Exhibit 99.6

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|2012 |  | 

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MANAGEMENT'S DISCUSSION
AND ANALYSIS

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For the year ended December 31, 2012

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LOGO

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MANAGEMENT'S DISCUSSION AND ANALYSIS (MD&A)

(March 6, 2013)

General

This Management's Discussion and Analysis (MD&A) should be read in conjunction with the Consolidated Financial Statements of Talisman
Energy Inc. (Talisman or the Company) for the year ended December 31, 2012. The Company's Consolidated Financial Statements and the financial data included in this MD&A have been
prepared in accordance with International Financial Reporting Standards (IFRS), unless otherwise noted.

Unless
otherwise stated, references to production and reserves represent Talisman's working interest share (including Talisman's share of volumes of royalty interest) before deduction of royalties.
Throughout this MD&A, the calculation of barrels of oil equivalent (boe) is calculated at a conversion rate of six thousand cubic feet (mcf) of natural gas to one barrel (bbl) of oil. The boe
measure may be misleading, particularly if used in isolation. A boe conversion ratio of 6 mcf:1 bbl is based on an energy equivalence conversion method primarily applicable at the burner
tip and does not necessarily represent a value equivalence at the wellhead.

All
comparisons are between the years ended December 31, 2012 and 2011, unless stated otherwise. All amounts presented are in US$, except where otherwise indicated. Abbreviations used in this
MD&A are listed in the section 'Abbreviations and Definitions'.

Additional
information relating to the Company, including the Company's Annual Information Form (AIF), can be found on the Canadian System for Electronic Document Analysis and Retrieval (SEDAR) at
www.sedar.com. The Company's Annual Report on Form 40-F may be found in the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database at www.sec.gov.

Change in Reporting Conventions

Effective January 1, 2011, the Company changed its reporting currency from C$ to US$. This change to US$ reporting recognizes the fact that a
significant portion of the Company's activities and transactions are conducted in US$. Accordingly, all financial amounts in this MD&A are presented in US$ unless otherwise indicated.

Effective
January 1, 2011, the composition of the Company's segments changed such that activities in the UK and Norway are now reported as a single 'North Sea' segment. This change reflects the
fact that, since 2011, the UK and Norway businesses each operate a mature set of cash-generating assets sharing similar economic characteristics. Comparative period balances have been
restated accordingly.

Company Overview

Talisman Energy Inc. is a global upstream oil and gas company, headquartered in Canada. Talisman has three main operating areas: the Americas
(North America and Latin America), Southeast Asia and the North Sea, with an active exploration program across all three. Talisman is committed to conducting business safely, in a socially and
environmentally responsible manner, and is included in the Dow Jones Sustainability (North America) Index. Talisman is listed on the Toronto Stock Exchange and New York Stock Exchange
under the symbol TLM.

Unless
the context indicates otherwise, references in this MD&A to 'Talisman' or 'the Company' include, for reporting purposes only, the direct or indirect subsidiaries of Talisman Energy Inc.
and partnership interests held by Talisman Energy Inc. and its subsidiaries. Such use of 'Talisman' or 'the Company' to refer to these other legal entities and partnership interests does not
constitute a waiver by Talisman Energy Inc. or such entities or partnerships of their separate legal status, for any purpose.

Talisman's
financial statements are prepared on a consolidated basis and include the accounts of Talisman and its subsidiaries. Substantially all of Talisman's activities are conducted jointly with
others, and the Consolidated Financial Statements reflect only the Company's proportionate interest in such activities.

Note 31
to the Consolidated Financial Statements provides segmented financial information that forms the basis for much of the following discussion and analysis. In 2012, Talisman's
activities were conducted in four geographic segments for the purposes of financial reporting: North America, Southeast Asia, North Sea and Other. The North America segment includes operations in
Canada and the US. The Southeast Asia segment includes operations and exploration activities in Indonesia, Malaysia, Vietnam and Papua New Guinea and non-operated production in
Australia/Timor-Leste. The North Sea segment includes operations and exploration activities in the UK and Norway. The Company also has non-operated production in Algeria, operations and
exploration activities in Colombia, and exploration activities in Sierra Leone and the Kurdistan Region of Iraq. In 2012, the Company decided to exit Peru and expects to complete the process in 2013.
For ease of reference, the activities in Algeria, Colombia, Peru, Poland, Sierra Leone and the Kurdistan Region of Iraq are referred to collectively as the Other geographic segment or rest of
the world.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       1

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2012 Performance Highlights

Financial and Operating Highlights

|(millions of $, unless otherwise stated)                                                  |                           |  | 2012   |      |  | 2011   |      |  | 2010  
|----------------------------------------------------------------------------------------- | ------------------------- |  | ------ | ---- |  | ------ | ---- |  | ------
|                                                                                         
|Cash provided by operating activities                                                     |                           |  | 2,716  |      |  | 2,812  |      |  | 3,144 
|                                                                                          |                           | 
|Net income                                                                                |                           |  | 132    |      |  | 776    |      |  | 945   
|                                                                                          |                           | 
|Common share dividends                                                                    |                           |  | 277    |      |  | 277    |      |  | 249   
|                                                                                          |                           | 
|Preferred share dividends                                                                 |                           |  | 9      |      |  |       |      |  |      
|                                                                                          |                           | 
|Per share ($)                                                                             |                           |  |        |      |  |        |      |  |       
|                                                                                          |                           | 
|                                                                                          | Net income(1)             |  |        | 0.12 |  |        | 0.76 |  |       
|                                                                                          |                           | 
|                                                                                          | Diluted net income(2)     |  |        | 0.01 |  |        | 0.38 |  |       
|                                                                                          |                           | 
|                                                                                          | Common share dividends    |  | US$    | 0.27 |  | US$    | 0.27 |  | C$    
|                                                                                          |                           | 
|                                                                                          | Preferred share dividends |  | C$     | 1.10 |  |        |     |  |       
|                                                                                          |                           | 
|Production (mboe/d)                                                                       |                           |  | 426    |      |  | 426    |      |  | 417   
|                                                                                          |                           | 
|Production from ongoing operations (mboe/d)                                               |                           |  | 397    |      |  | 383    |      |  | 343   
|                                                                                          |                           | 
|Average sales price ($/boe)                                                               |                           |  | 58.56  |      |  | 65.35  |      |  | 53.80 
|                                                                                          |                           | 
|Total revenue and other income                                                            |                           |  | 7,312  |      |  | 8,272  |      |  | 6,982 
|                                                                                          |                           | 
|Operating costs ($/boe)                                                                   |                           |  | 15.83  |      |  | 14.17  |      |  | 12.44 
|                                                                                          |                           | 
|Depreciation, depletion and amortization (DD&A) expense, exploration and dry hole expense |                           |  | 3,116  |      |  | 2,617  |      |  | 2,275 
|                                                                                          |                           | 
|Total exploration and development expenditures                                            |                           |  | 3,511  |      |  | 4,142  |      |  | 3,473 
|                                                                                          |                           | 
|Total assets                                                                              |                           |  | 21,858 |      |  | 24,226 |      |  | 22,094
|                                                                                          |                           | 
|Total long-term debt (including current portion)                                          |                           |  | 4,442  |      |  | 4,895  |      |  | 4,204 
|                                                                                          |                           | 
|Cash and cash equivalents, net of bank indebtedness                                       |                           |  | 721    |      |  | 414    |      |  | 1,653 
|                                                                                          |                           | 
|Total long-term liabilities                                                               |                           |  | 9,472  |      |  | 10,745 |      |  | 9,186 
|                                                                                         

2TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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2012 Net Income Variances

|(millions of $)                                       |  |        |  
|----------------------------------------------------- |  | ------ | -
|                                                      | 
|2011 net income                                       |  | 776    |  
|                                                      | 
|Favourable (unfavourable) variances(1):               |  |        |  
|                                                      |  |        |  
|Commodity prices(2)                                   |  | (527   | )
|                                                      |  |        |  
|Production volumes(2)                                 |  | (510   | )
|                                                      |  |        |  
|Royalties(2)                                          |  | 49     |  
|                                                      |  |        |  
|Operating expenses                                    |  | (262   | )
|                                                      |  |        |  
|General and administrative (G&A) expense              |  | (79    | )
|                                                      |  |        |  
|DD&A expense                                          |  | (552   | )
|                                                      |  |        |  
|Impairment                                            |  | (2,518 | )
|                                                      |  |        |  
|Dry hole expense                                      |  | (28    | )
|                                                      |  |        |  
|Exploration expense                                   |  | 81     |  
|                                                      |  |        |  
|Finance costs                                         |  | 2      |  
|                                                      |  |        |  
|Share-based payments recovery                         |  | (248   | )
|                                                      |  |        |  
|Gain on disposals                                     |  | 1,432  |  
|                                                      |  |        |  
|Gain on revaluation of investment                     |  | 365    |  
|                                                      |  |        |  
|Loss on held-for-trading financial instruments        |  | 117    |  
|                                                      |  |        |  
|Current taxes (including Petroleum Revenue Tax (PRT)) |  | 567    |  
|                                                      |  |        |  
|Deferred taxes (including PRT)                        |  | 1,408  |  
|                                                      |  |        |  
|Other                                                 |  | 59     |  
|                                                      | 
|Total variances                                       |  | (644   | )
|                                                      | 
|2012 net income                                       |  | 132    |  
|                                                      | 

The significant variances from 2011, as summarized in the net income variances table, are:

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       3

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Operations Review

Results Summary

Sales of oil, liquids and natural gas in 2012 were $7.2 billion, down 12% from 2011. Oil and liquids revenue decreased by $648 million
due to lower production in the North Sea and lower realized prices in North America and Southeast Asia, partially offset by higher production in North America and Southeast Asia. Natural gas revenue
decreased by $338 million primarily due to lower realized prices in North America.

In
North America, production growth of 11% was offset by lower gas prices resulting in a decrease in sales. DD&A and operating expenses increased year-over-year.

In
Southeast Asia, sales of $2.2 billion were 16% higher than 2011 due principally to a full year of production at the Jambi Merang and Kitan fields. Operating expenses and DD&A increased
year-over-year.

In
the North Sea, sales decreased by 27% as a result of lower production. Operational issues associated with the Galley pipeline and extended turnarounds in the UK along with natural declines at Varg,
pressure decline at Rev and base decline on Brage contributed to this reduction.

In
the rest of the world, sales of $623 million were 15% higher than 2011 due to new wells coming online in the Piedemonte region and increased production from the Cusiana liquefied petroleum
gas plant in Colombia, which went into operation in December 2011.

Daily Average Production

|                                 |                |                        |     |                  |     |       |     |       |     |       |     |      
|-------------------------------- | -------------- | ---------------------- | --- | ---------------- | --- | ----- | --- | ----- | --- | ----- | --- | -----
|                                 |                | Gross before royalties |     | Net of royalties
|                                
|                                 |                | 2012                   |     | 2011             |     | 2010  |     | 2012  |     | 2011  |     | 2010 
|                                
|Oil and liquids (mbbls/d)        |                |                        |     |                  |     |       |     |       |     |       |     |      
|                                 |                |                       
|                                 | North America  |                        | 27  |                  | 23  |       | 23  |       | 23  |       | 19  |      
|                                 |                |                       
|                                 | Southeast Asia |                        | 42  |                  | 34  |       | 39  |       | 24  |       | 17  |      
|                                 |                |                       
|                                 | North Sea      |                        | 71  |                  | 98  |       | 113 |       | 70  |       | 97  |      
|                                 |                |                       
|                                 | Other          |                        | 22  |                  | 23  |       | 14  |       | 14  |       | 13  |      
|                                
|                                 |                | 162                    |     | 178              |     | 189   |     | 131   |     | 146   |     | 160  
|                                
|Natural gas (mmcf/d)             |                |                        |     |                  |     |       |     |       |     |       |     |      
|                                 |                |                       
|                                 | North America  |                        | 985 |                  | 899 |       | 778 |       | 871 |       | 803 |      
|                                 |                |                       
|                                 | Southeast Asia |                        | 524 |                  | 506 |       | 485 |       | 357 |       | 351 |      
|                                 |                |                       
|                                 | North Sea      |                        | 31  |                  | 52  |       | 104 |       | 31  |       | 52  |      
|                                 |                |                       
|                                 | Other          |                        | 42  |                  | 34  |       |    |       | 33  |       | 27  |      
|                                
|                                 |                | 1,582                  |     | 1,491            |     | 1,367 |     | 1,292 |     | 1,233 |     | 1,161
|                                
|Total Daily Production (mboe/d)  |                |                        |     |                  |     |       |     |       |     |       |     |      
|                                 |                |                       
|                                 | North America  |                        | 192 |                  | 173 |       | 153 |       | 168 |       | 153 |      
|                                 |                |                       
|                                 | Southeast Asia |                        | 129 |                  | 119 |       | 119 |       | 84  |       | 75  |      
|                                 |                |                       
|                                 | North Sea      |                        | 76  |                  | 106 |       | 131 |       | 75  |       | 106 |      
|                                 |                |                       
|                                 | Other          |                        | 29  |                  | 28  |       | 14  |       | 20  |       | 17  |      
|                                
|Total (mboe/d)                   |                | 426                    |     | 426              |     | 417   |     | 347   |     | 351   |     | 353  
|                                
|Assets sold                      |                |                        |     |                  |     |       |     |       |     |       |     |      
|                                 |                |                       
|                                 | North America  |                        | 4   |                  | 8   |       | 36  |       | 3   |       | 6   |      
|                                 |                |                       
|                                 | North Sea      |                        | 25  |                  | 35  |       | 38  |       | 25  |       | 34  |      
|                                
|From ongoing operations (mboe/d) |                | 397                    |     | 383              |     | 343   |     | 319   |     | 311   |     | 285  
|                                

Production represents gross production before royalties, unless noted otherwise. Production identified as net is production after deducting royalties.

4TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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Production from ongoing operations increased by 4% over 2011 due principally to higher oil and gas volumes in North America and Southeast Asia, partially offset by lower North Sea production and the
sale of non-core assets in North America. Total production remained flat compared to 2011, despite an underlying shift in the segments from which volumes were produced.

In
North America, production from ongoing operations increased by 14%. Oil and liquids production increased 17% mainly due to successful development in the liquids-rich Eagle Ford shale
play, where liquids production averaged nine mboe/d in the current year and two mboe/d in 2011. Natural gas production increased by 10% due principally to successful development in the
Marcellus, Eagle Ford and Montney shale plays, partially offset by asset dispositions and natural declines in conventional assets.

In
Southeast Asia, natural gas production increased by 4% due principally to improved production efficiency at PM-3 CAA, located between Malaysia and Vietnam, and a full year of
production from Jambi Merang. Oil and liquids production increased due principally to a full year of production from Kitan, partially offset by natural declines and the unitization of the Suban field
in late 2011.

In
the North Sea, total production decreased 28% compared to 2011. In the UK, production was down due to extended turnaround activity on Tartan to repair the Galley pipeline and on Auk North to
address production efficiency issues, along with natural decline and reduced well performance on Tweedsmuir. Norway also contributed to the decrease with natural declines at Varg and Brage and
pressure decline at Rev.

In
the rest of the world, production from new wells drilled in Colombia accounted for most of the increase over 2011.

