by higher condensate costs and the strengthening of the Canadian dollar.

 

Foster Creek production increased seven percent primarily as a result of improved plant efficiency and well performance due to less downtime as well as improvements in the steam to oil ratio, partially offset by the scheduled turnaround completed in the second quarter of 2011. The 48 percent increase in production at Christina Lake was the result of the start up of phase C in the third quarter of 2011, two well pairs which came on production in the fourth quarter of 2010 and four wells (which use our Wedge WellTM technology) which came on production in 2011, partially offset by a scheduled turnaround completed in the second quarter of 2011. The decline in our Pelican Lake production was primarily due to the temporary curtailment of production in the second quarter of 2011 due to wild fires in the area which decreased production by approximately 500 barrels per day for the year and a scheduled turnaround in the third quarter of 2011 which reduced production by approximately 300 barrels per day for the year. Production at Pelican Lake was also reduced by expected natural production declines and pipeline apportionments partially offset by higher production due to polymer injection activities in 2011.

 

Royalty calculations for our oil sands projects are a function of the Canadian dollar WTI benchmark price and volume for pre-payout royalties (Christina Lake) and price, volume, allowed operating and capital costs for post-payout projects (Foster Creek and Pelican Lake). Royalties increased $6 million in 2011 primarily due to increased production at Christina Lake and Foster Creek, higher Canadian dollar WTI prices and Foster Creek being in post–payout for a full year after achieving payout in the first quarter of 2010. Royalties would have been about $65 million higher had we not received ADOE approval for the inclusion of Foster Creek expansion phases F, G and H capital investment from inception to June 30, 2011 as part of our existing Foster Creek royalty calculation. Also partially offsetting these increases were higher capital investment and decreased production at Pelican Lake. The effective royalty rates for 2011 were 16.8 percent at Foster Creek (2010 – 16.2 percent; 2009 – 2.7 percent), 5.2 percent at Christina Lake (2010 – 3.9 percent; 2009 – 2.3 percent) and 11.5 percent at Pelican Lake (2010 – 21.1 percent; 2009 – 20.1 percent).

 

Transportation and blending costs increased $295 million in 2011. The condensate (blending) portion of the increase was $257 million and was the result of increases in the average cost of condensate and volumes required due to increased production at Foster Creek and Christina Lake. Transportation costs increased $38 million primarily as a result of higher production volumes, increased transportation charges in the first quarter to access available markets to avoid shut-in of volumes due to pipeline restrictions and additional transportation allowing us to access an offshore market in the fourth quarter.

 

Our 2011 operating costs were primarily for staffing, workovers, repairs and maintenance; Foster Creek and Christina Lake fuel costs; and chemical usage at Pelican Lake and Foster Creek. In total, operating costs increased $70 million in 2011 due to scheduled turnarounds at Foster Creek, Christina Lake and Pelican Lake, higher staffing levels, increased repairs and maintenance expense and higher long-term incentive expense, partially offset by decreased trucking and chemical costs.

 

Risk management activities resulted in realized losses of $87 million (2010 – losses of $14 million; 2009 – gains of $47 million) consistent with the 2011 average benchmark prices exceeding our 2011 contract prices.

 

**OIL SANDS – NATURAL GAS**

 

Oil Sands includes our 100 percent owned natural gas operations in Athabasca and other minor properties. Primarily as a result of expected natural declines, our natural gas production decreased to 37 MMcf per day in 2011 (2010 – 43 MMcf per day; 2009 – 53 MMcf per day). As a result of the decreased production and lower natural gas prices, operating cash flow declined to $52 million for 2011 (2010 - $77 million; 2009 - $181 million).

 

 
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**OIL SANDS - CAPITAL INVESTMENT**

 
| ($ millions)        | **2011**   | 2010      | 2009                                     |
|--------------------------|------------|-----------|------------------------------------------|
|                     | ** ** |      | *(Prepared   following   previous GAAP)* |
| Foster   Creek           | **$**      | **429**   | $                                        | 277 | $ | 262 |
| Christina   Lake         | **472**    | 346       | 224                                      |
| Subtotal                 | **901**    | 623       | 486                                      |
| Pelican Lake             | **317**    | 104       | 72                                       |
| New Resource Plays       | **180**    | 113       | 17                                       |
| Other (1)                | **17**     | 17        | 54                                       |
| Capital Investment   (2) | **$**      | **1,415** | $                                        | 857 | $ | 629 |

 

(1)    Includes Athabasca natural gas.

(2)    Includes expenditures on PP&E and E&E assets.

 

Oil Sands capital investment in 2011 was primarily focused on the development of the expansion phases at Foster Creek and Christina Lake, facility expansion and infill drilling activities related to our Pelican Lake polymer flood and the drilling of stratigraphic test wells to support the development of our Oil Sands projects.

 

As compared to 2010, Foster Creek capital investment for 2011 increased primarily as a result of drilling 118 gross stratigraphic test wells in 2011 (2010 – 82 wells; 2009 – 65 wells) and higher spending on site construction, facility engineering and procurement for expansion phases F, G and H. Foster Creek capital investment also included maintenance capital on our producing phases and infrastructure spending.

 

Christina Lake capital investment was higher in 2011 compared to 2010 due primarily to the phase D, E and F expansions, including site preparation and facility construction, maintenance capital on producing phases and drilling 63 gross stratigraphic test wells (2010 – 24 wells; 2009 – 28 wells). We expect to increase gross production capacity to approximately 138,000 barrels per day with the completion of phases D and E. First production at phase D is expected in the fourth quarter of 2012 and first production at phase E is expected in the fourth quarter of 2013, both phases are now expected to commence production approximately six months earlier than initially scheduled. This acceleration results from a combination of capital execution efficiencies at both the Nisku module yard and at the construction site, as well as the application of new start up technologies and well design.

 

Pelican Lake capital investment for 2011 was primarily related to infill drilling to progress the polymer flood, drilling of stratigraphic test wells, facilities expansions and maintenance capital. Facilities spending was focused on expanding fluid capacity at Pelican Lake through additions and upgrades to our boiler units and emulsion pipelines.

 
| (gross production wells drilled (1)) | ** ** | **2011**   |   | 2010   |   | 2009   |   |
|--------------------------------------|------------|------------|--------|--------|--------|--------|--------|
| Foster Creek                         | ** ** | **21**     |   | 37     |   | 42     |   |
| Christina Lake                       | ** ** | **19**     |   | 32     |   | -      |   |
|                                 | ** ** | ** ** |   |   |   |   |   |
| Subtotal                             | ** ** | **40**     |   | 69     |   | 42     |   |
| Pelican Lake                         | ** ** | **31**     |   | 12     |   | 5      |   |
| Grand Rapids                         | ** ** | **-**      |   | 1      |   | -      |   |
| Other                                | ** ** | **3**      |   | -      |   | 11     |   |
|                                 | ** ** | ** ** |   |   |   |   |   |
|                                 | ** ** | **74**     |   | 82     |   | 58     |   |

 

(1)     Includes wells drilled using our Wedge WellTM technology

 

Capital investment in new resource plays in 2011 was mainly related to the drilling of stratigraphic test wells, completion of seismic programs to support future oil sands projects and the Grand Rapids pilot project. First oil from the Grand Rapids pilot project was achieved in the third quarter of 2011. Results to date are as expected and will give us a better understanding of the performance of SAGD in the Grand Rapids formation.

 

*Stratigraphic Test Wells*

 

Consistent with our strategy to unlock the value of our resource base, we completed our largest ever stratigraphic test well program in the first quarter of 2011 and began our next stratigraphic test well drilling program in the fourth quarter. The stratigraphic test wells drilled at Foster Creek and Christina Lake are to support the next phases of expansion, while the other stratigraphic test wells have been drilled to continue to gather data on the quality of our projects and to support regulatory applications for project approval. 

 

 
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We also drilled a number of wells at Pelican Lake to address potential lease expiries. To minimize the impact on local infrastructure, the drilling of stratigraphic test wells is primarily completed during the winter months, which typically occurs at the end of the fourth quarter and at the beginning of the first quarter.

 

Our 2011 stratigraphic test well program provided the primary basis for the 2.1 billion barrel increase to our best estimate bitumen contingent resources as results from the program caused prospective resources to be reclassified as contingent resources.

 
| (gross stratigraphic test wells drilled) | ** ** | **2011**   |   | 2010   |   | 2009   |   |
|------------------------------------------|------------|------------|--------|--------|--------|--------|--------|
| Foster   Creek                           | ** ** | **118**    |   | 82     |   | 65     |   |
| Christina   Lake                         | ** ** | **63**     |   | 24     |   | 28     |   |
|                                     | ** ** | ** ** |   |   |   |   |   |
| Subtotal                                 | ** ** | **181**    |   | 106    |   | 93     |   |
| Pelican   Lake                           | ** ** | **57**     |   | -      |   | -      |   |
| Narrows   Lake                           | ** ** | **47**     |   | 39     |   | -      |   |
| Grand   Rapids                           | ** ** | **59**     |   | 71     |   | 17     |   |
| Telephone   Lake                         | ** ** | **40**     |   | 26     |   | -      |   |
| Borealis                                 | ** ** | **44**     |   | -      |   | -      |   |
| Other                                    | ** ** | **52**     |   | 17     |   | -      |   |
|                                     | ** ** | ** ** |   |   |   |   |   |
|                                     | ** ** | **480**    |   | 259    |   | 110    |   |

 

 

**CONVENTIONAL**

 

Our Conventional operations include the development and production of crude oil, natural gas and NGLs in Alberta and Saskatchewan. The established assets in this segment are strategically important for their long life reserves, stable operations and diversity of products produced. The reliability of these properties to deliver consistent production and operating cash flow is important to the funding of our future crude oil growth. We plan to assess the potential of new crude oil projects on our existing properties and new regions, especially tight oil opportunities.

 

Significant factors that impacted our Conventional segment in 2011 include:
| · | Generating   operating cash flow in excess of capital investment from our Conventional   natural gas assets of $623 million;                                                                                                                                                                                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Average   crude oil production from our Lower Shaunavon area more than doubling to   2,041 barrels per day with capital spending focusing on drilling, completions   and facilities;                                                                                                                                                                      |
| · | Flooding   which resulted in restricted access and shut-in production at our Bakken,   Lower Shaunavon and Weyburn operations in the second quarter which reduced   our production by approximately 1,400 barrels per day;                                                                                                                                |
| · | Effectively   managing the expected natural declines in our natural gas assets resulting in   an absolute year over year production decline of 11 percent and a seven   percent decrease, excluding the 2010 dispositions;                                                                                                                                |
| · | Shifting   our capital investment focus from natural gas to crude oil where we increased   crude oil capital investment by 89 percent and drilled an additional 145   crude oil wells compared to 2010; and                                                                                                                                               |
| · | Updating   our strategic plan which targets production of 65,000 to 75,000 barrels per   day from our conventional crude oil operations in Saskatchewan and southern   Alberta by the end of 2016 as well as assessing the potential of new crude   oil projects on our existing properties and in new regions with a focus on   tight oil opportunities. |

 

 
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**CONVENTIONAL - CRUDE OIL and NGLs**

 

*Financial Results*

 
|  ($ millions)                                       | ** ** | **2011**   |       | 2010       |     | 2009 (1)                               |   |
|---------------------------------------------------------------|------------|------------|------------|------------|----------|----------------------------------------|--------|
|                                                          | ** ** | ** ** | ** ** | ** ** | * * | *(Prepared following   previous GAAP)* |
|                                                          | ** ** | ** ** | ** ** | ** ** |     |                                   |   |   |   |   |
| Gross Sales                                                   | ** ** | **$**      | **1,492**  | ** ** | $        | 1,229                                  |   | $ | 1,161 |   |
| Less: Royalties                                               | ** ** | **193**    |       | 153        |     | 119                                    |   |
|                                                          | ** ** | ** ** |       |       |     |                                   |   |
| Revenues                                                      | ** ** | **1,299**  |       | 1,076      |     | 1,042                                  |   |
| Expenses                                                      | ** ** | ** ** |       |       |     |                                   |   |
| Transportation   and blending                                 | ** ** | **104**    |       | 86         |     | 87                                     |   |
| Operating                                                     | ** ** | **244**    |       | 199        |     | 172                                    |   |
| Production   and mineral taxes                                | ** ** | **27**     |       | 28         |     | 28                                     |   |
| (Gains)   losses on risk management                           | ** ** | **43**     |       | 5          |     | 2                                      |   |
|                                                          | ** ** | ** ** |       |       |     |                                   |   |
| Operating Cash Flow                                           | ** ** | **881**    |       | 758        |     | 753                                    |   |
| Capital Investment                                            | ** ** | **686**    |       | 363        |     | 223                                    |   |
|                                                          | ** ** | ** ** |       |       |     |                                   |   |
| Operating Cash   Flow in Excess of Related Capital Investment | ** ** | **$**      | **195**    |       | $        | 395                                    |   | $ | 530 |   |

 

(1)     In 2009, realized financial hedging losses in operating costs of $2 million have been reclassified to (gain) loss on risk management to conform to the current year’s IFRS presentation.

 

*Production Volumes*

 
| (barrels per day)    | ** ** | **2011**   | ** ** | **2011 vs   2010** |       | 2010   |   | 2010 vs   2009 |   | 2009   |   |
|----------------------|------------|------------|------------|--------------------|------------|--------|--------|----------------|--------|--------|--------|
| Heavy Oil            |       | ** ** | ** ** | ** **         |       |   |   |           |   |   |   |
| Alberta              |       | **15,657** | ** ** | **-6%**            |       | 16,659 |   | -7%            |   | 17,888 |   |
| Light and Medium Oil |       | ** ** | ** ** | ** **         |       |   |   |           |   |   |   |
| Alberta              |       | **10,763** | ** ** | **-1%**            |       | 10,854 |   | -9%            |   | 11,959 |   |
| Saskatchewan         |       | **19,761** | ** ** | **7%**             |       | 18,492 |   | -%             |   | 18,435 |   |
| NGLs                 | ** ** | **1,101**  | ** ** | **-6%**            |       | 1,171  |   | -3%            |   | 1,206  |   |
|                 | ** ** | ** ** | ** ** | ** **         | ** ** |   |   |           |   |   |   |
|                 | ** ** | **47,282** | ** ** | **-%**             |       | 47,176 |   | -5%            |   | 49,488 |   |

 

*Revenues Variance for the Years Ended December 31, 2011 compared to December 31, 2010*

 

 

(1)    Revenues include the value of condensate sold as heavy oil blend. Condensate costs are recorded in transportation and blending expense.

 

 
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Our average crude oil and NGLs sales price increased 19 percent to $81.41 per barrel, consistent with the increase in crude oil benchmark prices.

 

Our sales and production volumes increased slightly, primarily because of higher light and medium crude oil production from our Bakken and Lower Shaunavon areas. These increases were mostly offset by the effects of cold weather in Alberta in early 2011, wet weather in Alberta and Saskatchewan in the middle of 2011, natural declines and the 2010 divestiture of non-core properties.

 

Royalties increased by $40 million primarily as a result of increased crude oil prices which resulted in an effective crude oil royalty rate of 14.2 percent (2010 – 13.3 percent; 2009 – 11.4 percent).

 

Transportation and blending costs increased $18 million. The condensate portion of the increase was $10 million as increases in the average cost of condensate were partially offset by a decrease in the volume required for blending consistent with the decline in heavy oil production. Transportation costs increased $8 million primarily due to a higher proportion of volumes being shipped subject to spot pipeline tolls.

 

Our primary operating costs components were electricity, repairs and maintenance, workover activity and staff costs. Operating costs increased $45 million for 2011 primarily due to higher electricity costs, increased repairs and maintenance and workover activity, higher salaries and benefits, increased trucking and waste handling costs as well as increased equipment rentals.

 

Risk Management activities resulted in realized losses of $43 million (2010 - losses of $5 million; 2009 – losses of $2 million) consistent with the 2011 average benchmark prices exceeding our 2011 contract prices.

 

Operating cash flow from Conventional crude oil and NGLs in excess of capital investment decreased $200 million in 2011 primarily due to a $323 million increase in capital investment, focused on drilling, completions and facilities work in Alberta and Saskatchewan, partially offset by higher crude oil and NGLs prices and increased light and medium crude oil production.

 

**CONVENTIONAL - NATURAL GAS**

 

*Financial Results*

 
|  ($ millions)                                       | ** ** | **2011**   |       | 2010       |     | 2009 (1)                               |
|---------------------------------------------------------------|------------|------------|------------|------------|----------|----------------------------------------|
|                                                          | ** ** | ** ** | ** ** | ** ** | * * | *(Prepared following   previous GAAP)* |
|                                                          | ** ** | ** ** | ** ** | ** ** |     |                                   |   |   |   |   |
| Gross Sales                                                   | ** ** | **$**      | **825**    | ** ** | $        | 1,042                                  |   | $ | 1,189 |   |
| Less: Royalties                                               | ** ** | **12**     |       | 17         |     | 19                                     |   |
|                                                          | ** ** | ** ** |       |       |     |                                   |   |
| Revenues                                                      | ** ** | **813**    |       | 1,025      |     | 1,170                                  |   |
| Expenses                                                      | ** ** | ** ** |       |       |     |                                   |   |
| Transportation   and blending                                 | ** ** | **34**     |       | 44         |     | 45                                     |   |
| Operating                                                     | ** ** | **240**    |       | 231        |     | 236                                    |   |
| Production   and mineral taxes                                | ** ** | **9**      |       | 6          |     | 15                                     |   |
| (Gains)   losses on risk management                           | ** ** | **(195**   | **)**      | (263       | )        | (1,006                                 | ) |
|                                                          | ** ** | ** ** |       |       |     |                                   |   |
| Operating Cash Flow                                           | ** ** | **725**    |       | 1,007      |     | 1,880                                  |   |
| Capital Investment                                            | ** ** | **102**    |       | 163        |     | 243                                    |   |
|                                                          | ** ** | ** ** |       |       |     |                                   |   |
| Operating Cash   Flow in Excess of Related Capital Investment | ** ** | **$**      | **623**    |       | $        | 844                                    |   | $ | 1,637 |   |

 

(1)    In 2009, realized financial hedging gains in revenue of $1,007 million and realized financial hedging losses in operating costs of $1 million have been reclassified to (gain) loss on risk management to conform to the current year’s IFRS presentation.

 

 
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*Revenues Variance for the Years Ended December 31, 2011 compared to December 31, 2010*

 

 

Our natural gas revenues and operating cash flow were lower in 2011 primarily due to lower production and average sales prices. The decline in our average sales price is consistent with the change in the benchmark AECO price. The cumulative impact of restricted natural gas capital spending over the last two years, the 2010 divestiture of non-core properties which had produced approximately four percent of our 2010 production, extreme cold in the first quarter and wet weather in the second quarter resulted in a decrease in natural gas production volumes to 619 MMcf per day for 2011 (2010 – 694 MMcf per day; 2009 – 784 MMcf per day). While year over year production was down, production within 2011 remained relatively flat with low levels of capital investment.

 

Royalties decreased $5 million in 2011 due to lower production and prices. The average 2011 royalty rate was 1.5 percent (2010 – 1.7 percent; 2009 – 1.6 percent).

 

Transportation costs decreased $10 million due to lower production volumes.

 

Our primary operating expense components include property taxes and lease costs, repairs and maintenance, staffing costs and electricity. Operating expenses increased $9 million in 2011 as higher expenses associated with electricity, increased workover activity and long-term incentives were partially offset by reduced operations due to divestitures in 2010 and lower production volumes.

 

Risk management activities resulted in realized gains in 2011 of $195 million (2010 – gains of $263 million; 2009 – gains of $1,006 million) consistent with our 2011 contract price exceeding the 2011 average benchmark price.

 

Operating cash flow from Conventional natural gas in excess of capital investment decreased $221 million primarily due to lower production volumes and average sales prices decreasing operating cash flow partially offset by a $61 million reduction in capital investment.

 

**CONVENTIONAL - CAPITAL INVESTMENT**

 
|  ($ millions) | ** ** | **2011**   |       | 2010       |     | 2009                                   |   |
|-------------------------|------------|------------|------------|------------|----------|----------------------------------------|--------|
|                    | ** ** | ** ** | ** ** | ** ** | * * | *(Prepared following   previous GAAP)* |
| Crude Oil               | ** ** | **$**      | **686**    | ** ** | $        | 363                                    |   | $ | 223 |   |
| Natural Gas             | ** ** | **102**    |       | 163        |     | 243                                    |   |
|                    | ** ** | ** ** |       |       |     |                                   |   |
| Capital Investment(1)   | ** ** | **$**      | **788**    |       | $        | 526                                    |   | $ | 466 |   |

 

(1)    Includes expenditures on PP&E and E&E assets.

 

Capital investment in our Conventional segment was focused on our crude oil development opportunities and high value natural gas opportunities such as CBM recompletions. Increased crude oil capital investment in Saskatchewan was focused on drilling and facility work at Weyburn and appraisal projects, drilling, completions and facilities work in the Lower Shaunavon and Bakken areas. Alberta crude oil capital investment was focused on drilling activities. Despite the impact of flooding in southern Saskatchewan in the second quarter we were able to complete our 2011 planned capital investment.

 

 
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The following table details our Conventional drilling activity. The increase in crude oil wells reflects the development of our Alberta properties and the Lower Shaunavon and Bakken areas in Saskatchewan. Well recompletions are mostly related to Alberta coal bed methane development.

 
| (net wells)                | ** ** | **2011**  |   | 2010  |   | 2009 |   |
|----------------------------|------------|-----------|--------|-------|--------|------|--------|
| Crude Oil                  | ** ** | **325**   |   | 180   |   | 105  |   |
| Natural Gas                | ** ** | **65**    |   | 495   |   | 502  |   |
| Recompletions              | ** ** | **1,122** |   | 1,194 |   | 855  |   |
| Stratigraphic Test   Wells | ** ** | **11**    |   | 9     |   | 5    |   |

 

 

**REFINING AND MARKETING**

 

This segment includes the results of our refining operations in the U.S. that are jointly owned with and operated by ConocoPhillips. Accordingly, reported amounts for refining are affected by the U.S./Canadian dollar exchange rate. This segment’s results also include the marketing of third party purchases and sales of product, undertaken to provide operational flexibility for transportation commitments, product quality, delivery points and customer diversification.

 

Significant factors related to our Refining and Marketing segment in 2011 include:
| · | Increased operating cash flow of   $905 million primarily due to improved refining margins, consistent with higher   benchmark crack spreads, and higher refinery utilization; |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| · | Completed coker construction and   start up activities of the CORE project in the fourth quarter of 2011; and                                                                  |
| · | Our refineries operating at 89   percent of capacity producing 419 thousand barrels per day of refined   products.                                                             |

 

*Financial Results*

 
| ($ millions)                                                 | ** ** | **2011**   |       | 2010   |     | 2009                                   |  (1) |
|-------------------------------------------------------------------|------------|------------|------------|--------|----------|----------------------------------------|-----------|
|                                                              | ** ** | ** ** |       |   | * * | *(Prepared following   previous GAAP)* |
|                                                              | ** ** | ** ** |       |   | * * | * *                               | * *  |
| Revenues                                                          | ** ** | **$**      | **10,625** |   | $        | 8,228                                  |      | $ | 6,922 |   |
| Purchased product                                                 | ** ** | **9,149**  |       | 7,674  |     | 5,986                                  |      |
|                                                              | ** ** | ** ** |       |   |     |                                   |      |
| Gross margin                                                      | ** ** | **1,476**  |       | 554    |     | 936                                    |      |
| Expenses                                                          | ** ** | ** ** |       |   |     |                                   |      |
| Operating expenses                                                | ** ** | **481**    |       | 488    |     | 534                                    |      |
| (Gain) loss on   risk management                                  | ** ** | **14**     |       | (10    | )        | 34                                     |      |
|                                                              | ** ** | ** ** |       |   |     |                                   |      |
| Operating Cash   Flow                                             | ** ** | **981**    |       | 76     |     | 368                                    |      |
| Capital Investment                                                | ** ** | **393**    |       | 656    |     | 1,033                                  |      |
|                                                              | ** ** | ** ** |       |   |     |                                   |      |
| Operating Cash   Flow in Excess (Deficient) of Capital Investment | ** ** | **$**      | **588**    |   | $        | (580                                   | )         | $ | (665 | ) |

 

(1)  In 2009, realized financial hedging losses in purchased product of $34 million have been reclassified to (gain) loss on risk management to conform to the current year’s IFRS presentation.

 

The gross margin for Refining and Marketing increased $922 million for 2011 primarily due to the significant improvement in refined product prices which more than offset higher purchased product costs compared to 2010. Refined product prices continue to be tied to global market prices which increased substantially in 2011. Purchased product costs, which are accounted for on a first-in, first-out basis, reflected the benefit of discounted heavy crude oil as well as discounts to U.S. inland crude oil for much of 2011. Both the heavy and inland crude oil discounts that benefited our refining financial results throughout 2011, reduced substantially midway through the fourth quarter with the announced plan to increase the transportation of crude oil to the U.S. gulf coast reducing the surplus that had generated the discounts. The benefit to our refining results of discounted purchased product prices demonstrates the effectiveness of our objective to economically integrate our heavy oil production. Gross margins realized in 2011 also reflected the impact of higher utilization when compared to 2010.

 

Operating costs, consisting mainly of labour, maintenance, utilities and supplies, decreased by $7 million in 2011 primarily due to the impact of a stronger Canadian dollar and reduced scheduled turnarounds costs.

 

Overall, this segment’s operating cash flow, which is mainly generated by our refining operations, increased $905 million in 2011 primarily due to the higher refining gross margins. This contrasts with 2010 which was affected by weaker refined product prices, refinery optimization and scheduled turnarounds. Capital investment decreased by $263 million in 2011 as CORE project construction neared completion.

 

 
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**REFINERY OPERATIONS**(1)
|                             | ** ** | **2011** |   | 2010 |   | 2009 |   |
|----------------------------------|------------|----------|--------|------|--------|------|--------|
| Crude   oil capacity *(Mbbls/d)* | ** ** | **452**  |   | 452  |   | 452  |   |
| Crude   oil runs *(Mbbls/d)*     | ** ** | **401**  |   | 386  |   | 394  |   |
| Crude   utilization *(percent)*  | ** ** | **89**   |   | 86   |   | 87   |   |
| Refined   products *(Mbbls/d)*   | ** ** | **419**  |   | 405  |   | 417  |   |

 

(1)  Represents 100 percent of the Wood River and Borger refinery operations.

 

On a 100 percent basis, our refineries had a capacity of approximately 452,000 barrels per day of crude oil and 45,000 barrels per day of NGLs, including processing capability to refine up to 145,000 barrels per day of blended heavy crude oil. The ability to refine heavy crudes demonstrates our objective of economically integrating our heavy oil production. Refining capacity increases attributable to the CORE project at the Wood River Refinery, including expanded coking and heavy oil processing capacities will be reflected in 2012 operations as plant test runs proceed.

 

Crude utilization in 2011 improved as the 2010 utilization levels were affected by refinery optimization activities undertaken in conjunction with market conditions at that time and scheduled turnarounds.

 

**REFINING AND MARKETING - CAPITAL INVESTMENT**
| ($ millions)     | ** ** | **2011**   |       | 2010       |     | 2009                                   |   |
|-----------------------|------------|------------|------------|------------|----------|----------------------------------------|--------|
|                  | ** ** | ** ** | ** ** | ** ** | * * | *(Prepared following   previous GAAP)* |
| Wood   River Refinery | ** ** | **$**      | **346**    |       | $        | 568                                    |   | $ | 944 |   |
| Borger   Refinery     | ** ** | **45**     |       | 87         |     | 88                                     |   |
| Marketing             | ** ** | **2**      |       | 1          |     | 1                                      |   |
| Capital   Investment  | ** ** | **$**      | **393**    |       | $        | 656                                    |   | $ | 1,033 |   |

 

Our refining capital investment in 2011 continued to focus on the CORE project at the Wood River Refinery. In 2011, of the $346 million capital expenditures at the Wood River Refinery, $243 million were related to the CORE project. In the fourth quarter of 2011 we completed the CORE project coker construction. Total CORE capital expenditures were approximately US$3.8 billion (US$1.9 billion net to Cenovus), or about 10 percent higher than originally budgeted.

 

The balance of the 2011 capital investment at the Wood River and Borger refineries was related to refining reliability and maintenance projects, clean fuels and other emission reduction environmental initiatives.

 

 

**CORPORATE AND ELIMINATIONS**

 

*Financial Results*
| ($ millions)                   | ** ** | **2011**   |    | 2010   |     | 2009 (1)                          |
|-------------------------------------|------------|------------|---------|--------|----------|----------------------------------------|
|                                | ** ** | ** ** |    |   | * * | *(Prepared following   previous GAAP)* |
| Revenues                            | ** ** | **$**      | **(59** | **)**  | $        | (124                                   | ) | $ | (110 | ) |
| Expenses   ((add)/deduct)           | ** ** | ** ** |    |   |     |                                   |   |
| Purchased   product                 | ** ** | **(59**    | **)**   | (123   | )        | (110                                   | ) |
| Operating                           | ** ** | **(1**     | **)**   | (3     | )        | -                                      |   |
| (Gains)   losses on risk management | ** ** | **(180**   | **)**   | (46    | )        | 698                                    |   |
|                                | ** ** | **$**      | **181** |   | $        | 48                                     |   | $ | 698 |   |

 

(1)     The 2009 revenue and operating cost components of unrealized financial hedging losses, $668 million and $30 million respectively, have been reclassified to (gain) loss on risk management to conform to the current year’s IFRS presentation.

 

The Corporate and Eliminations segment includes intersegment eliminations that relate to transactions that have been recorded at transfer prices based on current market prices as well as unrealized intersegment profits in inventory. The gains and losses on risk management represent the unrealized mark-to-market gains and losses related to derivative financial instruments used to mitigate fluctuations in commodity prices and unrealized mark-to-market gains and losses on long-term power purchase contracts.

 

 

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The Corporate and Eliminations segment also includes Cenovus-wide costs for general and administrative and financing activities made up of the following:

 
| ($ millions)                      | ** ** | **2011**   |    | 2010   |     | 2009 (1)                          |
|----------------------------------------|------------|------------|---------|--------|----------|----------------------------------------|
|                                   | ** ** | ** ** |    |   | * * | *(Prepared following   previous GAAP)* |
| General   and administrative           | ** ** | **$**      | **295** |   | $        | 246                                    |   | $ | 211 |   |
| Finance   costs                        | ** ** | **447**    |    | 498    |     | 476                                    |   |
| Interest   income                      | ** ** | **(124**   | **)**   | (144   | )        | (187                                   | ) |
| Foreign   exchange (gain) loss, net    | ** ** | **26**     |    | (51    | )        | 304                                    |   |
| (Gain)   loss on divestiture of assets | ** ** | **(107**   | **)**   | (116   | )        | (2                                     | ) |
| Other   (income) loss, net             | ** ** | **4**      |    | (13    | )        | -                                      |   |
|                                   | ** ** | **$**      | **541** |   | $        | 420                                    |   | $ | 802 |   |

 

(1)     2009 interest, net has been reclassified to interest income and finance costs and accretion of asset retirement obligations has been reclassified to finance costs to conform to the current year’s IFRS presentation.

 

General and administrative expenses increased $49 million in 2011. Increased staffing levels in 2011 to support our growth resulted in higher salaries and benefits, higher long-term incentive expense and increased office support costs.

 

Finance costs include interest expense on our long-term debt and short-term borrowings and U.S. dollar denominated partnership contribution payable, as well as the unwinding of discount on decommissioning liabilities. In 2011, our finance costs were $51 million lower than 2010 primarily as a result of a stronger average Canadian dollar in 2011 reducing our interest expense on our U.S. dollar denominated long-term debt as well as decreasing interest being incurred on the partnership contribution payable as principal payments are made quarterly. The weighted average interest rate on outstanding debt, excluding the U.S. dollar denominated partnership contribution payable, for 2011 was 5.5 percent (2010 – 5.8 percent; 2009 – 5.5 percent).

 

Interest income primarily includes interest earned on our U.S. dollar denominated partnership contribution receivable. Interest income for 2011 decreased by $20 million from 2010 mainly as a result of decreasing interest being earned on the partnership contribution receivable as the balance is being collected combined with a stronger average Canadian dollar.

 

In 2011, we reported net foreign exchange losses of $26 million (2010 - gains of $51 million; 2009 – losses of $304 million), which includes unrealized gains of $42 million (2010 – unrealized gains of $69 million; 2009 – unrealized losses of $327 million) and realized losses of $68 million (2010 – realized losses of $18 million; 2009 – realized gains of $23 million). The decrease of the Canadian dollar exchange rate at December 31, 2011 from 2010 led to unrealized losses on our U.S. dollar denominated long-term debt partially offset by net gains on our U.S. dollar denominated partnership contribution receivable.

 

A net gain of $107 million was recorded on the divestiture of assets in 2011 (2010 – $116 million; 2009 - $2 million) mainly due to the sale of marine terminal facilities as well as certain non-core assets.

 

**DEPRECIATION, DEPLETION and AMORTIZATION**

 
| ($ millions)            | ** ** | **2011**   |      | 2010   |     |     | 2009                                   |   |
|------------------------------|------------|------------|-----------|--------|----------|----------|----------------------------------------|--------|
|                         | ** ** | ** ** |      |   | * * | * * | *(Prepared following   previous GAAP)* |
| Oil   Sands                  | ** ** | **$**      | **347**   |   | $        | 375      |                                   |   |   |   |
| Conventional                 | ** ** | **778**    |      | 799    |     |     |                                   |   |
| Upstream                     | ** ** | **1,125**  |      | 1,174  |     |     | $                                      | 1,250  |   |
| Refining   and Marketing (1) | ** ** | **130**    |      | 96     |     |     | 232                                    |   |
| Corporate   and Eliminations | ** ** | **40**     |      | 32     |     |     | 45                                     |   |
|                         | ** ** | **$**      | **1,295** |   | $        | 1,302    |                                   |   | $ | 1,527 |   |

 

(1)     On the January 1, 2010 transition to IFRS we elected to measure the carrying value of our refineries at their then estimated fair value resulting in a permanent $2.6 billion reduction to their carrying value and decreasing DD&A expense in 2010 compared to 2009.

 

For 2011, Oil Sands DD&A decreased $28 million as higher sales volumes at Foster Creek and Christina Lake were offset by lower sales volumes at Pelican Lake and lower Oil Sands DD&A rates. The lower Oil Sands DD&A rates for 2011 were mostly due to the significant addition of proved reserves at Foster Creek at the end of 2010.

 

 

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DD&A in the Conventional segment decreased $21 million in 2011 primarily due to the decrease in natural gas production volumes and the disposition of non-core assets.

 

Refining and Marketing DD&A increased $34 million of which $45 million was due to the impairment of a catalytic cracking unit at the Wood River Refinery which will not be used in future operations. Refining and Marketing DD&A in 2010 included a loss on impairment of a redundant processing unit at the Borger Refinery of $14 million. Corporate and Eliminations DD&A includes provisions in respect of corporate assets, such as computer equipment, office furniture and leasehold improvements.

 

**INCOME TAX EXPENSE**

 
| ($ millions) | ** ** | **2011**   |    | 2010   |     | 2009                                   |   |
|-------------------|------------|------------|---------|--------|----------|----------------------------------------|--------|
|              | ** ** | ** ** |    |   | * * | *(Prepared following   previous GAAP)* |
| Current   tax     | ** ** | **$**      | **154** |   | $        | 82                                     |   | $ | 934 |   |
| Deferred   tax    | ** ** | **575**    |    | 141    |     | (590                                   | )      |
|              | ** ** | **$**      | **729** |   | $        | 223                                    |   | $ | 344 |   |

 

When comparing 2011 to 2010, our current tax expense increased primarily due to the substantial utilization in 2010 of certain Canadian tax pools acquired at our inception.

 

When comparing 2011 to 2010, our deferred tax expense increased primarily due to increased income from our Refining and Marketing segment which attract income tax at the higher U.S. tax rates and higher unrealized risk management gains.

 

The following table reconciles income taxes calculated at the Canadian statutory rate with the recorded income taxes:

 
| ($ millions, except percent amounts)                      | ** ** | **2011**   |          | 2010   |     | 2009                                   |   |
|----------------------------------------------------------------|------------|------------|---------------|--------|----------|----------------------------------------|--------|
|                                                           | ** ** | ** ** |          |   | * * | *(Prepared following   previous GAAP)* |
| Earnings   before income tax                                   | ** ** | **$**      | **2,****207** |   | $        | 1,304                                  |   | $ | 1,162 |   |
| Canadian   statutory rate                                      | ** ** | **26.7%**  |          | 28.2%  |     | 29.2%                                  |   |
| Expected   income tax                                          | ** ** | **589**    |          | 368    |     | 339                                    |   |
| Effect   of taxes resulting from:                              | ** ** | ** ** |          |   |     |                                   |   |
| Foreign   tax rate differential                                | ** ** | **78**     |          | (22)   |     | 3                                      |   |
| Non-deductible   stock-based compensation                      | ** ** | **18**     |          | 34     |     | -                                      |   |
| Multi-jurisdictional   financing                               | ** ** | **(50)**   |          | (93)   |     | (134)                                  |   |
| Foreign   exchange gains (losses) not included in net earnings | ** ** | **(9)**    |          | 28     |     | 58                                     |   |
| Non-taxable   capital (gains) losses                           | ** ** | **(9)**    |          | (13)   |     | 30                                     |   |
| Capital   loss                                                 | ** ** | **26**     |          | (107)  |     | -                                      |   |
| Adjustments   arising from prior year tax filings              | ** ** | **31**     |          | 26     |     | (16)                                   |   |
| Other                                                          | ** ** | **55**     |          | 2      |     | 64                                     |   |
|                                                           | ** ** | **729**    |          | 223    |     | 344                                    |   |
| Effective   tax rate                                           | ** ** | **33.0%**  |          | 17.1%  |     | 29.6%                                  |   |
|                                                                |            |            |               |        |          |                                        |        |  |  |  |

 

The Canadian statutory tax rate decreased to 26.7 percent in 2011 from 28.2 percent in 2010 as a result of tax legislation enacted in 2007.

 

The increase in our effective tax rate in 2011 is primarily due to a significant increase in the proportion of income in the higher tax rate U.S. jurisdiction relative to the lower tax rate Canadian jurisdiction and lower benefits of multi-jurisdictional financing. The effective tax rate for 2010 was unusually low because of a tax benefit recorded in respect of losses incurred in the U.S. in 2010.

 

Our effective tax rate in any year is a function of the relationship between total tax expense and the amount of earnings before income taxes for the year. The effective tax rate differs from the statutory tax rate as it takes into consideration permanent differences, adjustments for changes in tax rates and other tax legislation, variation in the estimate of reserves and the differences between the provision and the actual amounts subsequently reported on the tax returns. Permanent differences include:

· The non-taxable portion of Canadian capital gains and losses;

· Multi-jurisdictional financing;

· Non-deductible stock-based compensation;

· Recognition of net capital losses; and

· Taxable foreign exchange gains not included in net earnings.

 

 

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Tax interpretations, regulations and legislation in the various jurisdictions in which Cenovus and its subsidiaries operate are subject to change. We believe that our provision for taxes is adequate.

 

**QUARTERLY INFORMATION**

 

 
| ($ millions, except per share   amounts) | ** ** | **Q4**      | ** ** | **Q3**      | ** **   | **Q2**       | ** **   | **Q1**       |     |     | Q4            |          | Q3            |          | Q2       |     | Q1       |     |     | Q4                                         |     |
|-----------------------------------------------|------------|-------------|------------|-------------|--------------|--------------|--------------|--------------|----------|----------|---------------|---------------|---------------|---------------|----------|----------|----------|----------|----------|--------------------------------------------|----------|
| ** **                                    | **2011**   | ** **  | **2011**   | ** **  | **2011**     | ** **   | **2011**     |         |     | 2010     |          | 2010          |          | 2010          |     | 2010     |     |     | 2009     |                                       |
| ** **                                    | * *   | * *    | * *   | * *    | *** *** | *** *** | *** *** | *** *** | * * | * * | * *      | * *      | * *      | * *      | * * | * * | * * | * * | * * | *(Prepared   following   previous   GAAP)* | * * |
| Production   Volumes                          | ** ** | ** **  | ** ** | ** **  | ** **   | ** **   | ** **   | ** **   |     |     |          |          |          |          |     |     |     |     |     |                                       |     |
|   Crude   Oil and NGLs              | ** ** | **144,273** | ** ** | **133,496** | ** **   | **121,762**  | ** **   | **137,355**  |     |     | 129,593  | 128,067  | 128,566  | 130,549  |     | 129,315  |     |
|   Natural   Gas                     | ** ** | **660**     | ** ** | **656**     | ** **   | **654**      | ** **   | **652**      |     |     | 688           |          | 738           |          | 751      |     | 775      |     |     | 797                                        |     |
| Revenues   (1)                                | ** ** | **4,329**   | ** ** | **3,858**   | ** **   | **4,009**    | ** **   | **3,500**    |     |     | 3,363         |          | 2,962         |          | 3,094    |     | 3,222    |     |     | 2,970                                      |     |
| Operating   Cash Flow (2)                     | ** ** | **1,019**   | ** ** | **945**     | ** **   | **1,064**    | ** **   | **834**      |     |     | 815           |          | 661           |          | 665      |     | 840      |     |     | 954                                        |     |
| Cash   Flow (2)                               | ** ** | **851**     | ** ** | **793**     | ** **   | **939**      | ** **   | **693**      |     |     | 645           |          | 509           |          | 537      |     | 721      |     |     | 235                                        |     |
| -   per share – diluted (3)              | ** ** | **1.12**    | ** ** | **1.05**    | ** **   | **1.24**     | ** **   | **0.91**     |     |     | 0.85          |          | 0.68          |          | 0.71     |     | 0.96     |     |     | 0.31                                       |     |
| Operating   Earnings (2)                      | ** ** | **332**     | ** ** | **303**     | ** **   | **395**      | ** **   | **209**      |     |     | 147           |          | 156           |          | 143      |     | 353      |     |     | 169                                        |     |
| -   per share – diluted (3)              | ** ** | **0.44**    | ** ** | **0.40**    | ** **   | **0.52**     | ** **   | **0.28**     |     |     | 0.19          |          | 0.21          |          | 0.19     |     | 0.47     |     |     | 0.23                                       |     |
| Net   Earnings                                | ** ** | **266**     | ** ** | **510**     | ** **   | **655**      | ** **   | **47**       |     |     | 78            |          | 295           |          | 183      |     | 525      |     |     | 42                                         |     |
| -   per share – basic (3)                | ** ** | **0.35**    | ** ** | **0.68**    | ** **   | **0.87**     | ** **   | **0.06**     |     |     | 0.10          |          | 0.39          |          | 0.24     |     | 0.70     |     |     | 0.06                                       |     |
| -   per share – diluted (3)              | ** ** | **0.35**    | ** ** | **0.67**    | ** **   | **0.86**     | ** **   | **0.06**     |     |     | 0.10          |          | 0.39          |          | 0.24     |     | 0.70     |     |     | 0.06                                       |     |
| Capital   Investment (4)                      | ** ** | **903**     | ** ** | **631**     | ** **   | **476**      | ** **   | **713**      |     |     | 701           |          | 479           |          | 444      |     | 491      |     |     | 507                                        |     |
| Cash   Dividends (5)                          | ** ** | **151**     | ** ** | **150**     | ** **   | **151**      | ** **   | **151**      |     |     | 151           |          | 150           |          | 150      |     | 150      |     |     | 159                                        |     |
| -   per share (5)                             | ** ** | **0.20**    | ** ** | **0.20**    | ** **   | **0.20**     | ** **   | **0.20**     |     |     | 0.20          |          | 0.20          |          | 0.20     |     | 0.20     |     |     | US$0.20                                    |     |

 

(1)    In the fourth quarter of 2009, realized and unrealized financial hedging gains from revenue of $35 million have been reclassified to (gain) loss on risk management to conform to the current year’s IFRS presentation.

(2)    Non-GAAP measures defined within this MD&A.

(3)    Any per share amounts prior to December 1, 2009 have been calculated using Encana’s common share balances based on the Arrangement which is further explained in the Advisory.

(4)    Includes expenditures on PP&E and E&E assets.

(5)    The fourth quarter 2009 dividend reflected an amount determined in connection with the Arrangement based on carve-out earnings and cash flow.

 

The improvements in our operational and financial results in the fourth quarter of 2011 demonstrated the dedication of our teams throughout the year. In the fourth quarter, we completed the coker construction and start up activities of the CORE project construction at the Wood River Refinery, more than doubled production from Christina Lake and Lower Shaunavon compared to the fourth quarter of 2010 and completed our 2011 capital program despite the impacts of wet weather in the second and third quarters.

 

In the fourth quarter of 2011, coker construction and start up activities of the CORE project at the Wood River Refinery were completed. The initial CORE design included increasing nameplate refining capacity by 50,000 barrels per day and doubling heavy crude oil refining capacity to approximately 240,000 barrels per day, enhancing our ability to integrate our growing bitumen production. Total CORE project construction costs are within 10 percent of its original budget.

 

Our crude oil and NGLs fourth quarter production increased by 11 percent compared to the same period in 2010 due to increased production from Christina Lake, Foster Creek and at our Conventional light and medium crude oil properties. Partially offsetting these increases was the expected natural declines at Pelican Lake and at our Conventional heavy oil properties. The increase in production at Christina Lake was mainly due to the start of production at phase C in the third quarter of 2011.

 

We applied for an amendment to the existing Christina Lake regulatory approval to add cogeneration facilities to Christina Lake, increasing expected total gross production capacity by 10,000 barrels per day at each of phase F and phase G.

 

Natural gas production in the fourth quarter of 2011 was 660 MMcf per day, a decrease of four percent from 2010 due to expected declines in production from limited capital investment.

 

 

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Capital investment in the fourth quarter of 2011 was $903 million, an increase of $202 million from 2010. The fourth quarter was extremely busy with activity at three phases at Foster Creek, three phases at Christina Lake and our drilling and completions programs across the other areas.

 

Operating cash flow increased $204 million in the fourth quarter of 2011 primarily due to crude oil and NGLs increasing $157 million due to higher average sales prices and sales volumes. Refining and Marketing operating cash flow increased $113 million attributable to improved refining margins. The $64 million decrease in operating cash flow from natural gas was consistent with lower production volumes and average sales prices.

 

In the fourth quarter of 2011 our cash flow increased $206 million compared to 2010 primarily due to:

·       A 28 percent increase in the average sales price of crude oil and NGLs to $80.50 per barrel;

·       An increase in operating cash flow from Refining and Marketing of $113 million, mainly due to improved refining margins; and

·       An increase in our crude oil and NGLs sales volumes consistent with the 11 percent increase in production volumes primarily related to Christina Lake, conventional light and medium crude oil and Foster Creek.

 

The increases in our cash flow in the fourth quarter of 2011 were partially offset by:

·       Increased operating expenses, primarily from crude oil and NGLs production, due to higher staffing levels at Foster Creek, Christina Lake and Pelican Lake, increased trucking and fluid hauling costs with increased production at Bakken and Lower Shaunavon and higher electricity and workover costs;

·       Realized risk management gains before tax, excluding Refining and Marketing, of $29 million compared to gains of $79 million in 2010;

·       An increase in royalties of $43 million mainly as a result of higher crude oil production and increases to the Canadian dollar equivalent WTI price used to calculate certain royalty rates;

·       A $29 million increase in current income tax expense, excluding current tax on divestitures, as a result of the substantial utilization in 2010 of certain Canadian tax pools acquired at our inception which lowered current income tax expense for 2010;

·      A six percent decrease in the average natural gas sales price to $3.35 per Mcf; and

·       Natural gas production declining four percent (28 MMcf per day), as a result of lower capital investment and expected natural declines.

 

In the fourth quarter of 2011, our net earnings increased $188 million compared to 2010. The factors discussed above that increased our operating cash flow in the fourth quarter of 2011 also increased our net earnings. Other significant factors that impacted our 2011 fourth quarter net earnings include:

·       Unrealized risk management losses, after-tax, of $180 million, compared to losses of $197 million in the fourth quarter of 2010;

·       A gain of $104 million on the divesture of a non-core asset in the fourth quarter of 2011 compared to the fourth quarter of 2010 when we recognized a loss of $3 million;

·       Increased DD&A expense of $59 million primarily due to a $45 million refining asset impairment in the fourth quarter of 2011; and

·       Income tax expense, excluding the impact of unrealized risk management gains and losses, of $150 million, compared to $75 million in 2010.

 

 

**OIL AND GAS RESERVES AND RESOURCES**

 

As a Canadian issuer, we are subject to the reporting requirements of Canadian securities regulatory authorities, including the reporting of our reserves in accordance with National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities (“NI 51-101”).

 

Our reserves are primarily located in Alberta and Saskatchewan, Canada. We retained two independent qualified reserves evaluators (“IQREs”), McDaniel & Associates Consultants Ltd. (“McDaniel”) and GLJ Petroleum Consultants Ltd. (“GLJ”), to evaluate and prepare reports on 100 percent of our bitumen, heavy oil, light and medium oil, NGLs, natural gas and CBM reserves. McDaniel also evaluated 100 percent of our contingent and prospective bitumen resources.

 

The Reserves Committee of the Board, composed of independent directors, annually reviews the qualifications and selection of the IQREs, the procedures relating to the disclosure of information with respect to oil and gas activities and the procedures for providing information to the IQREs. The Reserves Committee meets independently with management and with each IQRE to determine whether any restrictions affect the ability of the IQRE to report on the reserves data without reservation, to review the reserves data and the report of the IQRE thereon, and to provide a recommendation on approval of the reserves and resources disclosure to the Board.

 

 

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Highlights in 2011 include:

·       Bitumen proved reserves increased approximately 26 percent and proved plus probable reserves increased approximately 16 percent;

o                  Christina Lake added proved reserves of 270 million barrels while proved plus probable reserves increased by 213 million barrels. Increases at Christina Lake were primarily a result of receiving regulatory approval to expand the development area and from positive delineation results;

o                  Foster Creek added proved reserves of 56 million barrels and proved plus probable reserves of 79 million barrels. Increases at Foster Creek were primarily due to positive revisions from delineation results, increased recovery from wells using our Wedge WellTM technology and improved steam chamber recovery;

·       Heavy oil proved reserves increased approximately four percent and proved plus probable reserves increased approximately seven percent. These increases were primarily as a result of expanding polymer flood areas and the successful performance of those flood areas at Pelican Lake;

·       Light and medium oil and NGLs proved and proved plus probable reserves each increased by approximately four percent, primarily as a result of expanding waterflood and carbon dioxide flood areas and the successful performance of those flood areas at Weyburn;

·       Natural gas proved reserves declined approximately 13 percent and proved plus probable reserves declined approximately 11 percent due to extensions and technical revisions not offsetting production and due to the impacts of declined capital investment;

·       Best estimate economic contingent resources increased 2.1 billion barrels or approximately 34 percent. This increase is primarily as a result of our significant stratigraphic test well drilling program successfully converting prospective resources to contingent resources and positive technical revisions to volumetric and recovery factor estimates;

·       Best estimate prospective resources declined 2.3 billion barrels or approximately 19 percent, primarily as a result of the reclassification of prospective resources to contingent resources resulting from stratigraphic test well drilling.

 

The reserves and resources data is presented as at December 31, 2011 using McDaniel’s January 1, 2012 forecast prices and costs and as at December 31, 2010 using McDaniel’s January 1, 2011 forecast prices and costs. We hold significant fee title rights which generate production for our account from third parties leasing those lands. The before royalty volumes presented below do not include reserves associated with this production.

 

**RESERVES AT DECEMBER 31**
|                   | ** ** | Bitumen   | ** ** | Heavy   Oil | ** ** | Light   & Medium Oil &   NGLs | ** ** | Natural   Gas & CBM |       |
|------------------------|------------|-----------|------------|-------------|------------|---------------------------------------|------------|-------------------------|------------|
|                   | ** ** | (MMbbls)  | ** ** | (MMbbls)    | ** ** | (MMbbls)                              | ** ** | (Bcf)                   |       |
| Before Royalties       | ** ** | **2011**  |       | 2010        | ** ** | **2011**                              |       | 2010                    | ** ** | **2011** |   | 2010 | ** ** | **2011** |   | 2010 |   |
| Proved                 | ** ** | **1,455** |       | 1,154       | ** ** | **175**                               |       | 169                     | ** ** | **115** |   | 111 | ** ** | **1,203** |   | 1,390 |   |
| Probable               | ** ** | **490**   |       | 523         | ** ** | **109**                               |       | 97                      | ** ** | **51** |   | 49 | ** ** | **391** |   | 410 |   |
| Proved   plus Probable | ** ** | **1,945** |       | 1,677       | ** ** | **284**                               |       | 266                     | ** ** | **166** |   | 160 | ** ** | **1,594** |   | 1,800 |   |

 

**RECONCILIATION OF PROVED RESERVES**
| Before Royalties                   |   | Bitumen(MMbbls) |   | Heavy   Oil(MMbbls) |   | Light   & Medium   Oil & NGLs(MMbbls) |   | Natural   Gas   & CBM(Bcf) |   |
|------------------------------------|--------|-----------------|--------|---------------------|--------|-----------------------------------------------|--------|--------------------------------|--------|
| December   31, 2010                |   | 1,154           |   |                | 169    |                                          |   | 111                            |   |   | 1,390 |   |   |
| Extensions   and Improved Recovery |   | 256             |   |                | 16     |                                          |   | 13                             |   |   | 50 |   |   |
| Discoveries                        |   | -               |   |                | -      |                                          |   | -                              |   |   | - |   |   |
| Technical   Revisions              |   | 69              |   |                | 2      |                                          |   | 1                              |   |   | 29 |   |   |
| Economic   Factors                 |   | -               |   |                | 1      |                                          |   | -                              |   |   | (28 | ) |   |
| Acquisitions                       |   | -               |   |                | -      |                                          |   | -                              |   |   | - |   |   |
| Dispositions                       |   | -               |   |                | -      |                                          |   | -                              |   |   | - |   |   |
| Production                         |   | (24             | )      |                | (13    | )                                             |   | (10                            | )      |   | (238 | ) |   |
| December   31, 2011                |   | 1,455           |   |                | 175    |                                          |   | 115                            |   |   | 1,203 |   |   |
| Year   over year change            |   | 301             |   |                | 6      |                                          |   | 4                              |   |   | (187 | ) |   |
|                               |   | 26              | %      |                | 4      | %                                             |   | 4                              | %      |   | -13 | % |   |

 

 

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**RECONCILIATION OF PROBABLE RESERVES**
| Before Royalties                   |   | Bitumen(MMbbls) |   | Heavy   Oil(MMbbls) |   | Light   & Medium   Oil & NGLs(MMbbls) |   | Natural   Gas   & CBM(Bcf) |   |
|------------------------------------|--------|-----------------|--------|---------------------|--------|-----------------------------------------------|--------|--------------------------------|--------|
| December 31, 2010             |   | 523             |   |                | 97     |                                          |   | 49                             |   |   | 410 |   |   |
| Extensions   and Improved Recovery |   | 32              |   |                | 14     |                                          |   | 3                              |   |   | 11 |   |   |
| Discoveries                        |   | -               |   |                | -      |                                          |   | -                              |   |   | - |   |   |
| Technical   Revisions              |   | (65             | )      |                | (2     | )                                             |   | (1                             | )      |   | (27 | ) |   |
| Economic   Factors                 |   | -               |   |                | -      |                                          |   | -                              |   |   | (3 | ) |   |
| Acquisitions                       |   | -               |   |                | -      |                                          |   | -                              |   |   | - |   |   |
| Dispositions                       |   | -               |   |                | -      |                                          |   | -                              |   |   | - |   |   |
| Production                         |   | -               |   |                | -      |                                          |   | -                              |   |   | - |   |   |
| December 31, 2011             |   | 490             |   |                | 109    |                                          |   | 51                             |   |   | 391 |   |   |
| Year over year change              |   | (33             | )      |                | 12     |                                          |   | 2                              |   |   | (19 | ) |   |
|                               |   | -6              | %      |                | 12     | %                                             |   | 4                              | %      |   | -5 | % |   |

 

**ECONOMIC CONTINGENT and PROSPECTIVE RESOURCES AT DECEMBER 31**
|                             | ** ** | Bitumen               |   |
|----------------------------------|------------|-----------------------|--------|
|                             | ** ** | (billions of barrels) |   |
| Before Royalties                 | ** ** | **2011**              |   | 2010 |   |
| Economic contingent resources(1) | ** ** | ** **            |   |   |   |
| Low   Estimate                   | ** ** | **6.0**               |   | 4.4 |   |
| Best   Estimate                  | ** ** | **8.2**               |   | 6.1 |   |
| High   Estimate                  | ** ** | **10.8**              |   | 8.0 |   |
| Prospective resources(1)(2)      | ** ** | ** **            |   |   |   |
| Low   Estimate                   | ** ** | **5.7**               |   | 7.3 |   |
| Best   Estimate                  | ** ** | **10.0**              |   | 12.3 |   |
| High   Estimate                  | ** ** | **17.9**              |   | 21.7 |   |

 

(1)    See Oil and Gas Information in the Advisory for definitions of contingent resources, economic contingent resources, prospective resources and low, best and high estimate. There is no certainty that it will be commercially viable to produce any portion of the contingent resources.

(2)    There is no certainty that any portion of the prospective resources will be discovered. If discovered, there is no certainty that it will be commercially viable to produce any portion of the resources. Prospective resources are not screened for economic viability.

 

Contingent and prospective resources are estimated using volumetric calculations of the in-place quantities, combined with performance from analog reservoirs. Existing SAGD projects that are producing from the McMurray-Wabiskaw formations are used as performance analogs at Foster Creek and Christina Lake. Other regional analogs are used for contingent and prospective resources estimation in the Cretaceous Grand Rapids formation at the Grand Rapids property in the Pelican Lake Region, in the McMurray formation at the Telephone Lake property in the Borealis Region and in the Clearwater formation in the Foster Creek Region.

 

Contingencies which must be overcome to enable the reclassification of contingent resources as reserves can be categorized as economic, non-technical and technical. The Canadian Oil and Gas Evaluation Handbook identifies non-technical contingencies as legal, environmental, political and regulatory matters or a lack of markets. The contingencies applicable to our contingent resources are not categorized as economic. Our bitumen contingent resources are located in four general regions: Foster Creek, Christina Lake, Borealis and Greater Pelican.

 

At Foster Creek and Christina Lake we have economic contingent resources located outside the currently approved development project areas. Regulatory approval of development project area expansion is necessary to enable the reclassification of these economic contingent resources as reserves. The rate at which we submit applications for development area expansion is dependent on the rate of development drilling, which ties to an orderly development plan that maximizes utilization of steam generation facilities and ultimately optimizes production, capital utilization and value.

 

In the Borealis Region we have submitted an application for a development project at the Telephone Lake property which, if approved, would enable the reclassification of certain economic contingent resources in the area to reserves. Other areas in the Borealis Region require additional results from delineation drilling and seismic activity in order to submit regulatory applications for development projects. Stratigraphic test well drilling and seismic activity is continuing in these areas to bring them to project readiness. Currently, sufficient pipeline capacity is also considered a contingency.

 

In the Greater Pelican Region we submitted an application in the fourth quarter of 2011 for development project approval at the Grand Rapids property. Provided all regulatory requirements are met, we anticipate receiving regulatory approval in 2013. Pilot project work is underway to examine optimal development strategies.

 

We are systematically progressing our bitumen prospective resources to contingent resources and then to reserves, and ultimately to production. For example, approval for expansion of the Christina Lake development area resulted in the movement of some contingent resources to proved and probable reserves. 

 

 

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Similarly, the stratigraphic test well program in the Borealis and Pelican Lake Regions moved some prospective resources to contingent resources. The overall reduction to prospective resources is the expected outcome of a successful stratigraphic test well program, which converts undiscovered resources to discovered resources.

 

Bitumen reserves and resources increased in part because of improvements in SAGD performance at our Foster Creek and Christina Lake properties resulting from improved operating performance and the use of wells drilled using our Wedge WellTM technology. Analysis of core data in the steamed portions of the reservoir has revealed that the efficiency of the SAGD process in extracting bitumen from the reservoir is greater than previously anticipated. We expect to continue to improve overall recovery from our bitumen assets as technology develops.

 

Information with respect to pricing as well as additional reserves and other oil and gas information, including the material risks and uncertainties associated with reserves and resource estimates, is contained in our Annual Information Form (“AIF”) for the year ended December 31, 2011 (see the Additional Information section).

 

 

**LIQUIDITY AND CAPITAL RESOURCES**

** **

** **
| ($ millions)                                                                          | ** ** | **2011**   |       | 2010       |     | 2009                                   |   |
|--------------------------------------------------------------------------------------------|------------|------------|------------|------------|----------|----------------------------------------|--------|
|                                                                                       | ** ** | ** ** | ** ** | ** ** | * * | *(Prepared following   previous GAAP)* |
| Net cash   from (used in)                                                                  | ** ** | ** ** | ** ** | ** ** |     |                                   |   |
| Operating   activities                                                                     | ** ** | **$**      | **3,273**  |       | $        | 2,591                                  |   | $ | 3,039 |   |
| Investing   activities                                                                     | ** ** | **(2,530** | **)**      | (1,793     | )        | (2,063                                 | )      |
| Net cash   provided (used) before Financing activities                                     | ** ** | **743**    |       | 798        |     | 976                                    |   |
| Financing   activities                                                                     | ** ** | **(558**   | **)**      | (631       | )        | (977                                   | )      |
| Foreign   exchange gains (losses) on cash and    cash equivalents held in foreign currency | ** ** | **10**     |       | (22        | )        | (32                                    | )      |
| Increase   (decrease) in cash and cash equivalents                                         | ** ** | **$**      | **195**    |       | $        | 145                                    |   | $ | (33 | ) |

 

**OPERATING ACTIVITIES**

 

Cash from operating activities increased $682 million in 2011 compared to 2010 mainly because of an $864 million increase in cash flow, which is discussed in the Financial Information section of this MD&A. Cash from operating activities is also impacted by the net change in non-cash working capital and the net change in other assets and liabilities.

 

Excluding risk management assets and liabilities and assets held for sale, we had working capital of $283 million at December 31, 2011 compared to $276 million at December 31, 2010. We anticipate that we will continue to meet our payment obligations.

 

**INVESTING ACTIVITIES**

 

Cash used for investing activities in 2011 increased $737 million from 2010. The increase is primarily due to higher capital expenditures, which increased by $591 million and decreased proceeds from divestiture of assets of $136 million. Capital expenditures are further discussed under Net Capital Investment within the Financial Information section and Capital Investment within the Reportable Segments sections of this MD&A.

 

**FINANCING ACTIVITIES**

 

In September 2011, we renegotiated our existing $2.5 billion committed bank credit facility, increasing the facility to $3.0 billion and extending the maturity date to November 30, 2015. In addition, the standby fees required to maintain the facility and the cost of future borrowings were reduced. We also have a commercial paper program which, together with the committed credit facility, may be used to manage our short-term cash requirements. At December 31, 2011, we had no short-term borrowings (2010 and 2009 – nil) in the form of commercial paper. We reserve capacity under our committed credit facility for amounts of commercial paper outstanding.

 

In addition, we have in place a Canadian debt shelf prospectus for $1.5 billion and a U.S. debt shelf prospectus for US$1.5 billion, the availability of which are dependent on market conditions. No notes have been issued under either prospectus. The Canadian debt shelf prospectus expires in July 2012 and the U.S. debt shelf prospectus in August 2012. It is our intention to renew both prospectuses prior to their expiration.

 

 

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Our disciplined approach to capital investment decisions means that we prioritize our use of cash flow first to committed capital investment then to paying a meaningful dividend and then finally to growth capital. In 2011, we declared and paid quarterly dividends of $0.20 per share (2010 – $0.20 per share; 2009 – US$0.20 per share in the fourth quarter) for total dividend payments of $603 million (2010 - $601 million; 2009 - $159 million). The declaration of dividends is at the sole discretion of the Board and is considered quarterly.

 

Cash used in financing activities in 2011 decreased by $73 million from 2010. The decrease in 2011 was primarily due to $58 million of revolving long-term debt payments in 2010 compared to none in 2011 and higher proceeds on the issuance of common shares in 2011, which were as a result of stock option exercises. Our long-term debt was $3,527 million as at December 31, 2011 (2010 - $3,432 million; 2009 - $3,656 million). There are no payments of principal due until September 2014 ($814 million).

 

As at December 31, 2011, we are in compliance with all of the terms of our debt agreements.

 

**FINANCIAL METRICS**

 
|                              | ** ** | December 31, |   |
|-----------------------------------|------------|--------------|--------|
|                              | ** ** | **2011**     |   | 2010 |   |   | 2009 |   |
| Debt to   Capitalization          | ** ** | **27%**      |   | 29% |   |   | 32% |  (1) |
| Debt to   Adjusted EBITDA (times) | ** ** | **1.0x**     |   | 1.3x |   |   | 0.9x |  (2) |

 

(1)            The 2009 Debt to Capitalization ratio has been calculated as at January 1, 2010 on an IFRS basis.

(2)            The 2009 Debt to Adjusted EBITDA ratio has been calculated on a previous GAAP basis.

 

In 2011, driven by strong operational results, our financial position has improved as measured by our debt to capitalization and debt to adjusted EBITDA metrics both of which are at or below the low end of our target ranges.

 

We monitor our capital structure and financing requirements using, among other things, non-GAAP financial metrics consisting of debt to capitalization and debt to adjusted EBITDA. We define our non-GAAP measure of debt as short-term borrowings and the current and long-term portions of long-term debt excluding any amounts with respect to the partnership contribution payable or receivable. We define our non-GAAP measure of capitalization as debt plus shareholders’ equity. Trailing 12-month Adjusted EBITDA is a non-GAAP measure defined as earnings before finance costs, interest income, income tax expense, DD&A, exploration expense, unrealized gain (loss) on risk management, foreign exchange gains (losses), gain (loss) on divestiture of assets and other income (loss), net. These metrics are used to steward our overall debt position as measures of our overall financial strength.

 

In order to increase comparability of debt to adjusted EBITDA between periods and remove the non-cash component of risk management activities, we changed our definition of adjusted EBITDA in 2011 to exclude unrealized gains and losses on risk management activities. Adjusted EBITDA and the ratio of debt to adjusted EBITDA for 2010 and 2009 have been re-presented in a consistent manner. Our capital structure objectives and targets remain unchanged from previous periods.

 

We continue to target a debt to capitalization ratio of between 30 to 40 percent and a debt to adjusted EBITDA of between 1.0 to 2.0 times. Additional information regarding our financial metrics and capital structure can be found in the notes to the Consolidated Financial Statements.

 

**OUTSTANDING SHARE DATA**

 

Cenovus is authorized to issue an unlimited number of common shares, an unlimited number of first preferred shares and an unlimited number of second preferred shares. As at December 31, 2011, approximately 754.5 million common shares were outstanding (2010 – 752.7 million; 2009 – 751.3 million) and no preferred shares were outstanding. The increase in common shares in 2011 was the result of stock option exercises. No other issuance of common shares has occurred in 2011.

 

We have in place a Board approved dividend reinvestment plan (“DRIP”), which permits holders of common shares to automatically reinvest all or any portion of their cash dividends paid on their common shares in additional common shares. At the discretion of Cenovus, the additional common shares may be issued from treasury or purchased on the market. For the years ended December 31, 2011 and 2010, common shares were purchased on the market to meet our DRIP requirements.

 

 

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*Long-term Incentive Plans*

 

The Cenovus Stock Option Plan (“ESOP”) permits our Board, from time to time, to grant to employees of Cenovus and its subsidiaries stock options to purchase our common shares. Option exercise prices approximate the market price for the common shares on the date the options were issued. Options granted under the ESOP are exercisable at 30 percent of the number granted after one year, an additional 30 percent of the number granted after two years and are fully exercisable after three years. Options granted prior to February 17, 2010 expire after five years while options granted on or after February 17, 2010 expire after seven years.

 

Options granted prior to February 24, 2011 have an associated tandem share appreciation right (“TSAR”), which gives employees the right to elect to receive a cash payment equal to the excess of the market price of our common shares over the exercise period of their option in exchange for surrendering their option. A portion of the options have an additional vesting condition which is subject to the Company attaining prescribed performance relative to key pre-determined measures. The performance-based options that do not vest when eligible are forfeited. The exercise of an option as a TSAR for a cash payment does not result in the issuance of any additional common shares, thus having no dilutive effect.

 

Options granted on or after February 24, 2011 have associated net settlement rights (“NSR”). The NSRs, in lieu of exercising the option, give the option holder the right to receive the number of common shares that could be acquired with the excess value of the market price of our common shares at the time of exercise over the exercise price of the option.

 

The TSARs and NSRs vest and expire under the same terms and conditions as the underlying options.

 

In accordance with the Arrangement, each Cenovus and Encana employee holding Encana options prior to the Arrangement received one Cenovus replacement option and one Encana replacement option for each original Encana option held. The terms and conditions of the Cenovus replacement options are similar to the terms and conditions of the original Encana options, which are also similar to the terms and conditions of Cenovus options. The original exercise price of the Encana options was apportioned to the Cenovus and Encana replacement options based on the one-day weighted average trading price of Cenovus’s common share price relative to that of Encana’s common share price on the Toronto Stock Exchange on December 2, 2009.

 

No further Cenovus replacement options will be granted to Encana employees. Encana is required to reimburse Cenovus in respect of cash payments made to Encana employees for Cenovus replacement options exercised as TSARs. Cenovus is required to reimburse Encana in respect of cash payments made to Cenovus employees for Encana replacement options exercised as TSARs. No further Encana replacement options will be granted to Cenovus employees.

 

The following is a summary of long-term incentives outstanding at year end:

 
|                          |       | **2011**   |       |                         | 2010   |   |                 | 2009   |                           |
|-------------------------------|------------|------------|------------|------------------------------|--------|--------|----------------------|--------|--------------------------------|
|                          |       | Units(1)   |       | Price(2)                     |   |   |   Units(1) |   | Price(2)                       |   |   | Units(1) |   | Price(2) |   |
| TSARs                         |       |       |       |                         |   |   |                 |   |                           |   |   |   |   |   |   |
| - outstanding                 | ** ** | **14,921** | ** ** | **$ 28.12  ** |   |   | 19,117     |   | $  27.75   |   |   | 16,455    |   | $  27.52 |   |
| - exercisable                 | ** ** | **8,874**  | ** ** | **$ 29.15  ** |   |   | 7,734      |   | $  28.07   |   |   | 6,107    |   | $  25.68 |   |
| NSRs                          | ** ** | ** ** |       |                         |   |   |                 |   |                           |   |   |   |   |   |   |
| - outstanding                 | ** ** | **5,809**  | ** ** | **$ 36.95  ** |   |   | -          |   | -                    |   |   | -    |   | - |   |
| - exercisable                 | ** ** | **1**      | ** ** | **$ 37.54  ** |   |   | -          |   | -                    |   |   | -    |   | - |   |
| Cenovus Replacement TSARs (3) | ** ** | ** ** |       |                         |   |   |                 |   |                           |   |   |   |   |   |   |
| - outstanding                 | ** ** | **9,686**  | ** ** | **$ 28.96  ** |   |   | 17,154     |   | $  28.16   |   |   | 22,945    |   | $  27.14 |   |
| - exercisable                 | ** ** | **7,522**  | ** ** | **$ 29.73  ** |   |   | 10,805     |   | $  27.88   |   |   | 9,972    |   | $  25.29 |   |
| Encana Replacement TSARs (4)  | ** ** | ** ** |       |                         |   |   |                 |   |                           |   |   |   |   |   |   |
| - outstanding                 | ** ** | **10,411** | ** ** | **$ 31.97  ** |   |   | 13,527     |   | $  31.17   |   |   | 16,357    |   | $  30.46 |   |
| - exercisable                 | ** ** | **8,461**  | ** ** | **$ 32.64  ** |   |   | 8,066      |   | $  30.85   |   |   | 6,076    |   | $  28.43 |   |

 

(1)   Thousands of units.

(2)   Weighted average exercise price.

(3)   Held by Encana Employees.

(4)   Held by Cenovus Employees.

 

The closing share price at December 31, 2011 for Cenovus was $33.83 and for Encana was $18.89.

 

 

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**CONTRACTUAL OBLIGATIONS AND COMMITMENTS**
|                                    |   | Expected Payment Date |   |
|-----------------------------------------|--------|-----------------------|--------|
| ($ millions)                       |   | 2012                  |   | 2013 |   | 2014 |   | 2015 |   | 2016 |   | 2017 | + | Total |   |
| Pipeline Transportation (1)             |   | $                     | 143    |   | $ | 137 |   | $ | 187 |   | $ | 311 |   | $ | 347 |   | $ | 2,754 |   | $ | 3,879 |   |
| Operating Leases (Building Leases)      |   | 71                    |   | 93 |   | 85 |   | 80 |   | 80 |   | 1,491 |   | 1,900 |   |
| Product Purchases                       |   | 19                    |   | 18 |   | 19 |   | 19 |   | 6 |   | - |   | 81 |   |
| Capital Commitments (2)                 |   | 366                   |   | 98 |   | 40 |   | 23 |   | 22 |   | 20 |   | 569 |   |
| Other long-term Commitments             |   | 5                     |   | 4 |   | 1 |   | 1 |   | - |   | 1 |   | 12 |   |
| Decommissioning liabilities             |   | 69                    |   | 2 |   | 7 |   | 2 |   | 2 |   | 6,458 |   | 6,540 |   |
| Long-term debt (3)                      |   | -                     |   | - |   | 814 |   | - |   | - |   | 2,745 |   | 3,559 |   |
| Partnership Contribution Payable (3)    |   | 372                   |   | 395 |   | 419 |   | 445 |   | 472 |   | 122 |   | 2,225 |   |
| Total Payments (4)                      |   | $                     | 1,045  |   | $ | 747 |   | $ | 1,572 |   | $ | 881 |   | $ | 929 |   | $ | 13,591 |   | $ | 18,765 |   |
| Product Sales                           |   | $                     | 52     |   | $ | 54 |   | $ | 56 |   | $ | 57 |   | $ | 60 |   | $ | 3 |   | $ | 282 |   |
| Partnership Contribution Receivable (3) |   | $                     | 372    |   | $ | 393 |   | $ | 414 |   | $ | 436 |   | $ | 460 |   | $ | 119 |   | $ | 2,194 |   |

 

(1) Certain transportation commitments included are subject to regulatory approval.

(2) Includes commitments related to jointly controlled entities.

(3) Principal component only. See notes to the Consolidated Financial Statements.

(4) Contracts undertaken by the Company on behalf of the FCCL Partnership are reflected at our 50 percent interest.

 

Cenovus has entered into various commitments in the normal course of operations primarily related to demand charges on firm transportation agreements (which include amounts for projects awaiting regulatory approval), future building leases, marketing agreements, capital commitments and debt. In addition, we have commitments related to our risk management program and an obligation to fund our defined benefit pension and other post-employment benefit plans. For further information please see the notes to the Consolidated Financial Statements.

 

Our commitments for 2012 increased by $385 million and in total increased by $2,537 million from 2010 mainly due to increased pipeline transportation commitments. These increased commitments were primarily for increased tolls and new agreements entered into in 2011 for crude oil transportation as we implement our marketing strategy to access new markets for our increasing crude oil production.

 

As at December 31, 2011, Cenovus remained a party to long-term, fixed price, physical contracts for natural gas with a current delivery of approximately 33 MMcf per day, with varying terms and volumes through 2017. The total volume to be delivered within the terms of these contracts is 61 Bcf of natural gas at a weighted average price of $4.62 per Mcf.

 

In the normal course of business, we also lease office space for personnel who support field operations and for corporate purposes.

 

**LEGAL PROCEEDINGS**

 

We are involved in a limited number of legal claims associated with the normal course of operations and we believe we have made adequate provisions for such claims. There are no individually or collectively significant claims.

 

 

**RISK MANAGEMENT**

 

Our business, prospects, financial condition, results of operations and cash flows, and in some cases our reputation, are impacted by risks that are categorized as follows:

·       Financial risks including market risk (fluctuations in commodity prices, foreign exchange rates and interest rates), credit risk, liquidity risk and cost overruns;

·       Operational risks including capital and operating risks, reserves replacement risks and safety and environmental risks; and

·       Regulatory risks including regulatory process and approval risks and changes to environmental regulations.

 

We are committed to identifying and managing these risks in the near-term, as well as on a strategic and longer term basis at all levels in the organization in accordance with our Board-approved Market Risk Mitigation Policy, Enterprise Risk Management Policy, Credit Policy and risk management programs. Management monitors our risk strategies to proactively respond to changing economic conditions and to eliminate or mitigate risk. Issues affecting, or with the potential to affect, our assets, operations and/or reputation, are generally of a strategic nature or are emerging issues that can be identified early and then managed, but occasionally unforeseen issues arise unexpectedly and must be managed on an urgent basis.

 

A description of the risks affecting Cenovus can be found in the Advisory and a full discussion of the material risk factors affecting Cenovus can be found in our AIF for the year ended December 31, 2011 (see Additional Information).

 

 

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**FINANCIAL RISKS**

 

Financial risk is the risk of loss or lost opportunity resulting from financial management and market conditions that could have a positive or negative impact on our business.

 

We continue to implement our business model which focuses on developing low-risk and low-cost long-life resource properties. Cost containment and reduction strategies are in place to help ensure our controllable costs are efficiently managed. Counterparty and credit risks are closely monitored as is our liquidity to ensure access to cost effective credit. Sufficient access to cash resources, including our committed credit facility, is maintained to fund capital expenditures.

 

We partially mitigate our exposure to financial risks through the use of various financial instruments and physical contracts governed by our Market Risk Mitigation Policy which contains prescribed hedging protocols and limits. We have entered into various financial instrument agreements to mitigate exposure to commodity price risk volatility. The details of these instruments, including any unrealized gains or losses, as of December 31, 2011, are disclosed in the notes to the Consolidated Financial Statements and discussed in this MD&A. The financial instruments used are primarily swaps which are entered into with major financial institutions, integrated energy companies or commodities trading institutions and exchanges.

 

*Global Economic Environment*

 

The global economic environment has been turbulent and there continues to be uncertainty surrounding the European sovereign debt crisis. The European financial conditions along with a potential U.S. recession are among our most significant economic concerns.

 

We believe our financial position is strong with debt metrics currently at or below the low end of our target ranges. In addition, we have a fully available committed credit facility of $3.0 billion and capacity under two shelf prospectuses available to assist in addressing continued economic uncertainty and deteriorating global conditions. We also have a risk mitigation strategy that helps protect a portion of our cash flow each year.

 

Our ability to react to global economic uncertainties is enhanced by our ability to scale our capital programs to accommodate reduced cash flows.

 

*Commodity Price Risk*

 

Commodity price risk is the exposure to fluctuations in future market prices that results from the sales of various commodities in our operations.

 

We seek to reduce our exposure to commodity price risk through an integrated business strategy whereby a portion of operating supplies and feedstock is provided from internal operations. To further mitigate commodity price risk, we use derivative instruments in various operational markets to optimize our supply or production chain. We have partially mitigated our exposure to the crude oil commodity price risk on our crude oil sales with fixed price WTI swaps. We have partially mitigated our exposure to the natural gas commodity price risk on our natural gas sales with fixed price NYMEX and AECO swaps. We have partially mitigated our exposure to widening location or quality differentials for crude oil and natural gas with fixed price differential and basis swaps. We have partially mitigated our exposure to electricity consumption costs with a derivative power contract.

 

*Credit Risk*

 

Credit risk is the potential for loss if a counterparty in a transaction fails to meet its obligations in accordance with agreed terms.

 

A substantial portion of our accounts receivable are with customers in the oil and gas industry. This credit exposure is mitigated through the use of our Board-approved credit policy governing our credit portfolio and with credit practices that limit transactions according to counterparties’ credit quality. All financial derivative agreements are with major financial institutions in North America and Europe or with counterparties having investment grade credit ratings.

 

*Liquidity Risk*

 

Liquidity risk is the risk we will not be able to meet all our financial obligations as they come due.  Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price.

 

We manage our liquidity risk through the active management of cash and debt by ensuring that we have access to multiple sources of capital including: cash and cash equivalents, cash from operating activities, undrawn credit facilities, commercial paper and availability under our shelf prospectuses. At December 31, 2011, no amounts were drawn on our committed credit facility.

 

 

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In addition, we had $1.5 billion in unused capacity under our Canadian shelf prospectus and US$1.5 billion in unused capacity under our U.S. shelf prospectus, the availability of which are dependent on market conditions. Both of these prospectuses expire in the third quarter of 2012 and it is our intention to renew them prior to their expiration.

 

*Foreign Exchange Risk*

 

Foreign exchange risk is the exposure to fluctuations in foreign currency exchange rates in our operations. As our commodity sales are generally priced in U.S. dollars and our capital expenditures and expenses are paid in both U.S. and Canadian dollars, fluctuations in the exchange rate between the U.S. and Canadian dollar can have a significant effect on our financial results which are reported in Canadian dollars.

 

We reduce our exposure to foreign exchange risk through an integrated business strategy with a mix of U.S. and Canadian operations that creates a partial hedge to foreign exchange exposure. To further mitigate foreign exchange risk, we may enter into foreign exchange contracts or hedge our commodity exposures in Canadian dollars.

 

We also have the flexibility to maintain a mix of both U.S. dollar and Canadian dollar debt, which helps to offset the exposure to the fluctuations in the U.S./Canadian dollar exchange rate. In addition to direct issuance of U.S. dollar denominated debt, we may enter into cross currency swaps on a portion of our debt as a means of managing the U.S./Canadian dollar debt mix.

 

*Interest Rate Risk*

 

Interest rate risk is the impact of changing interest rates on earnings, cash flows and valuations. Although all of our debt portfolio was fixed rate debt at December 31, 2011, we have the flexibility to partially mitigate our exposure to interest rate changes by maintaining a mix of both fixed and floating rate debt through the use of our commercial paper program and credit facilities. We may also enter into interest rate swap transactions from time to time as an additional means of managing the fixed/floating rate debt portfolio mix.

 

**OPERATIONAL RISKS**

 

Operational risk is the risk of loss or lost opportunity resulting from operating and capital activities that, by their nature, could have an impact on our ability to achieve our objectives.

 

*Capital and Operating Risks*

 

Our ability to operate, generate cash flows, complete projects and value reserves is subject to capital and operating risks, including continued market demand for our products and other risk factors outside of our control, which include: general business and market conditions; economic recessions and financial market turmoil; the ability to secure and maintain cost effective financing for our commitments; the ability to obtain necessary regulatory, stakeholder and partner approvals; environmental and regulatory matters; unexpected cost increases; royalties; taxes; the availability of drilling and other equipment; the ability to access lands; weather; the availability of processing capacity; the availability and proximity of pipeline capacity; the availability of diluents to transport crude oil; technology failures; accidents; the availability of skilled labour and reservoir quality.

 

In the context of continued market volatility and in the face of the European credit crisis, which could result in a significant global economic recession, we are mindful of the need to maintain financial resiliency. Our capital programs are scalable in most cases, and we identified areas where we could slow down our spending in response to lower cash flows due to lower market prices. We expect to maintain strong financial metrics and substantial liquidity to respond to periods of lower prices if recessionary pressures impact our business.

 

*Reserves Replacement Risk*

 

If we fail to acquire, develop or find additional crude oil and natural gas reserves, our reserves and production will decline materially from their current levels and, therefore, our cash flows are highly dependent upon successfully producing current reserves and acquiring, discovering or developing additional reserves.

 

To mitigate these risks, as part of the capital approval process, we evaluate projects on a fully risked basis, including geological risk and engineering risk. In addition, our asset teams undertake a project look back process. In this process, each asset team undertakes a thorough review of its previous capital program to identify key learnings, which often include technical and operational issues that positively and negatively impacted the project’s results. Mitigation plans are developed for the issues that had a negative impact on results. These mitigation plans are then incorporated into the current year plan for the project. On an annual basis, these look back results are analyzed in relation to our capital program with the results and identified learnings shared across our company.

 

 

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We utilize a peer review process to ensure that capital projects are appropriately risked and that knowledge is shared across our company. Peer reviews are undertaken primarily for early stage properties, although they may occur for any type of project.

 

*Safety and Environmental Risk*

 

Crude oil and natural gas development, production and refining are, by their nature, high risk activities that may cause personal injury or unanticipated environmental disruption. We are committed to safety in our operations and with high regard for the environment and stakeholders. These risks are managed by executing policies and standards that are designed to comply with or exceed government regulations and industry standards. In addition, we maintain a system, in respect of our assets and operations that identifies, assesses and controls safety, security and environmental risk and requires regular reporting to both senior management and our Board. The Safety, Environment and Responsibility Committee of our Board reviews and recommends policies pertaining to corporate responsibility, including safety and the environment, for approval by our Board and oversees compliance with government laws and regulations. Monitoring and reporting programs for environmental, health and safety performance in day-to-day operations, as well as inspections and assessments, are designed to provide assurance that environmental and regulatory standards are met. Contingency plans are in place for a timely response to an environmental event and remediation/reclamation strategies are utilized to restore the environment. In addition, security risks are managed through a security program designed to protect our personnel and assets.

 

We have an Investigations Committee whose mandate is to address potential violations of policies and practices and an Integrity Helpline that can be used to raise any concerns regarding operations, accounting or internal control matters.

 

When making operating and investing decisions, our business model allows flexibility in capital allocation to optimize investments focused on strategic fit, project returns, long-term value creation, and risk mitigation. We also mitigate operational risks through a number of other policies, systems and processes as well as by maintaining a comprehensive insurance program in respect of our assets and operations.

 

**REGULATORY RISKS**

 

Our operations are subject to regulation and intervention by governments that can affect or prohibit the drilling, completion and tie-in of wells, production, the construction or expansion of facilities and the operation and abandonment of fields. Contract rights can be cancelled or expropriated. Changes to government regulation could impact our existing and planned projects as well as impose a cost of compliance.

 

Regulatory and legal risks are identified by our operating and corporate groups, and our compliance with the required laws and regulations is monitored by our legal group in respect of our assets and operations. Our legal and environmental policy groups stay abreast of new developments and changes in laws and regulations to ensure that we continue to comply with prescribed laws and regulations. Of note in this regard, our approach to changes in regulations relating to climate change, royalty and regulatory frameworks is discussed below. To partially mitigate resource access risks, keep abreast of regulatory developments and be a responsible operator, we maintain relationships with key stakeholders and conduct other mitigation initiatives mentioned herein.

 

*Environmental Regulation Risk*

 

Environmental regulation impacts many aspects of our business. Regulatory regimes apply to all companies active in the energy industry. We are required to obtain regulatory approvals, licenses and permits in order to operate and we must comply with standards and requirements for the exploration, development and production of crude oil and natural gas and the refining, distribution and marketing of petroleum products. Regulatory assessment, review and approval are generally required before initiating, advancing or changing operations projects.

 

Climate Change

 

Various federal, provincial and state governments have announced intentions to regulate greenhouse gas (“GHG”) emissions and other air pollutants and a number of legislative and regulatory measures to address GHG emission reductions are in various phases of review, discussion or implementation in the U.S. and Canada. Adverse impacts to our business if comprehensive GHG regulation is enacted in any jurisdiction in which we operate may include, among other things, loss of markets, increased compliance costs, permitting delays, substantial costs to generate or purchase emission credits or allowances which may add costs to the products we produce and reduce demand for crude oil and certain refined products.

 

California has implemented climate change regulation in the form of a Low Carbon Fuel Standard that requires the reduction of life cycle carbon emissions from transportation fuels. This regulation currently differentiates oil sands crudes as high carbon intensity crude oils. As an oil sands producer, we are not directly regulated and will not have a compliance obligation; however, refiners in California will be required to meet the legislation. A number of studies produced on the subject, including one that was conducted by an organization that advised the legislation, suggest a wide range of carbon intensity values for oil sands crudes. We are well positioned within the sector given our typically low steam to oil ratio. 

 

 

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This legislation has many complexities that are currently being addressed and in December 2011 the U.S. District Court for the Eastern District of California temporarily suspended the enforcement of the legislation due to several pending federal lawsuits challenging its implementation. We continue to monitor this development.

 

Beyond existing legal requirements, the extent and magnitude of any adverse impacts of any of these additional programs cannot be reliably or accurately estimated at this time because specific legislative and regulatory requirements have not been finalized and uncertainty exists with respect to the additional measures being considered and the time frames for compliance.

 

We intend to continue our activity to use scenario planning to anticipate future impacts, reduce our emissions intensity and improve our energy efficiency. We will also continue to work with governments to develop an approach to deal with climate change issues that protects the industry’s competitiveness, limits the cost and administrative burden of compliance and supports continued investment in the sector.

 

The Government of Alberta has set targets for GHG emissions reductions. Regulations require facilities that emit more than 100,000 tonnes of GHG emissions per year to reduce their emissions intensity by 12 percent from a regulated baseline. To comply, companies can make operating improvements, purchase carbon offsets (or emission performance credits) or make a $15 per tonne contribution to an Alberta Climate Change and Emissions Management Fund. Cenovus currently has three facilities subject to this regulation. For the 2011 compliance year, we do not anticipate material costs in this regard.

 

Our efforts with respect to emissions management are founded in our industry leadership in:

·       Oil sands technology development to reduce GHG emissions;

·       Focus on energy efficiency; and

·       Carbon dioxide sequestration.

 

In particular, our low steam to oil ratios at Foster Creek and Christina Lake translates directly into lower emissions intensity. Given the uncertainty in North American carbon legislation, our strategy for addressing the implications of emerging carbon regulations is proactive and is composed of three principal elements:

 

(1) Manage Existing Costs

When regulations are implemented, a cost is placed on our emissions (or a portion thereof) and while these are not material at this stage, they are being actively managed to ensure compliance. Factors such as effective emissions tracking, attention to fuel consumption and a focus on minimizing our steam to oil ratio help to support and drive our focus on cost reduction.

 

(2) Respond to Price Signals

As regulatory regimes for GHGs develop in the jurisdictions where we work, inevitably price signals begin to emerge. We have initiated an Energy Efficiency Initiative in an effort to improve the energy efficiency of our operations. The price of potential carbon reductions plays a role in the economics of the projects that are implemented. In response to the anticipated price of carbon reduction, we are also attempting, where appropriate, to realize associated value of our reduction projects.

 

(3) Anticipate Future Carbon Constrained Scenarios

We continue to work with governments, academics and industry leaders to develop and respond to emerging GHG regulations. By continuing to stay engaged in the debate on the most appropriate means to regulate these emissions, we gain useful knowledge that allows us to explore different strategies for managing our emissions and costs. These scenarios assist with our long range planning and our analyses on the implications of regulatory trends.