Volumes Produced Into (Sold Out of) Inventory(1)

|                                       |  | 2012 |   | 2011 |   | 2010 |  
|-------------------------------------- |  | ---- | - | ---- | - | ---- | -
|                                       | 
|Southeast Asia  bbls/d                |  | 920  |   | 960  |   | 108  |  
|                                       |  |      |  
|North Sea  bbls/d                     |  | (482 | ) | (687 | ) | (174 | )
|                                       |  |      |  
|Other  bbls/d                         |  | 450  |   | 400  |   | 237  |  
|                                       | 
|Total produced into inventory  bbls/d |  | 888  |   | 673  |   | 171  |  
|                                       | 
|Total produced into inventory  mmbbls |  | 0.3  |   | 0.2  |   | 0.1  |  
|                                       | 
|Inventory at December 31  mmbbls      |  | 2.2  |   | 1.9  |   | 1.6  |  
|                                       | 

In the Company's international operations, produced oil is frequently stored in tanks until there is sufficient volume to be lifted. The Company recognizes
revenue and the related expenses on crude oil production when liftings have occurred. Volumes presented in the 'Daily Average Production' table represent production volumes in the period, which
include oil volumes produced into inventory and exclude volumes sold out of inventory.

During
the year ended December 31, 2012, volumes in inventory increased from 1.9 mmbbls to 2.2 mmbbls due principally to increased inventories in Malaysia, Indonesia and Algeria,
partially offset by reduced inventories in Norway and Australia.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       5

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Company Netbacks(1)

|                        |                 |                        |        |                  |        |       |       |       |        |       |        |      
|----------------------- | --------------- | ---------------------- | ------ | ---------------- | ------ | ----- | ----- | ----- | ------ | ----- | ------ | -----
|                        |                 | Gross before royalties |        | Net of royalties
|                       
|                        |                 | 2012                   |        | 2011             |        | 2010  |       | 2012  |        | 2011  |        | 2010 
|                       
|Oil and liquids ($/bbl) |                 |                        |        |                  |        |       |       |       |        |       |        |      
|                        |                 |                       
|                        | Sales price     |                        | 104.82 |                  | 107.04 |       | 78.19 |       | 104.82 |       | 107.04 |      
|                        |                 |                       
|                        | Royalties       |                        | 20.33  |                  | 19.69  |       | 12.00 |       |       |       |       |      
|                        |                 |                       
|                        | Transportation  |                        | 1.28   |                  | 1.29   |       | 1.15  |       | 1.59   |       | 1.58   |      
|                        |                 |                       
|                        | Operating costs |                        | 31.25  |                  | 25.72  |       | 20.10 |       | 38.78  |       | 31.49  |      
|                       
|                        |                 | 51.96                  |        | 60.34            |        | 44.94 |       | 64.45 |        | 73.97 |        | 53.10
|                       
|Natural gas ($/mcf)     |                 |                        |        |                  |        |       |       |       |        |       |        |      
|                        |                 |                       
|                        | Sales price     |                        | 5.01   |                  | 5.92   |       | 5.59  |       | 5.01   |       | 5.92   |      
|                        |                 |                       
|                        | Royalties       |                        | 1.19   |                  | 1.24   |       | 0.93  |       |       |       |       |      
|                        |                 |                       
|                        | Transportation  |                        | 0.25   |                  | 0.24   |       | 0.28  |       | 0.33   |       | 0.31   |      
|                        |                 |                       
|                        | Operating costs |                        | 1.05   |                  | 0.98   |       | 1.02  |       | 1.38   |       | 1.24   |      
|                       
|                        |                 | 2.52                   |        | 3.46             |        | 3.36  |       | 3.30  |        | 4.37  |        | 4.03 
|                       
|Total $/boe (6mcf=1boe) |                 |                        |        |                  |        |       |       |       |        |       |        |      
|                        |                 |                       
|                        | Sales price     |                        | 58.56  |                  | 65.35  |       | 53.80 |       | 58.56  |       | 65.35  |      
|                        |                 |                       
|                        | Royalties       |                        | 12.18  |                  | 12.54  |       | 8.49  |       |       |       |       |      
|                        |                 |                       
|                        | Transportation  |                        | 1.42   |                  | 1.39   |       | 1.45  |       | 1.79   |       | 1.72   |      
|                        |                 |                       
|                        | Operating costs |                        | 15.83  |                  | 14.17  |       | 12.44 |       | 20.31  |       | 17.68  |      
|                       
|                        |                 | 29.13                  |        | 37.25            |        | 31.42 |       | 36.46 |        | 45.95 |        | 37.26
|                       

During 2012, the Company's average gross netback was $29.13/boe, 22% lower than in 2011. Talisman's realized net price of $58.56/boe was 10% lower than 2011,
due principally to lower commodity prices in North America.

The
Company's realized net sale price includes the impact of physical commodity contracts, but does not include the impact of financial commodity price derivatives discussed in the 'Risk Management'
section of this MD&A.

6TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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Commodity Prices and Exchange

|                                            |                     | 2012   |        | 2011   |        | 2010 
|------------------------------------------- | ------------------- | ------ | ------ | ------ | ------ | -----
|                                           
|Oil and liquids ($/bbl)                     |                     |        |        |        |        |      
|                                            |                     |       
|                                            | North America       |        | 69.39  |        | 75.19  |      
|                                            |                     |       
|                                            | Southeast Asia      |        | 111.69 |        | 115.82 |      
|                                            |                     |       
|                                            | North Sea           |        | 111.83 |        | 110.75 |      
|                                            |                     |       
|                                            | Other               |        | 113.52 |        | 110.32 |      
|                                           
|                                            |                     | 104.82 |        | 107.04 |        | 78.19
|                                           
|Natural gas ($/mcf)                         |                     |        |        |        |        |      
|                                            |                     |       
|                                            | North America       |        | 2.63   |        | 3.93   |      
|                                            |                     |       
|                                            | Southeast Asia      |        | 9.28   |        | 9.30   |      
|                                            |                     |       
|                                            | North Sea           |        | 9.77   |        | 8.62   |      
|                                            |                     |       
|                                            | Other               |        | 4.30   |        | 4.22   |      
|                                           
|                                            |                     | 5.01   |        | 5.92   |        | 5.59 
|                                           
|Company $/boe (6mcf=1boe)                   |                     | 58.56  |        | 65.35  |        | 53.80
|                                           
|Benchmark prices and foreign exchange rates |                     |        |        |        |        |      
|                                            |                     |       
|                                            | WTI ($/bbl)         |        | 94.22  |        | 95.13  |      
|                                            |                     |       
|                                            | Dated Brent ($/bbl) |        | 111.61 |        | 111.27 |      
|                                            |                     |       
|                                            | Tapis ($/bbl)       |        | 117.03 |        | 117.11 |      
|                                            |                     |       
|                                            | NYMEX ($/mmbtu)     |        | 2.80   |        | 4.07   |      
|                                            |                     |       
|                                            | AECO (C$/gj)        |        | 2.28   |        | 3.48   |      
|                                           
|C$/US$ exchange rate                        |                     | 1.00   |        | 0.99   |        | 1.03 
|                                           
|UK£/US$ exchange rate                       |                     | 0.63   |        | 0.62   |        | 0.65 
|                                           

Talisman's realized oil and liquids prices decreased by 2%, consistent with movement in the benchmark price in the Company's primary oil and gas producing
regions. North America natural gas prices decreased by 33%, which is consistent with decreases in NYMEX and AECO prices whereas Southeast Asia natural gas prices remained relatively flat since a
significant portion of the Southeast Asia gas production is linked to oil-based indices. Corridor gas prices averaged $10.12/mcf, where 55% of sales are referenced to Duri crude oil and
High Sulphur Fuel Oil on an energy equivalent basis.

Royalties(1)

|               |  |          |  |           |  |          |  |           |  |          |  |          
|-------------- |  | -------- |  | --------- |  | -------- |  | --------- |  | -------- |  | ---------
|               |  | 2012     |  | 2011      |  | 2010    
|              
|               |  | Rate (%) |  | $ million |  | Rate (%) |  | $ million |  | Rate (%) |  | $ million
|              
|North America  |  | 14       |  | 239       |  | 13       |  | 255       |  | 11       |  | 217      
|               |  |         
|Southeast Asia |  | 36       |  | 1,243     |  | 40       |  | 1,236     |  | 36       |  | 834      
|               |  |         
|North Sea      |  | 1        |  | 18        |  | 1        |  | 25        |  |         |  | 7        
|               |  |         
|Other          |  | 37       |  | 369       |  | 43       |  | 402       |  | 53       |  | 215      
|              
|               |  | 21       |  | 1,869     |  | 19       |  | 1,918     |  | 16       |  | 1,273    
|              

The corporate royalty rate was 21%, up slightly from 19% in 2011. In the rest of the world, increased production from Equión
Energía Limited (Equión) further reduced the royalty rate to 37% in 2012 while increased production in the US contributed to a higher overall royalty rate in North
America. In Southeast Asia, production from newly producing properties reduced the overall royalty rate due to the cost recovery of exploration and development costs.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       7

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Unit Operating Expenses(1)

|               |  |                        |  |                  |  |       |  |       |  |       |  |      
|-------------- |  | ---------------------- |  | ---------------- |  | ----- |  | ----- |  | ----- |  | -----
|               |  | Gross before royalties |  | Net of royalties
|              
|($/boe)        |  | 2012                   |  | 2011             |  | 2010  |  | 2012  |  | 2011  |  | 2010 
|              
|North America  |  | 7.91                   |  | 7.11             |  | 8.65  |  | 9.05  |  | 8.04  |  | 9.59 
|               |  |                       
|Southeast Asia |  | 9.03                   |  | 8.78             |  | 6.67  |  | 13.88 |  | 13.82 |  | 10.14
|               |  |                       
|North Sea      |  | 50.29                  |  | 33.60            |  | 22.91 |  | 50.59 |  | 33.79 |  | 22.95
|               |  |                       
|Other          |  | 8.18                   |  | 7.07             |  | 5.37  |  | 12.42 |  | 11.65 |  | 11.39
|              
|               |  | 15.83                  |  | 14.17            |  | 12.44 |  | 20.31 |  | 17.68 |  | 14.81
|              

Total Operating Expenses

|(millions of $) |  | 2012  |  | 2011  |  | 2010 
|--------------- |  | ----- |  | ----- |  | -----
|               
|North America   |  | 564   |  | 454   |  | 487  
|                |  |      
|Southeast Asia  |  | 418   |  | 372   |  | 280  
|                |  |      
|North Sea       |  | 1,383 |  | 1,292 |  | 1,096
|                |  |      
|Other           |  | 87    |  | 72    |  | 27   
|               
|                |  | 2,452 |  | 2,190 |  | 1,890
|               

Total operating expenses increased by $262 million, due primarily to higher maintenance costs, increased production in North America and a full year of
operations from new fields in Southeast Asia.

In
North America, operating expenses increased with higher production in the Eagle Ford, and a $45 million expense relating to the Pennsylvania Impact Fee, of which $25 million relates
to the retrospective charge for wells drilled prior to 2012, partially offset by non-core asset dispositions in the first half of the year.

In
Southeast Asia, operating expenses increased due to a full year of production at the Kitan and Jambi Merang fields along with higher planned maintenance costs on certain assets.

In
the North Sea, operating expenses were higher due to increased maintenance and logistics costs combined with emergency response costs incurred to repair the Galley pipeline. These increases were
slightly offset by a reduction of $31 million in operating expenses as a result of the 49% divestiture in TEUK on December 17, 2012.

The
increase in the rest of the world was largely due to the startup of the Cusiana liquefied petroleum gas plant in Colombia and higher production during 2012 at Equión.

Unit
operating expenses for the Company increased to $15.83/boe due to the reasons noted above.

Unit Depreciation, Depletion and Amortization (DD&A) Expense

|               |  |                        |  |                  |  |       |  |       |  |       |  |      
|-------------- |  | ---------------------- |  | ---------------- |  | ----- |  | ----- |  | ----- |  | -----
|               |  | Gross before royalties |  | Net of royalties
|              
|($/boe)        |  | 2012                   |  | 2011             |  | 2010  |  | 2012  |  | 2011  |  | 2010 
|              
|North America  |  | 16.25                  |  | 13.50            |  | 12.85 |  | 18.58 |  | 15.26 |  | 14.24
|               |  |                       
|Southeast Asia |  | 9.13                   |  | 7.10             |  | 6.37  |  | 14.10 |  | 11.22 |  | 9.69 
|               |  |                       
|North Sea      |  | 28.56                  |  | 17.21            |  | 16.08 |  | 28.73 |  | 17.31 |  | 16.11
|               |  |                       
|Other          |  | 12.89                  |  | 11.82            |  | 5.53  |  | 20.75 |  | 20.92 |  | 11.97
|              
|               |  | 16.09                  |  | 12.55            |  | 11.76 |  | 19.85 |  | 15.28 |  | 13.88
|              

8TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

---



Total DD&A Expense

|(millions of $) |  | 2012  |  | 2011  |  | 2010 
|--------------- |  | ----- |  | ----- |  | -----
|               
|North America   |  | 1,140 |  | 852   |  | 717  
|                |  |      
|Southeast Asia  |  | 427   |  | 305   |  | 277  
|                |  |      
|North Sea       |  | 796   |  | 671   |  | 766  
|                |  |      
|Other           |  | 138   |  | 121   |  | 28   
|               
|                |  | 2,501 |  | 1,949 |  | 1,788
|               

Total DD&A expense was $2.5 billion, up 28% from 2011 as a result of higher production volumes and rates in North America, fourth quarter reserves
revisions and the ramp up of a number of fields, partially offset by lower North Sea production. During the fourth quarter of 2012, the Company recorded $187 million of DD&A associated with the
write-off of proved reserves in two fields. This incremental DD&A resulted in a full write-off of the book values of the associated fields.

DD&A
expense in North America increased largely due to higher production in Marcellus and Eagle Ford and an increase in unit rates for the Company's shale properties. In Southeast Asia, the increase
was due principally to a full year of production at Kitan and Jambi Merang and an increase in production from higher unit rate fields. DD&A expense in the North Sea increased due principally to
changes in production mix and higher rates at various fields as a result of reserves revisions, including a $165 million DD&A charge associated with the write-off of proved reserves
for the Auk field. This increase was partially offset by lower production
volumes and a $21 million reduction in the annual DD&A charge as a result of the sale of a 49% equity interest in TEUK on December 17, 2012. DD&A expense in the rest of the world
increased due to changes in production mix in 2012.

Unit
DD&A expense was impacted by the same factors as noted above with overall unit DD&A increasing to $16.09/boe.

For
additional information relating to DD&A, refer to the 'Application of Critical Accounting Policies and Use of Estimates' section of this MD&A.

Impairment

|(millions of $)      |                | 2012  |       | 2011 |     | 2010
|-------------------- | -------------- | ----- | ----- | ---- | --- | ----
|                    
|Impairment losses    |                |       |       |      |     |     
|                     |                |      
|                     | North America  |       | 363   |      | 129 |     
|                     |                |      
|                     | Southeast Asia |       |      |      |    |     
|                     |                |      
|                     | North Sea      |       | 2,097 |      | 231 |     
|                     |                |      
|                     | Other          |       | 284   |      |    |     
|                    
|                     |                | 2,744 |       | 360  |     | 301 
|                    
|Impairment reversals |                |       |       |      |     |     
|                     |                |      
|                     | North America  |       |      |      |    |     
|                     |                |      
|                     | Southeast Asia |       |      |      | 16  |     
|                     |                |      
|                     | North Sea      |       |      |      | 118 |     
|                     |                |      
|                     | Other          |       |      |      |    |     
|                    
|                     |                |      |       | 134  |     |    
|                    
|Net impairment       |                | 2,744 |       | 226  |     | 301 
|                    

During 2012, the Company recorded impairment expense of $363 million in North America of which $194 million pre-tax
($138 million after-tax) relates to lower long-term gas price assumptions and reserves reduction in conventional areas, and impairment expense of $60 million
pre-tax ($45 million after-tax) was recorded in respect of conventional assets disposed of in the third quarter. In addition, the Company concluded during the third
quarter that it would not commit capital in the foreseeable future to exploration and evaluation activities in Quebec, where the prohibition regarding hydraulic fracturing for shale gas developments
has been reaffirmed. Accordingly, the Company fully impaired its Quebec exploration and evaluation assets and recorded an impairment expense of $109 million pre-tax
($82 million after-tax).

Impairments
of $2.1 billion were recorded for the North Sea, primarily related to the Yme project in Norway. In 2012, the Yme project experienced significant delays, quality issues and cost
overruns and is subject to arbitration with the platform contractor. In the third quarter, Talisman made a decision to de-man the platform for safety related reasons and it has not been
re-manned since. Given the uncertainty of the timing for first oil, Talisman removed Yme from its forward projections and recorded impairment losses of $1,475 million
pre-tax ($373 million after-tax). At the end of the third quarter, this represented an impairment of the remaining book

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       9

---



value
of the PP&E of Yme, leaving a deferred tax asset of $521 million relating to the investment in the project. Capital expenditures incurred during the fourth quarter, capitalized interest
and revised decommissioning liabilities totalling $99 million pre-tax ($28 million after-tax) were also impaired in full. Management continues to work with all
stakeholders to evaluate project options.

During
the year, the Rev field in Norway experienced a significant drop in reservoir pressure, resulting in a decline in production. As a result, the Company made a downward revision of its estimates
of recoverable reserves and recorded an impairment expense of $250 million pre-tax ($55 million after-tax). In the fourth quarter, the Company recorded impairment
expense of $74 million pre-tax ($17 million after-tax) in respect of other Norwegian exploration assets
upon completion of commercial feasibility studies on these assets. In addition, a revision to decommissioning cost estimates at Gyda resulted in the Company recording an impairment expense of
$41 million pre-tax ($9 million after-tax).

In
the UK, impairment expense of $158 million pre-tax ($66 million after-tax) was recorded in respect of certain development areas largely due to fourth quarter reserves
revisions and increased future cost estimates.

In
the third quarter, the Company decided to cease exploration activities in the Marañon Basin in northern Peru and exit the country. As a result, $171 million of impairment
expense was recorded. The Company will fulfil its outstanding legal obligations as it exits Peru. In addition, impairment expense of $41 million was recorded during 2012 in respect of
exploration and evaluation assets in Poland.

In
addition to the impairments discussed above, $72 million of impairment expense was recorded in respect of exploration acreage relinquished in the Kurdistan Region of Iraq, where Talisman
will focus on the discoveries in its remaining Topkhana and Kurdamir Blocks.

Dry Hole Expense

|(millions of $) |  | 2012 |  | 2011 |  | 2010 |  
|--------------- |  | ---- |  | ---- |  | ---- | -
|                | 
|North America   |  | 22   |  | 6    |  | (11  | )
|                |  |      | 
|Southeast Asia  |  | 77   |  | 127  |  | 31   |  
|                |  |      | 
|North Sea       |  | 45   |  | 106  |  | 70   |  
|                |  |      | 
|Other           |  | 125  |  | 2    |  | 23   |  
|                | 
|                |  | 269  |  | 241  |  | 113  |  
|                | 

In 2012, dry hole expense principally relates to the write-off of unsuccessful exploration wells in Canada, Vietnam, Norway, Sierra Leone, Peru
and Colombia.

Exploration Expense

|(millions of $) |  | 2012 |  | 2011 |  | 2010
|--------------- |  | ---- |  | ---- |  | ----
|               
|North America   |  | 29   |  | 70   |  | 52  
|                |  |     
|Southeast Asia  |  | 92   |  | 208  |  | 116 
|                |  |     
|North Sea       |  | 47   |  | 40   |  | 47  
|                |  |     
|Other           |  | 178  |  | 109  |  | 159 
|               
|                |  | 346  |  | 427  |  | 374 
|               

Exploration expense consists of geological and geophysical costs, seismic, non-producing land lease rentals and indirect exploration expense. These
costs are expensed as incurred.

In
North America, exploration expense decreased by $41 million relative to 2011 due principally to reduced seismic activity in the Eagle Ford and Marcellus.

In
Southeast Asia, exploration expense decreased by $116 million relative to 2011 due principally to the Mitsubishi carry discussed in the 'Farm-Outs' section of this MD&A and a
reduction in seismic activity across the region.

In
the North Sea, the acquisition of seismic data for three blocks in Norway contributed to the increase of $7 million of exploration expense year-over-year.

Exploration
expense in the rest of the world increased $69 million year-over-year as a result of increased seismic activity in Colombia and increased activity in certain blocks in Peru prior to
the Company's third quarter decision to exit the country.

10TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

---



Corporate and Other

|(millions of $)                                       |  | 2012   |   | 2011 |   | 2010 |  
|----------------------------------------------------- |  | ------ | - | ---- | - | ---- | -
|                                                      | 
|G&A expense                                           |  | 510    |   | 431  |   | 371  |  
|                                                      |  |        |  
|Finance costs                                         |  | 276    |   | 278  |   | 276  |  
|                                                      |  |        |  
|Share-based payments expense (recovery)               |  | (62    | ) | (310 | ) | 212  |  
|                                                      |  |        |  
|(Gain) loss on held-for-trading financial instruments |  | 93     |   | 210  |   | (87  | )
|                                                      |  |        |  
|Gain on disposals                                     |  | (1,624 | ) | (192 | ) | (520 | )
|                                                      |  |        |  
|Gain on revaluation of investment                     |  | (365   | ) |     |   |     |  
|                                                      |  |        |  
|Other income                                          |  | 83     |   | 78   |   | 107  |  
|                                                      |  |        |  
|Other expenses, net                                   |  | 125    |   | 161  |   | 72   |  
|                                                      | 

G&A expense was higher due in part to new offices opened during 2011, increased external consulting costs, severance costs, IT costs and normal workforce
cost inflation.

Finance
costs include interest on long-term debt (including current portion), other finance charges and accretion expense relating to decommissioning liabilities, less interest
capitalized. Finance costs were relatively flat year-over-year as higher interest expense, due primarily to the completion in May 2012 of a $600 million offering
of 5.5% 30-year notes, was offset by an increase in capitalized interest costs in 2012.

The
share-based payments recovery for the year ended December 31, 2012 was $62 million, compared to a recovery of $310 million in 2011 due principally to changes in Talisman's
share price.

Talisman
recorded a loss on held-for-trading financial instruments of $93 million principally related to an increase in the Dated Brent price. See the 'Risk Management'
section of this MD&A for further details concerning the Company's financial instruments.

The
2012 gain on disposals arose largely from the sale of non-core coal and oil and gas assets in North America and the Company's divestiture of a 49% equity interest in TEUK. Refer to the
'Asset Disposals' section of this MD&A. The gain in 2011 arose principally from the sale of a 50% working interest in the Farrell Creek and Cypress A assets to Sasol Limited (Sasol).

The
$365 million gain on revaluation of investment in 2012 represents the fair value adjustment recorded upon restructuring of the Company's investment in Ocensa. Prior to the reorganization,
the Company's interest in Ocensa was held through a joint venture and now Talisman has direct ownership of its shares and transportation rights in Ocensa.

Other
income includes $46 million of pipeline and processing revenue in 2012 (2011  $53 million;
2010  $75 million).

In
2012, other expenses, net includes foreign exchange losses of $32 million, PP&E derecognition expense of $20 million, costs associated with the gas to liquids feasibility study and
other miscellaneous expenses. Other expenses, net in 2011 included a $65 million allowance for a doubtful account.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       11

---



Income Taxes

|(millions of $)                               |                     | 2012 |        | 2011  |       | 2010  |      
|--------------------------------------------- | ------------------- | ---- | ------ | ----- | ----- | ----- | -----
|                                              |                    
|Income (loss) before taxes                    |                     | (174 | )      | 2,445 |       | 1,971 |      
|                                              |                    
|Less: PRT                                     |                     |      |        |       |       |       |      
|                                              |                     |      |       
|                                              | Current             |      | 102    |       | 121   |       | 124  
|                                              |                     |      |       
|                                              | Deferred            |      | (34    | )     | 52    |       | (20  
|                                              |                    
|Total PRT                                     |                     | 68   |        | 173   |       | 104   |      
|                                              |                    
|                                              |                     | (242 | )      | 2,272 |       | 1,867 |      
|                                              |                    
|Income tax expense (recovery)                 |                     |      |        |       |       |       |      
|                                              |                     |      |       
|                                              | Current income tax  |      | 772    |       | 1,320 |       | 1,012
|                                              |                     |      |       
|                                              | Deferred income tax |      | (1,146 | )     | 176   |       | (90  
|                                              |                    
|Income tax expense (recovery) (excluding PRT) |                     | (374 | )      | 1,496 |       | 922   |      
|                                              |                    
|Effective income tax rate (%)                 |                     | 155% |        | 66%   |       | 49%   |      
|                                              |                    

The effective tax rate is expressed as a percentage of income before taxes adjusted for PRT, which is deductible in determining taxable income. The effective
tax rate was impacted by pre-tax losses of approximately $1.5 billion in the North Sea segment where tax rates are between 62% and 78% and pre-tax losses of
approximately $0.8 billion in the North America segment where the rates are between 25% and 39%, partially offset by income of approximately $1.1 billion in the Southeast Asia segment
where the rates range from 30% to 55%.

In
addition to the jurisdictional mix of income, the effective tax rate was also impacted by:

The
Company's 2011 expected effective tax rate based on the mix of income and losses in various jurisdictions was 57%. The 2011 income tax expense of $1,496 million was different from the
expected amount primarily as a result of a $225 million impact due to the UK rate change that was enacted in 2011. In March 2011, the UK government announced that, from March 24,
2011, the rate of supplementary charge levied on ring fence profits increased from 20% to 32%. A supplementary charge is levied on ring fence profits in addition to the ring fence corporation tax rate
of 30%. Consequently, there is now a combined corporation tax and supplementary charge rate of 62% for oil and gas fields not subject to PRT and 81% with fields subject to PRT.

The
reduction of $548 million in current taxes from $1,320 million in 2011 to $772 million in 2012 was primarily driven by lower revenues and higher operating costs in the North
Sea segment.

The
deferred tax recovery of $1,146 million in 2012 compared to the deferred tax expense of $176 million in 2011 was due principally to higher impairments in the North Sea segment and
higher DD&A in 2012 versus 2011. The deferred tax recovery associated with the higher impairments and DD&A was offset by deferred tax expense on the gains associated with non-core asset
disposals in Canada, the revaluation gain on the Company's investment in Ocensa and the derecognition of deferred tax assets in the US.

Capital Expenditures

|(millions of $)                  |  | 2012  |   | 2011  |   | 2010   |  
|-------------------------------- |  | ----- | - | ----- | - | ------ | -
|                                 | 
|North America                    |  | 1,562 |   | 2,155 |   | 1,700  |  
|                                 |  |       |  
|Southeast Asia                   |  | 421   |   | 487   |   | 442    |  
|                                 |  |       |  
|North Sea                        |  | 1,173 |   | 1,205 |   | 1,117  |  
|                                 |  |       |  
|Other                            |  | 355   |   | 295   |   | 214    |  
|                                 | 
|Exploration and development      |  | 3,511 |   | 4,142 |   | 3,473  |  
|                                 |  |       |  
|Corporate, IS and Administrative |  | 138   |   | 159   |   | 78     |  
|                                 |  |       |  
|Acquisitions                     |  | 160   |   | 1,319 |   | 1,530  |  
|                                 |  |       |  
|Proceeds of dispositions         |  | (964  | ) | (569  | ) | (2,273 | )
|                                 | 
|                                 |  | 2,845 |   | 5,051 |   | 2,808  |  
|                                 | 

12TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

---



North America capital expenditures for the year were $1.6 billion, of which $1.4 billion related to development drilling, with the majority spent
in the Eagle Ford, Marcellus, and Canadian conventional programs. The remaining capital was mainly invested in exploration drilling activities, largely in Canada.

In
Southeast Asia, capital expenditures of $421 million included $362 million on development, with the majority spent on development in Vietnam and development drilling in Indonesia and
Malaysia. The majority of the $59 million for exploration was spent on the drilling of exploration wells in Vietnam. In 2012, Talisman participated in 35 development wells, seven
exploration wells and three appraisal wells.

In
the North Sea, capital expenditures of $1.2 billion related primarily to development projects including Auk South, Auk North and Tweedsmuir in the UK, Yme in Norway and the Montrose area
redevelopment in the UK. Included in the total $1.2 billion of capital expenditures was $86 million for exploration activity, the majority of which occurred in Norway. A total of seven
development wells and three exploration wells were drilled during 2012.

Capital
expenditures in other areas were $355 million, including $249 million on exploration activity in Colombia, Peru, Poland, Sierra Leone and the Kurdistan Region of Iraq. Talisman
also spent $106 million on development in Colombia and Algeria. During the year, the Company participated in four exploration wells, two appraisal wells and five stratigraphic wells in
Colombia, one exploration well in Peru, one exploration well in the Kurdistan Region of Iraq, two exploration wells in Poland, one exploration well in Sierra Leone and seven development wells
in Algeria.

Information
related to details and funding of the planned 2013 capital expenditures program is included in the 'Strategy and Outlook' section of this MD&A.

Asset Disposals

Sale of 49% Equity Interest in TEUK to Sinopec

On December 17, 2012, Talisman completed the sale of a 49% equity interest in TEUK, which owns substantially all of Talisman's
UK assets, to Addax Petroleum UK Limited (APUK), an indirect wholly owned subsidiary of Sinopec, for cash consideration of $1.5 billion, based on an effective date of January 1, 2012.
The $1.5 billion cash consideration is comprised of $1,349 million in cash ($1,467 million cash received net of $118 million cash disposed) and $33 million of
working capital and other adjustments.

The
transaction resulted in a non-taxable gain of $860 million, which is included in 'Gain on disposals' on the Consolidated Statements of Income. Talisman will continue to hold 51%
of the joint venture company, with APUK holding the remaining 49%. TEUK has been renamed Talisman Sinopec Energy UK Limited (TSEUK). Since TSEUK is a jointly controlled entity, the Company is
proportionately consolidating its interest within the North Sea segment for the period December 17, 2012 through December 31, 2012.