 

We incorporate the potential costs of carbon into future planning. Management and the Board review the impact of a variety of carbon constrained scenarios on our strategy, with a current price range from $15 to $65 per tonne of emissions applied to a range of emissions coverage levels. A major benefit of applying a range of carbon prices at the strategic level is that it can provide direct guidance to the capital allocation process. We also examine the impact of carbon regulation on our major projects. Although uncertainty remains regarding potential future emissions regulation, our plan is to continue to assess and evaluate the cost of carbon relative to our investments across a range of scenarios.

 

We recognize that there is a cost associated with carbon emissions. We believe that GHG regulations and the cost of carbon at various price levels have been adequately taken into consideration as part of our business planning and scenarios analysis. We believe that our development strategy, use of technology and focus on continuous improvement is an effective way to develop the resource, generate shareholder returns and coordinate overall environmental objectives with respect to carbon, air emissions, water and land. We are committed to transparency with our stakeholders and will keep them apprised of how these issues affect our operations.

 

Further information regarding Climate Change can be found in the Risk Factors section of our AIF for the year ended December 31, 2011 (see Additional Information).

 

 

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*ALBERTA’S REGULATORY FRAMEWORK*

 

On April 5, 2011, the Government of Alberta released their draft of the Lower Athabasca Regional Plan (“LARP”), which was issued under the Alberta Land Stewardship Act. An updated draft of the LARP was released on August 29, 2011 after public consultation and stakeholder feedback was obtained. No substantial changes were made to the LARP from these consultations. The LARP is now awaiting provincial cabinet approval prior to being implemented.

 

The LARP identifies management frameworks for air, land and water that will incorporate cumulative limits and triggers as well as identifying areas related to conservation, tourism and recreation. If the land use designations for conservation, tourism and recreation areas are approved in their current form, some of our oil sands tenures may be cancelled, subject to compensation negotiations with the Government of Alberta. Access to some parts of our current resource properties may be restricted limiting the pace of development due to environmental limits and thresholds that may adversely affect the market price of our securities and the payment of dividends to our shareholders. The areas identified have no direct impact on our strategic plan, on our current operations at Foster Creek and Christina Lake, or any of our filed applications.

 

As part of the Government of Alberta’s competitiveness review, a comprehensive review of Alberta’s regulatory system called the Regulatory Enhancement Project (the “Project”) was initiated in March 2010. The Project’s goal is to create an effective regulatory system that will contribute to Alberta’s overall competitiveness while protecting the environment, ensuring public safety and conservation of resources. The Project involved engagement with a broad range of stakeholders, including industry and led to a recommendation to the Minister of Energy, in the fourth quarter of 2010, for adoption of a coordinated policy framework and an integrated regulatory system for the upstream oil and gas sector. The Government of Alberta accepted the Project team’s recommendations and decided to proceed in implementing those recommendations. There were no new developments in 2011.

 

To operate our SAGD facilities we rely on water, which is obtained under licenses from Alberta Environment and Water. There can be no assurance that the licenses to withdraw water will not be rescinded or that additional conditions will not be added to these licenses. There can be no assurance that we will not have to pay a fee for the use of water in the future or that any such fees will be reasonable. In addition, the expansion of our projects rely on securing licenses for additional water withdrawal, and there can be no assurance that these licenses will be granted on terms favourable to us or at all, or that such additional water will in fact be available to divert under such licenses. While we currently re-use a percentage of the water which we withdraw under license, there are no guarantees that our operations will continue to efficiently use water.

 

 

**TRANSPARENCY AND CORPORATE RESPONSIBILITY**

 

We are committed to operating in a responsible manner and to integrating our corporate responsibility principles into the way we conduct our business. We recognize the importance of reporting to stakeholders in a transparent and accountable manner. We disclose not only the information we are required to disclose by legislation or regulatory authorities, but also information that more broadly describes our activities, policies, opportunities and risks.

 

Our Corporate Responsibility (“CR”) policy continues to drive our commitments, strategy and reporting, and enables alignment with our business objectives and processes. Our future CR reporting activities will be guided by this policy and will focus on improving performance by continuing to track, measure and monitor our CR performance indicators. This policy is available on our website at www.cenovus.com.

 

Our CR policy focuses on six commitment areas: (i) Leadership; (ii) Corporate Governance and Business Practices; (iii) People; (iv) Environmental Performance; (v) Stakeholder and Aboriginal Engagement; and (vi) Community Involvement and Investment. We will continue to externally report on our performance in these areas through our annual CR report.

 

The CR policy emphasizes our commitment to protect the health and safety of all individuals affected by our activities, including our workforce and the communities where we operate. We will not compromise the health and safety of any individual in the conduct of our activities. We will strive to provide a safe and healthy work environment and we expect our workers to comply with the health and safety practices established for their protection. Additionally, the policy includes reference to emergency response management, investment in efficiency projects, new technologies and research, and support of the principles of the Universal Declaration of Human Rights.

 

As our CR reporting process matures, indicators will be developed and integrated in our CR reporting that better reflect Cenovus’s operations and challenges. Our online presence will be expanded through the corporate responsibility section of our website. In July 2011 we released our first comprehensive corporate responsibility report which can be found on our website at www.cenovus.com. This report was aligned with the Global Reporting Initiative guidelines and the standards set by the Canadian Association of Petroleum Producers in its Responsible Canadian Energy program.

 

 

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**ACCOUNTING POLICIES AND ESTIMATES**

 

We are required to make judgments, assumptions and estimates in the application of accounting policies that could have a significant impact on our financial results. Actual results may differ from those estimates, and those differences may be material. The estimates and assumptions used are subject to updates based on experience and the application of new information. Our critical accounting policies and estimates are reviewed annually by the Audit Committee of the Board. Further information on the basis of presentation and our significant accounting policies can be found in the notes to the Consolidated Financial Statements.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

** **

The following discussion outlines the accounting policies and practices involving the use of estimates that are critical to understanding our financial results.

 

*Basis of Presentation*

* *

Our results for the years ended December 31, 2011 and 2010 and the one month period from December 1, 2009 to December 31, 2009 represent our operations, cash flows and financial position as a stand-alone entity.

 

Our results for the period prior to the Arrangement, being January 1, 2009 to November 30, 2009, have been derived from the accounting records of Encana using the historical results of operations and historical basis of assets and liabilities of the businesses transferred to Cenovus. The historical consolidated financial statements include allocations of certain Encana expenses, assets and liabilities. In the opinion of management, the consolidated and historical carve-out consolidated financial statements reflect all adjustments necessary for a fair statement of the financial position and the results of operations and cash flows in accordance with previous GAAP.

 

Management believes that the assumptions underlying the historical consolidated financial statements are reasonable. However, as we operated as part of Encana and were not a stand-alone company prior to November 30, 2009, the historical consolidated financial statements included herein may not necessarily reflect our results of operations, financial position and cash flows had we been a stand-alone company during the period presented.

 

*Oil and Gas Reserves*

* *

All of our oil and gas reserves were evaluated and reported to Cenovus by the IQREs as at December 31, 2011 in accordance with NI 51-101. The estimation of reserves is a subjective process. Forecasts are based on engineering data, projected future rates of production, estimated commodity price forecasts and the timing of future expenditures, all of which are subject to numerous uncertainties and various interpretations. Reserves estimates can be revised upward or downward based on the results of future drilling, testing, production levels, and economics of recovery based on cash flow forecasts. These revisions can have a significant impact on our future earnings because they will directly impact our DD&A rates, asset impairment calculations, accounting for business combinations and decommissioning costs.

 

*Property, Plant and Equipment – DD&A*

* *

Development and production assets within property, plant and equipment are depreciated, depleted and amortized using the unit of production method based on estimated proved reserves determined using estimated future prices and costs. As a key component in the calculation of DD&A, the estimates of reserves can have a significant impact on net earnings, as a downward revision in our estimate of reserve quantities could result in a higher DD&A charge to net earnings.

 

Refining, marketing, corporate and other upstream assets, including pipelines and information technology assets, are depreciated on straight-line basis and are subject to our estimate of useful life and salvage value. These estimates can have a significant impact to net earnings as a decrease in the useful life or a lower salvage value could result in a higher DD&A charge to net earnings.

 

*E&E Assets*

* *

Costs incurred after the legal right to explore has been obtained and before technical feasibility and commercial viability of the area have been established are capitalized as E&E assets. The decision regarding technical feasibility and commercial viability of our E&E assets involves a number of assumptions, such as estimated reserves, commodity price forecasts, expected production volumes and discount rates, all of which are subject to material change in the future.

 

 

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*Impairment of Assets*

* *

Property, plant and equipment and E&E assets are assessed for impairment at least annually or when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. The impairment test is performed at the cash generating unit (“CGU”) for development and production assets and other upstream assets. E&E assets are allocated to a related CGU containing development and production assets. Corporate assets are allocated on a reasonable and consistent manner to the CGUs to which they contribute to the future cash flows for the purposes of testing for impairment. For refining assets the impairment test is performed at each refinery independently.

 

The assessment of facts and circumstances that are used for impairment testing to suggest that the carrying amount of the assets may exceed its recoverable amount is a subjective process that often involves a number of estimates and is subject to interpretation. Also, the testing of assets or CGUs for impairment, as well as the assessment of potential impairment reversals, requires that we estimate an asset’s or CGU’s recoverable amount. The recoverable amount calculation requires the use of estimates and assumptions which are subject to changes as new information becomes available including information on future commodity prices, expected production volumes, quantity of reserves and discount rates as well as future development and operating costs. Changes in assumptions used in determining the recoverable amount could affect the carrying value of the related assets and CGUs. Details on the assumptions used in determining the recoverable amount can be found in the notes to the Consolidated Financial Statements.

 

*Exchanges of Assets*

* *

Fair value estimates, which are used to determine the carrying value of a PP&E or E&E asset and recognize gains or losses on asset exchanges, requires a number of assumptions and estimates, including quantities of reserves, future commodity prices, discount rates as well as future development and operating costs. The resulting fair value estimates may not necessarily be indicative of the amounts that may be realized or settled in a current market transaction and these differences may be material.

 

*Business Combinations and Goodwill*

* *

Business combinations are accounted for using the acquisition method of accounting in which the identifiable assets acquired, liabilities assumed and any non-controlling interest are recognized and measured at their fair value at the date of acquisition. Any excess of the purchase price plus any non-controlling interest over the fair value of the net assets acquired is recognized as goodwill. Any deficiency of the purchase price over the fair value of the net assets acquired is credited to net earnings.

 

At acquisition, goodwill is allocated to each of the CGUs to which it relates. Goodwill is assessed for impairment at least annually. To assess impairment, the recoverable amount of the CGU to which the goodwill relates is compared to the carrying amount. If the recoverable amount of the CGU is less than the carrying amount, an impairment loss is recognized. An impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU. Goodwill impairments are not reversed.

 

*Decommissioning Liabilities*

* *

Provisions are recognized for the future decommissioning and restoration of our upstream oil and gas assets and refining assets at the end of their economic lives. Assumptions, based on current economic factors and experience to date which we believe are reasonable, have been made to estimate the future liability. However, the actual cost of decommissioning is uncertain and cost estimates may change in response to numerous factors including changes in legal requirements, technological advances, inflation and the timing of expected decommissioning and restoration. The impact to net earnings over the remaining economic life of the assets could be significant due to the changes in cost estimates as new information becomes available. In addition, we determine the appropriate discount rate at the end of each reporting period. This discount rate, which is credit adjusted, is used to determine the present value of the estimated future cash outflows required to settle the obligation and may change in response to numerous market factors. Details on the assumptions used in determining decommissioning liabilities can be found in the notes to the Consolidated Financial Statements.

 

*Compensation Plans*

* *

The amount of compensation expense accrued for long-term performance-based compensation arrangements is subject to our best estimate of whether or not the performance criteria will be met and what the ultimate payout will be. Certain obligations for payments under our compensation plans are measured at fair value and therefore fluctuations in the fair value will affect the accrued compensation expense that is recognized. The fair value of the obligation is based on several assumptions including the risk-free interest rate, dividend yield, and the expected volatility of the share price and therefore is subject to measurement uncertainty.

 

 

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*Income Tax Provisions*

* *

Tax regulations and legislations and their interpretations in the various jurisdictions that we operate are subject to change. As a result, there are usually a number of tax matters under review. As such, income taxes are subject to measurement uncertainty.

 

Deferred income tax assets are recognized to the extent that it is probable that the deductible temporary differences will be recoverable in future periods. The recoverability assessment involves a significant amount of estimation including an evaluation of when the temporary differences will reverse, an analysis of the amount of future taxable earnings, the availability of cash flow to offset the tax assets when the reversal occurs and the application of tax laws. To the extent that assumptions used in the recoverability assessment change, there may be a significant impact on the Consolidated Financial Statements of future periods.

 

*Financial Instruments*

* *

The fair value of derivatives, which may be used to manage commodity price, foreign currency and interest rate exposures, are determined using valuation models which require assumptions concerning the amount and timing of future cash flows and discount rates. Our assumptions rely on external observable market data including quoted commodity prices and volatility, interest rate yield curves and foreign exchange rates. The resulting fair value estimates may not be indicative of the amounts realized or settled in current market transactions and are therefore subject to measurement uncertainty.

 

*IFRS Transition*

* *

**OPENING BALANCE SHEET – CARRYING VALUE OF REFINERIES**

On transition to IFRS, we elected to measure the carrying value of our refineries at their then estimated fair value, which permanently reduced their carrying value by approximately $2.6 billion. The fair value estimate is deemed to be the carrying value of the refineries at January 1, 2010. The reduced carrying value impacts DD&A expense recorded in future periods. DD&A expense for the year ended December 31, 2010 was reduced by $103 million as a result of the reduced carrying value.

 

**OPENING BALANCE SHEET – FULL COST POOL**

Under previous GAAP, we accounted for our oil and gas properties in one cost centre using full cost accounting. IFRS has no equivalent treatment. IFRS 1 - First-time Adoption of IFRS, permits full cost accounting companies to allocate their existing upstream PP&E net book value (full cost pool) to the unit of account level upon transition to IFRS using reserve information. Applying this exemption, the cost of our E&E assets were reclassified from PP&E to the new E&E asset category, and the remainder of our full cost pool was allocated using the estimated proved reserve values discounted at 10 percent at the transition date. This approach was consistent with the allocation method which was required to be used in our formation as part of the Arrangement. The IFRS allocation process did not affect the net book value of our PP&E at the date of transition as no IFRS impairments were recognized.

 

Under both IFRS and previous GAAP, the DD&A on our development and production PP&E is calculated using the unit-of-production method based on estimated proved reserves. However, under previous GAAP, we calculated our DD&A rate at the country cost centre level whereas under IFRS, our DD&A rates are calculated at the area level. The adoption of this policy resulted in a $135 million increase in our DD&A for the year ended December 31, 2010.

 

**FUTURE CHANGES IN ACCOUNTING POLICIES**

** **

*Joint Arrangements and Off Balance Sheet Activities*

* *

In May 2011, the IASB issued the following new and amended standards:

 

·       *IFRS 10, “Consolidated Financial Statements”* (“IFRS 10”) replaces *IAS 27, “Consolidated and Separate Financial Statements”* (“IAS 27”) and Standing Interpretations Committee (“SIC”) 12*, “Consolidation – Special Purpose Entities”*. IFRS 10 revises the definition of control and focuses on the need to have power and variable returns for control to be present. IFRS 10 provides guidance on participating and protective rights and also addresses the notion of “de facto” control. It also includes guidance related to an investor with decision making rights to determine if it is acting as a principal or agent.

 

·       *IFRS 11, “Joint Arrangements”* (“IFRS 11”) replaces *IAS 31, “Interest in Joint Ventures”* (“IAS 31”) and *SIC 13, “Jointly Controlled Entities – Non-Monetary Contributions by Venturers”*. IFRS 11 defines a joint arrangement as an arrangement where two or more parties have joint control. A joint arrangement is classified as either a “joint operation” or a “joint venture” depending on the facts and circumstances. A joint operation is a joint arrangement where the parties that have joint control have rights to the assets and obligations for the liabilities, related to the arrangement.  

 

 

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A joint operator accounts for its share of the assets, liabilities, revenues and expenses of the joint arrangement. A joint venturer has the rights to the net assets of the arrangement and accounts for the arrangement as an investment using the equity method.

 

·       *IFRS 12, “Disclosure of Interest in Other Entities”* (“IFRS 12”) replaces the disclosure requirements previously included in IAS 27, IAS 31, and *IAS 28, “Investments in Associates”*. It sets out the extensive disclosure requirements relating to an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. An entity is required to disclose information that helps users of its financial statements evaluate the nature of and risks associated with its interests in other entities and the effects of those interests on its financial statements.

 

·       *IAS 27, “Separate Financial Statements”* has been amended to conform to the changes made in IFRS 10 but retains the current guidance for separate financial statements.

 

·       *IAS 28, “Investments in Associates and Joint Ventures”* has been amended to conform to the changes made in IFRS 10 and IFRS 11.

 

The above standards are effective for annual periods beginning on or after January 1, 2013. Early adoption is permitted, providing the five standards are adopted concurrently. We are currently evaluating the impact of adopting these standards on our Consolidated Financial Statements.

 

*Employee Benefits*

* *

In June 2011, the IASB amended *IAS 19, “Employee Benefits”* (“IAS 19”). The amendment eliminates the option to defer the recognition of actuarial gains and losses, commonly known as the corridor approach, rather it requires an entity to recognize actuarial gains and losses in Other Comprehensive Income (“OCI”) immediately. In addition, the net change in the defined benefit liability or asset must be disaggregated into three components: service cost, net interest and remeasurements. Service cost and net interest will continue to be recognized in net earnings while remeasurements, which include changes in estimates and the valuation of plan assets, will be recognized in OCI. Furthermore, entities will be required to calculate net interest on the net defined benefit liability or asset using the same discount rate used to measure the defined benefit obligation. The amendment also enhances financial statement disclosures.  This amended standard is effective for annual periods beginning on or after January 1, 2013, with modified retrospective application. Early adoption is permitted. We are currently evaluating the impact of adopting these amendments on our Consolidated Financial Statements.

 

*Fair Value Measurement*

* *

In May 2011, the IASB issued *IFRS 13, “Fair Value Measurement”* (“IFRS 13”) which provides a consistent and less complex definition of fair value, establishes a single source for determining fair value and introduces consistent requirements for disclosures related to fair value measurement. IFRS 13 is effective for annual periods beginning on or after January 1, 2013 and applies prospectively from the beginning of the annual period in which the standard is adopted. Early adoption is permitted. We are currently evaluating the impact of adopting IFRS 13 on our Consolidated Financial Statements.

 

*Financial Instruments*

* *

The IASB intends to replace *IAS 39, “Financial Instruments: Recognition and Measurement”* (“IAS 39”) with *IFRS 9, “Financial Instruments”* (“IFRS 9”). IFRS 9 will be published in three phases, of which the first phase has been published.

 

The first phase addresses the accounting for financial assets and financial liabilities. The second phase will address the impairment of financial instruments, and the third phase will address hedge accounting.

 

For financial assets, IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, and replaces the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. For financial liabilities, although the classification criteria for financial liabilities will not change under IFRS 9, the approach to the fair value option for financial liabilities may require different accounting for changes to the fair value of a financial liability as a result of changes to an entity’s own credit risk.

 

IFRS 9 is effective for annual periods beginning on or after January 1, 2015 with different transitional arrangements depending on the date of initial application. We are currently evaluating the impact of adopting IFRS 9 on our Consolidated Financial Statements.

 

 

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*Presentation of Items of Other Comprehensive Income*

* *

In June 2011, the IASB issued an amendment to *IAS 1, “Presentation of Financial Statements”* (“IAS 1”) requiring companies to group items presented within Other Comprehensive Income based on whether they may be subsequently reclassified to profit or loss. This amendment to IAS 1 is effective for annual periods beginning on or after July 1, 2012 with full retrospective application. Early adoption is permitted. We are currently evaluating the impact of adopting this amendment on our Consolidated Financial Statements.

 

*Offsetting Financial Assets and Financial Liabilities*

* *

In December 2011, the IASB issued the following amended standards:

·       *IFRS 7, “Financial Instruments: Disclosures”* (“IFRS 7”), has been amended to provide more extensive quantitative disclosures for financial instruments that are offset in the statement of financial position or that are subject to enforceable master netting or similar arrangements.

·       *IAS 32, “Financial Instruments: Presentation”* (“IAS 32”) has been amended to clarify the requirements for offsetting financial assets and liabilities. The amendments clarify that the right to offset must be available on the current date and cannot be contingent on a future event.

 

The amendments to IFRS 7 are effective for annual periods beginning on or after January 1, 2013 and the amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014, both requiring retrospective application. We are currently evaluating the impact of adopting the amendments to IAS 7 and IFRS 32 on our Consolidated Financial Statements.

 

 

**OUTLOOK**

** **

In early 2012, certain economic factors have created optimism that the U.S. economy will gradually improve throughout the year. However, the European sovereign debt situation is expected to continue and may inhibit the North American economic recovery. Our outlook for 2012 depends on commodity prices including the effect of new market access for North American crude oil. Crude oil prices are expected to remain volatile as they are sensitive to economic growth and supply interruption risks.

 

For 2012, the price of WTI is expected to remain close to the average in 2011 as increased demand driven by emerging markets is anticipated to be offset by the return of Libyan supply. The expected increase in demand however remains sensitive to events in Europe as its sovereign debt problems continues to unfold. Also, the potential of further political uncertainty in Middle Eastern and northern African countries could create a material risk of supply disruptions which would negate the effect of returning Libyan supply.

 

For 2012, the WTI-WCS differential is expected to face pressures to narrow compared to 2011 as new coking capacity at our Wood River Refinery will be in operation for the full year and other additional refining capacity is brought on in the latter part of the year. These pressures are expected to be offset by growing North American crude oil production which will lead to greater pipeline congestion. However, new rail capacity, especially out of North Dakota, will serve to reduce pipeline congestion.

 

The economics for U.S. Midwest refineries for 2012 are expected to be lower than 2011 as average crack spreads decrease. The expected decrease in crack spreads is mostly due to lower discounts on feedstock costs as inland crude oil finds an outlet to refineries on the Gulf of Mexico through the Seaway Pipeline reversal in the middle of 2012.

 

For 2012 our strategic initiatives and key priorities include:

·       Growth of production at Christina Lake with ramp up of phase C production and expected first production at phase D in the fourth quarter of 2012;

·       Conventional crude oil production increasing in 2012 primarily as a result of the development of our tight oil opportunities at Lower Shaunavon and Bakken while pursuing additional growth opportunities;

·       Improved production at Pelican Lake with the expansion of the polymer enhanced oil recovery program;

·       Investment in the dewatering pilot project at Telephone Lake and the drilling of a second well pair as part of the Grand Rapids pilot project;

·       Progressing the Telephone Lake and area project;

·       Anticipating regulatory and partner approval for Narrows Lake phases A, B and C, perform additional engineering and start construction;

·       Committing to transportation initiatives and advance new and expanded market development initiatives for our crude oil in step with a marketing strategy to deliver on our production growth;

·       Progressing environmental strategy by setting internal goals;

·       Demonstrating stable and reliable CORE operations at the Wood River Refinery; and

·       Growing our dividend, at the discretion of our Board, while continuing to invest in long-term projects.

 

 

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While we do not anticipate a significant impact to our business, our partner ConocoPhillips, announced its intention to split its Refining and Marketing and its Exploration and Production businesses into two stand-alone companies. If the split is completed, we expect our partnership and related agreements with ConocoPhillips to be amended to accommodate the separation and holding of the upstream assets and refining assets in two separate companies.

 

Our long-term objective is to focus on building net asset value and generating an attractive total shareholder return through the following strategies:

·       Material growth in oil sands production, primarily through expansions at our Foster Creek and Christina Lake properties, and heavy oil production at Pelican Lake. We also have an extensive inventory of emerging resource play assets such as Narrows Lake, Grand Rapids and Telephone Lake, and have a 100 percent working interest in many of these assets;

·       Continue the development of our oil sands resources in multiple phases using a low cost manufacturing-like approach enabled by technology, innovation and continued respect for the health and safety of our employees, emphasis on environmental performance and meaningful dialogue with our stakeholders;

·       Assess the potential for new crude oil projects on our existing properties at Pelican Lake, Weyburn, southern Alberta, Bakken and Lower Shaunavon as well as new regions focusing on tight oil opportunities;

·       Fund growth internally through free cash flow generation mainly from our established conventional natural gas assets as well as proceeds generated from our ongoing portfolio management strategy to divest of non-core assets with any incremental cash requirements covered by additional debt financing;

·       Lowering our commodity price risk profile through natural gas and refining integration as well as a consistent risk management hedging strategy; and

·       Maintain a sustainable dividend with a priority expected to be placed on growing the dividend as part of delivering a solid total shareholder return.

 

Our updated business plan outlines our targets of reaching net oil sands production of approximately 400,000 barrels per day and total net oil production of approximately 500,000 barrels per day by the end of 2021. Continued expansions are planned at Foster Creek and Christina Lake, as well as new projects at Narrows Lake, Grand Rapids and Telephone Lake in order to achieve our production targets.

 

The key challenges that need to be effectively managed to enable our growth are commodity price volatility, access to markets, timely regulatory and partner approvals, environmental regulations and competitive pressures within our industry. Additional details regarding the impact of these factors on our financial results are discussed in the Risk Management section of this MD&A.

 

Our disciplined approach to capital allocation includes prioritizing our uses of cash flow in the following manner:

·       First, to committed capital, which is the capital spending required for continued progress on approved expansions at our multi-phase projects, and capital for our existing business operations;

·       Second to paying a meaningful dividend as part of providing strong total shareholder return; and

·       Third for growth capital, which is the capital spending for projects beyond our committed capital projects.

 

This capital allocation process includes evaluating all opportunities using specific rigorous criteria as well as achieving our objectives of maintaining a prudent and flexible capital structure and strong balance sheet metrics which allow us to be financially resilient in times of lower cash flow. We will continue to develop our strategy with respect to capital investment and returns to shareholders. Future dividends are at the sole discretion of the Board and considered quarterly.

 

 

**ADVISORY**

** **

**FORWARD-LOOKING INFORMATION**

** **

This document contains certain forward-looking statements and other information (collectively “forward-looking information”) about our current expectations, estimates and projections, made in light of our experience and perception of historical trends. Forward-looking information in this document is identified by words such as “anticipate”, “believe”, “expect”, “plan”, “forecast”, “target”, “project”, “could”, “focus”, “vision”, “goal”, “proposed”, “scheduled”, “outlook”, “potential”, “may” or similar expressions and includes suggestions of future outcomes, including statements about our growth strategy and related schedules, projected future value or net asset value, forecast operating and financial results, planned capital expenditures, expected future production, including the timing, stability or growth thereof, expected future refining capacity, anticipated finding and development costs, expected reserves and contingent and prospective resources estimates, potential dividends and dividend growth strategy, anticipated timelines for future regulatory, partner or internal approvals, future impact of regulatory measures, forecasted commodity prices, future use and development of technology including technology and procedures to reduce our environmental impact and projected increasing shareholder value. Readers are cautioned not to place undue reliance on forward-looking information as our actual results may differ materially from those expressed or implied.

 

 

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Developing forward-looking information involves reliance on a number of assumptions and consideration of certain risks and uncertainties, some of which are specific to Cenovus and others that apply to the industry generally.

 

The factors or assumptions on which the forward-looking information is based include: assumptions inherent in our current guidance, available at www.cenovus.com; our projected capital investment levels, the flexibility of our capital spending plans and the associated source of funding; the estimation of quantities of oil, bitumen, natural gas and liquids from properties and other sources not currently classified as proved; our ability to obtain necessary regulatory and partner approvals; the successful and timely implementation of capital projects or stages thereof; our ability to generate sufficient cash flow from operations to meet our current and future obligations; and other risks and uncertainties described from time to time in the filings we make with securities regulatory authorities.

 

The risk factors and uncertainties that could cause our actual results to differ materially, include: volatility of and assumptions regarding oil and gas prices; the effectiveness of our risk management program, including the impact of derivative financial instruments and the success of our hedging strategies; accuracy of cost estimates; fluctuations in commodity prices, currency and interest rates; fluctuations in product supply and demand; market competition, including from alternative energy sources; risks inherent in our marketing operations, including credit risks; maintaining desirable ratios of debt to adjusted EBITDA as well as debt to capitalization; our ability to access various sources of debt and equity capital; accuracy of our reserves, resources and future production estimates; our ability to replace and expand oil and gas reserves; the ability of us and ConocoPhillips to maintain our relationship and to successfully manage and operate our integrated heavy oil business; reliability of our assets; potential disruption or unexpected technical difficulties in developing new products and manufacturing processes; refining and marketing margins; potential failure of new products to achieve acceptance in the market; unexpected cost increases or technical difficulties in constructing or modifying manufacturing or refining facilities; unexpected difficulties in producing, transporting or refining of crude oil into petroleum and chemical products; risks associated with technology and its application to our business; the timing and the costs of well and pipeline construction; our ability to secure adequate product transportation; changes in Alberta’s regulatory framework, including changes to the regulatory approval process and land-use designations, royalty, tax, environmental, greenhouse gas, carbon and other laws or regulations, or changes to the interpretation of such laws and regulations, as adopted or proposed, the impact thereof and the costs associated with compliance; the expected impact and timing of various accounting pronouncements, rule changes and standards on our business, our financial results and our consolidated financial statements; changes in the general economic, market and business conditions; the political and economic conditions in the countries in which we operate; the occurrence of unexpected events such as war, terrorist threats and the instability resulting therefrom; and risks associated with existing and potential future lawsuits and regulatory actions against us.

 

Readers are cautioned that the foregoing lists are not exhaustive and are made as at the date hereof. For a full discussion of our material risk factors, see “Risk Factors” in our AIF/Form 40-F for the year ended December 31, 2011 (see Additional Information).

 

**OIL AND GAS INFORMATION**

** **

The bitumen contingent and prospective resources estimates were prepared effective December 31, 2011 by McDaniel & Associates Consultants Ltd., an independent qualified reserves evaluator. The estimates were based on the Canadian Oil and Gas Evaluation Handbook and comply with the requirements of NI 51-101.

 

·       Contingent Resources are those quantities of bitumen estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. Contingencies may include such factors as economic, legal, environmental, political and regulatory matters or a lack of markets. It is also appropriate to classify as contingent resources the estimated discovered recoverable quantities associated with a project in the early evaluation stage. The estimate of contingent resources has not been adjusted for risk based on the chance of development. A discussion of contingencies applicable to our contingent resources can be found in the Oil and Gas Reserves section.

 

·       Economic Contingent Resources are those contingent resources that are currently economically recoverable based on specific forecasts of commodity prices and costs. In Cenovus’s case, contingent resources were evaluated using the same commodity price assumptions that were used for the 2011 reserves evaluation, which comply with NI 51-101 requirements.

 

·       Prospective Resources are those quantities of bitumen estimated, as of a given date, to be potentially recoverable from undiscovered accumulations by application of future development projects. Prospective resources have both an associated chance of discovery and a chance of development. Prospective resources are further subdivided in accordance with the level of certainty associated with recoverable estimates assuming their discovery and development and may be sub-classified based on project maturity. The estimate of prospective resources has not been adjusted for risk based on the chance of discovery or the chance of development.

 

 

47
| Cenovus Energy Inc. | 2011 Management’s Discussion and Analysis |
|---------------------|------------------------------------------------|

 

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·       Best Estimate is considered to be the best estimate of the quantity of resources that will actually be recovered. It is equally likely that the actual remaining quantities recovered will be greater or less than the best estimate. Those resources that fall within the best estimate have a 50 percent confidence level that the actual quantities recovered will equal or exceed the estimate.

 

·       Low Estimate is considered to be a conservative estimate of the quantity of resources that will actually be recovered. It is likely that the actual remaining quantities recovered will exceed the low estimate. Those resources at the low end of the estimate range have the highest degree of certainty, a 90 percent confidence level,  that the actual quantities recovered will equal or exceed the estimate.

 

·       High Estimate is considered to be an optimistic estimate of the quantity of resources that will actually be recovered. It is unlikely that the actual remaining quantities of resources recovered will meet or exceed the high estimate. Those resources at the high end of the estimate range have a lower degree of certainty, a 10 percent confidence level, that the actual quantities recovered will equal or exceed the estimate.

 

The economic contingent resources were estimated on a project level. The high and low estimates are arithmetic sums of multiple estimates which statistical principles indicate may be misleading as to volumes that may actually be recovered. The aggregated low estimate results shown may have a higher level of confidence than the individual projects, and the aggregated high estimate results shown may have a lower level of confidence than the individual projects.

 

Additional information relating to our oil and gas reserves and resources is presented in our AIF for the year ended December 31, 2011 (see Additional Information).

 

**ABBREVIATIONS**

** **

The following is a summary of the abbreviations that have been used in this document:
| Oil and Natural Gas Liquids | Natural Gas                      |
|-----------------------------|----------------------------------|
| bbl                         | barrel                           | Mcf | thousand cubic feet |
| bbls/d                      | barrels per day                  | MMcf | million cubic feet |
| Mbbls/d                     | thousand barrels per day         | Bcf | billion cubic feet |
| MMbbls                      | million barrels                  | MMBtu | million British thermal units |
| NGLs                        | Natural gas liquids              | GJ | Gigajoule |
| WTI                         | West Texas Intermediate          | CBM | Coal Bed Methane |
| WCS                         | Western Canadian Select          |   |   |
| TM                          | Trademark of Cenovus Energy Inc. |   |   |

 

**NON-GAAP MEASURES**

 

Certain financial measures in this document do not have a standardized meaning as prescribed by IFRS such as cash flow, operating cash flow, free cash flow, operating earnings, adjusted EBITDA, debt and capitalization and therefore are considered non-GAAP measures. These measures may not be comparable to similar measures presented by other issuers. These measures have been described and presented in this document in order to provide shareholders and potential investors with additional information regarding our liquidity and our ability to generate funds to finance our operations. The additional information should not be considered in isolation or as a substitute for measures prepared in accordance with IFRS. The definition and reconciliation of each non-GAAP measure is presented in this MD&A.

 

**ADDITIONAL INFORMATION**

 

The Arrangement refers to the plan of arrangement with Encana Corporation, effective November 30, 2009, resulting in the split of Encana into Cenovus and Encana, whereby Encana shareholders received, for each Encana common share held, one common share of each of Cenovus and the new Encana. Pursuant to the Arrangement, Cenovus commenced independent operations on December 1, 2009.

 

For convenience, references in this document to the “Company”, “Cenovus”, “we”, “us”, “our” and “its” may, where applicable, refer only to or include any relevant direct and indirect subsidiary corporations and partnerships (“subsidiaries”) of Cenovus, and the assets, activities and initiatives of such subsidiaries.

 

Additional information relating to Cenovus, including our AIF/Form 40-F for the year ended December 31, 2011, is available on SEDAR at www.sedar.com, EDGAR at www.sec.gov and on our website at www.cenovus.com.

 

 

48
| Cenovus Energy Inc. | 2011 Management’s Discussion and   Analysis |
|---------------------|--------------------------------------------------|

 

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** **

** **

** **

** **

** **

** **

**Cenovus Energy Inc.**

 

Consolidated Financial Statements

 

For the Year Ended December 31, 2011

 

(Canadian Dollars)

** **

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Table of Contents

 

Report of Management

 

***Management’s Responsibility for the Consolidated**********Financial Statements***

 

The accompanying Consolidated Financial Statements of Cenovus Energy Inc. (“Cenovus”) are the responsibility of Management. The Consolidated Financial Statements have been prepared by Management in Canadian dollars in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board and include certain estimates that reflect Management’s best judgments.

 

The Board of Directors has approved the information contained in the Consolidated Financial Statements. The Board of Directors fulfills its responsibility regarding the financial statements mainly through its Audit Committee which is made up of three independent directors. The Audit Committee has a written mandate that complies with the current requirements of Canadian securities legislation and the United States *Sarbanes-Oxley Act of 2002*and voluntarily complies, in principle, with the Audit Committee guidelines of the New York Stock Exchange. The Audit Committee meets with Management and the independent auditors on at least a quarterly basis to review and approve interim Consolidated Financial Statements and Management’s Discussion and Analysis prior to their public release as well as annually to review the annual Consolidated Financial Statements and Management’s Discussion and Analysis and recommend their approval to the Board of Directors.

 

***Management’s Assessment of Internal Control over Financial**********Reporting***

 

Management is also responsible for establishing and maintaining adequate internal control over financial reporting. The internal control system was designed to provide reasonable assurance to Management regarding the preparation and presentation of the Consolidated Financial Statements.

 

Internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management has assessed the design and effectiveness of internal control over financial reporting as at December 31, 2011. In making its assessment, Management has used the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) framework in Internal Control–Integrated Framework to evaluate the design and effectiveness of internal control over financial reporting. Based on our evaluation, Management has concluded that internal control over financial reporting was effective as at December 31, 2011.

 

PricewaterhouseCoopers LLP, an independent firm of Chartered Accountants, was appointed to audit and provide independent opinions on both the Consolidated Financial Statements and internal control over financial reporting as at December 31, 2011 as stated in their Auditor’s Report dated February 15, 2012. PricewaterhouseCoopers LLP has provided such opinions.

 

 

 

 
| /s/   Brian C. Ferguson    |                                  | /s/   Ivor M. Ruste |   |
|----------------------------|---------------------------------------|---------------------|--------|
|                       |                                  |                |   |
| **Brian C. Ferguson**      | **Ivor M. Ruste**                     |
| President &       | Executive   Vice-President & |
| Chief   Executive Officer  | Chief   Financial Officer             |
| Cenovus   Energy Inc.      | Cenovus   Energy Inc.                 |
|                       |                                  |
| **February 15, 2012** | ** **                            |

 

 
| Cenovus   Energy Inc. | 2

  | Consolidated   Financial Statements |
|-----------------------|-----------|-------------------------------------|

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Independent Auditor’s Report

 

**To the Shareholders of Cenovus Energy Inc.**

 

We have completed an integrated audit of Cenovus Energy Inc.’s 2011 consolidated financial statements and its internal control over financial reporting as at December 31, 2011 and an audit of its 2010 consolidated financial statements. Our opinions, based on our audits, are presented below.

 

**Report on the Consolidated****Financial Statements**

 

We have audited the accompanying consolidated financial statements of Cenovus Energy Inc., which comprise the consolidated balance sheets as at December 31, 2011, December 31, 2010 and January 1, 2010 and the consolidated statements of earnings and comprehensive income, shareholders’ equity and cash flows for the years ended December 31, 2011 and 2010, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.

 

**Management’s Responsibility for the Consolidated Financial Statements**

 

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board****and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

 

**Auditor’s Responsibility**

 

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. Canadian generally accepted auditing standards require that we comply with ethical requirements.

 

An audit involves performing procedures to obtain audit evidence, on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

 

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion on the consolidated financial statements.

 

**Opinion**

 

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Cenovus Energy Inc. as at December 31, 2011, December 31, 2010 and January 1, 2010 and its financial performance and cash flows for the years ended December 31, 2011 and 2010 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

**Report on Internal Control over Financial Reporting**

 

We have also audited Cenovus Energy Inc.’s internal control over financial reporting as at December 31, 2011, based on criteria established in Internal Control–Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

 

**Management’s Responsibility for Internal Control over Financial Reporting**

 

Management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Assessment of Internal Controls over Financial Reporting.

 

 
| Cenovus   Energy Inc. | 3 | Consolidated Financial   Statements |
|-----------------------|---|-------------------------------------|

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** **

**Auditor’s Responsibility**

 

Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.

 

An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other procedures as we consider necessary in the circumstances.

 

We believe that our audit provides a reasonable basis for our audit opinion on the company’s internal control over financial reporting.

 

**Definition of Internal Control over Financial Reporting**

 

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

 

**Inherent Limitations**

 

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

 

**Opinion**

 

In our opinion, Cenovus Energy Inc. maintained, in all material respects, effective internal control over financial reporting as at December 31, 2011 based on criteria established in Internal Control–Integrated Framework, issued by COSO.

 

 

 

 

/s/ PricewaterhouseCoopers LLP

**PricewaterhouseCoopers LLP**

Chartered Accountants

Calgary, Alberta, Canada

 

**February 15, 2012**

 

 
| Cenovus   Energy Inc. | 4 | Consolidated   Financial Statements |
|-----------------------|---|-------------------------------------|

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**CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME**

**For the years ended December 31,**

**($ millions, except per share amounts)**

 
|                                                |   | Notes  | ** ** | **2011**   |   | 2010*  |
|-----------------------------------------------------|--------|--------|------------|------------|--------|--------|
|                                                |   |   |       |       |   |   |
| **Revenues**                                        |   | 1      | ** ** |       |   |   |
| Gross Sales                                         |   |   | ** ** | **16,185** |   | 13,090 |
| Less:   Royalties                                   |   |   | ** ** | **489**    |   | 449    |
| ** **                                          |   |   | ** ** | **15,696** |   | 12,641 |
| **Expenses**                                        |   | 1      | ** ** |       |   |   |
| Purchased product                                   |   |   | ** ** | **9,090**  |   | 7,551  |
| Transportation and blending                         |   |   | ** ** | **1,369**  |   | 1,065  |
| Operating                                           |   |   | ** ** | **1,406**  |   | 1,286  |
| Production and mineral taxes                        |   |   | ** ** | **36**     |   | 34     |
| (Gain) loss on risk management                      |   | 31     | ** ** | **(248)**  |   | (324)  |
| Depreciation, depletion and   amortization          |   |   | ** ** | **1,295**  |   | 1,302  |
| Exploration expense                                 |   |   | ** ** | **-**      |   | 3      |
| General and administrative                          |   |   | ** ** | **295**    |   | 246    |
| Finance costs                                       |   | 5      | ** ** | **447**    |   | 498    |
| Interest income                                     |   | 6      | ** ** | **(124)**  |   | (144)  |
| Foreign exchange (gain) loss, net                   |   | 7      | ** ** | **26**     |   | (51)   |
| (Gain) loss on divestiture of assets                |   | 17     | ** ** | **(107)**  |   | (116)  |
| Other (income) loss, net                            |   |   | ** ** | **4**      |   | (13)   |
| **Earnings   Before Income Tax**                    |   |   | ** ** | **2,207**  |   | 1,304  |
| Income tax expense                                  |   | 8      | ** ** | **729**    |   | 223    |
| **Net   Earnings**                                  |   |   | ** ** | **1,478**  |   | 1,081  |
| **Other   Comprehensive Income (Loss), Net of Tax** |   |   | ** ** |       |   |   |
| Foreign   currency translation adjustment           |   |   | ** ** | **48**     |   | 71     |
| **Comprehensive   Income**                          |   |   | ** ** | **1,526**  |   | 1,152  |
|                                                |   |   |       |       |   |   |
| **Net   Earnings per Common Share**                 |   | 9      | ** ** |       |   |   |
| Basic                                               |   |   | ** ** | **1.96**   |   | 1.44   |
| Diluted                                             |   |   | ** ** | **1.95**   |   | 1.43   |
|                                                |   |   |       |       |   |   |

 

* Refer to Note 34 for the impact of adopting IFRS effective January 1, 2010.