North America Dispositions

In 2012, Talisman completed sales of oil and gas producing assets in Western Canada for proceeds of $437 million, resulting in gains of
$189 million, net of tax of $67 million.

In
2012, Talisman sold non-core coal assets in northeast British Columbia for cash consideration of $496 million after transaction costs. The carrying value of these assets was $nil
and a gain of $372 million was recorded, net of tax of $124 million.

Asset Sales Completed in 2011

During 2011, Talisman completed a transaction creating a strategic partnership with Sasol to develop the Farrell Creek assets in Talisman's Montney
shale play in British Columbia. Talisman sold 50% of its working interests in the Farrell
Creek assets for approximately $1 billion, comprising $238 million in cash and approximately $800 million of certain future development costs. The transaction resulted in a
pre-tax gain of $89 million, which is included in 'Gain on disposals' on the Consolidated Statements of Income.

Also
in 2011, Talisman completed an additional transaction with Sasol to develop the Cypress A assets in Talisman's Montney shale play in British Columbia. Talisman sold 50% of its working interests
in the Cypress A assets for approximately $1.1 billion, comprising $257 million in cash and approximately $800 million of certain future development costs. The transaction
resulted in a pre-tax gain of $113 million, which is included in 'Gain on disposals' on the Consolidated Statements of Income.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       13

---



Farm-Outs

In October 2012, the Company reached agreements to farm down its working interest in the Block SL04B-10 in Sierra Leone
from 80% to 30%, including a reimbursement of past costs.

In
February 2012, Talisman reached an agreement with Mitsubishi to farm-out interests in nine of the Company's licences in Papua New Guinea's onshore Western Province. The agreement has
been approved by all partners and government approval was obtained in July 2012. This agreement is valued at approximately $280 million and is being paid in the form of a capital carry.
Following the farm-out, the Company's equity position averages 40% in these nine licences.

Acquisitions

During the year ended December 31, 2012, Talisman completed an agreement with the Kurdistan Regional Government for a further investment of
$50 million in the Kurdamir Block arising from the Company's decision to enter the next exploration sub-period of the licence.

The
Company entered into a new PSC with PETRONAS, the national oil company of Malaysia, acquiring ownership of a 60% working interest in the Kinabalu PSC as well as assuming operatorship on
December 26, 2012. As consideration for receipt of the PSC interest, the Company paid to PETRONAS a financial commitment in the amount of $50 million in January 2013.

During
2011, Talisman completed the acquisition of a 49% interest in Equión for cash consideration of $785 million, of which $613 million was paid as a deposit in 2010.
Since Equión is a jointly controlled entity, the Company is proportionately consolidating its interest, which is reported in the Other segment.

Also
in 2011, the Company acquired undeveloped land in the Alberta Duvernay shale play for approximately $510 million and acquired undeveloped land in the Eagle Ford shale play for
approximately $145 million. This is in addition to the Eagle Ford acreage acquired in 2010 for cash consideration of $910 million.

Reserves at December 31

Disclosure Requirements

As a Canadian public company, Talisman is subject to the oil and gas disclosure requirements of National Instrument 51-101
(NI 51-101) of the Canadian Securities Administrators. Information regarding the pricing assumptions used in the preparation of the estimates of
NI 51-101 reserves is set forth in Schedule A of Talisman's AIF dated March 6, 2013.

Talisman's
gross proved and probable reserves at December 31, 2012, compiled in accordance with NI 51-101 disclosure requirements using forecast prices, are estimated
as follows:

|Summary of working interest
reserves on gross basis |  | Light Oil
(mmbbls) | Heavy Oil
(mmbbls) | Shale Oil
(mmbbls) | Shale Gas
(bcf) | Non-Shale
Natural
Gas (bcf) | NGL
(mmbbls) | Total
(mmboe)
|--------------------------------------------------- |  | ------------------ | ------------------ | ------------------ | --------------- | --------------------------- | ------------ | -------------
|                                                   
|Proved Developed Producing                          |  | 125.6              | 35.0               | 1.9                | 1,026.1         | 1,689.6                     | 49.4         | 664.6        
|                                                    |  |                   
|Proved Developed Non-Producing                      |  | 8.6                |                   | 1.1                | 111.7           | 183.4                       | 2.4          | 61.4         
|                                                    |  |                   
|Proved Undeveloped                                  |  | 47.9               | 0.1                | 4.7                | 845.6           | 822.5                       | 34.2         | 365.0        
|                                                   
|Proved                                              |  | 182.1              | 35.1               | 7.7                | 1,983.4         | 2,695.5                     | 86.0         | 1,091.0      
|                                                    |  |                   
|Probable                                            |  | 178.3              | 4.5                | 4.5                | 1,217.9         | 1,172.3                     | 33.3         | 619.0        
|                                                   
|Total Proved Plus Probable                          |  | 360.4              | 39.6               | 12.2               | 3,201.3         | 3,867.8                     | 119.3        | 1,710.0      
|                                                   

14TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

---



Reconciliation of proved and probable reserves:

|Continuity of working interest
reserves on gross basis |  | Light Oil
(mmbbls) |   | Heavy Oil
(mmbbls) |   | Shale Oil
(mmbbls) |   | Shale Gas
(bcf) |   | Non-Shale
Natural
Gas (bcf) |   | NGL
(mmbbls) |   | Total
(mmboe) |  
|------------------------------------------------------ |  | ------------------ | - | ------------------ | - | ------------------ | - | --------------- | - | --------------------------- | - | ------------ | - | ------------- | -
|                                                       | 
|At December 31, 2011                                   |  | 701.1              |   | 53.1               |   | 7.4                |   | 3,551.7         |   | 4,636.6                     |   | 95.9         |   | 2,222.3       |  
|                                                       |  |                    |  
|Discoveries                                            |  |                   |   |                   |   |                   |   |                |   |                            |   |             |   |              |  
|                                                       |  |                    |  
|Additions and extensions                               |  | (68.6              | ) | 1.0                |   | 8.1                |   | (340.1          | ) | (116.2                      | ) | 31.5         |   | (104.3        | )
|                                                       |  |                    |  
|Acquisitions                                           |  | 10.1               |   |                   |   |                   |   |                |   | 11.9                        |   |             |   | 12.0          |  
|                                                       |  |                    |  
|Divestment                                             |  | (206.6             | ) | (11.0              | ) |                   |   |                |   | (194.9                      | ) | (4.0         | ) | (254.4        | )
|                                                       |  |                    |  
|Technical revisions                                    |  | (21.7              | ) | 1.3                |   | (3.1               | ) | 107.3           |   | (131.9                      | ) | 3.4          |   | (23.3         | )
|                                                       |  |                    |  
|Economic revisions                                     |  | (7.1               | ) | (0.2               | ) | 0.2                |   | 109.8           |   | 14.6                        |   | 0.4          |   | 13.9          |  
|                                                       |  |                    |  
|Production                                             |  | (46.8              | ) | (4.6               | ) | (0.4               | ) | (227.4          | ) | (352.3                      | ) | (7.9         | ) | (156.2        | )
|                                                       | 
|At December 31, 2012                                   |  | 360.4              |   | 39.6               |   | 12.2               |   | 3,201.3         |   | 3,867.8                     |   | 119.3        |   | 1,710.0       |  
|                                                       | 

At the end of 2012, Talisman's proved plus probable reserves totalled 1.7 billion boe. The Company added (discoveries, extensions, and additions plus
other revisions) approximately 31 mmboe of proved plus probable reserves (18 mmboe proved) in the liquids-rich Eagle Ford shale play, 26 mmboe proved plus probable
reserves (19 mmboe proved) in the Montney shale, 11 mmboe proved plus probable reserves (five mmboe proved) in Wild River, Canada, and seven mmboe proved plus probable
(nil proved) reserves in Corridor, Indonesia.

In
the Marcellus dry gas shale play, capital spending has been reduced significantly, which led to negative reserve additions (discoveries, extensions, and additions plus other revisions) of
approximately 38 mmboe of proved plus probable reserves (91 mmboe proved). These negative additions reflect uncertainty in the timing of development, not technical certainty.

In
the North Sea, development of the Auk South and Yme projects have been deferred, resulting in negative additions (discoveries, extensions, and additions plus other revisions) of approximately
56 mmboe of proved plus probable reserves (44 mmboe proved). The negative additions in the North Sea also primarily reflect uncertainty in the timing of development, not technical
certainty.

As
part of the decision to focus the portfolio, Talisman announced it will exit Peru, with a reduction of approximately 21 mmboe of proved plus probable (nil proved) reserves.

Liquidity and Capital Resources

Talisman's debt at December 31, 2012 was $4.4 billion ($3.7 billion, net of cash and cash equivalents and bank indebtedness),
down from $4.9 billion ($4.5 billion, net of cash and cash equivalents and bank indebtedness) at December 31, 2011.

During
2012, the Company generated $2.7 billion of cash provided by operating activities, incurred capital expenditures of $3.7 billion and acquisition expenditures of
$109 million, and received proceeds of $964 million from the disposition of assets and proceeds of $1.3 billion from the reduction in its UK investment, net of
cash disposed.

On
an ongoing basis, Talisman plans to fund its capital program and acquisitions through a combination of cash on hand, cash provided by operating activities and cash proceeds from the disposition of
non-core assets, by drawing on the Company's credit facilities, issuing commercial paper, or issuing equity, long-term notes or debentures under the Company's shelf
prospectuses.

In
April 2012, the Company renewed the universal shelf prospectus under the Multi-Jurisdictional Disclosure System pursuant to which it may issue up to C$3.5 billion of debt securities,
common shares, preferred shares, subscription receipts, warrants and units. The Company also renewed its medium term note shelf prospectus in Canada pursuant to which it may issue up to
C$1 billion of medium term notes in Canada. Both shelf prospectuses remain valid over a 25 month period.

In
May 2012, Talisman completed a $600 million offering of 5.5% unsecured notes due May 2042. Interest on the notes is payable semi-annually. The proceeds of
$583 million, net of the discount and issuance costs, were used to repay commercial paper and bankers' acceptances.

At
December 31, 2012, there were 8,000,000 Series 1 preferred shares outstanding. Holders of Series 1 preferred shares are entitled to receive cumulative quarterly fixed
dividends of 4.2% per annum for the initial period ending December 31, 2016, as and when declared by the Board of Directors. Thereafter, the dividend rate will be reset every five years at a
rate equal to the five-year Government of Canada bond yield plus 2.77%. During 2012, Talisman declared preferred share dividends of C$1.1011 per share
(2011  C$nil; 2010  C$nil), including dividends for the full year of 2012 and a pro-rata amount from the date
of issuance of the

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       15

---



Series 1
preferred shares on December 13, 2011 until December 31, 2011, for an aggregate dividend of $9 million (2011  $nil;
2010  $nil).

The
Company has an active hedging program that will partially protect 2013 cash flow from the effect of declining oil and gas prices. See the 'Risk Management' section of this MD&A for further
information.

With
the exception of the $8 million of debt presented as a current liability relating to the Company's participation in a series of Tangguh project financing facilities, Talisman has no
significant debt maturities until 2014.

Talisman
manages its balance sheet with reference to its liquidity and a debt-to-cash flow ratio. The main factors in assessing the Company's liquidity are cash flow (defined
in accordance with the Company's debt covenant as cash provided by operating activities before adjusting for changes in non-cash working capital, exploration expenditure and amounts
attributable to assets subject to non-recourse debt), cash provided by and used in investing activities and available bank credit facilities. The debt-to-cash flow
ratio is calculated using debt (calculated by adding the gross debt and bank indebtedness, production payments and finance lease less non-recourse debt) divided by cash flow for
the year.

The
Company is in compliance with all of its debt covenants. The Company's principal financial covenant under its primary bank credit facility is a debt-to-cash flow ratio of
less than 3.5:1, calculated quarterly on a trailing 12-month basis as of the last day of each fiscal quarter. Talisman's debt-to-cash flow was 1.41:1 at
December 31, 2012 compared to 1.39:1 at December 31, 2011.

At
December 31, 2012, Talisman has unsecured bank credit facilities of $4.1 billion, consisting of facilities of $3.9 billion (Facility No. 1)
and $200 million (Facility No. 2), which are fully committed through November 2014. The maturity date of these facilities may be extended from time to time upon agreement
between the Company and the respective lenders.

The
Company established a US commercial paper program in November 2011. The authorized amount under this program is $1 billion. The amount available under the commercial paper program is
limited to the availability of backup funds under the Company's bank credit facilities. The outstanding commercial paper was repaid in full during 2012.

Available
borrowing capacity was $4.0 billion at December 31, 2012.

The
Company utilizes letters of credit pursuant to letter of credit facilities, most of which are uncommitted. Letters of credit are issued by banks under these uncommitted facilities and most are
renewed annually. At January 1, 2013, letters of credit totalling $2.1 billion had been issued under these facilities, of which $1.6 billion were provided as security for the
costs of decommissioning obligations in the UK. Under the contractual arrangements pursuant to which APUK acquired 49% of the share capital of TEUK, APUK's parent company, China Petrochemical
Corporation, has provided an unconditional and irrevocable guarantee for 49% of the UK decommissioning obligations. The remaining outstanding letters of credit relate primarily to a retirement
compensation arrangement, guarantees of minimum work commitments and decommissioning obligations in other areas.

The
Company routinely assesses the financial strength of its joint venture participants and customers, in accordance with the Company's credit risk guidelines. At this time, Talisman expects that such
counterparties will be able to meet their obligations when they become due.

A
significant proportion of Talisman's accounts receivable balance is with customers in the oil and gas industry and is subject to normal industry credit risks. At December 31, 2012,
approximately 91% of the Company's trade accounts receivable were current and the largest single counterparty exposure, accounting for 21% of the total, was with a very highly rated counterparty.
Concentration of credit risk is mitigated by having a broad domestic and international customer base. The maximum credit exposure associated with accounts receivable is the carrying value. At
December 31, 2012, an allowance of $33 million, representing the Company's 51% share of the $65 million allowance recorded in TEUK in 2011, consisted of a balance due from a
counterparty that had filed for bankruptcy.

Talisman's
normal course issuer bid program expired on December 14, 2011. Talisman did not renew this program in 2012 and did not repurchase any common shares under its normal course issuer bid
during the year ended December 31, 2011.

During
2012, Talisman declared common share dividends of $0.27 per share (2011  $0.27 per share; 2010  C$0.25 per share)
for an aggregate dividend of $277 million (2011  $277 million; 2010  $249 million).

At
December 31, 2012, there were 1,032,463,974 common shares outstanding, of which 7,014,244 were held in trust by the Company (see below) resulting in
1,025,449,730 common shares outstanding for accounting purposes. Subsequent to December 31, 2012, 1,313,810 shares were issued pursuant to the exercise of stock options, with
1,033,777,784 common shares outstanding at February 28, 2013, of which 7,014,244 were held in trust by the Company resulting in 1,026,763,540 common shares outstanding for accounting purposes.

16TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

---



At
December 31, 2012, there were 59,836,097 stock options, 6,795,106 cash units and 16,536,700 long-term performance share units (PSUs) outstanding. Subsequent
to December 31, 2012, 117,270 stock options were granted, 1,313,810 were exercised for shares, 259,500 were surrendered for cash and 1,922,532 were forfeited or expired, with 56,457,525
outstanding at February 28, 2013. Subsequent to December 31, 2012, 57,007 cash units were granted, 143,306 were exercised and 191,104 were forfeited or expired, with 6,517,703
outstanding at February 28, 2013. Subsequent to December 31, 2012, 622,578 long-term PSUs were granted and 1,186,873 were forfeited or expired, with 15,972,405 outstanding at
February 28, 2013.

The
Company may purchase shares on the open market to satisfy its obligation to deliver common shares to settle long-term PSUs, which are held in trust. During the year ended
December 31, 2012, 2,022,000 common shares were purchased on the open market for $25 million and placed in a trust having an arm's-length third party trustee. Between
January 1 and February 28, 2013, no further common shares were purchased on the open market.

Talisman
continually monitors its portfolio of assets and investigates business opportunities in the oil and gas sector. The Company may make acquisitions, investments or dispositions, some of which
may be material. In connection with any acquisition or investment, Talisman may incur debt or issue equity.

For
additional information regarding the Company's liquidity and capital resources, refer to notes 17 and 20 to the 2012 audited Consolidated Financial Statements.

Sensitivities

Talisman's financial performance is affected by factors such as changes in production volumes, commodity prices and exchange rates. The estimated
annualized impact of these factors for 2013 (excluding the effect of derivative contracts) is summarized in the following table, based on a Dated Brent oil price of approximately $100/bbl, a NYMEX
natural gas price of approximately $3.60/mmbtu and exchange rates of US$1=C$1 and UK£1=US$1.60.

|(millions of $)       |                                            | Net Income |    | Cash Provided
by Operating
Activities |    
|--------------------- | ------------------------------------------ | ---------- | -- | ------------------------------------- | ---
|                      |                                           
|Volume changes        |                                            |            |    |                                       |    
|                      |                                            |            |   
|                      | Oil  10,000 bbls/d                        |            | 75 |                                       | 190
|                      |                                            |            |   
|                      | Natural gas  60 mmcf/d                    |            | 10 |                                       | 50 
|                      |                                           
|Price changes(1)      |                                            |            |    |                                       |    
|                      |                                            |            |   
|                      | Oil  $1.00/bbl                            |            | 20 |                                       | 35 
|                      |                                            |            |   
|                      | Natural gas (North America)(2)  $0.10/mcf |            | 15 |                                       | 25 
|                      |                                           
|Exchange rate changes |                                            |            |    |                                       |    
|                      |                                            |            |   
|                      | US$/C$ decreased by US$0.01                |            | (5 | )                                     | (5 
|                      |                                            |            |   
|                      | US$/UK£ increased by US$0.02               |            |   |                                       | 5  
|                      |                                           

Commitments and Off-Balance Sheet Arrangements

As part of its normal business, the Company has entered into arrangements and incurred obligations that will impact the Company's future operations
and liquidity, some of which are reflected as liabilities in the Consolidated Financial Statements at year-end. The principal commitments of the Company are in the form of debt repayments,
decommissioning obligations, lease commitments relating to corporate offices and ocean-going vessels, firm commitments for gathering, processing and transmission services, minimum work commitments
under various international agreements, other service contracts and fixed price commodity sales contracts.

Additional
disclosure of the Company's decommissioning liabilities, debt repayment obligations and significant commitments can be found in notes 15, 17, 18 and 23 to the 2012 audited
Consolidated Financial Statements. A discussion of the Company's derivative financial instruments and commodity sales contracts can be found in the 'Risk Management' section of this MD&A.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       17

---



The
following table includes the Company's gross long-term debt, decommissioning obligations, share-based payments, operating and finance leases, PP&E and E&E assets, commitments and other
expected future payment commitments as at December 31, 2012 and estimated timing of such payments:

|                                             |  |                             |  |        |  | Payments due by period(1),(2) (millions of $) | 
|-------------------------------------------- |  | --------------------------- |  | ------ |  | --------------------------------------------- | 
|                                            
|Commitments                                  |  | Recognized
in balance sheet |  | Total  |  | Less than
1 year                              | 
|                                            
|Gross long-term debt                         |  | Yes  Liability             |  | 4,442  |  | 8                                             | 
|                                             |  |                            
|Decommissioning liabilities(3)               |  | Yes  Partially accrued     |  | 4,074  |  | 49                                            | 
|                                             |  |                            
|Office leases                                |  | No                          |  | 191    |  | 49                                            | 
|                                             |  |                            
|Vessel leases                                |  | No                          |  | 571    |  | 125                                           | 
|                                             |  |                            
|Finance lease obligations                    |  | Yes  Partially accrued     |  | 97     |  | 18                                            | 
|                                             |  |                            
|Transportation and processing commitments(4) |  | No                          |  | 2,348  |  | 329                                           | 
|                                             |  |                            
|PP&E and E&E assets(5)                       |  | No                          |  | 850    |  | 413                                           | 
|                                             |  |                            
|Other service contracts                      |  | No                          |  | 628    |  | 248                                           | 
|                                             |  |                            
|Share-based payments(6)                      |  | Yes  Liability             |  | 163    |  | 142                                           | 
|                                            
|Total                                        |  |                             |  | 13,364 |  | 1,381                                         | 
|                                            

There have been no significant changes in the Company's expected future payment commitments, and the timing of those payments, since
December 31, 2012.

Transactions with Related Parties

The compensation of key management personnel, consisting of the Company's directors and executive officers, is as follows:

|                                           |  |      |  |      |  |     
|------------------------------------------ |  | ---- |  | ---- |  | ----
|(millions of $)                            |  | 2012 |  | 2011 |  | 2010
|                                          
|Short-term benefits                        |  | 15   |  | 15   |  | 14  
|                                           |  |     
|Pension and other post-employment benefits |  | 6    |  | 5    |  | 4   
|                                           |  |     
|Termination benefits                       |  | 15   |  | 4    |  |    
|                                           |  |     
|Share-based payments(1)                    |  | 13   |  | 11   |  | 15  
|                                          
|                                           |  | 49   |  | 35   |  | 33  
|                                          

There were no other significant transactions with related parties.

Risk Management

Talisman monitors its exposure to variations in commodity prices, interest rates and foreign exchange rates. In response, Talisman periodically
enters into physical delivery transactions for commodities of fixed or collared prices and into derivative financial instruments to reduce exposure to unfavourable movements in commodity prices,
interest rates and foreign exchange rates. The terms of these contracts or instruments may limit the benefit of favourable changes in commodity prices, interest rates and currency values and may
result in financial or opportunity loss due to delivery commitments, royalty rates and counterparty risks associated with contracts.

The
Company has established a system of internal controls to minimize risks associated with its derivatives program and credit risk associated with derivatives counterparties.

18TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

---



The
accounting policy with respect to derivative financial instruments and commodity sales contracts is set out in note 3(p) to the Consolidated Financial Statements. Derivative
financial instruments and commodity sales contracts outstanding at December 31, 2012, including their respective fair values, are detailed in note 22 to the Consolidated Financial
Statements.

The
Company has elected not to designate as hedges for accounting purposes any commodity price derivative contracts entered into. These derivatives are classified as
held-for-trading financial instruments and are measured at fair value with changes in fair value recognized in net income quarterly. This can potentially increase the
volatility of net income.

Commodity Price Derivative Financial Instruments

The Company had the following commodity price derivative contracts outstanding at December 31, 2012, none of which are designated
as hedges:

|Two-way collars (Oil) |  | Term           |  | bbls/d |  | Floor/ceiling $/bbl
|--------------------- |  | -------------- |  | ------ |  | -------------------
|                     
|Dated Brent oil index |  | Jan  Dec 2013 |  | 6,000  |  | 90.00/121.63       
|                      |  |               
|Dated Brent oil index |  | Jan  Dec 2013 |  | 10,000 |  | 90.00/101.91       
|                      |  |               
|Dated Brent oil index |  | Jan  Dec 2013 |  | 10,000 |  | 90.00/105.33       
|                      |  |               
|WTI                   |  | Jan  Dec 2013 |  | 10,000 |  | 85.00/104.05       
|                     

|Fixed price swaps (Oil) |  | Term           |  | bbls/d |  | $/bbl 
|----------------------- |  | -------------- |  | ------ |  | ------
|                       
|Dated Brent oil index   |  | Jan  Dec 2013 |  | 7,500  |  | 110.01
|                        |  |               
|Dated Brent oil index   |  | Jan  Dec 2013 |  | 26,500 |  | 105.22
|                        |  |               
|Dated Brent oil index   |  | Jan  Mar 2014 |  | 9,000  |  | 103.12
|                       

|Two-way collars (Gas) |  | Term           |  | mcf/d  |  | Floor/ceiling $/mcf
|--------------------- |  | -------------- |  | ------ |  | -------------------
|                     
|NYMEX                 |  | Jan  Dec 2013 |  | 47,468 |  | 3.16/4.67          
|                      |  |               
|NYMEX                 |  | Jan  Dec 2013 |  | 94,936 |  | 3.16/4.74          
|                      |  |               
|NYMEX                 |  | Jan  Dec 2013 |  | 94,936 |  | 3.69/4.86          
|                      |  |               
|NYMEX                 |  | Jan  Dec 2013 |  | 94,936 |  | 3.79/4.69          
|                      |  |               
|NYMEX                 |  | Jan  Dec 2014 |  | 94,936 |  | 4.21/4.71          
|                     

Subsequent to December 31, 2012, the Company entered into a Dated Brent swap for the first quarter of 2014 of 1,000 bbls/d for $104.15/bbl, a
Dated Brent swap for the first half of 2014 of 10,000 bbls/d for $103.06/bbl, a Dated Brent swap for the second half of 2014 of 9,000 bbls/d for $103.67/bbl, a WTI swap for 2014 of
2,500 bbls/d for $91.91/bbl and a NYMEX swap for 2014 of 85,443 mcf/d for $4.25/mcf.

Further
details of contracts outstanding are presented in note 22 to the Consolidated Financial Statements.

Long-Term Sales Contracts

In order to support the Company's investments in natural gas projects outside of North America and the North Sea, Talisman has entered into a number
of long-term sales contracts.

The
majority of Talisman's Corridor natural gas production in Indonesia is currently sold under long-term sales agreements with PT Chevron Pacific Indonesia (Chevron), Gas Supply
Pte. Ltd. (Gas Supply) and PT Perusahaan Gas Negara (Persero), Tbk (PGN). Under two sales agreements with Chevron, the majority of sales are priced at approximately 76% of the equivalent
value of the Indonesia Crude Price for Duri crude oil. One of the agreements with Chevron is currently scheduled to expire in 2013 while the second agreement is due to expire in 2021. The minimum
volume commitment under the second agreement is approximately 294 bcf over its remaining nine-year life.

Under
the sales agreement with Gas Supply, sales to Singapore from Corridor are referenced to the spot price of high sulphur fuel oil in Singapore. The minimum volume commitment is approximately
197 bcf over the remaining 11-year life of the contract. Sales from Corridor to PGN for their markets in West Java are sold under a long-term contract with no associated
transportation costs. The minimum volume commitment is approximately 523 bcf over the remaining 11-year life of the contract. Subsequent to December 31, 2012, an agreement
has been reached with PGN to increase the contract price for the sale of Corridor gas under the PGN West Java Gas Sales Agreement. Under the new agreement, the gas price will increase in stages
effective September 2012.

The
balance of the gas production from Corridor is sold under medium to long-term agreements which vary in length from two to seven years and are generally at fixed prices with fixed
annual escalation.

At
Jambi Merang, the majority of gas production is sold under long-term agreements which contain fixed prices with fixed annual escalation and are in place until the current termination date of the
PSC, which is February 2019.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       19

---



The Company is subject to volume delivery requirements for approximately 90 mmcf/d, at prices referenced to the Singapore high sulphur fuel oil spot market in relation to a
long-term sales contract in Malaysia, currently scheduled to end in 2018. In the event these delivery requirements are not met in a contract year, volumes delivered in the subsequent
contract year are subject to a 25% price discount for the equivalent volume of unexcused shortage that was not delivered in the prior year.

Currently,
the Company anticipates having sufficient production to meet future delivery requirements.

Interest Rate Swap

In order to swap a portion of the $375 million 5.125% notes due 2015 to floating interest rates, the Company entered into fixed to floating
interest rate swap contracts with a total notional amount of $300 million that expire on May 15, 2015. These swap contracts require Talisman to pay interest at a rate of three-month US$
LIBOR plus 0.433% while receiving payments of 5.125% semi-annually.

Summary of Quarterly Results

The following is a summary of quarterly results of the Company for the eight most recently completed quarters.

|                                         |                                                      |        |       |                    |       |         |       |         |       |         |      
|---------------------------------------- | ---------------------------------------------------- | ------ | ----- | ------------------ | ----- | ------- | ----- | ------- | ----- | ------- | -----
|                                         |                                                      |        |       | Three months ended |      
|                                         |                                                     
|(millions of $, unless otherwise stated) |                                                      | Annual |       | Dec. 31            |       | Sep. 30 |       | Jun. 30 |       | Mar. 31 |      
|                                         |                                                     
|2012                                     |                                                      |        |       |                    |       |         |       |         |       |         |      
|                                         |                                                      |        |      
|Total revenue and other income           |                                                      | 7,312  |       | 1,606              |       | 1,722   |       | 1,869   |       | 2,115   |      
|                                         |                                                     
|Net income (loss)                        |                                                      | 132    |       | 376                |       | (731    | )     | 196     |       | 291     |      
|                                         |                                                     
|Per common share ($)                     |                                                      |        |       |                    |       |         |       |         |       |         |      
|                                         |                                                      |        |      
|                                         | Net income (loss)(1)                                 |        | 0.12  |                    | 0.37  |         | (0.71 | )       | 0.19  |         | 0.28 
|                                         |                                                      |        |      
|                                         | Diluted net income (loss)(2)                         |        | 0.01  |                    | 0.31  |         | (0.71 | )       | 0.14  |         | 0.24 
|                                         |                                                     
|Daily average production                 |                                                      |        |       |                    |       |         |       |         |       |         |      
|                                         |                                                      |        |      
|                                         | Oil and liquids from ongoing operations (mbbls/d)(3) |        | 162   |                    | 143   |         | 159   |         | 161   |         | 187  
|                                         |                                                      |        |      
|                                         | Natural gas from ongoing operations (mmcf/d)         |        | 1,582 |                    | 1,498 |         | 1,533 |         | 1,642 |         | 1,652
|                                         |                                                      |        |      
|                                         | From ongoing operations (mboe/d)                     |        | 397   |                    | 373   |         | 388   |         | 404   |         | 424  
|                                         |                                                      |        |      
|                                         | Assets sold (mboe/d)                                 |        | 29    |                    | 19    |         | 27    |         | 31    |         | 38   
|                                         |                                                     
|                                         | Total (mboe/d)                                       |        | 426   |                    | 392   |         | 415   |         | 435   |         | 462  
|                                         |                                                     
|2011                                     |                                                      |        |       |                    |       |         |       |         |       |         |      
|                                         |                                                      |        |      
|Total revenue and other income           |                                                      | 8,272  |       | 2,082              |       | 1,956   |       | 2,234   |       | 2,000   |      
|                                         |                                                     
|Net income (loss)                        |                                                      | 776    |       | (117               | )     | 521     |       | 698     |       | (326    | )    
|                                         |                                                     
|Per common share ($)                     |                                                      |        |       |                    |       |         |       |         |       |         |      
|                                         |                                                      |        |      
|                                         | Net income (loss)                                    |        | 0.76  |                    | (0.11 | )       | 0.51  |         | 0.68  |         | (0.32
|                                         |                                                      |        |      
|                                         | Diluted net income (loss)(2)                         |        | 0.38  |                    | (0.11 | )       | 0.24  |         | 0.50  |         | (0.32
|                                         |                                                     
|Daily average production                 |                                                      |        |       |                    |       |         |       |         |       |         |      
|                                         |                                                      |        |      
|                                         | Oil and liquids from ongoing operations (mbbls/d)(3) |        | 178   |                    | 180   |         | 161   |         | 175   |         | 197  
|                                         |                                                      |        |      
|                                         | Natural gas from ongoing operations (mmcf/d)         |        | 1,491 |                    | 1,572 |         | 1,435 |         | 1,470 |         | 1,484
|                                         |                                                      |        |      
|                                         | From ongoing operations (mboe/d)                     |        | 383   |                    | 403   |         | 364   |         | 376   |         | 391  
|                                         |                                                      |        |      
|                                         | Assets sold (mboe/d)                                 |        | 43    |                    | 39    |         | 36    |         | 44    |         | 53   
|                                         |                                                     
|                                         | Total (mboe/d)                                       |        | 426   |                    | 442   |         | 400   |         | 420   |         | 444  
|                                         |                                                     

During the three-month period ended December 31, 2012, total revenue and other income decreased by $476 million over the same period in 2011 due
principally to lower production volumes in the North Sea. Net loss of $117 million in the three-month period ended December 31, 2011 increased to net income of $376 million in the
three-month period ended December 31, 2012 due principally to the gain on sale of a 49% equity interest in TEUK to Sinopec, the revaluation gain recorded upon restructuring the Company's
investment in Ocensa, as well as a decrease in taxes and a decrease in loss on held-for-trading financial instruments, partially offset by the revenue variance and an increase
in impairment expense and DD&A.

20TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

---



Also,
during the three-month period ended December 31, 2012, the Company:

Strategy and Outlook

Talisman plans to improve total shareholder returns through more selective and disciplined allocation of capital, and better execution of
day-to-day operations within a more focused portfolio. Achieving this goal, combined with a focus on short-term, high cash margin opportunities, is expected to
increase cash flow per share. To achieve this, Talisman has set four key priorities:

The
2013 capital focus has shifted to near-term, higher netback opportunities. Exploration activities are expected to be reduced significantly and will be directed primarily at proving up
oil potential in Colombia, the Kurdistan Region of Iraq and Southeast Asia.

In
2013, Talisman plans to spend approximately $3.0 billion on exploration and development activities. The Company has some flexibility to adjust its capital spending to pursue opportunities
and respond to a changing economic outlook. Indicative capital estimates across the Company's subsidiaries and jointly controlled entities, which are subject to change, are as follows:

|(millions of $)                 |  | 2013 
|------------------------------- |  | -----
|                               
|North America                   |  | 1,100
|                                |  |      
|Colombia                        |  | 250  
|                                |  |      
|Southeast Asia                  |  | 650  
|                                |  |      
|North Sea                       |  | 800  
|                                |  |      
|Rest of the World and Corporate |  | 200  
|                               
|                                |  | 3,000
|                               

The Company intends to sell approximately $2  3 billion in non-core assets in the next 12 to
18 months.

Production
for 2013 is expected to be between 375,000  395,000 boe/d, down from 426,000 boe/d in 2012, primarily as a result of disposals of approximately
25,000 boe/d through the UK joint venture and 4,000 boe/d of non-core assets in North America.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       21

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Internal Control over Financial Reporting and Disclosure Controls and Procedures

Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in
rules 13a-15(f) and 15d-15(f) under the United States Securities Exchange Act of 1934, as amended (the Exchange Act).

Management,
including the Company's Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the Company's internal control over financial reporting based on criteria
established inInternal Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission.

Based
on management's assessment as at December 31, 2012, management has concluded that the Company's internal control over financial reporting is effective.

The
results of management's assessment were reviewed with the Audit Committee of the Company's Board of Directors. Ernst & Young LLP, the independent registered public accounting firm
that audited the Company's Consolidated Financial Statements, independently assessed the effectiveness of the Company's internal control over financial reporting. Ernst & Young LLP's
attestation is located in the Independent Auditors' Report on Internal Controls Under Standards of the Public Company Accounting Oversight Board (United States), which is an exhibit to the
Company's Annual Report on Form 40-F.

Because
of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of the Company's financial statements would be
prevented or detected. Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is
subject to the risks that controls may become inadequate.

Effective
January 1, 2012, Talisman implemented a new integrated finance and supply chain application in its North American business and corporate function. The implementation of this new
application was not in response to any deficiency in the Company's internal controls. The Company has assessed the impact of the application implementation and has made modifications to the control
environment accordingly.

Except
as disclosed above, there have been no other changes in Talisman's internal control over financial reporting during the year ended December 31, 2012 that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over financial reporting.

Disclosure Controls and Procedures

At the end of the period covered by this MD&A, an evaluation was carried out under the supervision of, and with the participation of, the Company's
management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures
(as defined in rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the design and operation of these disclosure controls and procedures were effective.

Talisman's
disclosure controls and procedures are designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is
(a) accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to
allow timely decisions regarding required disclosure; and (b) reported within the time periods specified in the rules and forms of the SEC and the Canadian Securities Administrators.

Legal Proceedings

From time to time, Talisman is the subject of litigation arising out of the Company's operations. Damages claimed under such litigation may be
material or may be indeterminate and the outcome of such litigation may materially impact the Company's financial condition or results of operations. While Talisman assesses the merits of each lawsuit
and defends itself accordingly, the Company may be required to incur significant expenses or devote significant resources to defend itself against such litigation. These claims are not expected to
have a material impact on the Company's financial position.

The
New York Attorney General has commenced an investigation, pursuant to theMartin Act, into the disclosure practices of companies engaged in
hydraulic fracturing in the New York state area. TheMartin Actprovides broad authority to commence and conduct investigations, whether upon
receipt of a complaint, or on the Attorney General's own initiative. Subpoenas have been issued to a number of companies, including Talisman. The Company has been cooperating with the New York
Attorney General in the investigation. No enforcement action has been taken against Talisman, nor has the Company been advised that any enforcement action is imminent.

22TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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Application of Critical Accounting Policies and Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect reported assets and liabilities,
disclosures of contingencies and revenues and expenses. Management is also required to adopt accounting policies that require the use of significant estimates and judgment. Actual results could differ
materially from those estimates. A summary of significant accounting policies adopted by Talisman can be found in note 3 to the Consolidated Financial Statements. In assisting the
Company's Audit Committee to fulfil its financial statement oversight role, management regularly meets with the Committee to review the Company's significant accounting policies, estimates and any
significant changes thereto, including those discussed below.

Management
believes the most critical accounting policies, including judgments in their application, which may have an impact on the Company's financial results, relate to the accounting for PP&E, E&E
assets, decommissioning liabilities, the recognition of assets acquired and liabilities assumed upon a business combination and goodwill. The rate at which the Company's assets are depleted,
depreciated or otherwise written off and the decommissioning liabilities provided for, with the associated accretion expensed to the income statement, are subject to a number of estimates about future
events, many of which are beyond management's control. Reserves recognition is central to much of an oil and gas company's accounting, as described below.

Reserves Recognition

Underpinning Talisman's estimates and judgments regarding oil and gas assets and goodwill are its oil and gas reserves. Detailed rules and industry
practice, to which Talisman adheres, have been developed to provide uniform reserves recognition criteria. However, the process of estimating oil and gas reserves is inherently judgmental. There are
two principal sources of uncertainty: technical and commercial. Technical reserves estimates are made using available geological and reservoir data as well as production performance data. As new data
becomes available, including actual reservoir performance, reserves estimates may change. Reserves can also be classified as proved or probable with decreasing levels of certainty as to the likelihood
that the reserves will be ultimately produced.

Reserves
recognition is also impacted by economic considerations. In order for reserves to be recognized, they must be reasonably certain of being produced under existing economic and operating
conditions, which is viewed as being annual average commodity prices determined by the prices in effect on the first day of each month with a cost profile based on current operations
(SEC requirements) or forecast prices and cost assumptions (NI 51-101 requirements). Any anticipated changes in conditions must have reasonable certainty of
occurrence. In particular, in international operations, consideration includes the status
of field development planning and gas sales contracts. As economic conditions change, primarily as a result of changes in commodity prices and, to a lesser extent, operating and capital costs,
marginally profitable production, typically experienced in the later years of a field's life cycle, may be added to reserves or, conversely, may no longer qualify for reserves recognition.

The
Company's reserves and revisions to those reserves, although not separately reported on the Company's balance sheet or income statement, impact the Company's reported assets, liabilities and net
income through the DD&A of the Company's PP&E, impairments and the provision for decommissioning liabilities.

The
Reserves Committee of Talisman's Board of Directors reviews the Company's reserves booking process and related public disclosures and the report of the internal qualified reserves evaluator
(IQRE). The primary responsibilities of the Reserves Committee include, among other things, reviewing the Company's reserves booking process and recommending to the Board of Directors the Company's
annual disclosure of reserves data and other oil and gas information contained in the Company's AIF. The IQRE reports the Company's annual reserves data to the Reserves Committee and delivers a
regulatory certificate regarding proved and probable reserves and their related future net revenue, disclosed pursuant to NI 51-101 requirements.

Depreciation, Depletion and Amortization Expense (DD&A)

A significant portion of the Company's PP&E is amortized based on the unit of production method with other assets being depreciated on a
straight-line basis over their expected useful lives. The unit of production method attempts to amortize the asset's cost over its proved oil and gas reserves base. Accordingly, revisions
to reserves or changes to management's view as to the operational lifespan of an asset will impact the Company's future DD&A expense. Depletion and depreciation rates are updated in each reporting
period that a significant change in circumstances, including reserves revisions, occurs.

Exploration and Evaluation (E&E) Assets

Exploration well costs are initially capitalized and, if subsequently determined to have not found sufficient reserves to justify commercial
production, are charged to dry hole expense. Exploration well costs that have found sufficient reserves to justify commercial production, but those reserves cannot be classified as proved, continue to
be capitalized as long as sufficient progress is being made to assess the reserves and economic viability of the well and/or related project. All such carried costs are subject to technical,
commercial and management review at each reporting date to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written
off. When proved reserves of oil and natural gas are

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       23

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determined
and development is sanctioned, the relevant expenditure is tested for potential impairment and then transferred to PP&E. If a project no longer meets these criteria, it is tested for
impairment and transferred back from PP&E to E&E assets.

Undeveloped
land costs are classified initially as E&E assets and transferred to PP&E as proved reserves are assigned.

E&E
assets are not subject to DD&A.

Impairment of Assets

The Company tests PP&E and E&E assets for possible impairment whenever events or changes in circumstances indicate that the carrying value of an
asset may not be recoverable; for example, changes in assumptions relating to future prices, future costs, reserves and contingent resources. Individual assets are grouped for impairment assessment
purposes at the lowest level at which there are identifiable cash inflows that are largely independent of the cash inflows of other groups of assets, known as a cash-generating unit (CGU).
If any such indication of impairment exists, an estimate of the CGU's recoverable amount is made. A CGU's recoverable amount is the higher of its fair value less costs to sell and its value in use.
These assessments require the use of estimates and assumptions regarding long-term commodity prices, discount rates, future capital expenditures requirements, reserves determination and
life-of-field. Consideration is also given to recent market transactions for similar assets in assessing fair value. E&E assets are also tested for impairment when transferred
to PP&E.

A
previously recognized impairment loss is reversed only if there has been a change in the estimates or assumptions used to determine the CGU's recoverable amount since the impairment loss was
recognized. If that is the case, the carrying amount of the CGU is increased to its recoverable amount. That increased amount cannot exceed the carrying amount that would have been determined, net of
depreciation, had no impairment loss been recognized for the CGU in prior periods. Such a reversal is recognized in net income, following which the depreciation charge is adjusted in future periods to
allocate the CGU's revised carrying amount, less any residual value, on a systematic basis over its remaining useful life.

In
estimating the possible impairment to PP&E, management estimates fair value based on market information, which consists of offers to purchase the asset or comparable assets, independent market
surveys and values derived from exchange-quoted prices. Where reliable market information is not available, the recoverable amount was determined using cash flow projections that were based on a
long-term view of commodity prices and a post-tax discount rate of 10%.

During
the year, the Company recorded a net impairment of oil and gas assets of $2.7 billion (2011  $226 million;
2010  $301 million).

Goodwill Impairments

Goodwill represents the excess of the consideration transferred over the fair value of the identifiable assets acquired and liabilities assumed in a
business combination. Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. The impairment test requires that goodwill be allocated to
CGUs, which Talisman has determined by aggregating locations having similar economic characteristics and/or which are in similar geographic locations, and which correspond with the operating segments,
except for locations within the Other segment, which are allocated to the relevant countries. Impairment is determined for goodwill by assessing the recoverable amount (based on fair value less costs
to sell) of each segment to which the goodwill relates. Where the recoverable amount of the segment is less than the carrying amount, an impairment loss is recognized. Goodwill impairment losses
cannot be reversed. No impairment of goodwill was recorded during the year.

Business Combinations

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration
transferred at acquisition date fair value. When the Company acquires a business, it assesses the assets and liabilities assumed for appropriate classification and designation in accordance with the
contractual terms, economic circumstances and pertinent conditions as at the acquisition date. The Company allocates the purchase price to identifiable assets and liabilities based on their fair
value. In many cases, the determination of fair value requires management to make certain assumptions and estimates regarding future events. Typically in determining fair value, management develops a
number of possible future cash flow scenarios to which probabilities are judgmentally assigned. The acquired assets and liabilities may span multiple geographical segments and may be amortized at
different rates, or not at all as in the case of goodwill or, initially, for acquired probable reserves.

Transaction
costs include stamp duty, consulting fees (e.g. legal, accounting and valuation fees) and other integration costs and are expensed as incurred.

24TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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Decommissioning Liabilities

Decommissioning liabilities are measured based on the estimated cost of abandonment discounted to its net present value using a weighted average
credit-adjusted risk free rate. At December 31, 2012, the net present value of the Company's decommissioning liability was $2.8 billion
(2011  $3.0 billion) and is recorded as a liability on the Company's balance sheet. In determining the net present value of the Company's decommissioning
liability, management developed a number of possible remediation scenarios to which probabilities were assigned based on management's reasonable judgment. The undiscounted decommissioning obligations
were estimated at $4.1 billion at December 31, 2012 (2011  $5.0 billion), which is based on management's probability weighted estimate of
costs and is in accordance with existing legislation and industry practice. The majority of the payments to settle this provision will occur over a period of 35 years and will be funded from
the general resources of the Company as they arise. The provision for the costs of decommissioning production facilities and pipelines at the end of their economic lives has been estimated using
existing technology, at current prices or long-term assumptions and based upon the expected timing of the activity. The provision has been discounted using a weighted average
credit-adjusted risk free rate of 2.3% (2011  3.1%), which excludes the impact of inflation.