 

*See accompanying Notes to Consolidated Financial**Statements.*

 

 
| Cenovus   Energy Inc. | 5 | Consolidated   Financial Statements |
|-----------------------|---|-------------------------------------|

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**CONSOLIDATED BALANCE SHEETS**

**As at**

**($ millions)**

 
|                                                   |   | Notes  | ** ** | **December 31,   2011** |       | December 31,   2010* |   | January 1,   2010* |
|--------------------------------------------------------|--------|--------|------------|------------------------------|------------|---------------------------|--------|-------------------------|
|                                                   |   |   |       |                         |       |                      |   |                    |
| **Assets**                                             |   |   | ** ** | ** **                   | ** ** | ** **                |   |                    |
| **Current Assets**                                     |   |   | ** ** | ** **                   | ** ** | ** **                |   |                    |
| Cash and cash equivalents                              |   | 10     | ** ** | **495**                      |       | 300                       |   | 155                     |
| Accounts receivable and accrued revenues               |   | 11     | ** ** | **1,405**                    |       | 1,059                     |   | 982                     |
| Income tax receivable                                  |   |   | ** ** | **-**                        |       | 31                        |   | 40                      |
| Current portion of Partnership Contribution Receivable |   | 12     | ** ** | **372**                      |       | 346                       |   | 345                     |
| Inventories                                            |   | 13     | ** ** | **1,291**                    |       | 880                       |   | 875                     |
| Risk management                                        |   | 31     | ** ** | **232**                      |       | 163                       |   | 60                      |
| Assets held for sale                                   |   | 14     | ** ** | **116**                      |       | 65                        |   | -                       |
| **Current Assets**                                     |   |   | ** ** | **3,911**                    |       | 2,844                     |   | 2,457                   |
| Exploration and Evaluation Assets                      |   | 1,15   | ** ** | **880**                      |       | 713                       |   | 580                     |
| Property, Plant and Equipment, net                     |   | 1,16   | ** ** | **14,324**                   |       | 12,627                    |   | 12,049                  |
| Partnership Contribution Receivable                    |   | 12     | ** ** | **1,822**                    |       | 2,145                     |   | 2,621                   |
| Risk Management                                        |   | 31     | ** ** | **52**                       |       | 43                        |   | 1                       |
| Income Tax Receivable                                  |   |   | ** ** | **29**                       |       | -                         |   | -                       |
| Other Assets                                           |   | 18     | ** ** | **44**                       |       | 281                       |   | 192                     |
| Deferred Income Taxes                                  |   | 8      | ** ** | **-**                        |       | 55                        |   | 3                       |
| Goodwill                                               |   | 1,19   | ** ** | **1,132**                    |       | 1,132                     |   | 1,146                   |
| **Total Assets**                                       |   |   | ** ** | **22,194**                   |       | 19,840                    |   | 19,049                  |
|                                                   |   |   |       |                         |       |                      |   |                    |
| **Liabilities   and Shareholders’ Equity**        |   |   | ** ** | ** **                   |       |                      |   |                    |
| **Current   Liabilities**                              |   |   | ** ** | ** **                   |       |                      |   |                    |
| Accounts payable and accrued liabilities               |   | 20     | ** ** | **2,579**                    |       | 1,843                     |   | 1,605                   |
| Income tax payable                                     |   |   | ** ** | **329**                      |       | 154                       |   | -                       |
| Current portion of Partnership Contribution Payable    |   | 12     | ** ** | **372**                      |       | 343                       |   | 340                     |
| Risk management                                        |   | 31     | ** ** | **54**                       |       | 163                       |   | 70                      |
| Liabilities related to assets held for sale            |   | 14     | ** ** | **54**                       |       | 7                         |   | -                       |
| **Current   Liabilities**                              |   |   | ** ** | **3,388**                    |       | 2,510                     |   | 2,015                   |
| Long-Term Debt                                         |   | 21     | ** ** | **3,527**                    |       | 3,432                     |   | 3,656                   |
| Partnership Contribution Payable                       |   | 12     | ** ** | **1,853**                    |       | 2,176                     |   | 2,650                   |
| Risk Management                                        |   | 31     | ** ** | **14**                       |       | 10                        |   | 4                       |
| Decommissioning Liabilities                            |   | 22     | ** ** | **1,777**                    |       | 1,399                     |   | 1,185                   |
| Other Liabilities                                      |   | 23     | ** ** | **128**                      |       | 346                       |   | 246                     |
| Deferred Income Taxes                                  |   | 8      | ** ** | **2,101**                    |       | 1,572                     |   | 1,484                   |
| **Total Liabilities**                                  |   |   | ** ** | **12,788**                   |       | 11,445                    |   | 11,240                  |
| Commitments and Contingencies                          |   | 33     | ** ** | ** **                   |       |                      |   |                    |
| Shareholders’ Equity                              |   |   | ** ** | **9,406**                    |       | 8,395                     |   | 7,809                   |
| **Total Liabilities   and Shareholders’ Equity**  |   |   | ** ** | **22,194**                   |       | 19,840                    |   | 19,049                  |
|                                                   |   |   |       |                         |       |                      |   |                    |

 

* Refer to Note 34 for the impact of adopting IFRS effective January 1, 2010.

 

*See accompanying Notes to Consolidated Financial**Statements.*

 

Approved by the Board

* *

* *
| /s/   Michael A. Grandin |                | /s/   Colin Taylor |   |
|--------------------------|---------------------|--------------------|--------|
|                     |                |               |   |
| **Michael A.   Grandin** | **Colin Taylor**    |
| Director                 | Director            |
| Cenovus Energy Inc.      | Cenovus Energy Inc. |

 

 
| Cenovus   Energy Inc. | 6 | Consolidated   Financial Statements |
|-----------------------|---|-------------------------------------|

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**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY**

**($ millions)**

* *
|                                          |       | Share    Capital    (Note 25) |       | Paid in    Surplus

(Note 25) |       | Retained   Earnings |       | AOCI**  |       | Total     |
|-----------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|---------------------|------------|---------|------------|-----------|
|                                          |       |                          |       |                          |       |                |       |    |       |      |
| **Balance as at January 1, 2010*******   |       | 3,681                         |       | 4,083                         |       | 45                  |       | -       |       | 7,809     |
| Net earnings                                  |       | -                             |       | -                             |       | 1,081               |       | -       |       | 1,081     |
| Other   comprehensive income (loss)           |       | -                             |       | -                             |       | -                   |       | 71      |       | 71        |
| Total   comprehensive income for the year     |       | -                             |       | -                             |       | 1,081               |       | 71      |       | 1,152     |
| Common shares   issued under option plans     |       | 35                            |       | -                             |       | -                   |       | -       |       | 35        |
| Dividends on   common shares                  |       | -                             |       | -                             |       | (601)               |       | -       |       | (601)     |
| **Balance as at December 31, 2010******* |       | 3,716                         |       | 4,083                         |       | 525                 |       | 71      |       | 8,395     |
| Net earnings                                  |       | -                             |       | -                             |       | 1,478               |       | -       |       | 1,478     |
| Other   comprehensive income (loss)           |       | -                             |       | -                             |       | -                   |       | 48      |       | 48        |
| Total   comprehensive income for the year     |       | -                             |       | -                             |       | 1,478               |       | 48      |       | 1,526     |
| Common shares   issued under option plans     |       | 64                            |       | -                             |       | -                   |       | -       |       | 64        |
| Stock-based   compensation expense            |       | -                             |       | 24                            |       | -                   |       | -       |       | 24        |
| Dividends on   common shares                  |       | -                             |       | -                             |       | (603)               |       | -       |       | (603)     |
| **Balance as at December 31, 2011**      | ** ** | **3,780**                     | ** ** | **4,107**                     | ** ** | **1,400**           | ** ** | **119** | ** ** | **9,406** |

 

 

* Refer to Note 34 for the impact of adopting IFRS effective January 1, 2010.

** Accumulated Other Comprehensive Income.

 

*See accompanying Notes to Consolidated Financial**Statements.*

 

 
| Cenovus   Energy Inc. | 7 | Consolidated Financial Statements |
|-----------------------|---|-----------------------------------|

 

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**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**For the years ended December 31,**

**($ millions)**

 
|                                                                                     |       | Notes      | ** ** | **2011**    |   | 2010*   |
|------------------------------------------------------------------------------------------|------------|------------|------------|-------------|--------|---------|
|                                                                                     |       |       |       |        |   |    |
| **Operating   Activities**                                                               | ** ** | ** ** | ** ** | ** **  |   |    |
| Net   earnings                                                                           | ** ** | ** ** | ** ** | **1,478**   |   | 1,081   |
| Depreciation,   depletion and amortization                                               | ** ** | ** ** | ** ** | **1,295**   |   | 1,302   |
| Deferred   income taxes                                                                  |       | 8          | ** ** | **575**     |   | 141     |
| Cash   tax on divestiture of assets                                                      |       |       | ** ** | **13**      |   | -       |
| Unrealized   (gain) loss on risk management                                              |       | 31         | ** ** | **(180)**   |   | (46)    |
| Unrealized   foreign exchange (gain) loss                                                |       | 7          | ** ** | **(42)**    |   | (69)    |
| (Gain)   loss on divestiture of assets                                                   |       | 17         | ** ** | **(107)**   |   | (116)   |
| Unwinding   of discount on decommissioning liabilities                                   |       | 5,22       | ** ** | **75**      |   | 75      |
| Other                                                                                    |       |       | ** ** | **169**     |   | 44      |
|                                                                                     |       |       | ** ** | **3,276**   |   | 2,412   |
| Net   change in other assets and liabilities                                             |       |       | ** ** | **(82)**    |   | (55)    |
| Net   change in non-cash working capital                                                 |       |       | ** ** | **79**      |   | 234     |
| **Cash From Operating Activities**                                                       |       |       | ** ** | **3,273**   |   | 2,591   |
|                                                                                     |       |       |       |        |   |    |
| **Investing   Activities**                                                               |       |       | ** ** | ** **  |   |    |
| Capital   expenditures – exploration and evaluation assets                          |       | 15         | ** ** | **(527)**   |   | (350)   |
| Capital   expenditures – property, plant and equipment                              |       | 16         | ** ** | **(2,265)** |   | (1,851) |
| Proceeds   from divestiture of assets                                                    |       |       | ** ** | **173**     |   | 309     |
| Cash   tax on divestiture of assets                                                      |       |       | ** ** | **(13)**    |   | -       |
| Net   change in investments and other                                                    |       |       | ** ** | **(28)**    |   | 4       |
| Net   change in non-cash working capital                                                 |       |       | ** ** | **130**     |   | 95      |
| **Cash (Used in) Investing   Activities**                                                |       |       | ** ** | **(2,530)** |   | (1,793) |
|                                                                                     |       |       |       |        |   |    |
| **Net Cash Provided (Used) before Financing   Activities**                               |       |       | ** ** | **743**     |   | 798     |
|                                                                                     |       |       |       |        |   |    |
| **Financing Activities**                                                                 |       |       | ** ** | ** **  |   |    |
| Net   issuance (repayment) of short-term borrowings                                      |       |       | ** ** | **(9)**     |   | -       |
| Net   issuance (repayment) of revolving long-term debt                                   |       |       | ** ** | **-**       |   | (58)    |
| Proceeds   on issuance of common shares                                                  | ** ** | ** ** | ** ** | **48**      |   | 28      |
| Dividends   paid on common shares                                                        |       | 9          | ** ** | **(603)**   |   | (601)   |
| Other                                                                                    | ** ** | ** ** | ** ** | **6**       |   | -       |
| **Cash From (Used in) Financing   Activities**                                           | ** ** | ** ** | ** ** | **(558)**   |   | (631)   |
|                                                                                     |       |       |       |        |   |    |
| **Foreign   Exchange Gain (Loss) on Cash and Cash Equivalents Held in Foreign Currency** | ** ** | ** ** | ** ** | **10**      |   | (22)    |
| **Increase (Decrease) in Cash and Cash Equivalents**                                     | ** ** | ** ** | ** ** | **195**     |   | 145     |
| **Cash and Cash Equivalents, Beginning of Year**                                         | ** ** | ** ** | ** ** | **300**     |   | 155     |
| **Cash and Cash Equivalents, End of Year**                                               | ** ** | ** ** | ** ** | **495**     |   | 300     |

 

 

* Refer to Note 34 for the impact of adopting IFRS effective January 1, 2010.

 

*See accompanying Notes to Consolidated Financial**Statements.*

 

 
| Cenovus   Energy Inc. | 8 | Consolidated Financial Statements |
|-----------------------|---|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**1. DESCRIPTION OF BUSINESS AND SEGMENTED DISCLOSURES**

 

Cenovus Energy Inc. and its subsidiaries (together “Cenovus” or the “Company”) are in the business of the development, production and marketing of crude oil, natural gas and natural gas liquids (“NGLs”) in Canada with refining operations in the United States (“U.S.”).

 

Cenovus began independent operations on December 1, 2009, as a result of the plan of arrangement (“Arrangement”) involving Encana Corporation (“Encana”) whereby Encana was split into two independent energy companies, one a natural gas company, Encana, and the other an oil company, Cenovus. In connection with the Arrangement, Encana common shareholders received one share in each of the new Encana and Cenovus in exchange for each Encana share held.

 

Cenovus was incorporated under the *Canada Business Corporations Act* and its shares are publicly traded on the Toronto (“TSX”) and New York (“NYSE”) stock exchanges. The executive and registered office is located at #4000, 421 - 7th Avenue S.W., Calgary, Alberta, Canada, T2P 4K9. Information on the Company’s basis of presentation for these financial statements is found in Note 2.

 

The Company’s reportable segments are as follows:

 

·                 **Oil Sands,******which consists of Cenovus’s producing bitumen assets at Foster Creek and Christina Lake, heavy oil assets at Pelican Lake, new resource play assets such as Narrows Lake, Grand Rapids and Telephone Lake, and the Athabasca natural gas assets. Certain of the Company’s operated oil sands properties, notably Foster Creek, Christina Lake and Narrows Lake, are jointly owned with ConocoPhillips, an unrelated U.S. public company.

 

·                 **Conventional,** which includes the development and production of conventional crude oil, natural gas and NGLs in Alberta and Saskatchewan, notably the carbon dioxide enhanced oil recovery project at Weyburn, and the Bakken and Lower Shaunavon crude oil properties.

 

·                  **Refining and Marketing,** which is focused on the refining of crude oil products into petroleum and chemical products at two refineries located in the U.S. The refineries are jointly owned with and operated by ConocoPhillips. This segment also markets Cenovus’s crude oil and natural gas, as well as third-party purchases and sales of product that provide operational flexibility for transportation commitments, product type, delivery points and customer diversification.

 

·                 **Corporate and Eliminations,**which primarily includes unrealized gains and losses recorded on derivative financial instruments, gains and losses on divestiture of assets, as well as other Cenovus-wide costs for general and administrative, and financing activities. As financial instruments are settled, the realized gains and losses are recorded in the operating segment to which the derivative instrument relates. Eliminations relate to sales and operating revenues and purchased product between segments recorded at transfer prices based on current market prices and to unrealized intersegment profits in inventory.

 

The tabular financial information which follows presents the segmented information first by segment, then by product and geographic location.

 

 
| Cenovus   Energy Inc. | 9 | Consolidated Financial Statements |
|-----------------------|---|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**A) Results of Operations - Segment and Operational Information**

** **
|                                     | ** ** | **Oil Sands** | ** ** | **Conventional** | ** ** | **Refining and Marketing** |
|------------------------------------------|------------|---------------|------------|------------------|------------|----------------------------|
| For the years ended December 31,    | ** ** | **2011**      |       | 2010             | ** ** | **2011**                   |   | 2010 | ** ** | **2011** |   | 2010 |
|                                     |       |          |       |             |       |                       |   |   |   |   |   |   |
| **Revenues**                             |       |          |       |             |       |                       |   |   |   |   |   |   |
| Gross Sales                              | ** ** | **3,291**     |       | 2,702            | ** ** | **2,328**                  |   | 2,284 | ** ** | **10,625** |   | 8,228 |
| Less: Royalties                          | ** ** | **284**       |       | 279              | ** ** | **205**                    |   | 170 | ** ** | **-** |   | - |
|                                     | ** ** | **3,007**     |       | 2,423            | ** ** | **2,123**                  |   | 2,114 | ** ** | **10,625** |   | 8,228 |
| **Expenses**                             | ** ** | ** **    |       |             | ** ** | ** **                 |   |   | ** ** | ** ** |   |   |
| Purchased product                        | ** ** | **-**         |       | -                | ** ** | **-**                      |   | - | ** ** | **9,149** |   | 7,674 |
| Transportation and blending              | ** ** | **1,231**     |       | 935              | ** ** | **138**                    |   | 130 | ** ** | **-** |   | - |
| Operating                                | ** ** | **438**       |       | 367              | ** ** | **488**                    |   | 434 | ** ** | **481** |   | 488 |
| Production and mineral taxes             | ** ** | **-**         |       | -                | ** ** | **36**                     |   | 34 | ** ** | **-** |   | - |
| (Gain) loss on risk management           | ** ** | **70**        |       | (10)             | ** ** | **(152)**                  |   | (258) | ** ** | **14** |   | (10) |
| **Operating Cash Flow**                  | ** ** | **1,268**     |       | 1,131            | ** ** | **1,613**                  |   | 1,774 | ** ** | **981** |   | 76 |
| Depreciation, depletion and amortization | ** ** | **347**       |       | 375              | ** ** | **778**                    |   | 799 | ** ** | **130** |   | 96 |
| Exploration expense                      | ** ** | **-**         |       | 3                | ** ** | **-**                      |   | - | ** ** | **-** |   | - |
| **Segment Income (Loss)**                | ** ** | **921**       |       | 753              | ** ** | **835**                    |   | 975 | ** ** | **851** |   | (20) |

 
| ** **                                                    | ** ** | **Corporate and   Eliminations** | ** ** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|------------|------------------|------------|
| **For the years ended December 31,** | ** ** | **2011**                              | ** ** | ** ** | 2010             | ** ** | ** ** | **2011** | ** ** | ** ** | 2010 | ** ** |
|                                                          |       |                                  |       |       |             |       |   |   |   |   |   |   |
| **Revenues**                                                  |       |                                  |       |       |             |       |   |   |   |   |   |   |
| Gross Sales                                                   | ** ** | **(59**                               | **)**      |       | (124             | )          | ** ** | **16,185** |   |   | 13,090 |   |
| Less: Royalties                                               | ** ** | **-**                                 |       |       | -                | ** ** | ** ** | **489** |   |   | 449 |   |
|                                                          | ** ** | **(59**                               | **)**      |       | (124             | )          | ** ** | **15,696** |   |   | 12,641 |   |
| **Expenses**                                                  | ** ** | ** **                            |       |       |             | ** ** | ** ** | ** ** |   |   |   |   |
| Purchased product                                             | ** ** | **(59**                               | **)**      |       | (123             | )          | ** ** | **9,090** |   |   | 7,551 |   |
| Transportation and blending                                   | ** ** | **-**                                 |       |       | -                | ** ** | ** ** | **1,369** |   |   | 1,065 |   |
| Operating                                                     | ** ** | **(1**                                | **)**      |       | (3               | )          | ** ** | **1,406** |   |   | 1,286 |   |
| Production and mineral taxes                                  | ** ** | **-**                                 |       |       | -                | ** ** | ** ** | **36** |   |   | 34 |   |
| (Gain) loss on risk management                                | ** ** | **(180**                              | **)**      |       | (46              | )          | ** ** | **(248** | **)** |   | (324 | ) |
|                                                          | ** ** | **181**                               |       |       | 48               | ** ** | ** ** | **4,043** |   |   | 3,029 |   |
| Depreciation, depletion and amortization                      | ** ** | **40**                                |       |       | 32               | ** ** | ** ** | **1,295** |   |   | 1,302 |   |
| Exploration expense                                           | ** ** | **-**                                 |       |       | -                | ** ** | ** ** | **-** |   |   | 3 |   |
| **Segment Income (Loss)**                                     | ** ** | **141**                               |       |       | 16               | ** ** | ** ** | **2,748** |   |   | 1,724 |   |
| General and administrative                                    | ** ** | **295**                               |       |       | 246              | ** ** | ** ** | **295** |   |   | 246 |   |
| Finance costs                                                 | ** ** | **447**                               |       |       | 498              | ** ** | ** ** | **447** |   |   | 498 |   |
| Interest income                                               | ** ** | **(124**                              | **)**      |       | (144             | )          | ** ** | **(124** | **)** |   | (144 | ) |
| Foreign exchange (gain) loss, net                             | ** ** | **26**                                |       |       | (51              | )          | ** ** | **26** |   |   | (51 | ) |
| (Gain) loss on divestiture of assets                          | ** ** | **(107**                              | **)**      |       | (116             | )          | ** ** | **(107** | **)** |   | (116 | ) |
| Other (income) loss, net                                      | ** ** | **4**                                 |       |       | (13              | )          | ** ** | **4** |   |   | (13 | ) |
|                                                          | ** ** | **541**                               |       |       | 420              | ** ** | ** ** | **541** |   |   | 420 |   |
| **Earnings Before Income Tax**                                |       |                                  |       |       |             | ** ** | ** ** | **2,207** |   |   | 1,304 |   |
| Income tax expense                                            |       |                                  |       |       |             | ** ** | ** ** | **729** |   |   | 223 |   |
| **Net Earnings**                                              |       |                                  |       |       |             | ** ** | ** ** | **1,478** |   |   | 1,081 |   |

 
| Cenovus   Energy Inc. | 10 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

** **

** **

*Exploration and Evaluation Assets, Property, Plant and Equipment, Goodwill and Total Assets*

** **
|                       | ** ** | **Exploration and Evaluation Assets** | ** ** | **Property, Plant and Equipment** |
|----------------------------|------------|---------------------------------------|------------|-----------------------------------|
| As at                      | ** ** | **December 31,   2011**          |       | December 31,   2010          |   | January 1,   2010 | ** ** | **December 31,   2011** |   | December 31,   2010 |   | January 1,   2010 |
|                       |       |                                  |       |                              |   |   |   |   |   |   |   |   |
| Oil Sands                  | ** ** | **741**                               |       | 570                               |   | 452 | ** ** | **6,224** |   | 5,219 |   | 4,870 |
| Conventional               | ** ** | **139**                               |       | 143                               |   | 128 | ** ** | **4,668** |   | 4,409 |   | 4,645 |
| Refining and Marketing     | ** ** | **-**                                 |       | -                                 |   | - | ** ** | **3,200** |   | 2,853 |   | 2,418 |
| Corporate and Eliminations | ** ** | **-**                                 |       | -                                 |   | - | ** ** | **232** |   | 146 |   | 116 |
| ** **                 | ** ** | ** **                            |       |                              |   |   | ** ** | ** ** |   |   |   |   |
| **Consolidated**           | ** ** | **880**                               |       | 713                               |   | 580 | ** ** | **14,324** |   | 12,627 |   | 12,049 |

 
|                       | ** ** | **Goodwill**                 | ** ** | **Total Assets**         |
|----------------------------|------------|------------------------------|------------|--------------------------|
| As at                      | ** ** | **December 31,   2011** |       | December 31,   2010 |   | January 1,   2010 | ** ** | **December 31,   2011** |   | December 31,   2010 |   | January 1,   2010 |
|                       |       |                         |       |                     |   |   |   |   |   |   |   |   |
| Oil Sands                  | ** ** | **739**                      |       | 739                      |   | 739 | ** ** | **10,524** |   | 9,487 |   | 9,426 |
| Conventional               | ** ** | **393**                      |       | 393                      |   | 407 | ** ** | **5,566** |   | 5,186 |   | 5,453 |
| Refining and Marketing     | ** ** | **-**                        |       | -                        |   | - | ** ** | **4,927** |   | 4,282 |   | 3,669 |
| Corporate and Eliminations | ** ** | **-**                        |       | -                        |   | - | ** ** | **1,177** |   | 885 |   | 501 |
|                       | ** ** | ** **                   |       |                     |   |   | ** ** | ** ** |   |   |   |   |
| **Consolidated**           | ** ** | **1,132**                    |       | 1,132                    |   | 1,146 | ** ** | **22,194** |   | 19,840 |   | 19,049 |

 

*Capital Expenditures*

 
| For the years ended December 31, | ** ** | **2011**   |   | 2010   |
|---------------------------------------|------------|------------|--------|--------|
|                                  | ** ** | ** ** |   |   |
| **Capital**                           | ** ** | ** ** |   |   |
| Oil Sands                             | ** ** | **1,415**  |   | 857    |
| Conventional                          | ** ** | **788**    |   | 526    |
| Refining and   Marketing              | ** ** | **393**    |   | 656    |
| Corporate                             | ** ** | **127**    |   | 76     |
|                                  | ** ** | **2,723**  |   | 2,115  |
| **Acquisition Capital**               | ** ** | ** ** |   |   |
| Oil Sands                             | ** ** | **44**     |   | 23     |
| Conventional                          | ** ** | **25**     |   | 25     |
| Refining and   Marketing              | ** ** | **-**      |   | 38     |
| Corporate                             | ** ** | **2**      |   | -      |
| **Total**                             | ** ** | **2,794**  |   | 2,201  |

 

*Major Customers*

 

In connection with the marketing and sale of Cenovus’s own and purchased crude oil, natural gas and refined products for the year ended December 31, 2011, Cenovus had two customers (2010 – two) which individually accounted for more than 10 percent of its consolidated gross revenues. Sales to these customers, major international integrated energy companies with an investment grade credit rating, were approximately $7,324 million and $2,683 million respectively (2010 – $5,376 million and $2,295 million).

 

 
| Cenovus   Energy Inc. | 11 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

**B) Financial Results by Upstream Product**

** **
|                                  | ** ** | **Crude Oil and NGLs** |
|---------------------------------------|------------|------------------------|
|                                  | ** ** | **Oil Sands**          | ** ** | **Conventional** | ** ** | **Total** |
| For the years ended December 31, | ** ** | **2011**               |   | 2010 | ** ** | **2011** |   | 2010 | ** ** | **2011** |   | 2010 |
|                                  |       |                   |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                          | * *   | * *               |   |   |   |   |   |   |   |   |   |   |
| Gross Sales                           | ** ** | **3,217**              |   | 2,610 | ** ** | **1,492** |   | 1,229 | ** ** | **4,709** |   | 3,839 |
| Less: Royalties                       | ** ** | **282**                |   | 276 | ** ** | **193** |   | 153 | ** ** | **475** |   | 429 |
|                                  | ** ** | **2,935**              |   | 2,334 | ** ** | **1,299** |   | 1,076 | ** ** | **4,234** |   | 3,410 |
| **Expenses**                          | ** ** | ** **             |   |   | ** ** | ** ** |   |   | ** ** | ** ** |   |   |
| Transportation and blending           | ** ** | **1,229**              |   | 934 | ** ** | **104** |   | 86 | ** ** | **1,333** |   | 1,020 |
| Operating                             | ** ** | **409**                |   | 339 | ** ** | **244** |   | 199 | ** ** | **653** |   | 538 |
| Production and mineral taxes          | ** ** | **-**                  |   | - | ** ** | **27** |   | 28 | ** ** | **27** |   | 28 |
| (Gain) loss on risk management        | ** ** | **87**                 |   | 14 | ** ** | **43** |   | 5 | ** ** | **130** |   | 19 |
| **Operating Cash Flow**               | ** ** | **1,210**              |   | 1,047 | ** ** | **881** |   | 758 | ** ** | **2,091** |   | 1,805 |

 
| ** **                            | ** ** | **Natural Gas** |
|---------------------------------------|------------|-----------------|
| ** **                            | ** ** | **Oil Sands**   | ** ** | **Conventional** | ** ** | **Total** |
| For the years ended December 31, | ** ** | **2011**        |   | 2010 | ** ** | **2011** |   | 2010 | ** ** | **2011** |   | 2010 |
|                                  |       |            |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                          |       |            |   |   |   |   |   |   |   |   |   |   |
| Gross Sales                           | ** ** | **63**          |   | 78 | ** ** | **825** |   | 1,042 | ** ** | **888** |   | 1,120 |
| Less: Royalties                       | ** ** | **2**           |   | 1 | ** ** | **12** |   | 17 | ** ** | **14** |   | 18 |
| ** **                            |       | **61**          |   | 77 | ** ** | **813** |   | 1,025 | ** ** | **874** |   | 1,102 |
| **Expenses**                          |       |            |   |   |   |   |   |   |   |   |   |   |
| Transportation and blending           | ** ** | **2**           |   | 1 | ** ** | **34** |   | 44 | ** ** | **36** |   | 45 |
| Operating                             | ** ** | **24**          |   | 23 | ** ** | **240** |   | 231 | ** ** | **264** |   | 254 |
| Production and mineral taxes          | ** ** | **-**           |   | - | ** ** | **9** |   | 6 | ** ** | **9** |   | 6 |
| (Gain) loss on risk management        | ** ** | **(17)**        |   | (24) | ** ** | **(195)** |   | (263) | ** ** | **(212)** |   | (287) |
| **Operating Cash Flow**               | ** ** | **52**          |   | 77 | ** ** | **725** |   | 1,007 | ** ** | **777** |   | 1,084 |

 
| ** **                            | ** ** | **Other**     |
|---------------------------------------|------------|---------------|
| ** **                            | ** ** | **Oil Sands** | ** ** | **Conventional** | ** ** | **Total** |
| For the years ended December 31, | ** ** | **2011**      |   | 2010 | ** ** | **2011** |   | 2010 | ** ** | **2011** |   | 2010 |
|                                  |       |          |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                          |       |          |   |   |   |   |   |   |   |   |   |   |
| Gross Sales                           | ** ** | **11**        |   | 14 | ** ** | **11** |   | 13 | ** ** | **22** |   | 27 |
| Less: Royalties                       | ** ** | **-**         |   | 2 | ** ** | **-** |   | - | ** ** | **-** |   | 2 |
| ** **                            |       | **11**        |   | 12 | ** ** | **11** |   | 13 | ** ** | **22** |   | 25 |
| **Expenses**                          |       |          |   |   |   |   |   |   |   |   |   |   |
| Transportation and blending           | ** ** | **-**         |   | - | ** ** | **-** |   | - | ** ** | **-** |   | - |
| Operating                             | ** ** | **5**         |   | 5 | ** ** | **4** |   | 4 | ** ** | **9** |   | 9 |
| Production and mineral taxes          | ** ** | **-**         |   | - | ** ** | **-** |   | - | ** ** | **-** |   | - |
| (Gain) loss on risk management        | ** ** | **-**         |   | - | ** ** | **-** |   | - | ** ** | **-** |   | - |
| **Operating Cash Flow**               | ** ** | **6**         |   | 7 | ** ** | **7** |   | 9 | ** ** | **13** |   | 16 |

 
| ** **                            | ** ** | **Total**     |
|---------------------------------------|------------|---------------|
| ** **                            | ** ** | **Oil Sands** | ** ** | **Conventional** | ** ** | **Total** |
| For the years ended December 31, | ** ** | **2011**      |   | 2010 | ** ** | **2011** |   | 2010 | ** ** | **2011** |   | 2010 |
|                                  |       |          |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                          |       |          |   |   |   |   |   |   |   |   |   |   |
| Gross Sales                           | ** ** | **3,291**     |   | 2,702 | ** ** | **2,328** |   | 2,284 | ** ** | **5,619** |   | 4,986 |
| Less: Royalties                       | ** ** | **284**       |   | 279 | ** ** | **205** |   | 170 | ** ** | **489** |   | 449 |
| ** **                            |       | **3,007**     |   | 2,423 | ** ** | **2,123** |   | 2,114 | ** ** | **5,130** |   | 4,537 |
| **Expenses**                          |       |          |   |   |   |   |   |   |   |   |   |   |
| Transportation and blending           | ** ** | **1,231**     |   | 935 | ** ** | **138** |   | 130 | ** ** | **1,369** |   | 1,065 |
| Operating                             | ** ** | **438**       |   | 367 | ** ** | **488** |   | 434 | ** ** | **926** |   | 801 |
| Production and mineral taxes          | ** ** | **-**         |   | - | ** ** | **36** |   | 34 | ** ** | **36** |   | 34 |
| (Gain) loss on risk management        | ** ** | **70**        |   | (10) | ** ** | **(152)** |   | (258) | ** ** | **(82)** |   | (268) |
| **Operating Cash Flow**               | ** ** | **1,268**     |   | 1,131 | ** ** | **1,613** |   | 1,774 | ** ** | **2,881** |   | 2,905 |

 

 
| Cenovus   Energy Inc. | 12 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**C) Geographic Information**

** **
|                                     |     | **Canada** | ** ** | **United States** | ** ** | **Consolidated** |
|------------------------------------------|----------|------------|------------|-------------------|------------|------------------|
| For the years ended December 31,         |     | **2011**   | ** ** | 2010              | ** ** | **2011**         | ** ** | 2010 | ** ** | **2011** | ** ** | 2010 |
|                                     |     |       |       |              |       |             |   |   |   |   |   |   |
| **Revenues**                             | * * | * *   | * *   |              | * *   | ** **       | * * |   | ** ** |   |   |   |
| Gross Sales                              | * * | **7,513**  | * *   | 6,466             | * *   | **8,672**        | * * | 6,624 | ** ** | **16,185** |   | 13,090 |
| Less: Royalties                          | * * | **489**    | * *   | 449               | * *   | **-**            | * * | - | ** ** | **489** |   | 449 |
|                                     |     | **7,024**  |       | 6,017             |       | **8,672**        |   | 6,624 |   | **15,696** |   | 12,641 |
| **Expenses**                             |     | ** ** |       |              |       | ** **       |   |   |   | ** ** |   |   |
| Purchased product                        |     | **1,867**  |       | 1,456             |       | **7,223**        |   | 6,095 |   | **9,090** |   | 7,551 |
| Transportation and blending              |     | **1,369**  |       | 1,065             |       | **-**            |   | - |   | **1,369** |   | 1,065 |
| Operating                                |     | **947**    |       | 814               |       | **459**          |   | 472 |   | **1,406** |   | 1,286 |
| Production and mineral taxes             |     | **36**     |       | 34                |       | **-**            |   | - |   | **36** |   | 34 |
| (Gain) loss on risk management           |     | **(255)**  |       | (322)             |       | **7**            |   | (2) |   | **(248)** |   | (324) |
|                                     |     | **3,060**  |       | 2,970             |       | **983**          |   | 59 |   | **4,043** |   | 3,029 |
| Depreciation, depletion and amortization |     | **1,165**  |       | 1,216             |       | **130**          |   | 86 |   | **1,295** |   | 1,302 |
| Exploration expense                      |     | **-**      |       | 3                 |       | **-**            |   | - |   | **-** |   | 3 |
| **Segment Income (Loss)**                |     | **1,895**  |       | 1,751             |       | **853**          |   | (27) |   | **2,748** |   | 1,724 |

 

The Oil Sands and Conventional segments operate in Canada. Both of Cenovus’s refining facilities are located and carry on business in the U.S. The marketing of Cenovus’s crude oil and natural gas produced in Canada, as well as the third party purchases and sales of product, is undertaken in Canada. Physical product sales that settle in the U.S. are considered to be export sales undertaken by a Canadian business. The Corporate and Eliminations segment is attributed to Canada with the exception of the unrealized risk management gains and losses which have been attributed to the country in which the transacting entity resides.

 

*Export Sales*

 

Sales of crude oil, natural gas and NGLs produced or purchased in Canada that have been delivered to customers outside of Canada were $700 million (2010 – $646 million).

 

*Exploration and Evaluation Assets, Property, Plant and Equipment, Goodwill and Total Assets*

 
|             |     | **Exploration and Evaluation Assets** | ** ** | **Property, Plant and Equipment** |
|------------------|----------|---------------------------------------|------------|-----------------------------------|
| As at            |     | **December   31,   2011**             |       | December 31,   2010               |   | January 1,   2010 | ** ** | **December   31,   2011** |   | December 31,   2010 |   | January 1,   2010 |
|             |     |                                  |       |                              |   |   |   |   |   |   |   |   |
| Canada           | * * | **880**                               |       | 713                               |   | 580 | ** ** | **11,124** |   | 9,774 |   | 9,645 |
| United States    |     | **-**                                 |       | -                                 |   | - | ** ** | **3,200** |   | 2,853 |   | 2,404 |
| ** **       |     | ** **                            |       |                              |   |   | ** ** | ** ** |   |   |   |   |
| **Consolidated** |     | **880**                               |       | 713                               |   | 580 | ** ** | **14,324** |   | 12,627 |   | 12,049 |
| ** **       |     | ** **                            |       |                              |   |   | ** ** | ** ** |   |   |   |   |
|             |     | **Goodwill**                          | ** ** | **Total Assets**                  |
| As at            |     | **December 31,   2011**          |       | December 31,   2010               |   | January 1,   2010 | ** ** | **December   31,   2011** |   | December 31,   2010 |   | January 1,   2010 |
|             |     |                                  |       |                              |   |   |   |   |   |   |   |   |
| Canada           | * * | **1,132**                             | * *   | 1,132                             |   | 1,146 |   | **17,536** | ** ** | 15,906 |   | 15,669 |
| United States    |     | **-**                                 |       | -                                 |   | - |   | **4,658** |   | 3,934 |   | 3,380 |
|             |     | ** **                            |       |                              |   |   |   | ** ** |   |   |   |   |
| **Consolidated** |     | **1,132**                             |       | 1,132                             |   | 1,146 |   | **22,194** |   | 19,840 |   | 19,049 |

 

 

 

**2. BASIS OF PREPARATION AND STATEMENT OF COMPLIANCE**

 

In these Consolidated Financial Statements, unless otherwise indicated, all dollars are expressed in Canadian dollars. All references to C$ or $ are to Canadian dollars and references to US$ are to U.S. dollars.

 

These Consolidated Financial Statements represent the Company’s first annual financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) and interpretations of the International Financial Reporting Interpretations Committee (“IFRIC”). These Consolidated Financial Statements have been prepared in compliance with IFRS. The Company’s accounting policies have been applied consistently to all years presented with the exception of certain IFRS 1, “*First-time Adoption of International Financial Reporting Standards*” (“IFRS 1”) transition elections and exemptions the Company applied in its transition from Canadian generally accepted accounting principles (“previous GAAP”) as discussed in Note 34. The impact of the transition to IFRS on the Company’s financial position, results of operation and cash flows from the Consolidated Financial Statements for the year ended December 31, 2010 prepared under previous GAAP is included in Note 34.

 

 
| Cenovus   Energy Inc. | 13 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

After applying the transition exemptions of IFRS 1, these Consolidated Financial Statements have been prepared on a historical cost basis, except as detailed in the Company’s accounting policies disclosed in Note 3.

 

The Consolidated Financial Statements of Cenovus were authorized for issuance in accordance with a resolution of the Board of Directors on February 14, 2012.

 

 

**3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

** **

**A) Principles of Consolidation**

 

The Consolidated Financial Statements include the accounts of Cenovus and its subsidiaries. Subsidiaries are entities over which the Company has the power to govern the financial and operating policies. Subsidiaries are consolidated from the date of acquisition of control and continue to be consolidated until the date that there is a loss of control. All intercompany transactions, balances and unrealized gains and losses from intercompany transactions are eliminated on consolidation.

 

Investments in jointly controlled partnerships and unincorporated joint operations carry on certain of Cenovus’s development, production and crude oil refining businesses and are accounted for using the proportionate consolidation method, whereby Cenovus’s proportionate share of revenues, expenses, assets and liabilities are included in the consolidated accounts.

 

**B) Segment Reporting**

 

Management has determined the operating segments based on information regularly reviewed for the purposes of decision making, allocating resources and assessing performance by Cenovus’s chief operating decision makers. The Company evaluates the financial performance of its operating segments primarily based on operating cash flow.

 

**C) Foreign Currency Translation**

 

*Functional and Presentation Currency*

 

The Company’s presentation currency is Canadian dollars. The accounts of the Company’s foreign operations that have a functional currency different from the Company’s presentation currency are translated into the Company’s presentation currency at period end exchange rates for assets and liabilities and at the average rate over the period for revenues and expenses. Translation gains and losses relating to the foreign operations are recognized in Other Comprehensive Income (“OCI”) as cumulative translation adjustments.

 

When the Company disposes of an entire interest in a foreign operation or loses control, joint control, or significant influence over a foreign operation, the foreign currency gains or losses accumulated in OCI related to the foreign operation are recognized in net earnings. When the Company disposes of part of an interest in a foreign operation which continues to be a subsidiary, a proportionate amount of gains and losses accumulated in OCI is allocated between controlling and non-controlling interests.

 

*Transactions and Balances*

 

Transactions in foreign currencies are translated to the respective functional currencies at exchange rates in effect at the dates of the transactions. Monetary assets and liabilities of Cenovus that are denominated in foreign currencies are translated into its functional currency at the rates of exchange in effect at the period end date. Any gains or losses are recorded in the Consolidated Statements of Earnings and Comprehensive Income.

 

 
| Cenovus   Energy Inc. | 14 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

** **

** **

**D) Revenue and Interest Income Recognition**

 

*Sales of Product*

 

Revenues associated with the sales of Cenovus’s crude oil, natural gas, NGLs and petroleum and refined products are recognized when the significant risks and rewards of ownership have been transferred to the customer, the sales price and costs can be measured reliably, and it is probable that the economic benefits will flow to the Company. This is generally met when title passes from the Company to its customer. Revenues from crude oil and natural gas production represent the Company’s share, net of royalty payments to governments and other mineral interest owners.

 

Purchases and sales of products that are entered into in contemplation of each other with the same counterparty are recorded on a net basis. Revenues associated with the services provided as agent are recorded as the services are provided.

 

*Interest Income*

 

Interest income is recognized as the interest accrues using the effective interest method.

 

**E) Transportation and Blending**

 

The costs associated with the transportation of crude oil, natural gas and NGLs, including the cost of diluent used in blending, are recognized when the product is delivered and the services provided.

 

**F) Production and Mineral Taxes**

 

Costs paid to non-mineral interest owners based on production of crude oil, natural gas and NGLs are recognized when the product is sold.

 

**G) Exploration Costs**

 

Costs incurred prior to obtaining the legal right to explore (pre-exploration costs) are expensed in the period in which they are incurred as exploration expense.

 

Costs incurred after the legal right to explore is obtained, are initially capitalized. If it is determined that the field/project/area is not technically feasible or commercially viable or if the Company decides not to continue the exploration and evaluation activity, the accumulated costs are expensed as exploration expense.

 

**H) Employee Benefit Plans**

 

Accruals for obligations under the employee defined benefit plans and the related costs are recorded net of plan assets.

 

The cost of pensions and other post-employment benefits is actuarially determined using the projected credit method based on length of service, and reflects Management’s best estimate of expected plan investment performance, salary escalation, retirement ages of employees and expected future health care costs. The expected return on plan assets is based on the fair value of those assets. The accrued benefit obligation is discounted using the market interest rate on high quality corporate debt instruments as at the measurement date.

 

Pension expense for the defined benefit pension plan includes the cost of pension benefits earned during the current year, the interest cost on pension obligations, the expected return on pension plan assets, the amortization of adjustments arising from pension plan amendments and the amortization of the excess of the net actuarial gain or loss over ten percent of the greater of the benefit obligation and the fair value of plan assets. Amortization is calculated on a straight-line basis over a period covering the non-vested expected average remaining service lives of employees and recognized immediately for vested benefits covered by the plans.

 

Pension expense for the defined contribution pension plans is recorded as the benefits are earned by the employees covered by the plans.

 

 
| Cenovus   Energy Inc. | 15 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

** **

** **

**I) Income Taxes**

 

Income taxes comprise current and deferred tax. Current and deferred income taxes are provided for on a non-discounted basis at amounts expected to be paid using the tax rates and laws that have been enacted or substantively enacted at the Balance Sheet date.

 

Cenovus follows the liability method of accounting for income taxes, where deferred income taxes are recorded for the effect of any temporary difference between the accounting and income tax basis of an asset or liability, using the substantively enacted income tax rates expected to apply when the assets are realized or liabilities are settled. Deferred income tax balances are adjusted to reflect changes in income tax rates that are substantively enacted with the adjustment being recognized in net earnings in the period that the change occurs except when it relates to items charged or credited directly to equity, in which case the deferred income tax is also recorded in equity.

 

Deferred income tax is provided on temporary differences arising from investments in subsidiaries except in the case where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.

 

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.

 

Deferred income tax assets and liabilities are only offset where they arise within the same entity and tax jurisdiction.

 

Deferred income tax assets and liabilities are presented as non-current.

 

**J) Net Earnings per Share Amounts**

 

Basic net earnings per common share is computed by dividing the net earnings by the weighted average number of common shares outstanding during the period. Diluted net earnings per share amounts are calculated giving effect to the potential dilution that would occur if stock options or other contracts to issue common shares were exercised or converted to common shares. The treasury stock method is used to determine the dilutive effect of stock options and other dilutive instruments. The treasury stock method assumes that proceeds received from the exercise of in-the-money stock options are used to repurchase common shares at the average market price. For those contracts that may be settled in cash or in shares at the holder’s option, the more dilutive of cash settlement and share settlement is used in calculating diluted earnings per share.

 

**K) Cash and Cash Equivalents**

 

Cash and cash equivalents include short-term investments, such as money market deposits or similar type instruments, with a maturity of three months or less.

 

**L) Inventories**

 

Product inventories are valued at the lower of cost and net realizable value on a first-in, first-out or weighted average cost basis. The cost of inventory includes all costs incurred in the normal course of business to bring each product to its present location and condition. Net realizable value is the estimated selling price in the ordinary course of business less any expected selling costs. If the carrying amount exceeds net realizable value, a write-down is recognized. The write-down may be reversed in a subsequent period if the circumstances which caused it no longer exist.

 

**M) Assets (Disposal Group) Held for Sale**

 

Non-current assets or disposal groups are classified as held for sale when their carrying amount will principally be recovered through a sales transaction rather than through continued use and a sales transaction is highly probable. Assets held for sale are recorded at the lower of carrying value and fair value less cost to sell.

 

**N) Exploration and Evaluation (“E&E”) Assets**

 

Costs incurred after the legal right to explore an area has been obtained and before technical feasibility and commercial viability of the area have been established are capitalized as E&E assets. These costs include license acquisition, geological and geophysical, drilling, sampling, decommissioning and other directly attributable internal costs. E&E assets are not depreciated and are carried forward until technical feasibility and commercial viability of the field/area/project is determined or the assets are determined to be impaired.

 

 
| Cenovus   Energy Inc. | 16 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

Once technical feasibility and commercial viability have been established for a field/area/project the carrying value of the E&E assets associated with that field/area/project is tested for impairment. The carrying value, net of any impairment loss, is then reclassified as property, plant and equipment.

 

E&E costs are subject to regular technical, commercial and management review to confirm the continued intent to develop the resources. If a field/area/project is determined to no longer be technically feasible or commercially viable and Management decides not to continue the exploration and evaluation activity, the unrecoverable costs are charged to exploration expense in the period in which the determination occurs.

 

Any gains or losses from the divestiture of E&E assets are recognized in net earnings.

 

**O) Property, Plant and Equipment**

 

*Development and Production Assets*

 

Development and production assets are stated at cost less accumulated depreciation, depletion, amortization and net impairment losses. Development and production assets are capitalized on an area-by-area basis and include all costs associated with the development and production of the crude oil and natural gas properties as well as any E&E expenditures incurred in finding commercial reserves of crude oil or natural gas transferred from E&E assets. Capitalized costs include internal costs, decommissioning liabilities, and, for qualifying assets, borrowing costs, directly associated with the acquisition of, the exploration for, and the development of crude oil and natural gas reserves.

 

Costs accumulated within each area are depleted using the unit-of-production method based on estimated proved reserves determined using estimated future prices and costs. For the purpose of this calculation, natural gas is converted to oil on an energy equivalent basis. Costs subject to depletion include estimated future costs to be incurred in developing proved reserves.

 

Exchanges of development and production assets are measured at fair value unless the transaction lacks commercial substance or the fair value of neither the asset received nor the asset given up can be reliably measured. When fair value is not used, the carrying amount of the asset given up is used as the cost of the asset acquired.

 

Expenditures related to renewals or betterments that improve the productive capacity or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Land is not depreciated.

 

Any gains or losses from the divestiture of development and production assets are recognized in net earnings.

 

*Other Upstream Assets*

 

Other upstream assets include pipelines and information technology assets used to support the upstream business. These assets are depreciated on a straight-line basis over their useful lives of three to 35 years.

 

*Refining Assets*

 

The refining assets are stated at cost less accumulated depreciation and net impairment losses.

 

The initial acquisition costs of refining property, plant and equipment are capitalized when incurred. Costs include the cost of constructing or otherwise acquiring the equipment or facilities, the cost of installing the asset and making it ready for its intended use, the associated decommissioning costs, and for qualifying assets, borrowing costs. Routine maintenance and repair costs are expensed in the period in which they are incurred.

 

Capitalized costs are not subject to depreciation until the asset is available for use, after which they are depreciated on a straight-line basis over the estimated service lives of each component of the refineries. The major components are depreciated as follows:

 
| Land Improvements and Buildings | 25 to 40   years |   |
|---------------------------------|------------------|--------|
| Office Equipment and Vehicles   | 3 to 20   years  |   |
| Refining Equipment              | 5 to 35   years  |   |

 

The residual value, method of amortization and the useful lives of each component are reviewed annually and adjusted, if appropriate.

 

 
| Cenovus   Energy Inc. | 17 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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* *

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

* *

* *

*Other Assets*

 

Costs associated with office furniture, fixtures, leasehold improvements, information technology, marine terminal facilities and aircraft are carried at cost and depreciated on a straight-line basis over the estimated service lives of the assets, which range from three to 25 years. The residual value, method of amortization and the useful lives of the assets are reviewed annually and adjusted, if appropriate. Assets under construction are not subject to depreciation until they are available for use. Expenditures related to renewals or betterments that improve the productive capacity or extend the life of an asset are capitalized. Maintenance and repairs are expensed as incurred. Land is not depreciated.

 

**P) Impairment**

 

*Non-Financial Assets*

 

Property, plant and equipment and E&E assets are assessed for impairment at least annually or when facts and circumstances suggest that the carrying amount may exceed its recoverable amount. Recoverable amount is determined as the greater of an asset’s or cash-generating unit’s (“CGU”) value-in-use (“VIU”) and fair value less costs to sell (“FVLCTS”). VIU is estimated as the discounted present value of the future cash flows expected to arise from the continuing use of a CGU or asset.

 

The impairment test is performed at the CGU for development and production assets and other upstream assets. E&E assets are allocated to a related CGU containing development and production assets. Corporate assets are allocated to the CGUs to which they contribute to the future cash flows for the purposes of testing for impairment. For refining assets, the impairment test is performed at each refinery independently.

 

Impairment losses are recognized in the Consolidated Statements of Earnings and Comprehensive Income as additional depreciation, depletion and amortization and are separately disclosed. An impairment of E&E assets is recognized as exploration expense in the Consolidated Statement of Earnings and Comprehensive Income.

 

Goodwill is assessed for impairment at least annually. To assess impairment, the recoverable amount of the CGU to which the goodwill relates is compared to the carrying amount. If the recoverable amount of the CGU is less than the carrying amount, an impairment loss is recognized. An impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the other assets in the CGU. Goodwill impairments are not reversed.

 

Impairment losses recognized in prior periods, other than goodwill impairments, are assessed at each reporting date for any indicators that the impairment losses may no longer exist or may have decreased. In the event that an impairment loss reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, but only to the extent that the carrying amount does not exceed the amount that would have been determined had no impairment loss been recognized on the asset in prior periods. The amount of the reversal is recognized in net earnings.

 

*Financial Assets*

 

At each reporting date, the Company assesses whether there are any indicators that its financial assets are impaired. An impairment loss is only recognized if there is objective evidence of impairment and the loss event has an impact on future cash flow and can be reliably estimated.

 

Evidence of impairment may include default or delinquency by a debtor or indicators that the debtor may enter bankruptcy. For equity securities a significant or prolonged decline in the fair value of the security below cost is evidence that the assets are impaired.

 

An impairment loss is recognized on a financial asset carried at amortized cost as the difference between the amortized cost and the present value of the future cash flows discounted at the asset’s original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account. Impairment losses on financial assets carried at amortized cost are reversed through net earnings in subsequent periods if the amount of the loss decreases.

 

 
| Cenovus   Energy Inc. | 18 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

** **

** **

**Q) Borrowing Costs**

 

Borrowing costs are recognized as an expense in the period in which they are incurred unless there is a qualifying asset. Borrowing costs directly associated with the acquisition, construction or production of a qualifying asset are capitalized when a substantial period of time is required to make the asset ready for its intended use. Capitalization of borrowing costs ceases when the asset is in the location and condition necessary for its intended use.

 

**R) Government Grants**

 

Government grants are recognized at fair value when there is reasonable assurance that the grants will be received and the Company will comply with the conditions of the grant. Grants related to assets are recorded as a reduction of the asset’s carrying value and are depreciated over the useful life of the asset. Grants related to income are treated as a reduction of the related expense in the Consolidated Statement of Earnings and Comprehensive Income.

 

**S) Leases**

 

Leases in which substantially all the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease payments are recognized as an expense on a straight-line basis over the lease term.

 

Leases where the Company assumes substantially all the risks and rewards of ownership are classified as finance leases within property, plant and equipment.

 

**T) Business Combinations and Goodwill**

 

Business combinations are accounted for using the acquisition method of accounting in which the identifiable assets acquired, liabilities assumed and any non-controlling interest are recognized and measured at their fair value at the date of acquisition. Any excess of the purchase price plus any non-controlling interest over the fair value of the net assets acquired is recognized as goodwill. Any deficiency of the purchase price over the fair value of the net assets acquired is credited to net earnings.

 

At acquisition, goodwill is allocated to each of the CGUs to which it relates. Subsequent measurement of goodwill is at cost less any accumulated impairment losses.

 

**U) Provisions**

 

*General*

 

A provision is recognized if, as a result of a past event, the Company has a present obligation, legal or constructive, that can be estimated reliably, and it is more likely than not that an outflow of economic benefits will be required to settle the obligation. Where applicable, provisions are determined by discounting the expected future cash flows at a pre-tax credit-adjusted rate that reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognized as a finance cost in the Consolidated Statements of Earnings and Comprehensive Income.

 

*Decommissioning Liabilities*

 

Decommissioning liabilities include those legal or constructive obligations where the Company will be required to retire tangible long-lived assets such as producing well sites, crude oil and natural gas processing facilities and refining facilities. The amount recognized is the present value of estimated future expenditures required to settle the obligation using a credit-adjusted risk-free rate. A corresponding asset equal to the initial estimated liability is capitalized as part of the cost of the related long-lived asset. Changes in the estimated liability resulting from revisions to estimated timing or future decommissioning cost estimates are recognized as a change in the decommissioning liability and the related long-lived asset. The amount capitalized in property, plant and equipment is depreciated over the useful life of the related asset. Increases in the decommissioning liabilities resulting from the passage of time are recognized as a finance cost in the Consolidated Statements of Earnings and Comprehensive Income.

 

Actual expenditures incurred are charged against the accumulated liability.

 

**V) Share Capital**

 

Common shares are classified as equity. Transaction costs directly attributable to the issue of common shares are recognized as a deduction from equity, net of any income tax.

 

 
| Cenovus   Energy Inc. | 19 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**W) Dividends**

 

Dividends are accrued when declared by the Board of Directors.

 

**X) Stock-Based Compensation**

 

Cenovus has a number of cash and stock-based compensation plans which include stock options with associated tandem stock appreciation rights, stock options with associated net settlement rights, performance share units and deferred share units.

 

*Tandem Stock Appreciation Rights*

 

Stock options with associated tandem stock appreciation rights (“TSARs”) are accounted for as liability instruments which are measured at the fair value at each period end using the Black-Scholes-Merton valuation model. The fair value is recognized as compensation costs over the vesting period. When options are settled for cash, the liability is reduced by the cash settlement paid. When options are settled for common shares, the cash consideration received by the Company and the previously recorded liability associated with the option are recorded as share capital.

 

*Net Settlement Rights*

 

Stock options with associated net settlement rights (“NSRs”) are accounted for as equity instruments which are measured at fair value on the grant date using the Black-Scholes-Merton valuation model and are not revalued at each reporting date. The fair value is recognized as compensation costs over the vesting period of the options, with a corresponding increase recorded as paid in surplus in Shareholders’ Equity. On exercise, the consideration received by the Company and the associated paid in surplus are recorded as share capital.

 

*Performance and Deferred Share Units*

 

Performance share units (“PSUs”) and deferred share units (“DSUs”) are accounted for as liability instruments and are measured at fair value based on the market value of the Cenovus common shares at each period end. The fair value is recognized as compensation costs over the vesting period. Fluctuations in the fair values are recognized as compensation costs in the period they occur.

 

**Y) Financial Instruments**

 

Financial instruments are recognized when the Company becomes a party to the contractual provisions of the instrument. Financial assets and liabilities are not offset unless the Company has the legal right to offset and intends to settle on a net basis or settle the asset and liability simultaneously. A financial asset is derecognized when the rights to receive cash flows from the asset have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership. A financial liability is derecognized when the obligation is discharged, cancelled or expired. When an existing financial liability is replaced by another from the same counterparty with substantially different terms, or the terms of an existing liability are substantially modified, this exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability. The difference in the carrying amounts of the liabilities is recognized in the Consolidated Statement of Earnings and Comprehensive Income.

 

Financial instruments are classified as either “fair value through profit and loss”, “loans and receivables”, “held-to-maturity investments”, “available for sale financial assets” or “financial liabilities measured at amortized cost”. The Company determines the classification of its financial assets at initial recognition. Financial instruments are initially measured at fair value except in the case of “financial liabilities measured at amortized cost” which are initially measured at fair value net of directly attributable transaction costs.

 

The Company’s financial assets include cash and cash equivalents, accounts receivable and accrued revenues, partner loans receivable, the Partnership Contribution Receivable, risk management assets and long-term receivables. The Company’s financial liabilities include accounts payable and accrued liabilities, partner loans payable, the Partnership Contribution Payable, derivative financial instruments, short-term borrowings and long-term debt.

 

*Fair Value through Profit or Loss*

 

Financial assets and financial liabilities at “fair value through profit or loss” are either “held-for-trading” or have been “designated at fair value through profit or loss”. In both cases the financial assets and financial liabilities are measured at fair value with changes in fair value recognized in net earnings.

 

 
| Cenovus   Energy Inc. | 20 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

Risk management assets and liabilities are derivative financial instruments classified as “held-for-trading” unless designated for hedge accounting. Derivative instruments that do not qualify as hedges, or are not designated as hedges, are recorded using mark-to-market accounting whereby instruments are recorded in the Consolidated Balance Sheets as either an asset or liability with changes in fair value recognized in net earnings as a (gain) loss on risk management. The estimated fair value of all derivative instruments is based on quoted market prices or, in their absence, third-party market indications and forecasts.

 

Derivative financial instruments are used to manage economic exposure to market risks relating to commodity prices, foreign currency exchange rates and interest rates. Derivative financial instruments are not used for speculative purposes. Policies and procedures are in place with respect to the required documentation and approvals for the use of derivative financial instruments. Where specific financial instruments are executed, the Company assesses, both at the time of purchase and on an ongoing basis, whether the financial instrument used in the particular transaction is effective in offsetting changes in fair values or cash flows of the transaction.

 

*Loans and Receivables*

 

“Loans and receivables” are financial assets with fixed or determinable payments that are not quoted in an active market. After initial measurement, these assets are measured at amortized cost at the settlement date using the effective interest method of amortization. “Loans and receivables” comprise cash and cash equivalents, accounts receivable and accrued revenue, partner loans receivable, the Partnership Contribution Receivable and long-term receivables. Gains and losses on “loans and receivables” are recognized in net earnings when the “loans and receivables” are derecognized or impaired.

 

*Held to Maturity Investments*

 

“Held-to-maturity investments” are measured at amortized cost at the settlement date using the effective interest method of amortization.

 

*Available for Sale Financial Assets*

 

“Available for sale financial assets” are measured at fair value at the settlement date, with changes in the fair value recognized in other comprehensive income. When an active market is non-existent, fair value is determined using valuation techniques. When fair value cannot be reliably measured, such assets are carried at cost.

 

*Financial Liabilities Measured at Amortized Cost*

 

These financial liabilities are measured at amortized cost at the settlement date using the effective interest method of amortization. Financial liabilities measured at amortized cost comprise accounts payable and accrued liabilities, partner loans payable, the Partnership Contribution Payable, short-term borrowings and long-term debt. Long-term debt transaction costs, premiums and discounts are capitalized within long-term debt or as a prepayment and amortized using the effective interest method.

 

**Z) Reclassification**

 

Certain information provided for prior years has been reclassified to conform to the presentation adopted in 2011.

 

**AA) Recent Accounting Pronouncements**

 

*Joint Arrangements and Off Balance Sheet Activities*

 

In May 2011, the IASB issued the following new and amended standards:

 

·                 IFRS 10, “*Consolidated Financial Statements*” (“IFRS 10”) replaces IAS 27, “*Consolidated**and Separate Financial Statements*” (“IAS 27”) and Standing Interpretations Committee (“SIC”) 12, “*Consolidation – Special Purpose Entities*”. IFRS 10 revises the definition of control and focuses on the need to have power and variable returns for control to be present. IFRS 10 provides guidance on participating and protective rights and also addresses the notion of “de facto” control. It also includes guidance related to an investor with decision making rights to determine if it is acting as a principal or agent.

 

·                 IFRS 11, “*Joint Arrangements*” (“IFRS 11”) replaces IAS 31, “*Interest in Joint Ventures*” (“IAS 31”) and SIC 13, “*Jointly Controlled Entities – Non-Monetary Contributions by Venturers*”. IFRS 11 defines a joint arrangement as an arrangement where two or more parties have joint control. A joint arrangement is classified as either a “joint operation” or a “joint venture” depending on the facts and circumstances. A joint operation is a joint arrangement where the parties that have joint control have rights to the assets and obligations for the liabilities, related to the arrangement. 

 

 
| Cenovus   Energy Inc. | 21 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

A joint operator accounts for its share of the assets, liabilities, revenues and expenses of the joint arrangement. A joint venturer has the rights to the net assets of the arrangement and accounts for the arrangement as an investment using the equity method.

 

·                 IFRS 12, “*Disclosure of Interest in Other Entities*” (“IFRS 12”) replaces the disclosure requirements previously included in IAS 27, IAS 31, and IAS 28, “*Investments in Associates*”. It sets out the extensive disclosure requirements relating to an entity’s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities. An entity is required to disclose information that helps users of its financial statements evaluate the nature of and risks associated with its interests in other entities and the effects of those interests on its financial statements.

 

·                 IAS 27, “*Separate Financial Statements*” has been amended to conform to the changes made in IFRS 10 but retains the current guidance for separate financial statements.

 

·                 IAS 28, “*Investments in Associates and Joint Ventures*” has been amended to conform to the changes made in IFRS 10 and IFRS 11.

 

The above standards are effective for annual periods beginning on or after January 1, 2013. Early adoption is permitted, providing the five standards are adopted concurrently. The Company is currently evaluating the impact of adopting these standards on its Consolidated Financial Statements.

 

*Employee Benefits*

 

In June 2011, the IASB amended IAS 19, “*Employee Benefits*” (“IAS 19”). The amendment eliminates the option to defer the recognition of actuarial gains and losses, commonly known as the corridor approach, rather it requires an entity to recognize actuarial gains and losses in Other Comprehensive Income (“OCI”) immediately. In addition, the net change in the defined benefit liability or asset must be disaggregated into three components: service cost, net interest and remeasurements. Service cost and net interest will continue to be recognized in net earnings while remeasurements, which include changes in estimates or the valuation of plan assets, will be recognized in OCI. Furthermore, entities will be required to calculate net interest on the net defined benefit liability or asset using the same discount rate used to measure the defined benefit obligation. The amendment also enhances financial statement disclosures. This amended standard is effective for annual periods beginning on or after January 1, 2013, with modified retrospective application. Earlier adoption is permitted. The Company is currently evaluating the impact of adopting these amendments on its Consolidated Financial Statements.

 

*Fair Value Measurement*

 

In May 2011, the IASB issued IFRS 13, “*Fair Value Measurement*” (“IFRS 13”) which provides a consistent and less complex definition of fair value, establishes a single source for determining fair value and introduces consistent requirements for disclosures related to fair value measurement. IFRS 13 is effective for annual periods beginning on or after January 1, 2013 and applies prospectively from the beginning of the annual period in which the standard is adopted. Early adoption is permitted. The Company is currently evaluating the impact of adopting IFRS 13 on its Consolidated Financial Statements.

 

*Financial Instruments*

 

The IASB intends to replace IAS 39, “*Financial Instruments: Recognition and Measurement*” (“IAS 39”) with IFRS 9, “*Financial Instruments*” (“IFRS 9”). IFRS 9 will be published in three phases, of which the first phase has been published.

 

The first phase addresses the accounting for financial assets and financial liabilities. The second phase will address the impairment of financial instruments, and the third phase will address hedge accounting.

 

For financial assets, IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, and replaces the multiple rules in IAS 39. The approach in IFRS 9 is based on how an entity manages its financial instruments in the context of its business model and the contractual cash flow characteristics of the financial assets. The new standard also requires a single impairment method to be used, replacing the multiple impairment methods in IAS 39. For financial liabilities, although the classification criteria for financial liabilities will not change under IFRS 9, the approach to the fair value option for financial liabilities may require different accounting for changes to the fair value of a financial liability as a result of changes to an entity’s own credit risk.

 

 
| Cenovus   Energy Inc. | 22 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

IFRS 9 is effective for annual periods beginning on or after January 1, 2015 with different transitional arrangements depending on the date of initial application. The Company is currently evaluating the impact of adopting IFRS 9 on its Consolidated Financial Statements.

 

*Presentation of Items of Other Comprehensive Income*

 

In June 2011, the IASB issued an amendment to IAS 1, “*Presentation of Financial Statements*” (“IAS 1”) requiring companies to group items presented within Other Comprehensive Income based on whether they may be subsequently reclassified to profit or loss. This amendment to IAS 1 is effective for annual periods beginning on or after July 1, 2012 with full retrospective application. Early adoption is permitted. The Company is currently evaluating the impact of adopting this amendment on its Consolidated Financial Statements.

 

*Offsetting Financial Assets and Financial Liabilities*

 

In December 2011, the IASB issued the following amended standards:

 

·                  IFRS 7, “*Financial Instruments: Disclosures”*(“IFRS 7”), has been amended to provide more extensive quantitative disclosures for financial instruments that are offset in the statement of financial position or that are subject to enforceable master netting or similar arrangements.

 

·                   IAS 32, *“Financial Instruments: Presentation”* (“IAS 32”), has been amended to clarify the requirements for offsetting financial assets and liabilities. The amendments clarify that the right to offset must be available on the current date and cannot be contingent on a future event.

 

The amendments to IFRS 7 are effective for annual periods beginning on or after January 1, 2013 and the amendments to IAS 32 are effective for annual periods beginning on or after January 1, 2014, both requiring retrospective application. The Company is currently evaluating the impact of adopting the amendments to IFRS 7 and IAS 32 on its Consolidated Financial Statements.

 

 

**4. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS**

 

The timely preparation of the Consolidated Financial Statements in accordance with IFRS requires that Management make estimates and assumptions and use judgment regarding the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the Consolidated Financial Statements and the reported amounts of revenues and expenses during the period. Such estimates primarily relate to unsettled transactions and events as of the date of the Consolidated Financial Statements. The estimated fair value of financial assets and liabilities, by their very nature, are subject to measurement uncertainty. Accordingly, actual results may differ from estimated amounts as future confirming events occur. Significant judgments, estimates and assumptions made by Management in the preparation of these Consolidated Financial Statements are outlined below.

 

**Carrying Value of Property, Plant and Equipment**

 

Development and production assets within property, plant and equipment are depreciated, depleted and amortized using the unit-of-production method based on estimated proved reserves determined using estimated future prices and costs. There are a number of inherent uncertainties associated with estimating reserves. By their nature, these estimates of reserves, including the estimates of future prices and costs, and related future cash flows are subject to measurement uncertainty, and the impact on the Consolidated Financial Statements of future periods could be material.

 

Refining, marketing, other upstream and corporate assets are depreciated on a straight-line basis and are subject to Management’s estimate of useful life and salvage value. Changes to the estimated useful life and salvage value could have a material impact on the Consolidated Financial Statements of future periods.

 

**Carrying Value of Exploration and Evaluation Assets**

 

The application of the Company’s accounting policy for exploration and evaluation expenditures requires judgment in determining whether it is likely that future economic benefit exists when activities have not reached a stage where technical feasibility and commercial viability can be reasonably determined and when technical feasibility and commercial viability have been reached. Estimates and assumptions may change as new information becomes available.

 

 
| Cenovus   Energy Inc. | 23 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**Decommissioning Costs**

 

Provisions are recognized for the future decommissioning and restoration of the Company’s upstream oil and gas assets and refining assets at the end of their economic lives. Assumptions have been made to estimate the future liability based on past experience and current economic factors which Management believes are reasonable. However, the actual cost of decommissioning is uncertain and cost estimates may change in response to numerous factors including changes in legal requirements, technological advances, inflation and the timing of expected decommissioning and restoration. The impact to net earnings over the remaining economic life of the assets could be significant due to the changes in cost estimates as new information becomes available. In addition, Management determines the appropriate discount rate at the end of each reporting period. This discount rate, which is credit adjusted, is used to determine the present value of the estimated future cash outflows required to settle the obligation and may change in response to numerous market factors.

 

**Impairment of Assets**

 

The recoverable amounts of CGUs and individual assets have been determined as the greater of an asset’s or CGU’s value-in-use and fair value less costs to sell. These calculations require the use of estimates and assumptions and are subject to changes as new information becomes available including information on future commodity prices, expected production volumes, quantity of reserves and discount rates as well as future development and operating costs. Changes in assumptions used in determining the recoverable amount could affect the carrying value of the related assets and CGUs.

 

For impairment testing purposes, goodwill has been allocated to each of the CGUs to which it relates.

 

At December 31, 2011, the recoverable amounts of Cenovus’s Upstream CGUs were determined based on fair value less costs to sell. Key assumptions in the determination of cash flows from reserves include reserves as estimated by Cenovus’s independent qualified reserve evaluators, oil and natural gas prices and the discount rate.

 

*Reserves*

 

Reserve estimates are dependent on a number of variables including the recoverable quantities of hydrocarbons, the cost of the development of the required infrastructure to recover the hydrocarbons, production costs and estimated selling price of the hydrocarbons produced. Changes in these variables could significantly impact the reserve estimates. The Company’s oil and gas reserves are evaluated and reported to the Company by independent qualified reserves evaluators.

 

*Oil and natural gas prices*

 

The future prices used to determine cash flows from oil and gas reserves are as follows:

 
| ** **       |       | 2012       |       | 2013       |       | 2014       |       | 2015       |       | 2016       |       | Average   Annual %   Change to   2023 |
|------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|---------------------------------------|
| ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                            |
| WTI (US$/barrel) |       | 97.50      |       | 97.50      |       | 100.00     |       | 100.80     |       | 101.70     |       | 1.3%                                  |
| AECO ($/Mcf)     |       | 3.50       |       | 4.20       |       | 4.70       |       | 5.10       |       | 5.55       |       | 3.5%                                  |

 

*Discount rate*

 

A discount rate of 10 percent has been used to determine the present value of future cash flows. Changes in the economic conditions could significantly change the estimated recoverable amount.

 

**Employee Benefit Plans and Post-Employment Benefits**

 

The values of pension assets and obligations and the amount of pension costs charged to net earnings depend on certain actuarial and economic assumptions which, by their nature, are subject to measurement uncertainty.

 

 
| Cenovus   Energy Inc. | 24 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**Compensation Plans**

 

The amount of compensation expense accrued for long-term performance-based compensation arrangements is subject to Management’s best estimate of whether or not the performance criteria will be met and what the ultimate payout will be. Certain obligations for payments under the Cenovus compensation plans are measured at fair value and therefore fluctuations in the fair value will affect the accrued compensation expense that is recognized. The fair value of the obligation is based on several assumptions including the risk-free interest rate, dividend yield, and the expected volatility of the share price and therefore is subject to measurement uncertainty.

 

**Income Tax Provisions**

 

Tax regulations and legislation and the interpretations thereof in the various jurisdictions in which Cenovus operates are subject to change. As a result there are usually a number of tax matters under review. As such, income taxes are subject to measurement uncertainty.

 

Deferred income tax assets are recognized to the extent that it is probable that the deductible temporary differences will be recoverable in future periods. The recoverability assessment involves a significant amount of estimation including an evaluation of when the temporary differences will reverse, an analysis of the amount of future taxable earnings, the availability of cash flow to offset the tax assets when the reversal occurs and the application of tax laws. To the extent that assumptions used in the recoverability assessment change, there may be a significant impact on the Consolidated Financial Statements of future periods.

 

**Contingencies**

 

Contingencies, by their nature, are subject to measurement uncertainty as the financial impact will only be confirmed by the outcome of a future event. The assessment of contingencies involves a significant amount of judgment including assessing whether a present obligation exists and providing a reliable estimate of the amount of cash outflow required to settle the obligation. The uncertainty involved with the timing and amount at which a contingency will be settled may have a material impact on the Consolidated Financial Statements of future periods to the extent that the amount provided for differs from the actual outcome.

 

**Financial Instruments**

 

The estimated fair values of financial assets and liabilities, by their very nature, are subject to measurement uncertainty due to their exposure to credit, liquidity and market risks. Furthermore, the Company may use derivative instruments to manage commodity price, foreign currency and interest rate exposures. The fair values of these derivatives are determined using valuation models which require assumptions concerning the amount and timing of future cash flows and discount rates. Management’s assumptions rely on external observable market data including quoted commodity prices and volatility, interest rate yield curves and foreign exchange rates. The resulting fair value estimates may not be indicative of the amounts realized or settled in current market transactions and as such are subject to measurement uncertainty.

 

 

**5. FINANCE COSTS**

** **
| For the years ended December 31,                              | ** ** | **2011** |   | 2010   |
|--------------------------------------------------------------------|------------|----------|--------|--------|
|                                                               |       |     |   |   |
| Interest Expense – Short-Term   Borrowings and Long-Term Debt | ** ** | **213**  |   | 227    |
| Interest Expense –   Partnership Contribution Payable         | ** ** | **138**  |   | 165    |
| Unwinding of   Discount on Decommissioning Liabilities             | ** ** | **75**   |   | 75     |
| Other                                                              | ** ** | **21**   |   | 31     |
|                                                               | ** ** | **447**  |   | 498    |

 

 

**6. INTEREST INCOME**

** **
| For the years ended December 31,                      | ** ** | **2011**   | ** ** | 2010   |
|------------------------------------------------------------|------------|------------|------------|--------|
|                                                       | ** ** | ** ** | ** ** |   |
| Interest Income – Partnership Contribution Receivable | ** ** | **120**    | ** ** | 144    |
| Other                                                      | ** ** | **4**      | ** ** | -      |
|                                                       | ** ** | **124**    | ** ** | 144    |

 

 
| Cenovus   Energy Inc. | 25 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**7. FOREIGN EXCHANGE (GAIN) LOSS, NET**

 
| For the years ended December 31,                                | ** ** | **2011**   |   | 2010   |
|----------------------------------------------------------------------|------------|------------|--------|--------|
|                                                                 |       |       |   |   |
| Unrealized Foreign Exchange (Gain)   Loss on translation of:         | ** ** | ** ** |   |   |
| U.S. dollar debt   issued from Canada                                | ** ** | **78**     |   | (182)  |
| U.S. dollar   Partnership Contribution Receivable issued from Canada | ** ** | **(107)**  |   | 91     |
| Other                                                                | ** ** | **(13)**   |   | 22     |
| Unrealized Foreign   Exchange (Gain) Loss                            | ** ** | **(42)**   |   | (69)   |
| Realized Foreign   Exchange (Gain) Loss                              | ** ** | **68**     |   | 18     |
|                                                                 | ** ** | **26**     |   | (51)   |

 

 

**8. INCOME TAXES**

 

The provision for income taxes is as follows:

 
| For the years ended December 31, | ** ** | **2011**   |   | 2010   |
|---------------------------------------|------------|------------|--------|--------|
|                                  |       |       |   |   |
| Current Tax                           | ** ** | ** ** |   |   |
| Canada                                | ** ** | **150**    |   | 82     |
| United States                         | ** ** | **4**      |   | -      |
| Total Current Tax                     | ** ** | **154**    |   | 82     |
| Deferred Tax                          | ** ** | **575**    |   | 141    |
|                                  | ** ** | **729**    |   | 223    |

 

The following table reconciles income taxes calculated at the Canadian statutory rate with the recorded income taxes:

 
| For the years ended December 31,                          | ** ** | **2011**        |   | 2010        |
|----------------------------------------------------------------|------------|-----------------|--------|-------------|
|                                                           |       |            |   |        |
| **Earnings   Before Income Tax**                               | ** ** | **2,207 ** |   | 1,304  |
| Canadian Statutory   Rate                                      | ** ** | **26.7% ** |   | 28.2%  |
| **Expected Income Tax**                                        | ** ** | **589 **   |   | 368    |
| Effect of Taxes   Resulting from:                              | ** ** | ** **      |   |        |
| Foreign   tax rate differential                                | ** ** | **78 **    |   | (22)   |
| Non-deductible   stock-based compensation                      | ** ** | **18 **    |   | 34     |
| Multi-jurisdictional   financing                               | ** ** | **(50) **  |   | (93)   |
| Foreign   exchange gains (losses) not included in net earnings | ** ** | **(9) **   |   | 28     |
| Non-taxable   capital (gains) losses                           | ** ** | **(9) **   |   | (13)   |
| Capital   losses                                               | ** ** | **26 **    |   | (107)  |
| Adjustments   arising from prior year tax filings              | ** ** | **31 **    |   | 26     |
| Other                                                          | ** ** | **55 **    |   | 2      |
|                                                           | ** ** | **729 **   |   | 223    |
| **Effective Tax Rate**                                         | ** ** | **33.0% ** |   | 17.1%  |

 

The Canadian statutory tax rate decreased to 26.7 percent in 2011 from 28.2 percent in 2010 as a result of tax legislation enacted in 2007.

 

 
| Cenovus   Energy Inc. | 26 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

The analysis of deferred income tax liabilities and deferred income tax assets is as follows:

 
| As at                                                                          | ** ** | **December 31,   2011** |       | December 31,   2010 |   | January 1,   2010 |
|--------------------------------------------------------------------------------|------------|------------------------------|------------|--------------------------|--------|------------------------|
| ** **                                                                     | ** ** | ** **                   | ** ** | ** **               |   |                   |
| **Deferred Income Tax Liabilities**                                            | ** ** | ** **                   | ** ** | ** **               |   |                   |
| Deferred   tax liabilities (assets) to be settled (recovered) within 12 months | ** ** | **117**                      |       | 57                       |   | (68)                   |
| Deferred   tax liabilities to be settled after more than 12 months             | ** ** | **1,984**                    |       | 1,515                    |   | 1,552                  |
|                                                                           | ** ** | **2,101**                    |       | 1,572                    |   | 1,484                  |
| **Deferred Income Tax Assets**                                                 | ** ** | ** **                   |       |                     |   |                   |
| Deferred   tax assets to be recovered within 12 months                         | ** ** | **-**                        |       | (3)                      |   | -                      |
| Deferred   tax assets to be recovered after more than 12 months                | ** ** | **-**                        |       | (52)                     |   | (3)                    |
|                                                                           | ** ** | **-**                        |       | (55)                     |   | (3)                    |
| **Net Deferred Income Tax Liability**                                          | ** ** | **2,101**                    |       | 1,517                    |   | 1,481                  |

 

For the purposes of the above table, deferred income tax assets are shown net of offsetting deferred income tax liabilities where these occur in the same entity and jurisdiction. The deferred income tax liabilities and assets to be settled (recovered) within 12 months represents Management’s estimate of the timing of the reversal of temporary differences and does not correlate to the current income tax expense of the subsequent year.

 

The movement in deferred income tax liabilities and assets, without taking into consideration the offsetting of balances within the same tax jurisdiction, is as follows:

 
| Deferred Income Tax Liabilities                    | ** ** | **Property,   Plant and   Equipment** | ** ** | **Timing   Of   Partnership   Items** | ** ** | **Net   Foreign   Exchange** **Gains** | ** ** | **Risk   Management** | ** ** | **Other**  | ** ** | **Total**  |
|----------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|---------------------------------------------|------------|-----------------------|------------|------------|------------|------------|
| ** **                                         | ** ** | ** **                            | ** ** | ** **                            | ** ** | ** **                                  | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** |
| As at   January 1, 2010                       |       | 1,678                                 |       | 9                                     |       | 61                                          |       | 17                    |       | -          |       | 1,765      |
| Charged/(credited)   to earnings                   |       | 83                                    |       | 116                                   |       | 66                                          |       | 38                    |       | 54         |       | 357        |
| Charged/(credited)   to held for sale              |       | 2                                     |       | -                                     |       | -                                           |       | -                     |       | -          |       | 2          |
| Charged/(credited)   to other comprehensive income |       | (112)                                 |       | -                                     |       | -                                           |       | -                     |       | 1          |       | (111)      |
| As at   December 31, 2010                     |       | 1,651                                 |       | 125                                   |       | 127                                         |       | 55                    |       | 55         |       | 2,013      |
| Charged/(credited)   to earnings                   |       | 725                                   |       | 38                                    |       | (15)                                        |       | 16                    |       | 75         |       | 839        |
| Charged/(credited)   to other comprehensive income |       | 18                                    |       | -                                     |       | -                                           |       | -                     |       | 2          |       | 20         |
| **As at December 31,   2011**                 | ** ** | **2,394**                             | ** ** | **163**                               | ** ** | **112**                                     | ** ** | **71**                | ** ** | **132**    | ** ** | **2,872**  |

 
| Deferred Income Tax Assets                         | ** ** | **Unused   Tax   Losses** | ** ** | **Risk   Management** | ** ** | **Other**  | ** ** | **Total**  |
|----------------------------------------------------|------------|---------------------------|------------|-----------------------|------------|------------|------------|------------|
| ** **                                         | ** ** | ** **                | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** |
| As at January 1, 2010                         |       | (242)                     |       | (33)                  |       | (9)        |       | (284)      |
| Charged/(credited)   to earnings                   |       | (47)                      |       | (12)                  |       | (161)      |       | (220)      |
| Charged/(credited)   to other comprehensive income |       | 8                         |       | -                     |       | -          |       | 8          |
| As at December 31,   2010                     |       | (281)                     |       | (45)                  |       | (170)      |       | (496)      |
| Charged/(credited)   to earnings                   |       | (270)                     |       | 29                    |       | (21)       |       | (262)      |
| Charged/(credited)   to other comprehensive income |       | (13)                      |       | -                     |       | -          |       | (13)       |
| **As at December 31, 2011**                   | ** ** | **(564)**                 | ** ** | **(16)**              | ** ** | **(191)**  | ** ** | **(771)**  |

 
| Net Deferred Income Tax Liabilities                                    | ** ** | **Total**  |
|------------------------------------------------------------------------|------------|------------|
| ** **                                                             | ** ** | ** ** |
| Net Deferred Income Tax Liabilities   as at January 1, 2010       |       | 1,481      |
| Charged/(credited)   to earnings                                       |       | 137        |
| Charged/(credited)   to held for sale                                  |       | 2          |
| Charged/(credited)   to other comprehensive income                     |       | (103)      |
| Net Deferred   Income Tax Liabilities as at December 31, 2010     |       | 1,517      |
| Charged/(credited)   to earnings                                       |       | 577        |
| Charged/(credited)   to other comprehensive income                     |       | 7          |
| **Net Deferred Income Tax Liabilities as   at December 31, 2011** | ** ** | **2,101**  |

 

 
| Cenovus   Energy Inc. | 27 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

The allocation of deferred income tax expense is comprised of:

 
| As at                                                               | ** ** | **December 31,   2011** |   | December 31,   2010 |
|---------------------------------------------------------------------|------------|------------------------------|--------|--------------------------|
|                                                                |       |                         |   |                     |
| Credited/(charged) to net deferred   income tax liabilities         | ** ** | **577**                      |   | 137                      |
| Credited/(charged)   to liabilities related to assets held for sale | ** ** | **(2)**                      |   | 4                        |
| **Deferred Income Tax Expense**                                     | ** ** | **575**                      |   | 141                      |

 

No tax liability has been recognized in respect of temporary differences associated with investments in subsidiaries. As no taxes are expected to be paid in respect of these differences related to Canadian subsidiaries the amounts have not been determined.  There are no taxable temporary differences associated with investments in non-Canadian subsidiaries.

 

The approximate amounts of tax pools available are as follows:

 
| As at         | ** ** | **December 31,   2011** |   | December 31,   2010 |   | January 1,  2010 |
|---------------|------------|------------------------------|--------|--------------------------|--------|----------------------------|
|          |       |                         |   |                     |   |                       |
| Canada        | ** ** | **4,471**                    |   | 4,239                    |   | 3,754                      |
| United States | ** ** | **2,740**                    |   | 3,082                    |   | 2,637                      |
|          | ** ** | **7,211**                    |   | 7,321                    |   | 6,391                      |

 

At December 31, 2011, the above tax pools included $78 million (December 31, 2010 – $236 million, January 1, 2010 – $491 million) of Canadian non-capital losses and $1,479 million (December 31, 2010 – $607 million, January 1, 2010 – $232 million) of U.S. net operating losses. These losses expire no earlier than 2029.

 

Also included in the December 31, 2011 tax pools are Canadian net capital losses totaling $759 million (December 31, 2010 – $983 million, January 1, 2010 – $51 million) which are available for carry forward to reduce future capital gains. Of these losses, $286 million are unrecognized as a deferred income tax asset at December 31, 2011 (December 31, 2010 – $415 million). Recognition is dependent on the level of future capital gains.

 

 

**9. PER SHARE AMOUNTS**

** **

**A) Net Earnings per Share**

 
| ** **                                                         |       | **December 31, 2011** |       | December 31, 2010 |
|--------------------------------------------------------------------|------------|----------------------------|------------|------------------------|
| For the years ended ($ millions, except earnings per   share) |       | Net Earnings               |       | Shares                 |   | Earnings per Share |   | Net Earnings |   | Shares |   | Earnings per Share |
|                                                               |       |                       |       |                   |   |   |   |   |   |   |   |   |
| Net   earnings per share – basic                              | ** ** | **1,478**                  | ** ** | **754.0**              | ** ** | **$1.96** |   | 1,081 |   | 751.9 |   | $1.44 |
| Dilutive effect of Cenovus TSARs                                   | ** ** | **-**                      | ** ** | **3.7**                | ** ** | ** ** |   | - |   | 2.1 |   |   |
| Dilutive effect of NSRs                                            | ** ** | **-**                      | ** ** | **-**                  | ** ** | ** ** |   | - |   | - |   |   |
| Net earnings per share – diluted                              | ** ** | **1,478**                  | ** ** | **757.7**              | ** ** | **$1.95** |   | 1,081 |   | 754.0 |   | $1.43 |

 

**B) Dividends per Share**

 

The dividends paid in 2011 and 2010 were $603 million ($0.80 per share) and $601 million ($0.80 per share) respectively. The Cenovus Board of Directors declared a first quarter 2012 dividend of $0.22 per share, payable on March 30, 2012, to common shareholders of record as of March 15, 2012.

 

 

**10. CASH AND CASH EQUIVALENTS**

** **
| As at                    | ** ** | **December 31,   2011** |   | December 31,

 2010 |   | January 1,    2010 |
|--------------------------|------------|------------------------------|--------|-------------------------------|--------|-------------------------|
|                     |       |                         |   |                          |   |                    |
| Cash                     | ** ** | **232**                      |   | 160                           |   | 76                      |
| Short-Term   Investments | ** ** | **263**                      |   | 140                           |   | 79                      |
|                     | ** ** | **495**                      |   | 300                           |   | 155                     |

 
| Cenovus   Energy Inc. | 28 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**11. ACCOUNTS RECEIVABLE AND ACCRUED REVENUES**

** **
| As at                            | ** ** | **December   31,   2011** | ** ** | December 31,   2010 |   | January 1,   2010 |
|----------------------------------|------------|---------------------------|------------|---------------------|--------|-------------------|
|                             |       |                      |       |                |   |              |
| Accruals                         | ** ** | **801**                   | ** ** | 606                 |   | 409               |
| Trade                            | ** ** | **251**                   | ** ** | 242                 |   | 395               |
| Joint Operations   with Partners | ** ** | **30**                    | ** ** | 32                  |   | 32                |
| Prepaids and   Deposits          | ** ** | **34**                    | ** ** | 24                  |   | 20                |
| Interest                         | ** ** | **28**                    | ** ** | 32                  |   | 38                |
| Other                            | ** ** | **261**                   | ** ** | 123                 |   | 88                |
|                             | ** ** | **1,405**                 | ** ** | 1,059               |   | 982               |

 

 

 

**12. PARTNERSHIP CONTRIBUTION RECEIVABLE AND PAYABLE**

 

In connection with the Arrangement with Encana (Note 1), Cenovus acquired Encana’s assets which are jointly controlled with ConocoPhillips. On January 2, 2007, Encana became a 50 percent partner in an integrated, North American oil business with ConocoPhillips which consisted of an upstream entity and a refining entity. The upstream entity contribution included assets from Encana, primarily the Foster Creek and Christina Lake properties, with a fair value of US$7.5 billion and a note receivable (Partnership Contribution Receivable) contributed from ConocoPhillips of an equal amount. For the refining entity, ConocoPhillips contributed its Wood River and Borger refineries, located in Illinois and Texas, respectively, for a fair value of US$7.5 billion and Encana contributed a note payable (Partnership Contribution Payable) of US$7.5 billion.

 

These entities are accounted for using the proportionate consolidation method with the results of operations included in the Oil Sands and Refining and Marketing segments (Note 29).

 

**Partnership Contribution Receivable**

 

This note receivable is denominated in US$ and bears interest at a rate of 5.3 percent per annum. Equal payments of principal and interest are payable quarterly, with final payment due January 2, 2017. The current and long-term Partnership Contribution Receivable shown in the Consolidated Balance Sheets represent Cenovus’s 50 percent share of this promissory note, net of payments to date.

 

*Mandatory Receipts – Partnership Contribution Receivable*

 
| ** **         |       | 2012       |       | 2013       |       | 2014       | ** ** | 2015       |       | 2016       |       | Thereafter | ** ** | **Total**  |
|--------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| US$                |       | 366        |       | 386        |       | 407        |       | 429        |       | 452        |       | 117        | ** ** | **2,157**  |
| C$ equivalent |       | 372        |       | 393        |       | 414        |       | 436        |       | 460        |       | 119        | ** ** | **2,194**  |

 

**Partnership Contribution Payable**

 

This note payable is denominated in US$ and bears interest at a rate of 6.0 percent per annum. Equal payments of principal and interest are payable quarterly, with final payment due January 2, 2017. The current and long-term Partnership Contribution Payable amounts shown in the Consolidated Balance Sheets represent Cenovus’s 50 percent share of this promissory note, net of payments to date.

 

*Mandatory Payments – Partnership Contribution Payable*

 
| ** **         |       | 2012       |       | 2013       |       | 2014       |       | 2015       |       | 2016       |       | Thereafter | ** ** | **Total**  |
|--------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| US$                |       | 366        |       | 388        |       | 412        |       | 437        |       | 464        |       | 121        | ** ** | **2,188**  |
| C$ equivalent |       | 372        |       | 395        |       | 419        |       | 445        |       | 472        |       | 122        | ** ** | **2,225**  |

 

In addition to the Partnership Contribution Receivable and Payable, Other Assets and Other Liabilities include equal amounts for interest bearing partner loans, with no fixed repayment terms, related to the funding of refining operating and capital requirements. At December 31, 2011 these amounts were $nil (December 31, 2010 – $274 million, January 1, 2010 – $183 million) (Notes 18 and 23).

 

 
| Cenovus   Energy Inc. | 29 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

 

**13. INVENTORIES**

 
| As at                    | ** ** | **December   31,   2011** |       | December 31,   2010 |   | January 1,  2010 |
|--------------------------|------------|---------------------------|------------|---------------------|--------|-----------------------|
|                     |       |                      |       |                |   |                  |
| **Product **        | ** ** | ** **                | ** ** | ** **          |   |                  |
| Refining   and Marketing | ** ** | **1,079**                 |       | 779                 |   | 772                   |
| Oil   Sands              | ** ** | **186**                   |       | 80                  |   | 84                    |
| Conventional             | ** ** | **1**                     |       | -                   |   | -                     |
| **Parts and Supplies**   | ** ** | **25**                    |       | 21                  |   | 19                    |
|                     | ** ** | **1,291**                 |       | 880                 |   | 875                   |

 

The total amount of inventories recognized as an expense during the year was $7,189 million (2010 – $5,997 million).