In
2012, the sale of a 49% equity interest in TEUK resulted in a reduction of decommissioning liabilities having a net present value of $996 million.

While
the provision is based on the best estimate of future costs and the economic lives of the facilities and pipelines, there is uncertainty regarding both the amount and timing of incurring these
costs. As an indication of possible future changes in estimated decommissioning liabilities, if all of the Company's decommissioning obligations could be deferred by one year, the net present value of
the liabilities would decrease by approximately $55 million.

Income Taxes

Current tax is based on estimated taxable income and tax rates, which are determined pursuant to the tax laws that are enacted or substantively
enacted at the balance sheet date.

Deferred
tax is determined using the liability method. Under the liability method, deferred tax is calculated based on the differences between assets and liabilities reported for financial accounting
purposes and those reported for income tax purposes. Deferred tax assets and liabilities are measured using substantively enacted tax rates. The impact of a change in tax rate is recognized in net
income in the period in which the tax rate is substantively enacted. The Company recognizes in its financial statements the best estimate of the impact of a tax position by determining if the
available evidence indicates whether it is more likely than not, based solely on technical merits, that the position will be sustained on audit. The Company estimates the amount to be recorded by
weighting all possible outcomes by their associated probabilities.

Deferred
tax assets and liabilities are offset only when a legally enforceable right of offset exists and the deferred tax assets and liabilities arose in the same tax jurisdiction and relate to the
same taxable entity. The Company assesses the available positive and negative evidence of both an objective and subjective nature to estimate if sufficient future taxable income will be generated to
realize the existing deferred tax assets.

The
determination of the income tax provision is an inherently complex process, requiring management to interpret continually changing regulations and to make certain judgments. Issues in dispute for
audited years and audits for subsequent years are ongoing and in various stages of completion in the jurisdictions in which the Company operates around the world. As a consequence, the balance in
unrecognized tax benefits can be expected to fluctuate from period to period. It is reasonably possible that such changes could be significant when compared with the Company's total unrecognized tax
benefits. However, the amount of change cannot be quantified.

Foreign Exchange Accounting

Talisman's worldwide operations expose the Company to transactions denominated in a number of different currencies, which are required to be
translated into one currency for financial statement reporting purposes. Talisman's foreign currency translation policy, as detailed in note 3(n) to the Consolidated Financial
Statements, is designed to reflect the economic exposure of the Company's operations to the various currencies. The Company's functional currency is US$, a reflection of Talisman's overall exposure to
US$ denominated transactions, assets and liabilities; oil prices are largely denominated in US$ as is much of the Company's corporate debt and international capital spending and operating costs.

Prior
to January 1, 2011 in the UK and prior to January 1, 2010 in Canada and Norway, the Company's operations were translated from UK£, C$ and NOK, respectively, into US$
using the current rate method whereby assets and liabilities were translated at year-end exchange rates, while revenues and expenses were converted using average rates for the period.
Gains and losses arising on translation from UK£, C$ and NOK to US$ were deferred and included in a separate component of shareholders' equity described as accumulated other comprehensive
income.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       25

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As
a result of changes in the composition of revenue and costs and changes in intercompany loan arrangements, management has determined that the functional currency of the Company's UK operation is
more closely linked to the US$. Accordingly, effective January 1, 2011, this operation has been accounted for as a US$ functional currency entity. Following the change in the functional
currency of the UK operation on January 1, 2011, the debt denominated in UK£ was no longer designated as a hedge of Talisman's net investment in the UK and, accordingly, foreign
exchange gains and losses are recorded on the Consolidated Statements of Income. In conjunction with the Company's reduction of its net investment in its UK subsidiary in 2012, foreign currency
translation adjustments of $23 million were reclassified out of accumulated comprehensive income into income.

The
Company's operations in Canada and Norway are accounted for as US$ functional currency entities. As a result, foreign currency translation adjustments remain in accumulated other comprehensive
income until Talisman reduces its net investment in its Canadian or Norwegian subsidiaries.

The
remaining foreign operations are translated as follows: monetary assets and liabilities at exchange rates in effect at the balance sheet date, non-monetary assets and liabilities at
rates in effect on the dates the assets were acquired or liabilities were assumed, and revenues and expenses at rates of exchange prevailing on the transaction dates. Gains and losses on translation
are reflected in income when incurred.

Production Sharing Contract (PSC) Arrangements

A significant portion of the Company's operations outside North America and the North Sea are governed by PSCs. Under PSCs, Talisman, along with
other working interest holders, typically bears all risk and costs for exploration, development and production. In return, if exploration is successful, Talisman recovers the sum of its investment and
operating costs (cost oil) from a percentage of the production and sale of the associated hydrocarbons. Talisman is also entitled to receive a share of the production in excess of cost oil (profit
oil). The sharing of profit oil varies between the working interest holders and the government from contract to contract. The cost oil, together with the Company's share of profit oil, represents
Talisman's hydrocarbon entitlement (working interest less royalties). Talisman records gross production, sales and reserves based on its working interest ownership with sales disclosed net of
royalties. In addition, certain of the Company's contractual arrangements in foreign jurisdictions stipulate that income tax payments are to be withheld from the Company and paid to the government out
of the respective national oil company's entitlement share of production. The Company includes such amounts in income tax expense at the statutory tax rate in effect at the time of production.

The
amount of cost oil required to recover Talisman's investment and costs in a PSC is dependent on commodity prices and, consequently, Talisman's share of profit oil is also impacted. Accordingly,
the amount of royalty paid by Talisman over the term of a PSC and the corresponding net after royalty reserves booked by the Company are dependent on the amount of initial investment and past costs
yet to be recovered and anticipated future costs, commodity prices and production. As a result, when year-end prices increase, the amount of net reserves after royalty the Company books
may decrease and vice versa.

Risk Management

The Company enters into derivative financial instruments in order to manage risks associated with fluctuations in commodity prices, interest rates
and foreign currency exchange rates. As detailed in Talisman's financial instruments accounting policy described in note 3(p) to the Consolidated Financial Statements, derivative
instruments are recorded at fair value on the Consolidated Balance Sheets. Gains or losses on financial instruments are recognized as hedging gains or losses or
held-for-trading gains or losses in net income. Fair values are determined based on third party market information and are subject to a degree of uncertainty. Estimates of fair
value are subject to change with fluctuations in commodity prices, interest rates, foreign currency exchange rates and estimates of non-performance risk. Cash settlement of derivative
financial instruments may vary from fair value estimates, depending on the underlying market prices at the date of settlement.

Accounting Changes

Accounting Standards and Interpretations Issued but Not Yet Effective

The following pronouncements from the International Accounting Standards Board (IASB) are applicable to Talisman and will become effective for future
reporting periods, but have not yet been adopted.

Effective January 1, 2013

26TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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Effective Subsequent to 2013

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       27

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Regulatory Developments

Dodd-Frank Act

In 2010, the US Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act or the Act) was signed into law.
The Dodd-Frank Act provides for numerous new substantive requirements in areas such as the disclosure of payments made to foreign governments, rules regarding the use of credit ratings,
and corporate governance and executive compensation reforms, among others, some of which apply to Talisman as a foreign private issuer. Talisman will continue to assess the effect on the Company of
the Dodd-Frank Act and related rules. The SEC has yet to issue the rules relating to pay-for-performance, pay parity, hedging and executive compensation clawbacks.

In
August 2012, the SEC adopted rules to implement Section 1504 of the Dodd-Frank Act. The rules require resource extraction issuers to disclose payments made to the US
federal government or a foreign government (including a department, agent or instrumentality of a foreign government or a company owned by a foreign government) in their annual reports. A payment
would be an amount that is not de minimus and that is paid to further the commercial development of oil, natural gas or minerals, including taxes, royalties, fees (including licence fees), bonuses,
production entitlements or any other material benefits the SEC determines is part of commonly recognized revenue streams for resource extraction. These rules come into effect for year-end
2013, but only with respect to the period from October 1 to December 31, 2013. Thereafter, Talisman will be required to report annually.

Risk Factors

Talisman is exposed to a number of risks inherent in exploring for, developing and producing crude oil and natural gas. This section describes the
important risks and other matters that could cause actual results of Talisman to differ materially from those presented and that could affect the trading price of the Company's outstanding securities.
The risks described below may not be the only risks Talisman faces, as Talisman's business and operations may also be subject to risks that Talisman does not yet know of, or that Talisman currently
believes are immaterial. If any of the events or circumstances described below actually occurs, Talisman's business, financial condition, results of operations or cash flow could be materially and
adversely affected and the trading price of Talisman's securities could decline. The risks described below are interconnected, and more than one of these risks could materialize simultaneously or in
short sequence if certain events or circumstances described below actually occur. The following risk factors should be read in conjunction with the other information contained herein and in the
Consolidated Financial Statements and the related notes.

Volatility of Oil and Natural Gas Prices

Talisman's financial performance is highly sensitive to the prevailing prices of crude oil and natural gas. Fluctuations in crude oil or natural gas
prices could have a material adverse effect on the Company's operations and financial condition, the value of its oil and natural gas reserves and its level of expenditure for oil and gas exploration
and development. Prices for crude oil and natural gas fluctuate in response to changes in the supply of and demand for crude oil and natural gas, market uncertainty and a variety of additional factors
that are largely beyond the Company's control. Oil prices are determined by international supply and demand. Factors which affect crude oil prices include the actions of the Organization of Petroleum
Exporting Countries, world economic conditions, government regulation, political stability throughout the world, the availability of alternative fuel sources, technological advances affecting energy
production and consumption, and weather conditions. About 60% of the natural gas prices realized by Talisman are affected primarily by North American supply and demand, weather conditions and prices
of alternative sources of energy. The remaining 40% of natural gas prices realized by Talisman are from markets outside of North America, primarily in Southeast Asia. These other prices are typically
determined by long-term contracts that are linked to international oil and/or oil prevalent prices. The development of oil and natural gas discoveries in offshore areas and the development
of shale gas plays are particularly dependent on the outlook for oil and natural gas prices because of the large amount of capital expenditure required for development prior to commencing production.

A
substantial and extended decline in the prices of crude oil or natural gas could result in delay or cancellation of drilling, development or construction programs, curtailment in production or
unutilized long-term transportation commitments, all of which

28TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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could
have a material adverse impact on the Company. The amount of cost oil required to recover Talisman's investment and costs in various PSCs is dependent on commodity prices, with higher commodity
prices resulting in the booking of lower oil and gas reserves net of royalties.

Moreover,
changes in commodity prices may result in the Company making downward adjustments to the Company's estimated reserves. If this occurs, or if the Company's estimates of production or economic
factors change, accounting rules may require the Company to impair, as a non-cash charge to earnings, the carrying value of the Company's oil and gas properties. The Company is required to
perform impairment tests on oil and gas properties whenever events or changes in circumstances indicate that the carrying value of properties may not be recoverable. To the extent such tests indicate
a reduction of the estimated useful life or estimated future cash flows of the Company's oil and gas properties, the carrying value may not be recoverable and, therefore, an impairment charge will be
required to reduce the carrying value of the properties to their estimated fair value. The Company may incur impairment charges in the future, which could materially affect the Company's results of
operations in the period incurred.

Exchange Rate Fluctuations

Results of operations are affected primarily by the exchange rates between the US$, the C$, UK£ and NOK. These exchange rates may vary
substantially. Most of the Company's revenue is received in or is referenced to US$ denominated prices (including the Company's Consolidated Financial Statements, which are presented in US$), while
the majority of Talisman's expenditures are denominated in US$, C$, UK£ and NOK. A change in the relative
value of the US$ against the C$ or the UK£ would also result in an increase or decrease in Talisman's C$ or UK£ denominated debt, as expressed in US$, and the related interest
expense. Talisman is also exposed to fluctuations in other foreign currencies.

Uncertainty of Reserves Estimates

The process of estimating oil and gas reserves is complex and involves a significant number of assumptions in evaluating available geological,
geophysical, engineering and economic data. In addition, the process requires future projections of reservoir performance and economic conditions; therefore, reserves estimates are inherently
uncertain. Since all reserves estimates are, to some degree, uncertain, reserves classification attempts to qualify the degree of uncertainty involved.

Since
the evaluation of reserves involves the evaluator's interpretation of available data and projections of price and other economic factors, estimates of the economically recoverable oil and
natural gas reserves attributable to any particular group of properties, the classification of such reserves based on estimated uncertainty, and the estimates of future net revenue or future net cash
flows prepared by different evaluators or by the same evaluators at different times may vary substantially.

Each
year, Talisman prepares evaluations of all of its reserves internally. Initial estimates of reserves are often based upon volumetric calculations and analogy to similar types of reservoirs,
rather than actual well data and performance history. Estimates based on these methods generally are less certain than those based on actual performance. The Company may adjust its estimates and
classification of reserves and future net revenues or cash flows based on results of exploration and development drilling and testing, additional performance history, prevailing oil and gas prices,
and other factors, many of which are beyond the Company's control. As new information becomes available, subsequent evaluations of the same reserves may continue to have variations in the estimated
reserves, some of which may be material. In addition, Talisman's actual production, taxes, and development and operating expenditures with respect to its reserves will likely vary from such estimates
and such variances could be material.

Ability to Find, Develop or Acquire Additional Reserves

The Company's future success depends largely on its ability to find and develop, or acquire, additional oil and gas reserves that are economically
recoverable. Hydrocarbons are a limited resource, and Talisman is subject to increasing competition from other companies, including national oil companies. Exploration and development drilling may not
result in commercially productive reserves and, if production begins, reservoir performance may be less than projected. Successful acquisitions require an assessment of a number of factors, many of
which are uncertain. These factors include recoverable reserves, exploration potential, future oil and gas prices, operating costs and potential environmental and other liabilities. Such assessments
are inexact and their accuracy is inherently uncertain. If a high impact prospect identified by the Company fails to materialize in a given year, the Company's multi-year exploration
and/or development portfolio may be compromised. See also 'Risk Factors  Volatility of Oil and Natural Gas Prices.' Continued failure to achieve anticipated
reserve and resource addition targets may result in the Company's withdrawal from an area, which in turn may result in a writedown of any associated reserves and/or resources for that area.

Project Delivery

Talisman manages a variety of projects, including exploration and development projects and the construction or expansion of facilities and pipelines.
Project delays may impact expected revenues and project cost overruns could make projects uneconomic. Talisman's ability to complete projects depends upon numerous factors, many of which are beyond
the Company's control. These factors include the level of direct control by Talisman since many of the projects in which Talisman is involved are not operated by Talisman, and timing and project
management control are the responsibility of the operator. See also 'Risk Factors  Non-Operatorship and Partner

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       29

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Relations.'
In particular, the majority of the Company's operations in Colombia are non-operated. In addition, for Talisman-operated projects, the global demand for project resources can
impact the access to appropriately competent contractors and construction yards as well as to raw products, such as steel. Typical execution risks include the availability of processing capacity, the
availability and proximity of pipeline capacity, the availability of drilling and other equipment, the ability to access lands, weather, unexpected cost increases, accidents, the availability of
skilled labour, including engineering and project planning personnel, the need for government approvals and permits, and regulatory matters. Subsurface challenges can also result in additional risk of
cost and schedule overrun if conditions are not typical of historical experiences, such as in up-scaling shale operations from pilot to full field developments. Talisman utilizes materials
and services which are subject to general industry-wide conditions. Cost escalation for materials and services may be unrelated to commodity price changes and may continue to have a
significant impact on project planning and economics. Talisman operates in challenging, environmentally hostile climates, such as Papua New Guinea, where logistical costs can be materially
impacted by seasonal and occasionally unanticipated weather patterns. Contracts where work has been placed under a lump sum arrangement, for example with the Company's Yme project, are subject to
additional challenges related to scheduling, reputation and relationship management with the Company's coventurers, as the contractor is wholly responsible for delivery of the facility.