 

 

**14. ASSETS AND LIABILITIES HELD FOR SALE**

 

Assets and liabilities classified as held for sale consisted of the following:

 
| As at                                             | ** ** | **December   31,   2011** |       | December 31,   2010 |   | January 1,  2010 |
|---------------------------------------------------|------------|---------------------------|------------|---------------------|--------|-----------------------|
|                                              |       |                      |       |                |   |                  |
| **Assets Held for Sale**                          | ** ** | ** **                | ** ** | ** **          |   |                  |
| Property, plant   and equipment                   | ** ** | **116**                   |       | 65                  |   | -                     |
|                                              |       |                      |       |                |   |                  |
| **Liabilities Related to Assets Held for   Sale** | ** ** | ** **                |       |                |   |                  |
| Decommissioning   liabilities                     | ** ** | **54**                    |       | 5                   |   | -                     |
| Deferred income   taxes                           | ** ** | **-**                     |       | 2                   |   | -                     |
|                                              | ** ** | **54**                    |       | 7                   |   | -                     |

 

*Non-Core Natural Gas Assets*

 

At December 31, 2011, the Company classified certain non-core natural gas assets located in Northern Alberta as assets held for sale. The assets were recorded at the lesser of fair value less costs to sell and their carrying amount, resulting in an impairment loss of approximately $2 million which has been recorded as additional depreciation, depletion and amortization in the Consolidated Statement of Earnings and Comprehensive Income. These assets and the related liabilities are reported in the Conventional segment.

 

In January 2012, the Company completed the sale of the natural gas assets to an unrelated third party for net proceeds of $63 million.

 

*Marine Terminal Facilities*

 

On November 1, 2010, under the terms of an agreement with a non-related Canadian company, Cenovus acquired certain marine terminal facilities in Kitimat, British Columbia for cash consideration of $38 million. The net assets were recorded at estimated fair value less costs to sell and classified as held for sale. These assets and liabilities were reported in the Refining and Marketing segment. Cenovus recognized a bargain purchase gain of $12 million, resulting from the excess fair value of the net assets acquired over the cash consideration paid. The gain was recorded in other income.

 

In October 2011, the Company completed the sale of the marine terminal facilities and recorded an after-tax gain on sale of $89 million.

 

 
| Cenovus   Energy Inc. | 30 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

** **

** **

**15. EXPLORATION AND EVALUATION ASSETS**

 
|                                                   | ** ** | **E&E** |
|--------------------------------------------------------|------------|-------------|
|                                                   |       |        |
| **COST**                                               |       |        |
| As at January 1,   2010                                |       | 580         |
| Additions                                              |       | 350         |
| Transfers to   property, plant and equipment (Note 16) |       | (144)       |
| Divestitures                                           |       | (81)        |
| Change in   decommissioning liabilities                |       | 8           |
| As at December 31,   2010                              |       | 713         |
| Additions                                              |       | 527         |
| Transfers to   property, plant and equipment (Note 16) |       | (356)       |
| Divestitures                                           |       | (3)         |
| Change in   decommissioning liabilities                |       | (1)         |
| **As at December 31, 2011**                            | ** ** | **880**     |

 

E&E assets consist of the Company’s evaluation projects which are pending the determination of technical feasibility and commercial viability. All of the Company’s E&E assets are located within Canada.

 

Additions to E&E assets for the year ended December 31, 2011 include $15 million of internal costs directly related to the evaluation of these projects (year ended December 31, 2010 – $11 million).

 

For the year ended December 31, 2011, $356 million of E&E assets****were transferred to property, plant and equipment – development and production assets following the determination of technical feasibility and commercial viability of the projects in question (year ended December 31, 2010 – $144 million).

 

**Impairment**

 

The impairment of E&E assets and any subsequent reversal of such impairment losses are recognized in exploration expense in the Consolidated Statement of Earnings and Comprehensive Income. There were no impairments of E&E assets in 2011 and 2010.

 

 
| Cenovus   Energy Inc. | 31 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**16. PROPERTY, PLANT AND EQUIPMENT, NET**

 
|                                                   | ** ** | **Upstream   Assets**              | ** ** | ** **           | ** ** | ** **               | ** ** | ** **     |
|--------------------------------------------------------|------------|------------------------------------|------------|----------------------|------------|--------------------------|------------|----------------|
|                                                   | ** ** | **Development   & Production** | ** ** | **Other   Upstream** | ** ** | **Refining   Equipment** | ** ** | **Other****1** | ** ** | **Total** |
| ** **                                             | ** ** | ** **                         | ** ** | ** **           | ** ** | ** **               | ** ** | ** **     | ** ** | ** ** |
| **COST**                                               |       |                               |       |                 |       |                     |       |           |   |   |
| As at January 1,   2010                                |       | 20,836                             |       | 134                  |       | 2,419                    |       | 427            |   | 23,816 |
| Additions                                              |       | 1,061                              |       | 19                   |       | 651                      |       | 136            |   | 1,867 |
| Transfers   from E&E assets (Note 15)              |       | 144                                |       | -                    |       | -                        |       | -              |   | 144 |
| Transfers   and reclassifications                      |       | -                                  |       | -                    |       | -                        |       | (92)           |   | (92) |
| Change   in decommissioning liabilities           |       | 237                                |       | -                    |       | 22                       |       | -              |   | 259 |
| Exchange   rate movements                              |       | (2)                                |       | -                    |       | (142)                    |       | -              |   | (144) |
| Divestitures                                           |       | (556)                              |       | -                    |       | -                        |       | (21)           |   | (577) |
| As at December 31,   2010                              |       | 21,720                             |       | 153                  |       | 2,950                    |       | 450            |   | 25,273 |
| Additions                                              |       | 1,704                              |       | 41                   |       | 391                      |       | 131            |   | 2,267 |
| Transfers   from E&E assets (Note 15)              |       | 356                                |       | -                    |       | -                        |       | -              |   | 356 |
| Transfers   and reclassifications                      |       | (326)                              |       | -                    |       | (5)                      |       | (2)            |   | (333) |
| Change   in decommissioning liabilities           |       | 403                                |       | -                    |       | 10                       |       | 1              |   | 414 |
| Exchange   rate movements                              |       | 1                                  |       | -                    |       | 79                       |       | -              |   | 80 |
| Divestitures                                           |       | -                                  |       | -                    |       | -                        |       | (4)            |   | (4) |
| **As at December 31, 2011**                            | ** ** | **23,858**                         | ** ** | **194**              | ** ** | **3,425**                | ** ** | **576**        | ** ** | **28,053** |
|                                                   |       |                               |       |                 |       |                     |       |           |   |   |
| **ACCUMULATED DEPRECIATION, DEPLETION AND IMPAIRMENT** |       |                               |       |                 |       |                     |       |           |
| As at January 1,   2010                                |       | 11,342                             |       | 113                  |       | 15                       |       | 297            |   | 11,767 |
| Depreciation   and depletion expense                   |       | 1,163                              |       | 11                   |       | 72                       |       | 42             |   | 1,288 |
| Transfers   and reclassifications                      |       | -                                  |       | -                    |       | -                        |       | (28)           |   | (28) |
| Impairment   losses                                    |       | -                                  |       | -                    |       | 14                       |       | -              |   | 14 |
| Exchange   rate movements                              |       | (1)                                |       | -                    |       | (4)                      |       | -              |   | (5) |
| Divestitures                                           |       | (383)                              |       | -                    |       | -                        |       | (7)            |   | (390) |
| As at December 31,   2010                              |       | 12,121                             |       | 124                  |       | 97                       |       | 304            |   | 12,646 |
| Depreciation   and depletion expense                   |       | 1,108                              |       | 15                   |       | 85                       |       | 40             |   | 1,248 |
| Impairment   losses                                    |       | 2                                  |       | -                    |       | 45                       |       | -              |   | 47 |
| Transfers   and reclassifications                      |       | (211)                              |       | -                    |       | (5)                      |       | -              |   | (216) |
| Exchange   rate movements                              |       | 1                                  |       | -                    |       | 3                        |       | -              |   | 4 |
| **As at December 31, 2011**                            | ** ** | **13,021**                         | ** ** | **139**              | ** ** | **225**                  | ** ** | **344**        | ** ** | **13,729** |
|                                                   |       |                               |       |                 |       |                     |       |           |   |   |
| **CARRYING VALUE**                                     |       |                               |       |                 |       |                     |       |           |   |   |
| As at January 1,   2010                                |       | 9,494                              |       | 21                   |       | 2,404                    |       | 130            |   | 12,049 |
| As at December 31,   2010                              |       | 9,599                              |       | 29                   |       | 2,853                    |       | 146            |   | 12,627 |
| **As at December 31, 2011**                            | ** ** | **10,837**                         | ** ** | **55**               | ** ** | **3,200**                | ** ** | **232**        | ** ** | **14,324** |

 

1.      Includes office furniture, fixtures, leasehold improvements, information technology, aircraft and marine terminal facilities.

 

Additions to development and production assets include internal costs directly related to the development, construction and production of oil and gas properties of $125 million (2010 – $87 million). All of the Company’s development and production assets are located within Canada. Costs classified as general and administrative expenses have not been capitalized as part of capital expenditures. No borrowing costs have been capitalized in 2011 (2010 – $nil).

 

Property, plant and equipment include the following amounts in respect of assets under construction which are not subject to depreciation until put into use:

 
| As at                        | ** ** | **December   31,   2011** |   | December 31,   2010 |   | January 1,   2010 |
|------------------------------|------------|---------------------------|--------|---------------------|--------|-------------------|
|                         |       |                      |   |                |   |              |
| Development and   production | ** ** | **52**                    |   | 42                  |   | 64                |
| Refining equipment           | ** ** | **125**                   |   | 1,673               |   | 1,366             |
| Other                        | ** ** | **112**                   |   | 45                  |   | 4                 |
|                         | ** ** | **289**                   |   | 1,760               |   | 1,434             |

 

 
| Cenovus   Energy Inc. | 32 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

** **

** **

**Impairment**

 

The impairment of property, plant and equipment and any subsequent reversal of such impairment losses are recognized in depreciation, depletion and amortization in the Consolidated Statement of Earnings and Comprehensive Income.

 

Depreciation, depletion and amortization expense includes impairment losses as follows:

 
| As at                        | ** ** | **December   31,   2011** | ** ** | December 31,   2010 |   | January 1,   2010 |
|------------------------------|------------|---------------------------|------------|---------------------|--------|-------------------|
|                         |       |                      |       |                |   |              |
| Development and   Production | ** ** | **2**                     | ** ** | -                   |   | -                 |
| Refining Equipment           | ** ** | **45**                    | ** ** | 14                  |   | -                 |
|                         | ** ** | **47**                    | ** ** | 14                  |   | -                 |

 

The impairment losses during the year were related to a catalytic cracking unit at the Wood River Refinery, which will not be used in future operations and an impairment on non-core natural gas assets that have been reclassified as held for sale (Note 14). The natural gas assets reside in the Conventional segment. The 2010 impairment loss was related to a processing unit at the Borger Refinery which was determined to be a redundant asset.

 

 

**17. DIVESTITURES**

 

In 2011, the Company disposed of non-core oil and gas properties and marine terminal facilities recognizing an after-tax gain of $91 million in the Statement of Earnings and Comprehensive Income. In 2010, an after-tax gain of $116 million was recognized on the disposition of non-core oil and gas properties and corporate assets.

 

 

**18. OTHER ASSETS**

 
| As at                   | ** ** | **December   31,   2011** | ** ** | December 31,   2010 |   | January 1,  2010 |
|-------------------------|------------|---------------------------|------------|---------------------|--------|-----------------------|
|                    |       |                      |       |                |   |                  |
| Partner Loans           | ** ** | **-**                     | ** ** | 274                 |   | 183                   |
| Long-term   Receivables | ** ** | **18**                    | ** ** | 7                   |   | 7                     |
| Prepaids                | ** ** | **8**                     | ** ** | -                   |   | -                     |
| Other                   | ** ** | **18**                    | ** ** | -                   |   | 2                     |
|                    | ** ** | **44**                    | ** ** | 281                 |   | 192                   |

 

 

**19. GOODWILL**

 
| As at                               | ** ** | **December   31,   2011** | ** ** | December 31,   2010 |
|-------------------------------------|------------|---------------------------|------------|---------------------|
|                                |       |                      |       |                |
| Carrying Value,   Beginning of Year | ** ** | **1,132**                 |       | 1,146               |
| Divestitures                        | ** ** | **-**                     |       | (14)                |
| Impairment                          | ** ** | **-**                     |       | -                   |
| Carrying Value,   End of Year       | ** ** | **1,132**                 |       | 1,132               |
|                                |       |                      |       |                |
| Cost                                | ** ** | **1,132**                 |       | 1,132               |
| Accumulated   Impairment            | ** ** | **-**                     |       | -                   |
| Carrying Value, End   of Year       | ** ** | **1,132**                 |       | 1,132               |

 

There were no additions to goodwill during 2011 and 2010.

 

 
| Cenovus   Energy Inc. | 33 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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** **

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

** **

** **

**Impairment Test for Cash-Generating Units Containing Goodwill**

 

For the purpose of impairment testing, goodwill is allocated to the CGU to which it relates. All of the Company’s goodwill arose on the acquisition of exploration and production assets. The carrying amount of goodwill allocated to the Company’s exploration and production CGUs was as follows:

 
| As at            | ** ** | **December   31,   2011** |   | December 31,   2010 |   | January 1,    2010 |
|------------------|------------|---------------------------|--------|---------------------|--------|--------------------|
|             |       |                      |   |                |   |               |
| Suffield         | ** ** | **393**                   |   | 393                 |   | 393                |
| Palliser         | ** ** | **-**                     |   | -                   |   | 14                 |
| Foster Creek     | ** ** | **242**                   |   | 242                 |   | 242                |
| Northern Alberta | ** ** | **497**                   |   | 497                 |   | 497                |
|             | ** ** | **1,132**                 |   | 1,132               |   | 1,146              |

 

There was no impairment of goodwill in 2011 and 2010.

 

 

**20. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES**

 
| As at                           | ** ** | **December   31,   2011** |   | December 31,   2010 |   | January 1,  2010 |
|---------------------------------|------------|---------------------------|--------|---------------------|--------|-----------------------|
|                            |       |                      |   |                |   |                  |
| Accruals                        | ** ** | **1,193**                 |   | 852                 |   | 545                   |
| Trade                           | ** ** | **789**                   |   | 471                 |   | 509                   |
| Employee Long-Term   Incentives | ** ** | **209**                   |   | 267                 |   | 217                   |
| Interest                        | ** ** | **72**                    |   | 74                  |   | 104                   |
| Other                           | ** ** | **316**                   |   | 179                 |   | 230                   |
|                            | ** ** | **2,579**                 |   | 1,843               |   | 1,605                 |

 

 

**21. LONG-TERM DEBT**

 
| As at                                  |   | Note   | ** ** | **December   31,   2011** |       | December 31,   2010 |   | January 1,  2010 |
|----------------------------------------|--------|--------|------------|---------------------------|------------|---------------------|--------|-----------------------|
|                                   |   |   |       |                      |       |                |   |                  |
| Canadian Dollar   Denominated Debt     |   |   | ** ** | ** **                | ** ** | ** **          |   |                  |
| Revolving term   debt 1                |   | A      | ** ** | **-**                     |       | -                   |   | 32                    |
| U.S. Dollar   Denominated Debt         |   |   | ** ** | ** **                |       |                |   |                  |
| Revolving term   debt 1                |   | A      | ** ** | **-**                     |       | -                   |   | 26                    |
| Unsecured notes   (US$ 3,500)     |   | B      | ** ** | **3,559**                 |       | 3,481               |   | 3,663                 |
|                                   |   |   | ** ** | **3,559**                 |       | 3,481               |   | 3,689                 |
| Total Debt   Principal                 |   |   | ** ** | **3,559**                 |       | 3,481               |   | 3,721                 |
|                                   |   |   |       |                      |       |                |   |                  |
| Debt Discounts and   Transaction Costs |   | C      | ** ** | **(32)**                  |       | (49)                |   | (65)                  |
| Current Portion of   Long-Term Debt    |   | D      | ** ** | **-**                     |       | -                   |   | -                     |
|                                   |   |   | ** ** | **3,527**                 |       | 3,432               |   | 3,656                 |

 

1.        Revolving term debt may include bankers’ acceptances, LIBOR loans, prime rate loans and U.S. base rate loans.

 

The weighted average interest rate on outstanding debt for the year ended December 31, 2011 was 5.5 percent (2010 – 5.8 percent).

 

**A) Revolving Term Debt**

 

At December 31, 2011, Cenovus had in place a committed credit facility in the amount of $3,000 million or its equivalent amount in U.S. dollars. The committed credit facility matures on November 30, 2015 and is extendable from time to time for a period of up to four years at the option of Cenovus and upon agreement from the lenders. Borrowings are available by way of Bankers Acceptances, LIBOR based loans, prime rate loans or U.S. base rate loans. At December 31, 2011, there were no amounts drawn on Cenovus’s committed bank credit facility (December 31, 2010 – $nil, January 1, 2010 – $58 million).

 

 
| Cenovus   Energy Inc. | 34 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**B) Unsecured Notes**

 

Unsecured notes are comprised of the following senior unsecured notes:

 
| ** **                         | ** ** | **US$ Principal   Amount** | ** ** | **December 31,   2011** |   | December 31,   2010 |   | January  1,   2010 |
|------------------------------------|------------|---------------------------------|------------|------------------------------|--------|--------------------------|--------|-------------------------|
|                               |       |                            |       |                         |   |                     |   |                    |
| 4.50% due September 15, 2014  | ** ** | **800**                         | ** ** | **814**                      |   | 796                      |   | 837                     |
| 5.70% due   October 15, 2019  | ** ** | **1,300**                       | ** ** | **1,322**                    |   | 1,293                    |   | 1,361                   |
| 6.75% due   November 15, 2039 | ** ** | **1,400**                       | ** ** | **1,423**                    |   | 1,392                    |   | 1,465                   |
|                               | ** ** | **3,500**                       | ** ** | **3,559**                    |   | 3,481                    |   | 3,663                   |

 

Cenovus has in place a Canadian base shelf prospectus for unsecured medium term notes in the amount of $1,500 million. The Canadian shelf prospectus allows for the issuance of medium term notes in Canadian dollars or other foreign currencies from time to time in one or more offerings. The terms of the notes, including, but not limited to, interest at either fixed or floating rates and expiry dates, will be determined at the date of issue. At December 31, 2011, no medium term notes have been issued under this Canadian prospectus. The shelf prospectus expires in July 2012.

 

Cenovus has in place a U.S. base shelf prospectus for unsecured notes in the amount of US$1,500 million. The U.S. shelf prospectus allows for the issuance of debt securities in U.S. dollars or other foreign currencies from time to time in one or more offerings. The terms of the notes, including, but not limited to, interest at either fixed or floating rates and expiry dates, will be determined at the date of issue. At December 31, 2011, no notes have been issued under this U.S. prospectus. The shelf prospectus expires in August 2012.

 

At December 31, 2011, the Company is in compliance with all of the terms of its debt agreements.

 

**C) Debt Discounts and Transaction Costs**

 

Long-term debt transaction costs and discounts associated with the unsecured notes are recorded within long-term debt and are being amortized using the effective interest rate method. Transaction costs associated with the revolving term debt have been recorded as a prepayment and are being amortized over the remaining term of the committed credit facility. During 2011, additional transaction costs of $3 million were recorded (2010 – $nil).

 

**D) Mandatory Debt Payments**

 
| ** ** |       | US$ Principal   Amount |       | C$ Principal   Amount | ** ** | **Total   C$   Equivalent** |
|------------|------------|-----------------------------|------------|----------------------------|------------|-----------------------------|
| ** ** | ** ** | ** **                  | ** ** | ** **                 | ** ** | ** **                  |
| 2012       |       | -                           |       | -                          | ** ** | **-**                       |
| 2013       |       | -                           |       | -                          | ** ** | **-**                       |
| 2014       |       | 800                         |       | -                          | ** ** | **814**                     |
| 2015       |       | -                           |       | -                          | ** ** | **-**                       |
| 2016       |       | -                           |       | -                          | ** ** | **-**                       |
| Thereafter |       | 2,700                       |       | -                          | ** ** | **2,745**                   |
|       |       | 3,500                       |       | -                          | ** ** | **3,559**                   |

 

 
| Cenovus   Energy Inc. | 35 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

 

**22. DECOMMISSIONING LIABILITIES**

 

The decommissioning provision represents the present value of the future costs associated with the retirement of upstream oil and gas assets and refining facilities. The aggregate carrying amount of the obligation is as follows:

 
| As at                                                  | ** ** | **December 31,   2011** |   | December 31,   2010 |
|--------------------------------------------------------|------------|------------------------------|--------|--------------------------|
|                                                   |       |                         |   |                     |
| Decommissioning   Liabilities, Beginning of Year       | ** ** | **1,399**                    |   | 1,185                    |
| Liabilities   incurred                                 | ** ** | **49**                       |   | 44                       |
| Liabilities   settled                                  | ** ** | **(56)**                     |   | (32)                     |
| Liabilities   divested                                 | ** ** | **-**                        |   | (90)                     |
| Transfers   and reclassifications                      | ** ** | **(55)**                     |   | (5)                      |
| Change   in estimated future cash flows                | ** ** | **146**                      |   | 51                       |
| Change   in discount rate                              | ** ** | **218**                      |   | 173                      |
| Unwinding   of discount on decommissioning liabilities | ** ** | **75**                       |   | 75                       |
| Foreign   currency translation                         | ** ** | **1**                        |   | (2)                      |
| Decommissioning   Liabilities, End of Year             | ** ** | **1,777**                    |   | 1,399                    |

 

The undiscounted amount of estimated cash flows required to settle the obligation is $6,541 million (December 31, 2010 – $6,093 million, January 1, 2010 – $5,683 million), which has been discounted using a credit-adjusted risk free rate of 4.8 percent (December 31, 2010 – 5.4 percent, January 1, 2010 – 6.0 percent). Most of these obligations are not expected to be paid for several years, or decades, and will be funded from general resources at that time.

 

**Sensitivities**

 

Changes to the credit-adjusted risk-free rate or the inflation rate would have the following impact on the decommissioning liabilities:

 
|                   | ** ** | **2011**                              |       | 2010                 |
|------------------------|------------|---------------------------------------|------------|----------------------|
| As at                  | ** ** | **Credit-adjusted****risk-free rate** | ** ** | **Inflation   rate** |   | Credit-adjusted   risk-free rate |   | Inflation rate |
|                   |       |                                  |       |                 |   |   |   |   |
| One percent increase   | ** ** | **(367)**                             | ** ** | **504**              |   | (287) |   | 398 |
| One percent   decrease | ** ** | **494**                               | ** ** | **(379)**            |   | 388 |   | (278) |

 

 

 

**23. OTHER LIABILITIES**

 
| As at                                        | ** ** | **December 31,   2011** |   | December 31,   2010 |   | January 1,  2010 |
|----------------------------------------------|------------|------------------------------|--------|--------------------------|--------|----------------------------|
|                                         |       |                         |   |                     |   |                       |
| Partner Loans                                | ** ** | **-**                        |   | 274                      |   | 183                        |
| Deferred Revenue                             | ** ** | **35**                       |   | 37                       |   | 40                         |
| Employee Long-Term   Incentives              | ** ** | **55**                       |   | 18                       |   | -                          |
| Pension and Other   Post-Employment Benefits | ** ** | **16**                       |   | 13                       |   | 19                         |
| Other                                        | ** ** | **22**                       |   | 4                        |   | 4                          |
|                                         | ** ** | **128**                      |   | 346                      |   | 246                        |

 

 

 

**24. PENSIONS AND OTHER POST-EMPLOYMENT BENEFITS**

 

The Company provides employees with a pension plan that includes defined contribution and defined benefit components, and other post-employment benefit plans (“OPEB”). Most of the employees participate in the defined contribution pension; the defined benefit pension component is closed to new entrants.

 

The Company files an actuarial valuation of its pension plans with the provincial regulator at least every three years. The most recently filed valuation was dated December 31, 2010 and the next required actuarial valuation will be as at December 31, 2013.

 

 
| Cenovus   Energy Inc. | 36 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

Information related to defined benefit pension and OPEB plans, based on actuarial estimations is as follows:

 
|                                                            | ** ** | **Pension Benefits**         |
|-----------------------------------------------------------------|------------|------------------------------|
| As at                                                           | ** ** | **December 31,   2011** |   | December 31, 2010 |   | January 1, 2010 |
|                                                            |       |                         |   |   |   |   |
|                                                            | ** ** | ** **                   |   |   |   |   |
|                                                            | ** ** | ** **                   |   |   |   |   |
| Accrued Benefit Obligation, End of   Year                       | ** ** | **84**                       |   | 68 |   | 56 |
| Fair Value of Plan   Assets, End of Year                        | ** ** | **61**                       |   | 59 |   | 54 |
| Funded Status–Plan   Assets (less) than Benefit Obligation | ** ** | **(23)**                     |   | (9) |   | (2) |
| Amounts Not   Recognized:                                       | ** ** | ** **                   |   |   |   |   |
| Unamortized net   actuarial (gain) loss                         | ** ** | **22**                       |   | 8 |   | - |
| Unamortized past   service cost                                 | ** ** | **-**                        |   | - |   | - |
| Accrued Benefit   Asset (Liability)                             | ** ** | **(1)**                      |   | (1) |   | (2) |

 
|                                                            | ** ** | **OPEB**                     |
|-----------------------------------------------------------------|------------|------------------------------|
| As at                                                           | ** ** | **December 31,   2011** |   | December 31,   2010 |   | January 1, 2010 |
|                                                            |       |                         |   |   |   |   |
|                                                            | ** ** | ** **                   |   |   |   |   |
|                                                            | ** ** | ** **                   |   |   |   |   |
| Accrued Benefit   Obligation, End of Year                       | ** ** | **19**                       |   | 14 |   | 11 |
| Fair Value of Plan   Assets, End of Year                        | ** ** | **-**                        |   | - |   | - |
| Funded Status–Plan   Assets (less) than Benefit Obligation | ** ** | **(19)**                     |   | (14) |   | (11) |
| Amounts Not   Recognized:                                       | ** ** | ** **                   |   |   |   |   |
| Unamortized net   actuarial (gain) loss                         | ** ** | **4**                        |   | 2 |   | - |
| Unamortized past   service cost                                 | ** ** | **-**                        |   | - |   | - |
| Accrued Benefit   Asset (Liability)                             | ** ** | **(15)**                     |   | (12) |   | (11) |

 

Pension and other post-employment benefit costs recognized are as follows:

 
|                                  | ** ** | **Pension Benefits** | ** ** | **OPEB** |
|---------------------------------------|------------|----------------------|------------|----------|
| For the years ended December 31, | ** ** | **2011**             |       | 2010     | ** ** | **2011** |   | 2010 |
|                                  |       |                 |       |     |   |   |   |   |
|                                  | ** ** | ** **           |       |     | ** ** | ** ** |   |   |
| Current Service Cost                  | ** ** | **3**                |       | 3        | ** ** | **2** |   | 1 |
| Interest Cost                         | ** ** | **4**                |       | 3        | ** ** | **1** |   | 1 |
| Expected Return on   Plan Assets      | ** ** | **(4)**              |       | (3)      | ** ** | **-** |   | - |
| Actuarial Gains   (Losses)            | ** ** | **1**                |       | -        | ** ** | **-** |   | - |
| Past Service Cost                     | ** ** | **-**                |       | -        | ** ** | **-** |   | - |
| Effect of   Curtailment/Settlement    | ** ** | **-**                |       | -        | ** ** | **-** |   | - |
| Plan Cost                             | ** ** | **4**                |       | 3        | ** ** | **3** |   | 2 |
| Defined Contribution   Plans Cost     | ** ** | **22**               |       | 18       | ** ** | **-** |   | - |
| Net Benefit Plan   Cost               | ** ** | **26**               |       | 21       | ** ** | **3** |   | 2 |

 

The weighted average actuarial assumptions used to determine benefit obligations are as follows:

 
|                            | ** ** | **Pension Benefits**                | ** ** | **OPEB**                    |
|---------------------------------|------------|-------------------------------------|------------|-----------------------------|
| As at                           | ** ** | **December 31,** **2011** |       | December 31, 2010 | ** ** | January 1, 2010 | ** ** | **December 31,** **2011** |   | December 31, 2010 |   | January 1, 2010 |
|                            |       |                                |       |                        |   |   |   |   |   |   |   |   |
|                            | ** ** | ** **                          |       |                        | ** ** |   | ** ** | ** ** |   |   |   |   |
| Discount Rate                   | ** ** | **4.25%**                           |       | 5.25%                       | ** ** | 6.00% | ** ** | **4.25%** |   | 5.25% |   | 6.00% |
| Rate of   Compensation Increase | ** ** | **3.99%**                           |       | 4.05%                       | ** ** | 4.05% | ** ** | **5.77%** |   | 5.65% |   | 5.77% |

 

The expected future benefits payments for the year ended December 31, 2012 is $2 million for the defined benefit plan and $nil for the OPEB.

 

 
| Cenovus   Energy Inc. | 37 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

** **

** **

**25. SHARE CAPITAL**

 

**Authorized**

 

Cenovus is authorized to issue an unlimited number of common shares, an unlimited number of First Preferred Shares and an unlimited number of Second Preferred Shares. The First and Second Preferred Shares may be issued in one or more series with rights and conditions to be determined by the Company’s Board of Directors prior to issuance and subject to the Company’s articles.

 

**Issued and Outstanding**

 
|                                            | ** ** | **2011**                                           |       | 2010       |
|-------------------------------------------------|------------|----------------------------------------------------|------------|------------|
| As at December 31,                         | ** ** | **Number   of    Common    Shares****(thousands)** | ** ** | **Amount** |   | Number of    Common    Shares (thousands) |   | Amount |
| ** **                                      | ** ** | ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Outstanding, Beginning of Year                  | ** ** | **752,675**                                        | ** ** | **3,716**  |   | 751,309 |   | 3,681 |
| Common Shares   Issued under Stock Option Plans | ** ** | **1,824**                                          | ** ** | **64**     |   | 1,366 |   | 35 |
| Outstanding, End   of Year                      | ** ** | **754,499**                                        | ** ** | **3,780**  |   | 752,675 |   | 3,716 |

 

There were no Preferred Shares outstanding as at December 31, 2011 (2010 – nil).

 

At December 31, 2011, there were 30 million (2010 – 26 million) common shares available for future issuance under stock option plans.

 

The Company has a dividend reinvestment plan (“DRIP”). Under the DRIP, holders of common shares may reinvest all or a portion of the cash dividends payable on their common shares in additional common shares. At the discretion of the Company, the additional common shares may be issued from treasury or purchased on the market.

 

**Paid in Surplus**

 

Cenovus’s paid in surplus reflects the Company’s retained earnings prior to the split of Encana under the Arrangement into two independent energy companies, Encana and Cenovus. In addition, paid in surplus includes compensation expense related to the Company’s NSRs discussed in Note 26 A).

 
|                                                    | ** ** | **Pre-   Arrangement   Earnings** | ** ** | **Stock-based   Compensation** | ** ** | **Total**  |
|---------------------------------------------------------|------------|-----------------------------------|------------|--------------------------------|------------|------------|
| ** **                                              | ** ** | ** **                        | ** ** | ** **                     | ** ** | ** ** |
| As at January 1, 2010 and   December 31, 2010 |       | 4,083                             |       | -                              |       | 4,083      |
| Stock-based   compensation expense                      |       | -                                 |       | 24                             |       | 24         |
| As at   December 31, 2011                          | ** ** | **4,083**                         | ** ** | **24**                         | ** ** | **4,107**  |

 

 

 

**26. STOCK-BASED COMPENSATION PLANS**

** **

**A) Employee Stock Option Plan**

 

Cenovus has an Employee Stock Option Plan that provides employees with the opportunity to exercise an option to purchase common shares of the Company. Option exercise prices approximate the market price for the common shares on the date the options were issued. Options granted are exercisable at 30 percent of the number granted after one year, an additional 30 percent of the number granted after two years, and are fully exercisable after three years. Options granted prior to February 17, 2010 expire after five years while options granted on or after February 17, 2010 expire after seven years.

 

Options issued by the Company under the Employee Stock Option Plan prior to February 24, 2011 have associated tandem stock appreciation rights. In lieu of exercising the options, the tandem stock appreciation rights give the option holder the right to receive a cash payment equal to the excess of the market price of Cenovus’s common shares at the time of exercise over the exercise price of the option.

 

 
| Cenovus   Energy Inc. | 38 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

Options issued by the Company on or after February 24, 2011 have associated net settlement rights. The net settlement rights, in lieu of exercising the option, give the option holder the right to receive the number of common shares that could be acquired with the excess value of the market price of Cenovus’s common shares at the time of exercise over the exercise price of the option.

 

The tandem stock appreciation rights and net settlement rights vest and expire under the same terms and conditions as the underlying options. For the purpose of this financial statement note, options with associated tandem stock appreciation rights are referred to as “TSARs” and options with associated net settlement rights are referred to as “NSRs”.

 

In addition, certain of the TSARs are performance based (“Performance TSARs”). The Performance TSARs vest and expire under the same terms and service conditions as the underlying option, and have an additional vesting requirement whereby vesting is subject to achievement of prescribed performance relative to pre-determined key measures. Performance TSARs that do not vest when eligible are forfeited.

 

In accordance with the Arrangement described in Note 1, each Cenovus and Encana employee exchanged their original Encana TSAR for one Cenovus Replacement TSAR and one Encana Replacement TSAR. The terms and conditions of the Cenovus and Encana Replacement TSARs are similar to the terms and conditions of the original Encana TSAR. The original exercise price of the Encana TSAR was apportioned to the Cenovus and Encana Replacement TSARs based on the one day volume weighted average trading price of Cenovus’s Common Share price relative to that of Encana’s Common Share price on the TSX on December 2, 2009. Cenovus TSARs and Cenovus Replacement TSARs are measured against the Cenovus Common Share price while Encana Replacement TSARs are measured against the Encana Common Share price. The Cenovus Replacement TSARs have similar vesting provisions as outlined above for the Employee Stock Option Plan. The original Encana Performance TSARs were also exchanged under the same terms as the original Encana TSARs.

 
| As at December 31, 2011                         | ** ** | **Issued**                         | ** ** | **Term**

**(Years)** | ** ** | **Weighted**

**Average**

**Remaining**

**Contractual**

**Life (Years)** | ** ** | **Weighted**

**Average**

**Exercise**

**Price ($)** | ** ** | **Closing**

**Share**

** Price ($)** | ** ** | **Units**

**Outstanding** |
|------------------------------------------------------|------------|------------------------------------|------------|-----------------------|------------|----------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------|
|                                                 |       |                               |       |                  |       |                                                                             |       |                                                        |       |                                        |       |                       |
| Encana   Replacement TSARs held by Cenovus Employees |       | Prior to Arrangement               | ** ** | **5**                 | ** ** | **1.35**                                                                         | ** ** | **31.97**                                                   | ** ** | **18.89**                                   | ** ** | **10,411**                 |
| Cenovus   Replacement TSARs held by Encana Employees |       | Prior to Arrangement               | ** ** | **5**                 | ** ** | **1.38**                                                                         | ** ** | **28.96**                                                   | ** ** | **33.83**                                   | ** ** | **9,686**                  |
| TSARs                                                |       | Prior to February 17, 2010    | ** ** | **5**                 | ** ** | **1.45**                                                                         | ** ** | **28.95**                                                   | ** ** | **33.83**                                   | ** ** | **9,395**                  |
| TSARs                                                |       | On or After February 17, 2010 | ** ** | **7**                 | ** ** | **5.20**                                                                         | ** ** | **26.72**                                                   | ** ** | **33.83**                                   | ** ** | **5,526**                  |
| NSRs                                                 |       | On or After February 24, 2011 | ** ** | **7**                 | ** ** | **6.24**                                                                         | ** ** | **36.95**                                                   | ** ** | **33.83**                                   | ** ** | **5,809**                  |

 

Unless otherwise indicated, all references to TSARs collectively refer to both the Cenovus issued TSARs and Cenovus Replacement TSARs.

 

*NSRs*

 

The weighted average unit fair value of NSRs granted during the year ended December 31, 2011 was $8.27 before considering forfeitures. The fair value of each NSR was estimated on their grant date using the Black-Scholes-Merton valuation model with weighted average assumptions as follows:

 
|                      | ** ** | **2011**   |
|---------------------------|------------|------------|
| ** **                | ** ** | ** ** |
| Risk Free Interest Rate   | ** ** | **2.46%**  |
| Expected Dividend   Yield | ** ** | **2.16%**  |
| Expected   Volatility 1   | ** ** | **28.81%** |
| Expected Life   (Years)   | ** ** | **4.55**   |

 

1.  Expected volatility has been based on historical volatility of the Company’s publicly traded shares.

 

 
| Cenovus   Energy Inc. | 39 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

The following tables summarize the information related to the NSRs as at December 31, 2011:

 
| As at December 31, 2011

(thousands of units) | ** ** | **NSRs**   | ** ** | **Weighted   Average   Exercise   Price ($)** |
|----------------------------------------------------|------------|------------|------------|-----------------------------------------------|
| ** **                                         | ** ** | ** ** | ** ** | ** **                                    |
| Outstanding, Beginning of Year                     | ** ** | **-**      | ** ** | **-**                                         |
| Granted                                            | ** ** | **5,931**  | ** ** | **36.96**                                     |
| Exercised   as options for common shares           | ** ** | **-**      | ** ** | **-**                                         |
| Forfeited                                          | ** ** | **(122)**  | ** ** | **37.50**                                     |
| Outstanding, End   of Year                         | ** ** | **5,809**  | ** ** | **36.95**                                     |
| Exercisable, End   of Year                         | ** ** | **1**      | ** ** | **37.54**                                     |

 

 
|                        | ** ** | **Outstanding NSRs**

(thousands of units) |
|-----------------------------|------------|--------------------------------------------|
| Range of Exercise Price ($) | ** ** | **NSRs**                                   | ** ** | **Weighted**

**Average**

**Remaining**

**Contractual**

**Life (Years)** | ** ** | **Weighted**

**Average**

**Exercise**

**Price ($)** |
| ** **                  | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** |
| 30.00 to 39.99              | ** ** | **5,809**                                  | ** ** | **6.24** | ** ** | **36.95** |
|                        | ** ** | **5,809**                                  | ** ** | **6.24** | ** ** | **36.95** |

 
|                        | ** ** | **Exercisable NSRs**   (thousands of units) |
|-----------------------------|------------|---------------------------------------------|
| Range of Exercise Price ($) | ** ** | **NSRs**                                    | ** ** | **Weighted**

**Average**

**Exercise**

**Price ($)** |
| ** **                  | ** ** | ** **                                  | ** ** | ** ** |
| 30.00 to 39.99              | ** ** | **1**                                       | ** ** | **37.54** |
|                        | ** ** | **1**                                       | ** ** | **37.54** |

 

*TSARs Held by Cenovus Employees*

 

The Company has recorded a liability of $90 million at December 31, 2011 (December 31, 2010 – $87 million, January 1, 2010 – $43 million) in the Consolidated Balance Sheets based on the fair value of each TSAR held by Cenovus employees. Fair value was estimated at the period end date using the Black-Scholes-Merton valuation model with weighted average assumptions as follows:

 
|                                | ** ** | **2011**   |
|-------------------------------------|------------|------------|
| ** **                          | ** ** | ** ** |
| Risk Free Interest Rate             | ** ** | **1.10%**  |
| Expected Dividend   Yield           | ** ** | **2.36%**  |
| Expected   Volatility 1             | ** ** | **31.95%** |
| Cenovus’s Common   Share Price | ** ** | **$33.83** |

 

1.  Expected volatility has been based on historical volatility of the Company’s publicly traded shares.

 

The intrinsic value of vested TSARs held by Cenovus employees at December 31, 2011 was $43 million (December 31, 2010 – $42 million).

 

 
| Cenovus   Energy Inc. | 40 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

 

The following tables summarize the information related to the TSARs held by Cenovus employees as at December 31, 2011:

 
| As at December 31, 2011

(thousands of units) | ** ** | **TSARs**  | ** ** | **Performance   TSARs** | ** ** | **Total**   | ** ** | **Weighted   Average   Exercise   Price ($)** |
|----------------------------------------------------|------------|------------|------------|-------------------------|------------|-------------|------------|-----------------------------------------------|
| ** **                                         | ** ** | ** ** | ** ** | ** **              | ** ** | ** **  | ** ** | ** **                                    |
| Outstanding, Beginning of Year                     |       | 12,044     |       | 7,073                   | ** ** | **19,117**  | ** ** | **27.75**                                     |
| Granted                                            |       | 138        |       | -                       | ** ** | **138**     | ** ** | **33.40**                                     |
| Exercised for cash   payment                       |       | (1,274)    |       | (641)                   | ** ** | **(1,915)** | ** ** | **26.31**                                     |
| Exercised as   options for common shares           |       | (1,202)    |       | (564)                   | ** ** | **(1,766)** | ** ** | **26.38**                                     |
| Forfeited                                          |       | (315)      |       | (338)                   | ** ** | **(653)**   | ** ** | **28.37**                                     |
| Outstanding, End   of Year                         | ** ** | **9,391**  | ** ** | **5,530**               | ** ** | **14,921**  | ** ** | **28.12**                                     |
| Exercisable, End   of Year                         | ** ** | **4,618**  | ** ** | **4,256**               | ** ** | **8,874**   | ** ** | **29.15**                                     |

 

The weighted average market price of Cenovus’s common shares at the date of exercise during the year ended December 31, 2011 was $35.71.

 
|                        | ** ** | Outstanding TSARs

(thousands of units) |
|-----------------------------|------------|-----------------------------------------|
| Range of Exercise Price ($) | ** ** | **TSARs**                               | ** ** | **Performance**

**TSARs** | ** ** | **Total** | ** ** | **Weighted**

**Average**

**Remaining**

**Contractual**

**Life   (Years)** | ** ** | **Weighted**

**Average**

**Exercise**

**Price   ($)** |
| ** **                  | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 20.00 to 29.99              |       | 7,617                                   |   | 3,578 | ** ** | **11,195** | ** ** | **3.32** | ** ** | **26.43** |
| 30.00 to 39.99              |       | 1,711                                   |   | 1,952 | ** ** | **3,663** | ** ** | **1.40** | ** ** | **33.03** |
| 40.00 to 49.99              |       | 63                                      |   | - | ** ** | **63** | ** ** | **1.45** | ** ** | **43.30** |
|                        | ** ** | **9,391**                               | ** ** | **5,530** | ** ** | **14,921** | ** ** | **2.84** | ** ** | **28.12** |

 
|                        | ** ** | Exercisable TSARs

(thousands of units) |
|-----------------------------|------------|-----------------------------------------|
| Range of Exercise Price ($) | ** ** | **TSARs**                               | ** ** | **Performance**

**TSARs** | ** ** | **Total** | ** ** | **Weighted**

**Average**

**Exercise**

**Price   ($)** |
| ** **                  | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 20.00 to 29.99              |       | 3,029                                   |   | 2,304 | ** ** | **5,333** | ** ** | **26.45** |
| 30.00 to 39.99              |       | 1,526                                   |   | 1,952 | ** ** | **3,478** | ** ** | **33.04** |
| 40.00 to 49.99              |       | 63                                      |   | - | ** ** | **63** | ** ** | **43.30** |
|                        | ** ** | **4,618**                               | ** ** | **4,256** | ** ** | **8,874** | ** ** | **29.15** |

 

 

The market price of Cenovus common shares at December 31, 2011 was $33.83.

 

*Encana Replacement TSARs Held by Cenovus Employees*

 

Cenovus is required to reimburse Encana in respect of cash payments made by Encana to Cenovus employees when a Cenovus employee exercises an Encana Replacement TSAR for cash. No further Encana Replacement TSARs will be granted to Cenovus employees.

 

 
| Cenovus   Energy Inc. | 41 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

The Company has recorded a liability of $1 million at December 31, 2011 (December 31, 2010 – $24 million, January 1, 2010 – $70 million) in the Consolidated Balance Sheets based on the fair value of each Encana Replacement TSAR held by Cenovus employees. Fair value was estimated at the period end date using the Black-Scholes-Merton valuation model with weighted average assumptions as follows:

 
|                               | ** ** | **2011**   |
|------------------------------------|------------|------------|
| ** **                         | ** ** | ** ** |
| Risk Free Interest Rate            | ** ** | **0.99%**  |
| Expected Dividend   Yield          | ** ** | **4.31%**  |
| Expected   Volatility 1            | ** ** | **28.04%** |
| Encana’s Common   Share Price | ** ** | **$18.89** |

 

1.  Expected volatility has been based on the historical volatility of Encana’s publicly traded shares.

 

The intrinsic value of vested Encana Replacement TSARs held by Cenovus employees at December 31, 2011 was $nil (December 31, 2010 – $6 million).

 

The following tables summarize the information related to the Encana Replacement TSARs held by Cenovus employees as at December 31, 2011:

 
| As at December 31, 2011

(thousands of units) | ** ** | **TSARs**  | ** ** | **Performance   TSARs** | ** ** | **Total**   | ** ** | **Weighted   Average   Exercise   Price ($)** |
|----------------------------------------------------|------------|------------|------------|-------------------------|------------|-------------|------------|-----------------------------------------------|
| ** **                                         | ** ** | ** ** | ** ** | ** **              | ** ** | ** **  | ** ** | ** **                                    |
| Outstanding, Beginning of Year                     |       | 6,429      |       | 7,098                   | ** ** | **13,527**  | ** ** | **31.17**                                     |
| Exercised for cash   payment                       |       | (1,824)    |       | (451)                   | ** ** | **(2,275)** | ** ** | **26.97**                                     |
| Exercised as   options for Encana common shares    |       | (16)       |       | -                       | ** ** | **(16)**    | ** ** | **25.71**                                     |
| Forfeited                                          |       | (308)      |       | (517)                   | ** ** | **(825)**   | ** ** | **32.72**                                     |
| Outstanding, End   of Year                         | ** ** | **4,281**  | ** ** | **6,130**               | ** ** | **10,411**  | ** ** | **31.97**                                     |
| Exercisable, End   of Year                         | ** ** | **3,605**  | ** ** | **4,856**               | ** ** | **8,461**   | ** ** | **32.64**                                     |

 

The weighted average market price of Encana’s common shares at the date of exercise during the year ended December 31, 2011 was $31.95.

 
|                        | ** ** | Outstanding TSARs

(thousands of units) |
|-----------------------------|------------|-----------------------------------------|
| Range of Exercise Price ($) | ** ** | **TSARs**                               | ** ** | **Performance**

**TSARs** | ** ** | **Total** | ** ** | **Weighted**

**Average**

**Remaining**

**Contractual**

**Life   (Years)** | ** ** | **Weighted**

**Average**

**Exercise**

**Price   ($)** |
| ** **                  | ** ** | ** **                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 20.00 to 29.99              |       | 2,437                                   |   | 4,014 | ** ** | **6,451** | ** ** | **1.48** | ** ** | **29.15** |
| 30.00 to 39.99              |       | 1,711                                   |   | 2,116 | ** ** | **3,827** | ** ** | **1.12** | ** ** | **36.26** |
| 40.00 to 49.99              |       | 131                                     |   | - | ** ** | **131** | ** ** | **1.48** | ** ** | **44.86** |
| 50.00 to 59.99              |       | 2                                       |   | - | ** ** | **2** | ** ** | **1.39** | ** ** | **50.39** |
| ** **                  | ** ** | **4,281**                               | ** ** | **6,130** | ** ** | **10,411** | ** ** | **1.35** | ** ** | **31.97** |

 
|                        | ** ** | Exercisable TSARs 

(thousands of units) |
|-----------------------------|------------|------------------------------------------|
| Range of Exercise Price ($) | ** ** | **TSARs**                                | ** ** | **Performance**

**TSARs** | ** ** | **Total** | ** ** | **Weighted**

**Average**

**Exercise**

**Price   ($)** |
| ** **                  | ** ** | ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 20.00 to 29.99              |       | 1,778                                    |   | 2,740 | ** ** | **4,518** | ** ** | **29.20** |
| 30.00 to 39.99              |       | 1,694                                    |   | 2,116 | ** ** | **3,810** | ** ** | **36.28** |
| 40.00 to 49.99              |       | 131                                      |   | - | ** ** | **131** | ** ** | **44.86** |
| 50.00 to 59.99              |       | 2                                        |   | - | ** ** | **2** | ** ** | **50.39** |
| ** **                  | ** ** | **3,605**                                | ** ** | **4,856** | ** ** | **8,461** | ** ** | **32.64** |

 

The market price of Encana common shares at December 31, 2011 was $18.89.

 

 
| Cenovus   Energy Inc. | 42 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

*Cenovus Replacement TSARs Held by Encana Employees*

 

Encana is required to reimburse Cenovus in respect of cash payments made by Cenovus to Encana’s employees when these employees exercise a Cenovus Replacement TSAR for cash. No compensation expense is recognized and no further Cenovus Replacement TSARs will be granted to Encana employees.

 

The Company has recorded a liability of $83 million at December 31, 2011 (December 31, 2010 – $123 million, January 1, 2010 – $84 million) in the Consolidated Balance Sheets based on the fair value of each Cenovus Replacement TSAR held by Encana employees, with an offsetting account receivable from Encana. Fair value was estimated at the period end date using the Black-Scholes-Merton valuation model with weighted average assumptions as follows:

 
| ** **                          | ** ** | **2011**   | ** ** |
|-------------------------------------|------------|------------|------------|
| ** **                          | ** ** | ** ** | ** ** |
| Risk Free Interest   Rate           | ** ** | **0.99**   | **%**      |
| Expected Dividend   Yield           | ** ** | **2.36**   | **%**      |
| Expected   Volatility 1             | ** ** | **31.95**  | **%**      |
| Cenovus’s Common   Share Price | ** ** | **$33.83** | ** ** |

 

1.  Expected volatility has been based on historical volatility of the Company’s publicly traded shares.

 

The intrinsic value of vested Cenovus Replacement TSARs held by Encana employees at December 31, 2011 was $32 million (December 31, 2010 – $60 million).

 

The following tables summarize the information related to the Cenovus Replacement TSARs held by Encana employees as at December 31, 2011:

 
| As at December 31, 2011 (thousands of units) | ** ** | **TSARs** | ** ** | ** ** | **Performance****TSARs** | ** ** | ** ** | **Total**  | ** ** | ** ** | **Weighted****Average****Exercise****Price ($)** | ** ** |
|---------------------------------------------------|------------|-----------|------------|------------|--------------------------|------------|------------|------------|------------|------------|--------------------------------------------------|------------|
|                                              |       |      |       |       |                     |       |       |       |       |       |                                             |       |
| Outstanding,   Beginning of Year                  |       | 8,214     |       |       | 8,940                    | ** ** | ** ** | **17,154** | ** ** | ** ** | **28.16**                                        | ** ** |
| Exercised   for cash payment                      |       | (4,082    | )          |       | (2,758                   | )          | ** ** | **(6,840** | **)**      | ** ** | **27.00**                                        | ** ** |
| Exercised   as options for common shares          |       | (55       | )          |       | (3                       | )          | ** ** | **(58**    | **)**      | ** ** | **23.29**                                        | ** ** |
| Forfeited                                         |       | (142      | )          |       | (428                     | )          | ** ** | **(570**   | **)**      | ** ** | **29.14**                                        | ** ** |
| Outstanding,   End of Year                        | ** ** | **3,935** | ** ** | ** ** | **5,751**                | ** ** | ** ** | **9,686**  | ** ** | ** ** | **28.96**                                        | ** ** |
| Exercisable,   End of Year                        | ** ** | **3,203** | ** ** | ** ** | **4,319**                | ** ** | ** ** | **7,522**  | ** ** | ** ** | **29.73**                                        | ** ** |

 

The weighted average market price of Cenovus’s common shares at the date of exercise during the year ended December 31, 2011 was $35.80.

** **
|                        | ** ** | **Outstanding TSARs**   (thousands of units) |
|-----------------------------|------------|----------------------------------------------|
| Range of Exercise Price ($) | ** ** | **TSARs**                                    | ** ** | ** ** | **Performance****TSARs** | ** ** | ** ** | **Total** | ** ** | ** ** | **Weighted   Average   Remaining   Contractual   Life (Years)** | ** ** | ** ** | **Weighted****Average****Exercise   Price ($)** | ** ** |
| ** **                  | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 20.00   to 29.99            |       | 2,197                                        |   |   | 3,807 | ** ** | ** ** | **6,004** | ** ** | ** ** | **1.55** | ** ** | ** ** | **26.41** | ** ** |
| 30.00   to 39.99            |       | 1,671                                        |   |   | 1,944 | ** ** | ** ** | **3,615** | ** ** | ** ** | **1.11** | ** ** | ** ** | **32.95** | ** ** |
| 40.00   to 49.99            |       | 67                                           |   |   | - | ** ** | ** ** | **67** | ** ** | ** ** | **1.44** | ** ** | ** ** | **42.88** | ** ** |
|                        | ** ** | **3,935**                                    | ** ** | ** ** | **5,751** | ** ** | ** ** | **9,686** | ** ** | ** ** | **1.38** | ** ** | ** ** | **28.96** | ** ** |

 

 
| Cenovus   Energy Inc. | 43 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

** **

** **
|                          | **Exercisable TSARs**(thousands of units) |
|-------------------------------|-------------------------------------------|
| Range of Exercise   Price ($) | ** **                                | **TSARs** | ** ** | ** ** | **Performance****TSARs** | ** ** | ** ** | **Total** | ** ** | ** ** | **Weighted****Average****Exercise****Price ($)** | ** ** |
|                          |                                      |   |   |   |   |   |   |   |   |   |   |   |
| 20.00 to 29.99                |                                      | 1,465 |   |   | 2,375 | ** ** | ** ** | **3,840** | ** ** | ** ** | **26.48** | ** ** |
| 30.00 to 39.99                |                                      | 1,671 |   |   | 1,944 | ** ** | ** ** | **3,615** | ** ** | ** ** | **32.95** | ** ** |
| 40.00 to 49.99                |                                      | 67 |   |   | - | ** ** | ** ** | **67** | ** ** | ** ** | **42.88** | ** ** |
|                          | ** **                                | **3,203** | ** ** | ** ** | **4,319** | ** ** | ** ** | **7,522** | ** ** | ** ** | **29.73** | ** ** |

 

The market price of Cenovus common shares at December 31, 2011 was $33.83.

 

**B) Performance Share Units**

 

Cenovus has granted Performance Share Units (“PSUs”) to certain employees under its Performance Share Unit Plan for Employees. PSUs are whole share units and entitle employees to receive, upon vesting, either a Common Share of Cenovus or a cash payment equal to the value of a Cenovus Common Share. The number of PSUs eligible for payment is determined over three years based on the units granted multiplied by 30 percent after year one, 30 percent after year two and 40 percent after year three, multiplied by a performance multiplier for each year. The multiplier is based on the Company achieving key pre-determined performance measures. PSUs vest after three years.

 

The Company has recorded a liability of $55 million at December 31, 2011 (December 31, 2010 – $18 million, January 1, 2010 – $nil) in the Consolidated Balance Sheets for PSUs based on the market value of the Cenovus common shares at December 31, 2011. The intrinsic value of vested PSUs was $nil at December 31, 2011 and 2010 as PSUs are paid out upon vesting.

 

The following table summarizes the information related to the PSUs held by Cenovus employees as at December 31, 2011:

** **
| (thousands of   units)           | ** ** | **PSUs**   | ** ** |
|----------------------------------|------------|------------|------------|
| ** **                       | ** ** | ** ** | ** ** |
| Outstanding,   Beginning of Year | ** ** | **1,252**  | ** ** |
| Granted                          | ** ** | **1,409**  | ** ** |
| Cancelled                        | ** ** | **(98**    | **)**      |
| Units   in Lieu of Dividends     | ** ** | **60**     | ** ** |
| Outstanding,   End of Year       | ** ** | **2,623**  | ** ** |

 

**C) Deferred Share Units**

 

Under two Deferred Share Unit Plans, Cenovus directors, officers and employees may receive Deferred Share Units (“DSUs”), which are equivalent in value to a Common Share of the Company. Employees have the option to convert either zero, 25 or 50 percent of their annual bonus award into DSUs. DSUs vest****immediately, are redeemed in accordance with the terms of the agreement and expire on December 15 of the calendar year following the year of cessation of directorship or employment.

 

The Company has recorded a liability of $35 million at December 31, 2011 (December 31, 2010 – $31 million, January 1, 2010 – $20 million) in the Consolidated Balance Sheets for DSUs based on the market value of the Cenovus common shares at December 31, 2011. The intrinsic value of vested DSUs equals the carrying value as DSUs vest at the time of grant.

 

 
| Cenovus   Energy Inc. | 44 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

The following table summarizes the information related to the DSUs held by Cenovus directors, officers and employees as at December 31, 2011:

 
| (thousands of units)               | ** ** | **DSUs**   | ** ** |
|------------------------------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** |
| Outstanding,   Beginning of Year   | ** ** | **940**    | ** ** |
| Granted   to Directors             | ** ** | **65**     | ** ** |
| Granted   from Annual Bonus Awards | ** ** | **17**     | ** ** |
| Units   in Lieu of Dividends       | ** ** | **23**     | ** ** |
| Exercised                          | ** ** | **(3**     | **)**      |
| Outstanding,   End of Year         | ** ** | **1,042**  | ** ** |

 

**D) Total Stock-Based Compensation Expense (Recovery)**

 

The following table summarizes the stock-based compensation expense (recovery) recorded for all plans within operating and general and administrative expenses on the Consolidated Statements of Earnings and Comprehensive Income:

** **
| For the years   ended December 31,              | ** ** | **2011** |   |   | 2010   |   |
|------------------------------------------------------|------------|----------|--------|--------|--------|--------|
|                                                 |       |     |   |   |   |   |
| NSRs                                                 | ** ** | **16**   |   |   | -      |   |
| TSARs   held by Cenovus employees                    | ** ** | **24**   |   |   | 45     |   |
| Encana   Replacement TSARs held by Cenovus employees | ** ** | **(8**   | **)**  |   | (20    | )      |
| PSUs                                                 | ** ** | **27**   |   |   | 13     |   |
| DSUs                                                 | ** ** | **4**    |   |   | 9      |   |
| Total   stock-based compensation expense (recovery)  | ** ** | **63**   |   |   | 47     |   |

 

 

 

**27. EMPLOYEE SALARIES AND BENEFIT EXPENSES**

** **
| For the years   ended December 31,                    | ** ** | **2011** |   |   | 2010   |   |
|------------------------------------------------------------|------------|----------|--------|--------|--------|--------|
|                                                       |       |     |   |   |   |   |
| Salaries,   Bonuses and Other Short-Term Employee Benefits | ** ** | **399**  |   |   | 348    |   |
| Defined   Contribution Pension Plan                        | ** ** | **13**   |   |   | 11     |   |
| Defined   Benefit Pension Plan and OPEB                    | ** ** | **4**    |   |   | (1     | )      |
| Stock-Based   Compensation (Note 26)                       | ** ** | **63**   |   |   | 47     |   |
|                                                       | ** ** | **479**  |   |   | 405    |   |

** **

** **

**28. RELATED PARTY TRANSACTIONS**

** **

**Key Management Compensation**

 

Key management includes Directors (executive and non-executive), the Executive Officers, Senior Vice-Presidents and Vice-Presidents. The compensation paid or payable to key management is as follows:

 
| For the years   ended December 31,           | ** ** | **2011** |   |   | 2010   |   |
|---------------------------------------------------|------------|----------|--------|--------|--------|--------|
|                                              |       |     |   |   |   |   |
| Salaries,   Director Fees and Short-Term Benefits | ** ** | **25**   |   |   | 22     |   |
| Post-Employment   Benefits                        | ** ** | **3**    |   |   | 2      |   |
| Other   Long-Term Benefits                        | ** ** | **-**    |   |   | -      |   |
| Stock-Based   Compensation                        | ** ** | **35**   |   |   | 37     |   |
| Total                                             | ** ** | **63**   |   |   | 61     |   |

 

Post-employment benefits represent the present value of future pension benefits earned during the year. Stock-based compensation includes the costs associated with stock options, NSRs, TSARs, PSUs and DSUs recognized during the year.

 

 
| Cenovus   Energy Inc. | 45 | Consolidated Financial Statements |
|-----------------------|----|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**29.  INTEREST IN JOINT OPERATIONS**

 

Cenovus has a 50 percent interest in FCCL Partnership, a jointly controlled entity which is involved in the development and production of crude oil. In addition, through its interest in the general partner and a limited partner, Cenovus has a 50 percent interest in WRB Refining LP, a jointly controlled entity, which owns two refineries in the U.S. and focuses on the refining of crude oil into petroleum and chemical products.

 

These entities have been accounted for using the proportionate consolidation method with the results of operations included in the Oil Sands and Refining and Marketing segments, respectively. Summarized financial statement information for these jointly controlled entities is as follows:

 
|                                                                               | ** ** | **FCCL   Partnership****1** | ** ** | **WRB   Refining LP****1** |
|------------------------------------------------------------------------------------|------------|-----------------------------|------------|----------------------------|
| Consolidated Statements of Earnings 

For the years ended December 31,             | ** ** | **2011**                    |       |                       | 2010 | ** ** | ** ** | **2011** |   |   | 2010 |   |
| ** **                                                                         | ** ** | ** **                  |       |                       |   | ** ** | ** ** | ** ** |   |   |   |   |
| **Revenues**                                                                       | ** ** | **2,364**                   |       |                       | 1,829 | ** ** | ** ** | **8,672** |   |   | 6,624 |   |
| **Expenses**                                                                       | ** ** | ** **                  | ** ** | ** **                 | ** ** |   |   |   |   |   |   |   |
| Purchased product                                                                  | ** ** | **-**                       |       |                       | - | ** ** | ** ** | **7,223** |   |   | 6,095 |   |
| Operating, transportation and blending and realized   gain/loss on risk management | ** ** | **1,397**                   |       |                       | 1,074 | ** ** | ** ** | **473** |   |   | 462 |   |
| **Operating   Cash Flow**                                                          | ** ** | **967**                     |       |                       | 755 | ** ** | ** ** | **976** |   |   | 67 |   |
| Depreciation, depletion and amortization                                           | ** ** | **205**                     |       |                       | 210 | ** ** | ** ** | **130** |   |   | 86 |   |
| Other expenses (income)                                                            | ** ** | **(136**                    | **)**      |                       | 20 | ** ** | ** ** | **(4** | **)** |   | 13 |   |
| **Net   Earnings (Loss)**                                                          | ** ** | **898**                     |       |                       | 525 | ** ** | ** ** | **850** |   |   | (32 | ) |

 

1.     FCCL Partnership and WRB Refining LP are not separate tax paying entities. Income taxes related to the Partnerships’ income are the responsibility of their respective Partners.

 
|                                | ** ** | **FCCL   Partnership**    | ** ** | **WRB   Refining LP** |
|-------------------------------------|------------|---------------------------|------------|-----------------------|
| Consolidated   Balance Sheets as at | ** ** | **December   31,   2011** |       |                  | December 31,   2010 |   |   | January 1,   2010 | ** ** | ** ** | **December   31,   2011** |   |   | December 31,   2010 |   |   | January 1,   2010 |   |
|                                |       |                      |       |                  |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |   |   |   |   |
| Current Assets                      | ** ** | **937**                   |       |                  | 703 |   |   | 800 | ** ** | ** ** | **1,402** |   |   | 951 |   |   | 812 |   |
| Long-term Assets                    | ** ** | **6,864**                 |       |                  | 6,419 |   |   | 6,374 | ** ** | ** ** | **3,188** |   |   | 2,840 |   |   | 2,391 |   |
| Current Liabilities                 | ** ** | **317**                   |       |                  | 229 |   |   | 147 | ** ** | ** ** | **759** |   |   | 559 |   |   | 515 |   |
| Long-term Liabilities               | ** ** | **83**                    |       |                  | 40 |   |   | 29 | ** ** | ** ** | **73** |   |   | 327 |   |   | 407 |   |

 

Capital commitments through jointly controlled entities are as follows:

** **
| ** 2011**        |       | 1 Year |       |       | 2 Years |       |       | 3 Years |       |       | 4 Years |       |       | 5 Years |       |       | Thereafter |       |       | **Total**  |       |
|-----------------------|------------|-------------|------------|------------|--------------|------------|------------|--------------|------------|------------|--------------|------------|------------|--------------|------------|------------|------------|------------|------------|------------|------------|
| ** **            | ** ** | ** **  | ** ** | ** ** | ** **   | ** ** | ** ** | ** **   | ** ** | ** ** | ** **   | ** ** | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital   Commitments |       | 179         |       |       | 58           |       |       | 11           |       |       | 2            |       |       | 3            |       |       | -          | ** ** | ** ** | **253**    | ** ** |
|                  |       |        |       |       |         |       |       |         |       |       |         |       |       |         |       |       |       |       |       |       |       |
| ** **            |       |        |       |       |         |       |       |         |       |       |         |       |       |         |       |       |       |       |       | ** ** |       |
| **2010 **        |       | 1 Year      |       |       | 2 Years      |       |       | 3 Years      |       |       | 4 Years      |       |       | 5 Years      |       |       | Thereafter |       |       | **Total**  |       |
| ** **            | ** ** |        | ** ** | ** ** |         | ** ** | ** ** |         | ** ** | ** ** |         | ** ** | ** ** |         | ** ** | ** ** |       | ** ** | ** ** | ** ** | ** ** |
| Capital   Commitments |       | 147         |       |       | 10           |       |       | 3            |       |       | 3            |       |       | -            |       |       | -          | ** ** | ** ** | **163**    | ** ** |

 

There are no contingent liabilities related to the Company’s interest in jointly controlled entities, nor contingent liabilities of the jointly controlled entities themselves.

 

 

**30. CAPITAL STRUCTURE**

 

Cenovus’s capital structure objectives and targets have remained unchanged from previous periods. Cenovus’s capital structure consists of Shareholders’ Equity plus Debt. Debt includes the Company’s short-term borrowings plus long-term debt, including the current portion. Cenovus’s objectives when managing its capital structure are to maintain financial flexibility, preserve access to capital markets, ensure its ability to finance internally generated growth and to fund potential acquisitions while maintaining the ability to meet the Company’s financial obligations as they come due.

 

Cenovus monitors its capital structure financing requirements using, among other things, non-GAAP financial metrics consisting of Debt to Capitalization and Debt to Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”). These metrics are used to steward Cenovus’s overall debt position as measures of Cenovus’s overall financial strength. Debt is defined as short-term borrowings and the current and long-term portions of long-term debt excluding any amounts with respect to the Partnership Contribution Payable or Receivable. Cenovus continues to target a Debt to Capitalization ratio of between 30 and 40 percent.

 

 
| Cenovus   Energy Inc. | 46

  | Consolidated Financial Statements |
|-----------------------|------------|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 
| As at                  | ** ** | **December 31,**

**2011** | ** ** | ** ** | December 31,

2010 |   |   | January 1,

2010 |   |
|-----------------------------|------------|---------------------------------|------------|------------|-------------------------|--------|--------|-----------------------|--------|
| ** **                  | ** ** | ** **                      |       |       |                    |   |   |                  |   |
| Short-Term   Borrowings     | ** ** | **-**                           |       |       | -                       |   |   | -                     |   |
| Long-Term   Debt            | ** ** | **3,527**                       |       |       | 3,432                   |   |   | 3,656                 |   |
| Debt                        | ** ** | **3,527**                       |       |       | 3,432                   |   |   | 3,656                 |   |
| Shareholders’   Equity | ** ** | **9,406**                       |       |       | 8,395                   |   |   | 7,809                 |   |
| Total   Capitalization      | ** ** | **12,933**                      |       |       | 11,827                  |   |   | 11,465                |   |
| **Debt to Capitalization**  | ** ** | **27%**                         |       |       | 29%                     |   |   | 32%                   |   |

 

Cenovus continues to target a Debt to Adjusted EBITDA of between 1.0 and 2.0 times.

 
| As at                                  | ** ** | **December 31,**

**2011** | ** ** | ** ** | December 31,

2010 | ** ** |
|---------------------------------------------|------------|---------------------------------|------------|------------|-------------------------|------------|
| Debt                                        | ** ** | **3,527**                       |       |       | 3,432                   |       |
| Net   Earnings                              | ** ** | **1,478**                       |       |       | 1,081                   |       |
| Add   (deduct):                             | ** ** | ** **                      |       |       |                    |       |
| Finance   costs                             | ** ** | **447**                         |       |       | 498                     |       |
| Interest   income                           | ** ** | **(124**                        | **)**      |       | (144                    | )          |
| Income   tax expense                        | ** ** | **729**                         |       |       | 223                     |       |
| Depreciation,   depletion and amortization  | ** ** | **1,295**                       |       |       | 1,302                   |       |
| Exploration   expense                       | ** ** | **-**                           |       |       | -                       |       |
| Unrealized   (gain) loss on risk management | ** ** | **(180**                        | **)**      |       | (46                     | )          |
| Foreign   exchange (gain) loss, net         | ** ** | **26**                          |       |       | (51                     | )          |
| (Gain)   loss on divestiture of assets      | ** ** | **(107**                        | **)**      |       | (116                    | )          |
| Other   (income) loss, net                  | ** ** | **4**                           |       |       | (13                     | )          |
| Adjusted   EBITDA                           | ** ** | **3,568**                       |       |       | 2,734                   |       |
| **Debt to Adjusted EBITDA**                 | ** ** | **1.0x**                        |       |       | 1.3x                    |       |

 

It is Cenovus’s intention to maintain investment grade credit ratings to help ensure it has continuous access to capital and the financial flexibility to fund its capital programs, meet its financial obligations and finance potential acquisitions. Cenovus will maintain a high level of capital discipline and manage its capital structure to ensure sufficient liquidity through all stages of the economic cycle. To manage the capital structure, Cenovus may adjust capital and operating spending, adjust dividends paid to shareholders, purchase shares for cancellation pursuant to normal course issuer bids, issue new shares, issue new debt, draw down on its credit facilities or repay existing debt.

 

In order to increase comparability of Debt to Adjusted EBITDA between periods and remove the non-cash component of risk management, Cenovus changed its definition of Adjusted EBITDA to exclude unrealized gains and losses on risk management activities. The Adjusted EBITDA and the ratio of Debt to Adjusted EBITDA for prior periods have been re-presented in a consistent manner. As noted above, Cenovus’s capital structure objectives and targets remain unchanged from previous periods. At December 31, 2011, Cenovus is in compliance with all of the terms of its debt agreements.

 

 

**31. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT**

 

Cenovus’s consolidated financial assets and financial liabilities consist of cash and cash equivalents, accounts receivable and accrued revenues, accounts payable and accrued liabilities, Partnership Contribution Receivable and Payable, partner loans, risk management assets and liabilities, long-term receivables, short-term borrowings, long-term debt and obligations for stock-based compensation carried at fair value. Risk management assets and liabilities arise from the use of derivative financial instruments. Fair values of financial assets and liabilities, summarized information related to risk management positions, and discussion of risks associated with financial assets and liabilities are presented as follows.

 

 
| Cenovus   Energy Inc. | 47

  | Consolidated Financial Statements |
|-----------------------|------------|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**A) Fair Value of Financial Assets and Liabilities**

 

The fair values of cash and cash equivalents, accounts receivable and accrued revenues, and accounts payable and accrued liabilities approximate their carrying amount due to the short-term maturity of those instruments.

 

The fair values of the Partnership Contribution Receivable and Partnership Contribution Payable, partner loans and long-term receivables approximate their carrying amount due to the specific non-tradeable nature of these instruments.

 

Risk management assets and liabilities are recorded at their estimated fair value based on mark-to-market accounting, using quoted market prices or, in their absence, third-party market indications and forecasts.

 

Long-term debt is carried at amortized cost. The estimated fair values of long-term borrowings have been determined based on prices sourced from market data.

** **
| ** **                                              | ** ** | **December 31, 2011** | ** ** | December 31, 2010 |       | January 1, 2010 |   |
|---------------------------------------------------------|------------|---------------------------------|------------|-----------------------------|------------|---------------------------|--------|
| As at                                              | ** ** | **Carrying********Amount**      | ** ** | **Fair********Value**       | ** ** | Carrying Amount           |   | Fair Value |   | Carrying Amount |   | Fair Value |   |
|                                                    |       |                            |       |                        |       |                      |   |   |   |   |   |   |   |
| **FINANCIAL ASSETS**                                    | ** ** | ** **                      | ** ** | ** **                  |       |                      |   |   | ** ** | ** ** |   |   |   |
| **Held-For-Trading:**                                   | ** ** | ** **                      | ** ** | ** **                  |       |                      |   |   | ** ** | ** ** |   |   |   |
| Risk   management assets                                | ** ** | **284**                         | ** ** | **284**                     |       | 206                       |   | 206 |   | 61 |   | 61 |   |
| **Loans and Receivables:**                              | ** ** | ** **                      | ** ** | ** **                  |       |                      |   |   |   |   |   |   |   |
| Cash   and cash equivalents                             | ** ** | **495**                         | ** ** | **495**                     |       | 300                       |   | 300 |   | 155 |   | 155 |   |
| Accounts   receivable and accrued liabilities           | ** ** | **1,405**                       | ** ** | **1,405**                   |       | 1,059                     |   | 1,059 |   | 982 |   | 982 |   |
| Partnership   contribution receivable                   | ** ** | **2,194**                       | ** ** | **2,194**                   |       | 2,491                     |   | 2,491 |   | 2,966 |   | 2,966 |   |
| Other                                                   | ** ** | **29**                          | ** ** | **29**                      |       | -                         |   | - |   | - |   | - |   |
|                                                    |       |                            |       |                        |       |                      |   |   |   |   |   |   |   |
| **FINANCIAL LIABILITIES**                               | ** ** | ** **                      | ** ** | ** **                  |       |                      |   |   |   |   |   |   |   |
| **Held-For-Trading:**                                   | ** ** | ** **                      | ** ** | ** **                  |       |                      |   |   |   |   |   |   |   |
| Risk   management liabilities                           | ** ** | **68**                          | ** ** | **68**                      |       | 173                       |   | 173 |   | 74 |   | 74 |   |
| **Financial Liabilities Measured   at Amortized Cost:** | ** ** | ** **                      | ** ** | ** **                  |       |                      |   |   |   |   |   |   |   |
| Accounts   payable and accrued liabilities              | ** ** | **2,579**                       | ** ** | **2,579**                   |       | 1,843                     |   | 1,843 |   | 1,605 |   | 1,605 |   |
| Short-term   borrowings                                 | ** ** | **-**                           | ** ** | **-**                       |       | -                         |   | - |   | - |   | - |   |
| Long-term   debt                                        | ** ** | **3,527**                       | ** ** | **4,316**                   |       | 3,432                     |   | 3,940 |   | 3,656 |   | 3,964 |   |
| Partnership   contribution payable                      | ** ** | **2,225**                       | ** ** | **2,225**                   |       | 2,519                     |   | 2,519 |   | 2,990 |   | 2,990 |   |
| Other                                                   | ** ** | **17**                          | ** ** | **17**                      |       | -                         |   | - |   | - |   | - |   |

 

**B) Risk Management Assets and Liabilities**

 

Under the terms of the Arrangement, the risk management positions at November 30, 2009 were allocated to Cenovus based upon Cenovus’s proportion of the related volumes covered by the contracts. To effect the allocation, Cenovus entered into a contract with Encana with the same terms and conditions as between Encana and the third parties to the existing contracts. All positions entered into after the Arrangement have been negotiated between Cenovus and third parties.

 

*Net Risk Management Position*

** **
| As at                                       | ** ** | **December 31,**

**2011** | ** ** | ** ** | December 31,

2010 |   |   | January 1,

2010 |   |
|--------------------------------------------------|------------|---------------------------------|------------|------------|-------------------------|--------|--------|-----------------------|--------|
|                                             |       |                            |       |       |                    |   |   |                  |   |
| **Risk Management Assets**                       | ** ** | ** **                      | ** ** | ** ** | ** **              |   |   |                  |   |
| Current   asset                                  | ** ** | **232**                         |       |       | 163                     |   |   | 60                    |   |
| Long-term   asset                                | ** ** | **52**                          |       |       | 43                      |   |   | 1                     |   |
|                                             | ** ** | **284**                         |       |       | 206                     |   |   | 61                    |   |
| **Risk Management Liabilities**                  | ** ** | ** **                      |       |       |                    |   |   |                  |   |
| Current   liability                              | ** ** | **54**                          |       |       | 163                     |   |   | 70                    |   |
| Long-term   liability                            | ** ** | **14**                          |       |       | 10                      |   |   | 4                     |   |
|                                             | ** ** | **68**                          |       |       | 173                     |   |   | 74                    |   |
| **Net Risk Management Asset   (Liability)****1** | ** ** | **216**                         |       |       | 33                      |   |   | (13                   | )      |

1. Of the $216 million net risk management asset balance at December 31, 2011, a liability of $3 million relates to the contract with Encana (2010 – net asset of $41 million).

 

 
| Cenovus   Energy Inc. | 48

  | Consolidated Financial Statements |
|-----------------------|------------|-----------------------------------|

 

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

*Summary of Unrealized Risk Management Positions*

 
|                   | ** ** | **December 31,   2011** |       | December 31, 2010 |       | January 1, 2010 |
|------------------------|------------|------------------------------|------------|------------------------|------------|----------------------|
|                   | ** ** | **Risk Management**          |       | Risk Management        |       | Risk Management      |
| As at                  | ** ** | **Asset**                    | ** ** | **Liability**          | ** ** | **Net**              |   | Asset |   | Liability |   | Net |   | Asset |   | Liability |   | Net |
|                   |       |                         |       |                   |       |                 |   |   |   |   |   |   |   |   |   |   |   |   |
| **Commodity   Prices** |       |                         |       |                   |       |                 |   |   |   |   |   |   | ** ** | ** ** |   |   |   |   |
| Crude Oil              | ** ** | **22**                       | ** ** | **65**                 | ** ** | **(43)**             |   | 4 |   | 159 |   | (155) |   | 8 |   | 66 |   | (58) |
| Natural Gas            | ** ** | **247**                      | ** ** | **3**                  | ** ** | **244**              |   | 202 |   | - |   | 202 |   | 53 |   | - |   | 53 |
| Power                  | ** ** | **15**                       | ** ** | **-**                  | ** ** | **15**               |   | - |   | 14 |   | (14) |   | - |   | 8 |   | (8) |
| **Total   Fair Value** | ** ** | **284**                      | ** ** | **68**                 | ** ** | **216**              |   | 206 |   | 173 |   | 33 |   | 61 |   | 74 |   | (13) |

 

*Net Fair Value Methodologies Used to Calculate Unrealized Risk Management**Positions*

 
| As at                                                         | ** ** | **December 31,   2011** |   | December 31,   2010 |   | January 1,   2010 |
|---------------------------------------------------------------|------------|------------------------------|--------|--------------------------|--------|------------------------|
|                                                          |       |                         |   |                     |   |                   |
| Prices actively quoted                                        | ** ** | **226**                      |   | 40                       |   | 6                      |
| Prices sourced from observable data   or market corroboration | ** ** | **(10)**                     |   | (7)                      |   | (19)                   |
| Total Fair Value                                              | ** ** | **216**                      |   | 33                       |   | (13)                   |

 

Prices actively quoted refers to the fair value of contracts valued using quoted prices in an active market. Prices sourced from observable data or market corroboration refers to the fair value of contracts valued in part using active quotes and in part using observable, market-corroborated data.

 

*Net Fair Value of Commodity Price Positions at December 31,**2011*

 
| As at   December 31, 2011    | ** ** | **Notional   Volumes** | ** ** | **Term**   | ** ** | **Average   Price** | ** ** | **Fair Value** |
|-----------------------------------|------------|------------------------|------------|------------|------------|---------------------|------------|----------------|
| ** **                        | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | ** **     |
| **Crude Oil Contracts**           | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          |       |           |
| Fixed Price   Contracts           |       |                   |       |       |       |                | ** ** | ** **     |
| WTI NYMEX   Fixed Price           |       | 24,800 bbls/d          |       | 2012       |       | US$98.72/bbl        | ** ** | **(1)**        |
| WTI NYMEX   Fixed Price           |       | 24,500 bbls/d          |       | 2012       |       | $99.47/bbl          | ** ** | **(12)**       |
| Other Fixed   Price Contracts 1   | ** ** | ** **             |       | 2012-2013  | ** ** | ** **          | ** ** | **(22)**       |
| ** **                        | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | ** **     |
| Other Financial   Positions 2     | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | **(8)**        |
| Crude Oil Fair   Value Position   | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | **(43)**       |
| ** **                        | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | ** **     |
| **Natural Gas Contracts**         | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | ** **     |
| Fixed Price   Contracts           | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | ** **     |
| NYMEX Fixed   Price               |       | 130 MMcf/d             |       | 2012       |       | US$5.96/Mcf         | ** ** | **131**        |
| AECO Fixed   Price 1              |       | 127 MMcf/d             |       | 2012       |       | $4.50/Mcf           | ** ** | **73**         |
| NYMEX Fixed   Price               |       | 166 MMcf/d             |       | 2013       |       | US$4.64/Mcf         | ** ** | **43**         |
| Other Fixed   Price Contracts 1   | ** ** | ** **             |       | 2012-2013  | ** ** | ** **          | ** ** | **(3)**        |
| Natural Gas Fair   Value Position | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | **244**        |
| ** **                        | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | ** **     |
| **Power Purchase Contracts**      | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | ** **     |
| Power Fair Value   Position       | ** ** | ** **             | ** ** | ** ** | ** ** | ** **          | ** ** | **15**         |

 

1.      Cenovus has entered into fixed price swaps to protect against widening price differentials between production areas in Canada, various sales points and quality differentials.

2.      Other financial positions are part of ongoing operations to market the Company’s production.

 

 
| Cenovus   Energy Inc. | 49

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

*Earnings Impact of Realized and Unrealized Gains (Losses) on Risk**Management Positions*

 
| For the years   ended December 31, | ** ** | **2011**   |   | 2010   |
|-----------------------------------------|------------|------------|--------|--------|
|                                    |       |       |   |   |
| **REALIZED GAIN (LOSS)****1**           |       |       |   |   |
| Crude Oil                               | ** ** | **(135)**  |   | (17)   |
| Natural Gas                             | ** ** | **210**    |   | 289    |
| Refining                                | ** ** | **(14)**   |   | 10     |
| Power                                   | ** ** | **7**      |   | (4)    |
|                                    | ** ** | **68**     |   | 278    |
|                                    |       |       |   |   |
| **UNREALIZED   GAIN (LOSS)****2**       | ** ** | ** ** |   |   |
| Crude Oil                               | ** ** | **106**    |   | (92)   |
| Natural Gas                             | ** ** | **38**     |   | 152    |
| Refining                                | ** ** | **7**      |   | (8)    |
| Power                                   | ** ** | **29**     |   | (6)    |
|                                    | ** ** | **180**    |   | 46     |
| **Gain (Loss) on Risk Management**      | ** ** | **248**    |   | 324    |

 

1. Realized gains and losses on risk management are recorded in the operating segment to which the derivative instrument relates.

2. Unrealized gains and losses on risk management are recorded in the Corporate and Eliminations segment.

 

*Reconciliation of Unrealized Risk Management Positions from January 1 to December 31,*

 
|                                                                                                         | ** ** | **2011**       | ** ** | 2010                                   |
|--------------------------------------------------------------------------------------------------------------|------------|----------------|------------|----------------------------------------|
|                                                                                                         | ** ** | **Fair Value** | ** ** | **Total****Unrealized****Gain (Loss)** | ** ** | **Total****Unrealized****Gain (Loss)** |
|                                                                                                         |       |           |       |                                   |   |   |
| Fair Value of Contracts, Beginning of Year                                                                   | ** ** | **33**         | ** ** | ** **                             |   |   |
| Change in fair value of contracts in place at beginning of   year and contracts entered into during the year | ** ** | **248**        | ** ** | **248**                                |   | 324 |
| Unrealized foreign exchange gain (loss) on U.S. dollar   contracts                                           | ** ** | **3**          | ** ** | **-**                                  |   | - |
| Fair value of contracts realized during the year                                                             | ** ** | **(68)**       | ** ** | **(68)**                               |   | (278) |
| Fair Value of Contracts, End of Year                                                                         | ** ** | **216**        | ** ** | **180**                                |   | 46 |

 

*Commodity Price Sensitivities – Risk Management Positions*

 

The following table summarizes the sensitivity of the fair value of Cenovus’s risk management positions to fluctuations in commodity prices, with all other variables held constant. Management believes the price fluctuations identified in the table below are a reasonable measure of volatility. Fluctuations in commodity prices could have resulted in unrealized gains (losses) impacting earnings before income tax as follows:

 

**Risk Management Positions in Place as at December 31, 2011**

 
| **Commodity**                  | ** ** | **Sensitivity   Range**                                                 | ** ** | **Increase**     | ** ** | **Decrease**      |
|--------------------------------|------------|-------------------------------------------------------------------------|------------|------------------|------------|-------------------|
|                           |       |                                                                    |       |             |       |              |
| Crude   oil commodity price    |       | ± US$10 per bbl applied to WTI hedges                              | ** ** | **(214)**        | ** ** | **214**** ** |
| Crude   oil differential price |       | ± US$5 per bbl applied to differential hedges tied to   production | ** ** | **67**** ** | ** ** | **(67)**          |
| Natural   gas commodity price  |       | ± $1 per mcf applied to NYMEX and AECO natural gas hedges          | ** ** | **(160)**        | ** ** | **160**** ** |
| Natural   gas basis price      |       | ± $0.10 per mcf natural gas basis hedges                           | ** ** | **2**** **  | ** ** | **(2)**           |
| Power   commodity price        |       | ± $25 per MWHr applied to power hedge                              | ** ** | **19**** ** | ** ** | **(19)**          |

 

**Risk Management Positions in Place as at December 31, 2010**

 
| **Commodity**                  | ** ** | **Sensitivity   Range**                                                 | ** ** | **Increase** | ** ** | **Decrease** |
|--------------------------------|------------|-------------------------------------------------------------------------|------------|--------------|------------|--------------|
|                           |       |                                                                    |       |         |       |         |
| Crude   oil commodity price    |       | ± US$10 per bbl applied to WTI hedges                              |       | (251)        |       | 251     |
| Crude   oil differential price |       | ± US$5 per bbl applied to differential hedges tied to   production |       | 7       |       | (7)          |
| Natural   gas commodity price  |       | ± $1 per mcf applied to NYMEX and AECO natural gas hedges          |       | (218)        |       | 218     |
| Natural   gas basis price      |       | ± $0.10 per mcf natural gas basis hedges                           |       | 2       |       | (2)          |
| Power   commodity price        |       | ± $25 per MWHr applied to power hedge                              |       | 38      |       | (38)         |

 

 
| Cenovus   Energy Inc. | 50

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**C) Risks Associated with Financial Assets and Liabilities**

 

*Commodity Price Risk*

 

Commodity price risk arises from the effect that fluctuations of future commodity prices may have on the fair value or future cash flows of financial assets and liabilities. To partially mitigate exposure to commodity price risk, the Company has entered into various financial derivative instruments. The use of these derivative instruments is governed under formal policies and is subject to limits established by the Board of Directors. The Company’s policy is not to use derivative instruments for speculative purposes.

 

Crude Oil – The Company has used fixed price swaps to partially mitigate its exposure to the commodity price risk on its crude oil sales and condensate supply used for blending. To help protect against widening crude oil price differentials, Cenovus has entered into a limited number of swaps and futures to manage the price differentials.

 

Natural Gas – To partially mitigate the natural gas commodity price risk, the Company has entered into swaps, which fix the NYMEX and AECO prices. To help protect against widening natural gas price differentials in various production areas, Cenovus has entered into a limited number of swaps to manage the price differentials between these production areas and various sales points.

 

Power – The Company has in place a Canadian dollar denominated derivative contract, which commenced January 1, 2007 for a period of 11 years, to manage a portion of its electricity consumption costs.

 

*Credit Risk*

 

Credit risk arises from the potential that the Company may incur a loss if a counterparty to a financial instrument fails to meet its obligation in accordance with agreed terms. This credit risk exposure is mitigated through the use of Board-approved credit policies governing the Company’s credit portfolio and with credit practices that limit transactions according to counterparties’ credit quality. Agreements are entered into with major financial institutions with investment grade credit ratings or with counterparties having investment grade credit ratings. A substantial portion of Cenovus’s accounts receivable are with customers in the oil and gas industry and are subject to normal industry credit risks. As at December 31, 2011, over 92 percent (2010 – 92 percent) of Cenovus’s accounts receivable and financial derivative credit exposures are with investment grade counterparties.

 

At December 31, 2011, Cenovus had two counterparties whose net settlement position individually account for more than 10 percent (2010 – two counterparties) of the fair value of the outstanding in-the-money net financial and physical contracts by counterparty. The maximum credit risk exposure associated with accounts receivable and accrued revenues, risk management assets, Partnership Contribution Receivable, partner loans receivable, and long-term receivables is the total carrying value. The current concentration of this credit risk resides with A rated or higher counterparties. Cenovus’s exposure to its counterparties is acceptable and within Credit Policy tolerances.

 

*Liquidity Risk*

 

Liquidity risk is the risk that Cenovus will not be able to meet all of its financial obligations as they become due. Liquidity risk also includes the risk of not being able to liquidate assets in a timely manner at a reasonable price. Cenovus manages its liquidity risk through the active management of cash and debt and by maintaining appropriate access to credit. As disclosed in Note 30, Cenovus targets a Debt to Capitalization ratio between 30 and 40 percent and a Debt to Adjusted EBITDA of between 1.0 to 2.0 times to manage the Company’s overall debt position. It is Cenovus’s intention to maintain investment grade credit ratings on its senior unsecured debt.

 

Cenovus manages its liquidity risk by ensuring that it has access to multiple sources of capital including: cash and cash equivalents, cash from operating activities, undrawn credit facilities, commercial paper and availability under its shelf prospectuses. At December 31, 2011, Cenovus’s committed credit facility was fully available. In addition, Cenovus had in place a Canadian debt shelf prospectus for $1,500 million and a U.S. debt shelf prospectus for US$1,500 million, the availability of which are dependent on market conditions. No notes have been issued under either prospectus.

 

 
| Cenovus   Energy Inc. | 51

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

Undiscounted cash outflows relating to financial liabilities are outlined in the table below:

** **
| **2011**                                               |       | Less than 1 Year |       | 1-3 Years  |       | 4-5 Years  |       | Thereafter | ** ** | **Total**  |
|--------------------------------------------------------|------------|------------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                             | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts   Payable and Accrued Liabilities             |       | 2,579            |       | -          |       | -          |       | -          | ** ** | **2,579**  |
| Risk   Management Liabilities                          |       | 54               |       | 14         |       | -          |       | -          | ** ** | **68**     |
| Long-Term   Debt 1                                     |       | 208              |       | 1,230      |       | 343        |       | 5,182      | ** ** | **6,963**  |
| Partnership   Contribution Payable 1                   |       | 497              |       | 994        |       | 994        |       | 125        | ** ** | **2,610**  |
| Other   1                                              |       | 3                |       | 10         |       | 3          |       | 4          | ** ** | **20**     |
| ** **                                             |       |             |       |       |       |       |       |       | ** ** | ** ** |
| 1.Principal   and interest, including current portion. |       |             |       |       |       |       |       |       | ** ** | ** ** |
| ** **                                             |       |             |       |       |       |       |       |       | ** ** | ** ** |
| **2010**                                               |       | Less than 1 Year |       | 1-3 Years  |       | 4-5 Years  |       | Thereafter | ** ** | **Total**  |
| ** **                                             | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accounts   Payable and Accrued Liabilities             |       | 1,843            |       | -          |       | -          |       | -          |       | 1,843      |
| Risk   Management Liabilities                          |       | 163              |       | 10         |       | -          |       | -          |       | 173        |
| Long-Term   Debt 1                                     |       | 203              |       | 407        |       | 1,167      |       | 5,236      |       | 7,013      |
| Partnership   Contribution Payable 1                   |       | 486              |       | 972        |       | 972        |       | 609        |       | 3,039      |
| Partner   Loans Payable                                |       | -                |       | 274        |       | -          |       | -          |       | 274        |

 

1.Principal and interest, including current portion.

 

*Foreign Exchange Risk*

 

Foreign exchange risk arises from changes in foreign exchange rates that may affect the fair value or future cash flows of Cenovus’s financial assets or liabilities. As Cenovus operates in North America, fluctuations in the exchange rate between the U.S./Canadian dollars can have a significant effect on reported results.

 

As disclosed in Note 7, Cenovus’s foreign exchange (gain) loss primarily includes unrealized foreign exchange gains and losses on the translation of the U.S. dollar debt issued from Canada and the translation of the U.S. dollar Partnership Contribution Receivable issued from Canada. At December 31, 2011, Cenovus had US$3,500 million in U.S. dollar debt issued from Canada (US$3,500 million at December 31, 2010) and US$2,157 million related to the U.S. dollar Partnership Contribution Receivable (US$2,505 million at December 31, 2010). A $0.01 change in the U.S. to Canadian dollar exchange rate would have resulted in a $13 million change in foreign exchange (gain) loss at December 31, 2011 (2010 – $10 million).

 

*Interest Rate Risk*

 

Interest rate risk arises from changes in market interest rates that may affect the earnings, cash flows and valuations. Cenovus has the flexibility to partially mitigate its exposure to interest rate changes by maintaining a mix of both fixed and floating rate debt.

 

At December 31, 2011, the increase or decrease in net earnings for a one percentage point change in interest rates on floating rate debt amounts to $nil (2010 – $nil). This assumes the amount of fixed and floating debt remains unchanged from the respective balance sheet dates.

 

 

**32. SUPPLEMENTARY INFORMATION**

 

**Supplementary Cash Flow Information**

** **
| For the years   ended December 31, | ** ** | **2011** |   | 2010   |
|-----------------------------------------|------------|----------|--------|--------|
|                                    |       |     |   |   |
| Interest   Paid                         | ** ** | **357**  |   | 423    |
| Income   Taxes Paid                     | ** ** | **-**    |   | 62     |

 

 
| Cenovus   Energy Inc. | 52

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**33. COMMITMENTS AND CONTINGENCIES**

 

**A) Commitments**

 

As part of normal operations, the Company has committed to certain amounts over the next five years and thereafter as follows:

 
| **2011**                                                                                                                    |       | 1 Year     |       | 2 Years    |       | 3 Years    |       | 4 Years    |       | 5 Years    |       | Thereafter | ** ** | **Total**  |
|-----------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| ** **                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pipeline   Transportation 1                                                                                                 |       | 143        |       | 137        |       | 187        |       | 311        |       | 347        |       | 2,754      | ** ** | **3,879**  |
| Operating Leases   (Building Leases)                                                                                        |       | 71         |       | 93         |       | 85         |       | 80         |       | 80         |       | 1,491      | ** ** | **1,900**  |
| Product Purchases                                                                                                           |       | 19         |       | 18         |       | 19         |       | 19         |       | 6          |       | -          | ** ** | **81**     |
| Capital Commitments   2                                                                                                     |       | 366        |       | 98         |       | 40         |       | 23         |       | 22         |       | 20         | ** ** | **569**    |
| Other Long-Term   Commitments                                                                                               |       | 5          |       | 4          |       | 1          |       | 1          |       | -          |       | 1          | ** ** | **12**     |
| Total Payments3                                                                                                             |       | 604        |       | 350        |       | 332        |       | 434        |       | 455        |       | 4,266      | ** ** | **6,441**  |
| Product Sales                                                                                                               |       | 52         |       | 54         |       | 56         |       | 57         |       | 60         |       | 3          | ** ** | **282**    |
| 1.Certain   transportation commitments included are subject to regulatory approval.                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 2. Includes those commitments related   to jointly controlled entities.                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 3. Contracts undertaken by the Company on behalf of FCCL   Partnership are reflected at Cenovus’s 50 percent interest. | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **2010**                                                                                                                    |       | 1 Year     |       | 2 Years    |       | 3 Years    |       | 4 Years    |       | 5 Years    |       | Thereafter | ** ** | **Total**  |
| ** **                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Pipeline   Transportation 1                                                                                                 |       | 107        |       | 93         |       | 167        |       | 167        |       | 166        |       | 953        |       | 1,653      |
| Operating Leases   (Building Leases)                                                                                        |       | 33         |       | 87         |       | 88         |       | 85         |       | 78         |       | 1,553      |       | 1,924      |
| Product Purchases                                                                                                           |       | 23         |       | 18         |       | 18         |       | 18         |       | 18         |       | 7          |       | 102        |
| Capital Commitments   2                                                                                                     |       | 248        |       | 94         |       | 16         |       | 14         |       | 11         |       | 37         |       | 420        |
| Other Long-Term   Commitments                                                                                               |       | 4          |       | 2          |       | 1          |       | 1          |       | -          |       | 1          |       | 9          |
| Total Payments 3                                                                                                            |       | 415        |       | 294        |       | 290        |       | 285        |       | 273        |       | 2,551      |       | 4,108      |
| Product Sales                                                                                                               |       | 50         |       | 52         |       | 54         |       | 56         |       | 57         |       | 63         |       | 332        |

1.Certain transportation commitments included are subject to regulatory approval.

2. Includes those commitments related to jointly controlled entities.

3. Contracts undertaken by the Company on behalf of FCCL Partnership are reflected at Cenovus’s 50 percent interest.

 

At December 31, 2011, there were outstanding letters of credit aggregating $17 million issued as security for performance under certain contracts (2010 – $23 million).

 

In addition to the above, Cenovus’s commitments related to its risk management program are disclosed in Note 31.

 

**B) Contingencies**

 

*Legal Proceedings*

 

Cenovus is involved in a limited number of legal claims associated with the normal course of operations. Cenovus believes it has made adequate provisions for such legal claims. There are no individually or collectively significant claims.

 

*Decommissioning Liabilities*

 

Cenovus is responsible for the retirement of long-lived assets related to its oil and gas properties, refining facilities and midstream facilities at the end of their useful lives. Cenovus has recognized a liability of $1,777 million based on current legislation and estimated costs. Actual costs may differ from those estimated due to changes in legislation and changes in costs.

 

*Income Tax Matters*

 

The tax regulations and legislation and interpretations thereof in the various jurisdictions in which Cenovus operates are continually changing. As a result, there are usually a number of tax matters under review. Management believes that the provision for taxes is adequate.

 

 
| Cenovus   Energy Inc. | 53

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

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Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**34. FIRST TIME ADOPTION OF IFRS**

 

**Transition to IFRS**

 

These Consolidated Financial Statements for the year ended December 31, 2011 represent the Company’s first annual consolidated financial statements prepared in accordance with IFRS, which are also generally accepted accounting principles for publicly accountable enterprises in Canada. The Company adopted IFRS in accordance with IFRS 1, “First-time Adoption of International Financial Reporting Standards” and has prepared its Consolidated Financial Statements with IFRS applicable for periods beginning on or after January 1, 2010, using significant accounting policies as described in Note 3. For all periods up to and including the year ended December 31, 2010, the Company prepared its Consolidated Financial Statements in accordance with Canadian generally accepted accounting principles (“previous GAAP”). As allowed by IFRS 1, the Company has chosen not to include the comparative financial information for the year ended December 31, 2009. This note explains the principal adjustments made by the Company to restate its previous GAAP Consolidated Financial Statements on transition to IFRS.

 

**Exemptions Applied under IFRS 1**

 

On first-time adoption of IFRS, the general principle is that an entity retrospectively restates its results for all standards in force at the first reporting date. However, IFRS 1 provides certain exemptions from the general requirements of IFRS to assist with the transition process. Cenovus has applied the following exemptions in the preparation of its opening Balance Sheet dated January 1, 2010 (the “Transition Date”):

 

·                  **Fair Value as Deemed Cost******– The Company has elected to measure its Refining assets at their fair values at the Transition Date and use those fair values as their deemed cost at that date (Note A).

 

·                  **Deemed Cost Election for Oil and Gas Assets**– Under previous GAAP, Cenovus accounted for its oil and gas properties in one cost centre using full cost accounting. The Company has elected to measure its oil and gas properties at the Transition Date on the following basis:

 

a)              exploration and evaluation assets at the amount determined under the Company’s previous GAAP; and

 

b)              the remainder allocated to the underlying property, plant and equipment assets on a pro rata basis using proved reserve values discounted at 10 percent at the Transition Date (Note B).

 

·                  **Leases******– Cenovus has elected to assess lease arrangements using the facts and circumstances as of the Transition Date under International Financial Reporting Interpretations Committee Interpretation 4,*“Determining whether an Arrangement contains a Lease”* (“IFRIC 4”).

 

·                  **Employee Benefits******– The Company has elected not to apply IAS 19, *“Employee Benefits”* retrospectively and as such all cumulative actuarial gains and losses on the Company’s defined benefit plans were recognized at the Transition Date (Note F).

 

·                  **Business Combinations******– IFRS 3, *“Business Combinations”* has not been applied to business combinations that occurred before the Transition Date.

 

·                  **Cumulative Currency Translation Differences******– Cumulative currency translation differences for all foreign operations are deemed to be zero at the Transition Date (Note J).

 

·                  **Decommissioning Liabilities******– Cenovus applied the deemed cost election for oil and gas assets under IFRS 1 and as such****decommissioning liabilities at the date of transition have been measured in accordance with IAS 37, *“Provisions, Contingent Liabilities and Contingent Assets”* (Note D).

 

·                  **Borrowing Costs******– In accordance with IFRS 1, the Company has elected to apply IAS 23, *“Borrowing Costs”* to qualifying assets for which the commencement date for capitalization of borrowing costs occurred on or after the Transition Date. Borrowing costs have not been capitalized on qualifying assets under construction on or before the Transition Date.

 

·                  **Estimates******– Hindsight was not used to create or revise estimates and accordingly, the estimates made by the Company under previous GAAP are consistent with their application under IFRS.

 

 
| Cenovus   Energy Inc. | 54

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

Under IFRS 1, the opening Balance Sheet adjustments are recorded directly to retained earnings, or if appropriate, another category of equity. As Cenovus’s paid in surplus reflects the Company’s retained earnings prior to the split of Encana into two independent energy companies, Encana and Cenovus, all opening Balance Sheet adjustments have been recorded to paid in surplus. The impacts of applying the above noted IFRS 1 exemptions and the accounting policy differences between previous GAAP and IFRS are summarized in the following tables:

 

**Reconciliation of Statement of Earnings and Comprehensive Income**

For the year ended December 31, 2010

 
|                                              |       | Notes      |       | Previous GAAP  |       | Adjustments |       | **IFRS**   |
|---------------------------------------------------|------------|------------|------------|---------------------|------------|-------------|------------|------------|
|                                              |       |       |       |                |       |        |       |       |
| **Revenues**                                      |       |       |       |                | ** ** |        |       |       |
| Gross Sales                                       |       | K          |       | 13,422              | ** ** | (332)       |       | **13,090** |
| Less: Royalties                                   |       |       |       | 449                 | ** ** | -           |       | **449**    |
|                                              |       |       |       | 12,973              |       | (332)       |       | **12,641** |
| **Expenses**                                      |       |       |       |                |       |        |       | ** ** |
| Purchased product                                 |       | K          |       | 7,549               |       | 2           |       | **7,551**  |
| Transportation and blending                       |       |       |       | 1,065               |       | -           |       | **1,065**  |
| Operating                                         |       | E,F,K      |       | 1,302               |       | (16)        |       | **1,286**  |
| Production and mineral taxes                      |       |       |       | 34                  |       | -           |       | **34**     |
| (Gain) loss on risk management                    |       | K          |       | -                   |       | (324)       |       | **(324)**  |
| Depreciation, depletion and amortization          |       | A,B,C      |       | 1,310               |       | (8)         |       | **1,302**  |
| Exploration expense                               |       | H          |       | -                   |       | 3           |       | **3**      |
| General and administrative                        |       | E,F        |       | 251                 |       | (5)         |       | **246**    |
| Finance costs                                     |       | K          |       | -                   |       | 498         |       | **498**    |
| Interest, net                                     |       | K          |       | 279                 |       | (279)       |       | **-**      |
| Interest income                                   |       | K          |       | -                   |       | (144)       |       | **(144)**  |
| Accretion of asset retirement obligation          |       | K          |       | 75                  |       | (75)        |       | **-**      |
| Foreign exchange (gain) loss, net                 |       |       |       | (51)                |       | -           |       | **(51)**   |
| (Gain) loss on divestiture of assets              |       | G          |       | 9                   |       | (125)       |       | **(116)**  |
| Other (income) loss, net                          |       |       |       | (13)                |       | -           |       | **(13)**   |
| **Earnings Before Income Tax**                    |       |       |       | 1,163               |       | 141         |       | **1,304**  |
| Income tax expense                                |       | I          |       | 170                 |       | 53          |       | **223**    |
| **Net Earnings**                                  |       |       |       | 993                 |       | 88          |       | **1,081**  |
| **Other Comprehensive Income (Loss), Net of Tax** |       |       |       |                |       |        |       | ** ** |
| Foreign currency translation   adjustment         |       | J          |       | (13)                |       | 84          |       | **71**     |
| **Comprehensive Income (Loss)**                   |       |       |       | 980                 |       | 172         |       | **1,152**  |
| ** **                                        | ** ** | ** ** | ** ** | ** **          | ** ** | ** **  | ** ** | ** ** |
| **Net Earnings per Common Share**                 |       |       |       |                |       |        |       | ** ** |
| Basic                                             |       | L          |       | 1.32                |       | 0.12        |       | **1.44**   |
| Diluted                                           |       | L          |       | 1.32                |       | 0.11        |       | **1.43**   |

 

 
| Cenovus   Energy Inc. | 55

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**Reconciliation of the Balance Sheet**

As at

 
|                                                   |       |                    | ** ** | **December   31, 2010** | ** ** | **January   1, 2010** |
|--------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|-----------------------|
|                                                   |       | Notes                   |       | Previous GAAP           |       | Adjustments      | ** ** | **IFRS** |   | Previous GAAP |   | Adjustments | ** ** | **IFRS** |
| ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Assets**                                             |       |                    | * *   | * *                |       |                  | ** ** | ** ** |   |   |   |   | ** ** | ** ** |
| **Current Assets**                                     |       |                    | * *   | * *                |       |                  | ** ** | ** ** |   |   |   |   | ** ** | ** ** |
| Cash and cash equivalents                              |       |                    |       | 300                     |       | -                     | ** ** | **300** |   | 155 |   | - | ** ** | **155** |
| Accounts receivable and accrued revenues               |       | E                       |       | 1,055                   |       | 4                     | ** ** | **1,059** |   | 978 |   | 4 | ** ** | **982** |
| Income tax receivable                                  |       |                    |       | 31                      |       | -                     | ** ** | **31** |   | 40 |   | - | ** ** | **40** |
| Current portion of Partnership Contribution Receivable |       |                    |       | 346                     |       | -                     | ** ** | **346** |   | 345 |   | - | ** ** | **345** |
| Inventories                                            |       |                    |       | 880                     |       | -                     | ** ** | **880** |   | 875 |   | - | ** ** | **875** |
| Risk management                                        |       |                    |       | 163                     |       | -                     | ** ** | **163** |   | 60 |   | - | ** ** | **60** |
| Assets held for sale                                   |       | K                       |       | -                       |       | 65                    | ** ** | **65** |   | - |   | - | ** ** | **-** |
| **Current Assets**                                     |       |                    |       | 2,775                   |       | 69                    | ** ** | **2,844** |   | 2,453 |   | 4 | ** ** | **2,457** |
| Assets Held for Sale                                   |       | K                       |       | 65                      |       | (65)                  | ** ** | **-** |   | - |   | - | ** ** | **-** |
| Exploration and Evaluation Assets                      |       | K                       |       | -                       |       | 713                   | ** ** | **713** |   | - |   | 580 | ** ** | **580** |
| Property, Plant and Equipment, net                     |       | A,B,D,   E,F,G,   H,J,K |       | 15,530                  |       | (2,903)               | ** ** | **12,627** |   | 15,214 |   | (3,165) | ** ** | **12,049** |
| Partnership Contribution Receivable                    |       |                    |       | 2,145                   |       | -                     | ** ** | **2,145** |   | 2,621 |   | - | ** ** | **2,621** |
| Risk Management                                        |       |                    |       | 43                      |       | -                     | ** ** | **43** |   | 1 |   | - | ** ** | **1** |
| Other Assets                                           |       | C,F,J                   |       | 391                     |       | (110)                 | ** ** | **281** |   | 320 |   | (128) | ** ** | **192** |
| Deferred Income Tax                                    |       | K                       |       | -                       |       | 55                    | ** ** | **55** |   | - |   | 3 | ** ** | **3** |
| Goodwill                                               |       | G                       |       | 1,146                   |       | (14)                  | ** ** | **1,132** |   | 1,146 |   | - | ** ** | **1,146** |
| **Total Assets**                                       |       |                    |       | 22,095                  |       | (2,255)               | ** ** | **19,840** |   | 21,755 |   | (2,706) | ** ** | **19,049** |
| ** **                                             | ** ** | ** **              | ** ** | ** **              | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Liabilities and Shareholders’ Equity**          |       |                    |       |                    |       |                  | ** ** | ** ** |   |   |   |   | ** ** | ** ** |
| **Current   Liabilities**                              |       |                    |       |                    |       |                  | ** ** | ** ** |   |   |   |   | ** ** | ** ** |
| Accounts payable and accrued liabilities               |       | E                       |       | 1,825                   |       | 18                    | ** ** | **1,843** |   | 1,574 |   | 31 | ** ** | **1,605** |
| Income tax payable                                     |       |                    |       | 154                     |       | -                     | ** ** | **154** |   | - |   | - | ** ** | **-** |
| Current portion of Partnership Contribution Payable    |       |                    |       | 343                     |       | -                     | ** ** | **343** |   | 340 |   | - | ** ** | **340** |
| Risk management                                        |       |                    |       | 163                     |       | -                     | ** ** | **163** |   | 70 |   | - | ** ** | **70** |
| Liabilities related to assets held for sale            |       | K                       |       | -                       |       | 7                     | ** ** | **7** |   | - |   | - | ** ** | **-** |
| **Current   Liabilities**                              |       |                    |       | 2,485                   |       | 25                    | ** ** | **2,510** |   | 1,984 |   | 31 | ** ** | **2,015** |
| Liabilities Related to Assets Held for Sale            |       | K                       |       | 7                       |       | (7)                   | ** ** | **-** |   | - |   | - | ** ** | **-** |
| Long-Term Debt                                         |       |                    |       | 3,432                   |       | -                     | ** ** | **3,432** |   | 3,656 |   | - | ** ** | **3,656** |
| Partnership Contribution Payable                       |       |                    |       | 2,176                   |       | -                     | ** ** | **2,176** |   | 2,650 |   | - | ** ** | **2,650** |
| Risk Management                                        |       |                    |       | 10                      |       | -                     | ** ** | **10** |   | 4 |   | - | ** ** | **4** |
| Decommissioning Liabilities                            |       | D,G                     |       | 1,213                   |       | 186                   | ** ** | **1,399** |   | 1,147 |   | 38 | ** ** | **1,185** |
| Other Liabilities                                      |       | F                       |       | 346                     |       | -                     | ** ** | **346** |   | 239 |   | 7 | ** ** | **246** |
| Deferred Income Tax                                    |       | I,J,K                   |       | 2,404                   |       | (832)                 | ** ** | **1,572** |   | 2,467 |   | (983) | ** ** | **1,484** |
| **Total Liabilities**                                  |       |                    |       | 12,073                  |       | (628)                 | ** ** | **11,445** |   | 12,147 |   | (907) | ** ** | **11,240** |
| Share Capital                                          |       |                    |       | 3,716                   |       | -                     | ** ** | **3,716** |   | 3,681 |   | - | ** ** | **3,681** |
| Paid in Surplus                                        |       | A,C,D,   E,F,I,J        |       | 5,896                   |       | (1,813)               | ** ** | **4,083** |   | 5,896 |   | (1,813) | ** ** | **4,083** |
| Accumulated Other Comprehensive Income (Loss)          |       | J                       |       | (27)                    |       | 98                    | ** ** | **71** |   | (14) |   | 14 | ** ** | **-** |
| Retained Earnings                                      |       |                    |       | 437                     |       | 88                    | ** ** | **525** |   | 45 |   | - | ** ** | **45** |
| Shareholders’ Equity                              |       |                    |       | 10,022                  |       | (1,627)               | ** ** | **8,395** |   | 9,608 |   | (1,799) | ** ** | **7,809** |
| **Total Liabilities and Shareholders’ Equity**    |       |                    |       | 22,095                  |       | (2,255)               | ** ** | **19,840** |   | 21,755 |   | (2,706) | ** ** | **19,049** |

 

 
| Cenovus   Energy Inc. | 56

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

----

Table of Contents

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**Reconciliation of the Statement of Cash Flows**

For the year ended December 31, 2010

 

 
|                                                                                     |         | Notes        |         | Previous GAAP |         | Adjustments | ** **   | **IFRS**     |
|------------------------------------------------------------------------------------------|--------------|--------------|--------------|---------------|--------------|-------------|--------------|--------------|
|                                                                                     |         |         |         |          |         |        |         |         |
| **Operating Activities**                                                                 |         |         |         |          |         |        |         |         |
| Net earnings                                                                             |         |         |         | 993           |         | 88          | ** **   | **1,081**    |
| Depreciation, depletion and amortization                                                 |         | A,B,C        |         | 1,310         |         | (8)         | ** **   | **1,302**    |
| Deferred income taxes                                                                    |         | I            |         | 88            |         | 53          | ** **   | **141**      |
| Unrealized (gain) loss on risk management                                                | * *     | * *     |         | (46)          |         | -           | ** **   | **(46)**     |
| Unrealized foreign exchange (gain) loss                                                  |         |         |         | (69)          |         | -           | ** **   | **(69)**     |
| (Gain) loss on divestitures of assets                                                    |         | G            |         | 9             |         | (125)       | ** **   | **(116)**    |
| Unwinding of discount on decommissioning liabilities                                     |         |         |         | 75            |         | -           | ** **   | **75**       |
| Other                                                                                    |         |         |         | 55            |         | (11)        | ** **   | **44**       |
|                                                                                     |         |         |         | 2,415         |         | (3)         | ** **   | **2,412**    |
| Net change in other assets and liabilities                                               |         |         |         | (55)          |         | -           | ** **   | **(55)**     |
| Net change in non-cash working capital                                                   |         |         |         | 234           |         | -           | ** **   | **234**      |
| **Cash From Operating   Activities**                                                     |         |         |         | 2,594         |         | (3)         | ** **   | **2,591**    |
| ** **                                                                               | ** **   | ** **   | ** **   | ** **    | ** **   | ** **  | ** **   | ** **   |
| **Investing Activities**                                                                 |         |         |         |          |         |        | ** **   | ** **   |
| Capital expenditures – exploration and evaluation assets                            |         |         |         | -             |         | (350)       | ** **   | **(350)**    |
| Capital expenditures – property, plant and equipment                                | * *     | * *     |         | (2,208)       |         | 357         | ** **   | **(1,851)**  |
| Proceeds from divestitures of assets                                                     |         |         |         | 309           |         | -           | ** **   | **309**      |
| Net change in investments and other                                                      |         |         |         | 4             |         | -           | ** **   | **4**        |
| Net change in non-cash working capital                                                   |         | E            |         | 99            |         | (4)         | ** **   | **95**       |
| **Cash From (Used   in) Investing Activities**                                           |         |         |         | (1,796)       |         | 3           | ** **   | **(1,793)**  |
| ** **                                                                               | ** **   | ** **   | ** **   | ** **    | ** **   | ** **  | ** **   | ** **   |
| **Net Cash Provided (Used) before Financing Activities**                                 |         |         |         | 798           |         | -           | ** **   | **798**      |
| ** **                                                                               | ** **   | ** **   | ** **   | ** **    | ** **   |        | ** **   | ** **   |
| **Cash From (Used in) Financing Activities**                                             |         |         |         | (631)         |         | -           | ** **   | **(631)**    |
| *** ***                                                                             | *** *** | *** *** | *** *** | *** ***  | *** *** |        | *** *** | *** *** |
| **Foreign Exchange Gain (Loss) on Cash and Cash   Equivalents Held in Foreign Currency** |         |         |         | (22)          | * *     | -           | ** **   | **(22)**     |
| **Increase (Decrease) in Cash and Cash   Equivalents**                                   |         |         |         | 145           |         | -           | ** **   | **145**      |
| **Cash and Cash Equivalents, Beginning of Year**                                         |         |         |         | 155           |         | -           | ** **   | **155**      |
| **Cash and Cash Equivalents, End of Year**                                               |         |         |         | 300           |         | -           | ** **   | **300**      |

 

**Notes:**

 

**A)    Refining Property, Plant and Equipment**

 

At January 1, 2010, Cenovus elected to measure its refining assets at fair value and to use that fair value as its deemed cost on transition to IFRS. The fair value of the refining assets was determined to be US$4,543 million, US$2,272 million net to Cenovus, which resulted in the carrying value of the refining assets exceeding the fair value. Cenovus’s carrying value of property, plant and equipment was reduced by C$2,585 million at the Transition Date with a corresponding reduction in paid in surplus.

 

In December 2010, it was determined that a processing unit at the Borger Refinery was a redundant asset and would not be used in future operations at the refinery. The fair value of the unit was determined to be negligible based on market prices for refining assets of similar age and condition. Accordingly, under previous GAAP, an impairment of $37 million was recorded. Under IFRS, the impairment was only $14 million due to the IFRS 1 election noted above to use the fair value as deemed cost. Therefore DD&A expense under IFRS was reduced by $23 million.

 

The lower carrying value under IFRS and the impairment adjustment noted above resulted in lower DD&A expense of $126 million for the year ended December 31, 2010.

 

 
| Cenovus   Energy Inc. | 57

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**B)    Oil and Gas Property, Plant and Equipment**

 

Under previous GAAP, costs accumulated within each cost centre for oil and gas properties were depleted using the unit-of-production method based on estimated proved reserves determined using estimated future prices and costs on a country-by-country cost centre basis (full cost accounting). Under IFRS, costs accumulated within each area are depleted using the unit-of-production method based on estimated proved reserves determined using estimated future prices and costs on an area-by-area basis. This resulted in an increase of $135 million in DD&A expense for the year ended December 31, 2010.

 

**C)    Impairment of Deferred Asset**

 

Under previous GAAP, other assets included a deferred asset, which represented the disproportionate interest received in 2007 and 2008 (15 percent in 2007 and 35 percent in 2008) that arose from the acquisition of the Borger Refinery in 2007. On transition to IFRS, it was determined that as a result of the reduction in the carrying value of the refineries due to the fair value election, the deferred asset was impaired and therefore was written off. Paid in surplus was decreased by the carrying value of the asset under previous GAAP of $121 million. Under previous GAAP, the deferred asset was being amortized over 10 years. As such, DD&A expense under IFRS decreased by $17 million for the year ended December 31, 2010.

 

**D)    Decommissioning Liabilities**

 

As discussed above, the Company elected to apply the exemption to measure decommissioning liabilities at the Transition Date in accordance with IAS 37. As such, the Company re-measured the decommissioning liabilities as at the Transition Date using the period end credit-adjusted risk-free discount rate and recognized an increase of $38 million to the decommissioning liability.

 

Consistent with IFRS, decommissioning liabilities under previous GAAP were measured based on the estimated costs of decommissioning, discounted to their net present value upon initial recognition. However, under IFRS, estimated cash flows are discounted using the credit-adjusted risk-free rate that exists at the balance sheet date. As at December 31, 2010, property, plant and equipment and the decommissioning liability increased $154 million under IFRS. There was minimal impact to the unwinding of the discount for the year ended December 31, 2010.

 

**E)     Stock-Based Compensation**

 

Under previous GAAP, obligations for payments under Cenovus’s stock option plan (with associated tandem stock appreciation rights) were accrued for using the intrinsic method. Under IFRS, these obligations are accrued for using the fair value method. As a result of the re-measurement of the liability as at January 1, 2010 a charge of $27 million was recognized in paid in surplus with an increase to accounts payable and accrued liabilities of $31 million and an increase to accounts receivable and accrued revenue of $4 million. For the year ended December 31, 2010, due to the differences in the measurement basis under IFRS, operating and general and administrative expense decreased $5 million and $4 million, respectively, property, plant and equipment decreased $4 million and accounts payable and accrued liabilities decreased $13 million.

 

**F)     Employee Benefits**

 

Cenovus elected under IFRS 1 to recognize all unamortized actuarial gains and losses on the defined benefit pension and other post-employment benefits plans at the Transition Date resulting, in a $7 million increase to other liabilities, a $7 million decrease to other assets and a $14 million charge to paid in surplus. Under previous GAAP, the actuarial losses continued to be amortized and, as such, for the year ended December 31, 2010, both operating and general and administrative expense decreased by $1 million. In addition, due to the recognition of all unamortized actuarial gains and losses at the Transition date, it was necessary to reclassify the pension asset to a pension liability resulting in a reclassification from other assets to other liabilities of $4 million at December 31, 2010.

 

**G)    Gains/Losses on Divestiture of Assets**

 

Under previous GAAP, proceeds on the divestiture of oil and gas properties were credited to the full cost pool and no gain or loss was recognized unless the effect of the sale would have changed the DD&A rate by 20 percent or more. Under IFRS, all gains and losses are recognized on oil and gas property divestitures and calculated as the difference between net proceeds and the carrying value of the net assets disposed. Accordingly, a gain of $125 million was recognized for the year ended December 31, 2010 under IFRS. At December 31, 2010 the carrying value of property, plant and equipment increased $133 million and goodwill and decommissioning liabilities were reduced by $14 million and $6 million, respectively.

 

 
| Cenovus   Energy Inc. | 58

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

**H)****            ****Pre-Exploration Expense**

 

Under IFRS, costs incurred prior to obtaining the legal right to explore must be expensed whereas under previous GAAP these costs were capitalized in the full cost pool. For the year ended December 31, 2010, $3 million of pre-exploration costs were expensed under IFRS. The accounting policy difference has resulted in a $3 million decrease to property, plant and equipment and a corresponding increase in exploration expense. This adjustment has decreased cash from operating activities by $3 million and increased cash from investing activities by a corresponding amount for the year ended December 31, 2010.

 

**I) Deferred Income Taxes**

 

The increase in paid in surplus of $986 million at the Transition Date related to deferred income taxes reflects the change in temporary differences resulting from the IFRS 1 exemptions applied. For the year ended December 31, 2010 deferred income tax increased by $53 million to reflect the changes in temporary differences resulting from the IFRS adjustments described above and a $9 million adjustment to recognize the deferred tax benefit on an intercompany transfer of oil and gas properties.

 

**J) Currency Translation Adjustments**

 

In accordance with IFRS 1, Cenovus elected to deem all cumulative currency translation differences for all foreign operations to be zero at the Transition Date. All foreign currency translation differences in respect of foreign operations that arose prior to the Transition Date were transferred to paid in surplus.

 

In addition, AOCI is affected by the revaluation of the adjustments noted above that reside in a foreign operation notably the reduction in the carrying value of the Refining property, plant and equipment, the impairment of the deferred asset and the associated deferred income tax payable. The table below identifies the cumulative balance sheet impact at December 31, 2010 and January 1, 2010:

 

 
| Increase   (Decrease)                  |   | December 31, 2010 |   | January 1,   2010 |
|----------------------------------------|--------|-------------------|--------|-------------------|
|                                   |   |              |   |              |
| **Assets**                             |   |              |   |              |
| Refining property, plant and equipment |   | 125               |   | -                 |
| Other assets                           |   | 5                 |   | -                 |
|                                   |   |              |   |              |
| **Liabilities and   Equity**           |   |              |   |              |
| Deferred income tax liability          |   | 46                |   | -                 |
| Accumulated other comprehensive income |   | 98                |   | 14                |
| Paid in surplus                        |   | (14)              |   | (14)              |

 

**K) Reclassifications**

 

*Exploration and evaluation (“E&E”) assets*

 

Under previous GAAP, E&E assets were included in property, plant and equipment, whereas under IFRS E&E assets are separately disclosed. The Company reclassified $580 million and $713 million from property, plant and equipment to E&E assets at January 1, 2010 and December 31, 2010, respectively.

 

*Finance costs and interest income*

 

In addition, under previous GAAP, the unwinding of the discount on decommissioning liabilities was classified as accretion expense in the Consolidated Statements of Earnings and Comprehensive Income. Under IFRS this amount has been reclassified to finance costs.

 

Under previous GAAP, interest was reported on a net basis. Under IFRS interest expense is included in finance costs and interest income is reported separately.

 

 
| Cenovus   Energy Inc. | 59

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

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* *

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

*All amounts in $ millions, unless otherwise indicated*

*For the year ended December 31, 2011*

 

 

*Gains/losses on risk management*

 

Under previous GAAP, gains and losses from crude oil and natural gas commodity price risk management activities were recorded in gross revenues. Under IFRS, these activities do not meet the definition of revenue and therefore have been reclassified to (gain) loss on risk management in the Consolidated Statements of Earnings and Comprehensive Income. In addition, risk management activities related to power and the refining business have been reclassified to gain (loss) on risk management activities from operating expense and purchased product, respectively.

 

*Assets and liabilities classified as held for sale*

 

Under previous GAAP, assets held for sale and liabilities related to assets held for sale were included as part of non-current assets and liabilities. Under IFRS, non-current assets that meet the definition of held for sale are required to be classified as current.

 

*Deferred income taxes*

 

A net deferred income tax asset has arisen at January 1, 2010 and December 31, 2010 related to the U.S. foreign operations, due to the adjustments noted above. Consistent with previous GAAP, a deferred income tax asset may not be offset against a deferred income tax liability in a different tax jurisdiction. Accordingly, $55 million and $3 million were reclassified to deferred income tax asset at December 31, 2010 and January 1, 2010, respectively.

 

**L) Net Earnings Per Share**

 

*Basic earnings per share*

 

Basic earnings per share under IFRS was impacted by the IFRS earnings adjustments discussed above.

 

*Diluted earnings per share*

 

Under previous GAAP, Cenovus’s TSARs, which may be cash or equity settled at the option of the holder, had no dilutive effect on diluted earnings per share because cash settlement was assumed. Under IFRS, the more dilutive of cash settlement and share settlement is required to be used in calculating diluted earnings per share. The following table identifies the differences between previous GAAP and IFRS:

** **
|                                                                                  |       | Previous GAAP |       | IFRS       |
|---------------------------------------------------------------------------------------|------------|---------------|------------|------------|
| For the year ended   December 31, 2010 ($ millions, except earnings per   share) |       | Net Earnings  |       | Shares     |   | Earnings per Share | ** ** | **Net   Earnings** | ** ** | **Shares** | ** ** | **Earnings****per Share** |
| ** **                                                                            | ** ** | ** **    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net earnings per share – basic                                                   |       | 993           |       | 751.9      |   | $1.32 | ** ** | **1,081** | ** ** | **751.9** | ** ** | **$1.44** |
| Dilutive effect of exercised Cenovus TSARs                                            |       | -             |       | 0.8        | * * | * * | ** ** | **-** | ** ** | **0.8** | ** ** | ** ** |
| Dilutive effect of outstanding Cenovus TSARs                                          |       | -             |       | -          |   |   | ** ** | **-** | ** ** | **1.3** | ** ** | ** ** |
| Net earnings per share – diluted                                                 |       | 993           |       | 752.7      |   | $1.32 | ** ** | **1,081** | ** ** | **754.0** | ** ** | **$1.43** |

 

**M)   Debt to Capitalization Ratio**

 

The transition to IFRS resulted in changes to the Company’s Debt to Capitalization ratio as follows:

 
| ** **                   |   | December 31, 2010 |       | January 1, 2010 |
|------------------------------|--------|-------------------|------------|-----------------|
| ** **                   |   | Previous GAAP     | ** ** | **IFRS**        |   | Previous GAAP | ** ** | **IFRS** |
| Long-Term Debt               |   | 3,432             | ** ** | **3,432**       |   | 3,656 | ** ** | **3,656** |
| Debt                         |   | 3,432             | ** ** | **3,432**       |   | 3,656 | ** ** | **3,656** |
| Shareholders’ Equity    |   | 10,022            | ** ** | **8,395**       |   | 9,608 | ** ** | **7,809** |
| Total Capitalization         |   | 13,454            | ** ** | **11,827**      |   | 13,264 | ** ** | **11,465** |
| Debt to Capitalization ratio |   | 26%               | ** ** | **29%**         |   | 28% | ** ** | **32%** |

 

 
| Cenovus   Energy Inc. | 60

  | Consolidated   Financial Statements |
|-----------------------|------------|-------------------------------------|

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**ADDITIONAL DISCLOSURE**

 

**Certifications and Disclosure Regarding Controls and Procedures.**

 
| (a)    | Certifications. See Exhibits 99.1, 99.2, 99.3 and   99.4 to this annual report on Form 40-F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (b)    | Disclosure Controls and Procedures. As of the end of the   registrant’s fiscal year ended December 31, 2011, an evaluation of the   effectiveness of the registrant’s “disclosure controls and procedures” (as   such term is defined in Rules 13a-15(e) and 15d-15(e) of the   Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was carried   out by the registrant’s management with the participation of the principal   executive officer and principal financial officer. Based upon that   evaluation, the registrant’s principal executive officer and principal   financial officer have concluded that as of the end of that fiscal year, the   registrant’s disclosure controls and procedures are effective to ensure that   information required to be disclosed by the registrant in reports that it   files or submits under the Exchange Act is (i) recorded, processed,   summarized and reported within the time periods specified in the Securities   and Exchange Commission’s (the “Commission”) rules and forms and (ii) accumulated   and communicated to the registrant’s management, including its principal   executive and principal financial officers, or persons performing similar   functions, to allow timely decisions regarding required disclosure. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   | It should be noted that while the registrant’s principal executive   officer and principal financial officer believe that the registrant’s   disclosure controls and procedures provide a reasonable level of assurance   that they are effective, they do not expect that the registrant’s disclosure   controls and procedures or internal control over financial reporting will   prevent all errors and fraud. A control system, no matter how well conceived   or operated, can provide only reasonable, not absolute, assurance that the   objectives of the control system are met.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (c)    | Management’s Annual Report on Internal Control Over Financial   Reporting. The required disclosure is included in the   “Management Report” that accompanies the registrant’s Consolidated Financial   Statements for the fiscal year ended December 31, 2011, filed as part of   this annual report on Form 40-F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (d)    | Attestation Report of the Registered Public Accounting Firm. The   required disclosure is included in the “Auditors’ Report” that accompanies   the registrant’s Consolidated Financial Statements for the fiscal year ended   December 31, 2011, filed as part of this annual report on   Form 40-F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| (e)    | Changes in Internal Control Over Financial Reporting. During the   fiscal year ended December 31, 2011, there was no change in the registrant’s   internal control over financial reporting that has materially affected, or is   reasonably likely to materially affect, the registrant’s internal control   over financial reporting.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

 

**Notices Pursuant to Regulation BTR.**

 

None.

 

**Audit Committee Financial Expert.**

 

The registrant’s board of directors has determined that Colin Taylor, a member of the registrant’s audit committee, qualifies as an “audit committee financial expert” (as such term is defined in paragraph (8) of General Instruction B to Form 40-F), and is “independent” as that term is defined in the rules of the New York Stock Exchange.

 

**Code of Ethics.**

 

The registrant has adopted a “code of ethics” (as that term is defined in paragraph (9) of general Instruction B to Form 40-F), entitled the “Code of Business Conduct & Ethics”, that applies to all of its employees, including its principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions.

 

The Code of Business Conduct & Ethics is available for viewing on the registrant’s website at www.cenovus.com, and is available in print to any person without charge, upon request.  Requests for copies of the Code of Business Conduct & Ethics should be made by contacting: Kerry D. Dyte, Executive Vice-President, General Counsel & Corporate Secretary, Cenovus Energy Inc., 4000, 421-7th Avenue S.W., Calgary, Alberta, Canada T2P 4K9.  Alternatively, requests for a copy of the Code of Business Conduct & Ethics may be made by contacting the registrant’s Corporate Secretarial Department at (403) 766-2000 (Fax: (403) 766-7600).

 

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Since the adoption of the Code of Business Conduct & Ethics, there have not been any waivers, including implicit waivers, granted from any provision of the Code of Business Conduct & Ethics.

 

**Principal Accountant Fees and Services.**

 

The required disclosure is included under the heading “Audit Committee—External Auditor Service Fees” in the registrant’s Annual Information Form for the fiscal year ended December 31, 2011, filed as part of this annual report on Form 40-F.

 

**Pre-Approval Policies and Procedures.**

 

The required disclosure is included under the heading “Audit Committee Information—Pre-Approval Policies and Procedures” in the registrant’s Annual Information Form for the fiscal year ended December 31, 2011, filed as part of this annual report on Form 40-F.

 

**Off-Balance Sheet Arrangements.**

 

The registrant does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

**Tabular Disclosure of Contractual Obligations.**

 

The required disclosure is included under the heading “Contractual Obligations and Contingencies” in the registrant’s Management’s Discussion and Analysis for the fiscal year ended December 31, 2011, filed as part of this annual report on Form 40-F.

 

**Identification of the Audit Committee.**

 

The registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act.  The members of the audit committee are:  Patrick D. Daniel, Valerie A. A. Nielsen and Colin Taylor.

 

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**UNDERTAKING****AND CONSENT TO SERVICE OF PROCESS**

 

**A.  Undertaking**

 

The registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

 

**B.  Consent to Service of Process**

 
| (1)    | The   registrant has previously filed a Form F-X in connection with the class   of securities in relation to which the obligation to file this report arises.                                                                 |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                               |
| (2)    | Any   change to the name or address of the agent for service of process of the   registrant shall be communicated promptly to the Commission by an amendment   to the Form F-X referencing the file number of the registrant. |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
| Date:   February 22, 2012 | **CENOVUS ENERGY INC.** |
|--------------------------------|-------------------------|
|                           | ** **              |   |
|                           | ** **              |   |
|                           | By:                     | /s/   Ivor M. Ruste |   |
|                           |                    | Name: | Ivor   M. Ruste |
|                           |                    | Title: | Executive   Vice-President & Chief   Financial Officer |
|                                |                         |  |  |  |

 

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**EXHIBIT INDEX**

 
| **Exhibits** | ** ** | **Documents**                                                                                                                              |
|--------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------|
|         |       |                                                                                                                                       |
| 99.1         |       | Certification   of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of   the Securities Exchange Act of 1934 |
|         |       |                                                                                                                                       |
| 99.2         |       | Certification   of Chief Financial Officer pursuant to Rule 13a-14(a) or   15d-14(a) of the Securities Exchange Act of 1934 |
|         |       |                                                                                                                                       |
| 99.3         |       | Certification   of Chief Executive Officer pursuant to 18 U.S.C. Section 1350                                                    |
|         |       |                                                                                                                                       |
| 99.4         |       | Certification   of Chief Financial Officer pursuant to 18 U.S.C. Section 1350                                                    |
|         |       |                                                                                                                                       |
| 99.5         |       | Consent   of PricewaterhouseCoopers LLP                                                                                                    |
|         |       |                                                                                                                                       |
| 99.6         |       | Consent   of McDaniel & Associates Consultants Ltd.                                                                               |
|         |       |                                                                                                                                       |
| 99.7         |       | Consent   of GLJ Petroleum Consultants Ltd.                                                                                                |

 

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