Capital Allocation and Project Decisions

Talisman's long-term financial performance is sensitive to the capital allocation decisions taken and the underlying performance of the
projects undertaken. In 2013, Talisman plans to spend approximately $3 billion in cash capital expenditures, the majority of which is to be allocated among Talisman's North America, Southeast
Asia, North Sea and exploration portfolios. Capital allocation and project decisions are undertaken after assessing reserve and production projections, capital and operating cost estimates and
applicable fiscal regimes that govern the respective government take from any project. All of these factors are evaluated against common commodity pricing assumptions and the relative risks of
projects. These factors are used to establish a relative ranking of projects and capital allocation, which is then calibrated to ensure the debt and liquidity of the Company is not compromised.
However, material changes to project outcomes, and deviation from forecasted assumptions such as production volumes and rates, realized commodity price, cost or tax and/or royalties, could have a
material impact on the Company's cash flow and financial performance, as well as assessed impacts of impairments on Talisman's assets. Adverse economic and/or fiscal conditions could impact the
prioritization of projects and capital allocation to these projects, which in turn could lead to adverse effects such as asset underinvestment, asset performance, impairments or land access expiries.

Uncertainties
around some of Talisman's projects, including the Yme project, could result in changes to the Company's capital allocation or the $3 billion spend target being exceeded. The
Company cannot be certain that funding, if needed, will be available to the extent required or on acceptable terms. To the extent that asset sales are necessary to fund capital requirements,
Talisman's ability to sell assets is subject to market interest. If Talisman is unable to access funding when needed on acceptable terms, the Company may not be able to fully implement its business
plans, take advantage of business opportunities or respond to competitive
pressures, any of which could have a material adverse effect on Talisman's business, financial condition, cash flows, and results of operations. See also 'Risk
Factors  Credit and Liquidity' and 'Risk Factors  Interest Rates.'

Operational Risks

Major Incident, Major Spill / Loss of Well Control

Oil and gas drilling and producing operations are subject to many risks, including the risk of fire, explosions, mechanical failure, pipe or well cement failure, well casing
collapse, pressure or irregularities in formations, chemical and other spills, unauthorized access to hydrocarbons, accidental flows of oil, natural gas or well fluids, sour gas releases,
contamination of oil and gas, vessel collision, structural failure, loss of buoyancy, storms or other adverse weather conditions and other occurrences. If any of these should occur, Talisman could
incur legal defence costs and remedial costs and could suffer substantial losses due to injury or loss of life, human health risks, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, unplanned production outage, cleanup responsibilities, regulatory investigation and penalties, increased public interest in Talisman's operational
performance and suspension of operations. The Company's horizontal and deep drilling activities involve greater risk of mechanical problems than vertical and shallow drilling operations.

Talisman
maintains insurance that contemplates both first and third party exposures for Talisman's onshore and offshore operations globally. There is no assurance that this insurance will be adequate
to cover all losses or exposures to liability. The Company believes that its coverage is aligned with customary industry practices and in amounts and at costs that Talisman believes to be prudent and
commercially practicable. While Talisman believes these policies are customary in the industry, they do not provide complete coverage against all operating risks. In addition, the Company's insurance
does not cover penalties or fines that may be assessed by a governmental authority. A loss not fully covered by insurance could have a material adverse effect on the Company's financial position,
results of operations and cash flows. The insurance coverage that the Company maintains may not be sufficient to cover every claim made against Talisman in the future. In addition, a major incident
could impact Talisman's reputation in such a way that it could have a material adverse effect on the Company's business.

30TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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Talisman
operates and drills wells in both mature producing areas such as the UK, Norway and North America and in several remote areas in multiple countries. In 2012, Talisman carried out drilling
operations in the Kurdistan Region of Iraq, Papua New Guinea, Poland, Colombia, Peru and offshore Sierra Leone. The Company may seek new leases and/or drill in similar environments.

Health Hazards and Personal Safety Incidents

The employee and contractor personnel involved in exploration and production activities and operations of the Company, including, but not limited to, well fracturing are
subject to many inherent health and safety risks and hazards, which could result in occupational illness or health issues, personal injury and loss of life, facility quarantine and/or facility and
personnel evacuation. In particular, employees and contractors working in well fracturing operations are subject to the possibility of loss of containment. This could lead to exposure to the release
of high pressure materials as well as collateral shrapnel from piping or vessels which could result in personal injury and loss of life.

Security Incident

Talisman's operations may be adversely affected by security-related incidents which are not within the control of the Company, such as war (external and internal conflicts) and
remnants of war, sectarian violence, civil unrest or criminal acts in locations where Talisman operates. Security-related incidents may include allegations of human rights abuse associated with the
provision of security to Talisman operations. In particular, the Company faces increased security risks in the Kurdistan Region of Iraq and Colombia within Talisman's current portfolio. A significant
security incident could result in the deferral of or termination of Company activity within the impacted areas of operations, thus adversely impacting execution of the Company's business strategy
(e.g., delaying exploration, causing a halt to production or forcing exit strategy processes), which could adversely affect Talisman's financial condition.

Regulatory Approvals and Changes to Laws and Regulations

Talisman's exploration and production operations are subject to extensive regulation at many levels of government, including municipal, state,
provincial and federal governments, in the countries where Talisman operates and are subject to interruption or termination by governmental and regulatory authorities based on environmental or other
considerations. Moreover, Talisman has incurred and will continue to incur costs in the Company's efforts to comply with the requirements of environmental, safety and other regulations. Further, the
regulatory environment in the oil and gas industry could change in ways that Talisman cannot predict and that might substantially increase the Company's costs of compliance and, in turn, materially
and adversely affect the Company's business, results of operations and financial condition.

Failure
to comply with the applicable laws or regulations may result in significant increases in costs, fines or penalties and even shutdowns or losses of operating licences or criminal sanctions. If
regulatory approvals or permits required for operations are delayed or not obtained, Talisman could experience delays or abandonment of projects, decreases in production and increases in costs. This
could result in an inability of the Company to fully execute its strategy and adverse impacts on its financial condition. See also 'Risk Factors  Fiscal
Stability' and 'Risk Factors  Socio-Political Risks.'

Changes
to existing laws and regulations or new laws could have an adverse effect on Talisman's business by increasing costs, impacting development schedules, reducing revenue and cash flow from
natural gas and oil sales, reducing liquidity or otherwise altering the way Talisman conducts business. There have been various proposals to enact new, or amend existing, laws and regulations relating
to greenhouse gas (GHG) emissions, hydraulic fracturing (including associated additives, water use, induced seismicity, and disposal) and shale gas development generally. For example, in Colombia, the
high level of oil and gas activity in the
country has resulted in significant delays in the granting of the required environmental licences. These delays may result in reduced near-term production. In Quebec, delays in shale gas
development are expected to continue as the Province completes a strategic environmental assessment on shale gas development. Indonesia dissolved its upstream oil and gas regulatory body, BP Migas,
creating uncertainty for oil and gas producers. See also 'Risk Factors  Environmental Risks.'

Talisman
continues to monitor and assess any new policies, legislation, regulations and treaties in the areas where the Company operates to determine the impact on Talisman's operations. Governmental
organizations unilaterally control the timing, scope and effect of any currently proposed or future laws, regulations or treaties, and such enactments are subject to a myriad of factors, including
political, monetary and social pressures. Talisman acknowledges that the direct and indirect costs of such laws, regulations and treaties (if enacted) could materially and adversely affect the
Company's business, results of operations and financial condition.

Fiscal Stability

Governments may amend or create new legislation that could impact the Company's operations and that could result in increased capital, operating and
compliance costs. The UK could increase the ring fence taxes due to the change in the UK supplementary tax. Moreover, Talisman's operations are subject to various levels of taxation in the countries
where the Company operates. Federal, provincial, and state income tax rates or incentive programs relating to the oil and gas industry in the jurisdictions where the Company operates may in the future
be changed or interpreted in a manner that could materially affect the economic value of the respective assets. For example, the US Congress has been considering a revision of the immediate deduction
currently available for drilling costs.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       31

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Litigation

From time to time, Talisman is the subject of litigation arising out of the Company's operations. Specific disclosure of current legal proceedings,
and the risks associated with current proceedings and litigation generally, are disclosed under the heading 'Legal Proceedings' in this MD&A.

Environmental Risks

General

All phases of Talisman's oil and natural gas business are subject to environmental regulation pursuant to a variety of laws and regulations in the countries where Talisman does
business. These laws and regulations may require the acquisition of a permit before drilling commences, restrict the types, quantities and concentration of substances that can be released into the
environment in connection with the Company's drilling and production activities, limit or prohibit drilling activities on certain lands lying within wilderness, wetlands and other protected areas, and
impose substantial liabilities for pollution that may result from the Company's operations. Talisman's business is subject to the trend toward increased rigour in regulatory compliance and civil or
criminal liability for environmental matters in certain regions (e.g., Canada, the United States and the European Union). Compliance with environmental legislation can require
significant expenditures, and failure to comply with environmental legislation may result in the assessment of administrative, civil and criminal penalties, the cancellation or suspension of
regulatory permits, the imposition of investigatory or remedial obligations or the issuance of injunctions restricting or prohibiting certain activities. Under existing environmental laws and
regulations, Talisman could be held strictly liable for the remediation of previously released materials or property contamination resulting from its operations, regardless of whether those operations
were in compliance with all applicable laws at the time they were performed. Regulatory delays, legal proceedings and reputational impacts from an environmental incident could result in a material
adverse effect on the Company's business. Increased stakeholder concerns and regulatory actions regarding
shale gas development could lead to third party or governmental claims, and could adversely affect the Company's business and financial condition. Although Talisman currently believes that the costs
of complying with environmental legislation and dealing with environmental civil liabilities will not have a material adverse effect on the Company's financial condition or results of operations,
there can be no assurance that such costs will not have such an effect in the future.

Hydraulic Fracturing

Concern has been expressed over the potential environmental impact of hydraulic fracturing operations, including water aquifer contamination and other qualitative and
quantitative effects on water resources as large quantities of water are used and injected fluids either remain underground or flow back to the surface to be collected, treated and disposed.
Regulatory authorities in certain jurisdictions have announced initiatives in response to such concerns. Federal, provincial, state, and local legislative and regulatory initiatives relating to
hydraulic fracturing, as well as governmental reviews of such activities, could result in increased costs, additional operating restrictions or delays, and adversely affect Talisman's production.
Public perception of environmental risks associated with hydraulic fracturing can further increase pressure to adopt new laws, regulation or permitting requirements or lead to regulatory delays, legal
proceedings and/or reputational impacts. Any new laws, regulations or permitting requirements regarding hydraulic fracturing could lead to operational delay, increased operating costs, and third party
or governmental claims. They could also increase the Company's costs of compliance and doing business as well as delay the development of hydrocarbon (natural gas and oil) resources from shale
formations, which may not be commercial without the use of hydraulic fracturing. Restrictions on hydraulic fracturing could also reduce the amount of oil and natural gas that the Company is ultimately
able to produce from its reserves.

If
legal restrictions are adopted in areas where Talisman is currently conducting or in the future plans to conduct operations, Talisman may incur additional costs to comply with such requirements
that may be significant in nature, experience delays or curtailment in the pursuit of exploration, development, or production activities, and perhaps even be precluded from the drilling of wells. In
addition, if hydraulic fracturing becomes more regulated, the Company's fracturing activities could become subject to additional permitting requirements and result in permitting delays as well as
potential increases in costs. Restrictions on hydraulic fracturing could also reduce the amount of oil and natural gas that the Company is ultimately able to produce from its reserves.

Greenhouse Gas Emissions (GHG)

Talisman is subject to various GHG emissions-related legislation. Current GHG emissions legislation does not result in material compliance costs, but compliance costs may
increase in the future and may impact the Company's operations and financial results. Talisman operates in jurisdictions with existing GHG legislation (e.g., UK, Norway, United States
and Canada, notably Alberta and British Columbia) as well as in regions which currently do not have GHG emissions legislation and jurisdictions where GHG emissions legislation is emerging or is
subject to change. Talisman monitors GHG legislative developments in all areas that the Company operates. Potential new or additional GHG legislation, and associated compliance costs, may have a
material impact on the Company.

32TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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Environmental and Decommissioning Liabilities

Talisman is involved in the operation and maintenance of facilities and infrastructure in difficult and challenging areas, including offshore,
deepwater, jungle and desert environments. Despite Talisman's implementation of health, safety and environmental standards, there is a risk that accidents or regulatory noncompliance can occur, the
outcomes of which, including remedial work or regulatory intervention, cannot be foreseen or planned for. Talisman expects to incur site restoration costs over a prolonged period as existing fields
are depleted. The Company provides for decommissioning liabilities in its annual Consolidated Financial Statements in accordance with IFRS. Additional information regarding decommissioning liabilities
is set forth in the notes to the annual Consolidated Financial Statements. The process of estimating decommissioning liabilities is complex and involves significant uncertainties concerning the timing
of the decommissioning activity; legislative changes; technological advancement; regulatory, environmental and political changes; and the appropriate discount rate used in estimating the liability.
Any change to these assumptions could result in a change to the decommissioning liabilities to which Talisman is subject. In Talisman's North Sea operations, changes in these assumptions would
potentially have a significant impact on the Company's decommissioning liabilities because of the assessed size of these future costs. There can be no assurances that the cost estimates and
decommissioning liabilities are materially correct and that the liabilities will occur when predicted. In addition, Talisman is often jointly and severally liable for the decommissioning costs
associated with Talisman's various operations and could, therefore, be required to pay more than its net share.

Socio-Political Risks

The Company's operations may be adversely affected by political or economic developments or social instability in the jurisdictions in which it
operates, which are not within the control of Talisman, including, among other things, a change in crude oil or natural gas pricing policy and/or related regulatory delays, the risks of war,
terrorism, abduction, expropriation, nationalization, renegotiation or nullification of existing concessions and contracts, a change in taxation policies, economic sanctions, the imposition of
specific drilling obligations, the imposition of rules relating to development and abandonment of fields, jurisdictional boundary disputes, and currency controls. As a result of continuing evolution
of an international framework for corporate responsibility and accountability for international crimes, the Company could also be exposed to potential claims for alleged breaches of international law,
health, safety and environmental regulations, and other human rights-based litigation risk. Numerous countries in which the Company is active, including, but not limited to, the Kurdistan Region of
Iraq, Colombia, Vietnam, Algeria, Sierra Leone and Papua New Guinea, have been subject to recent economic or political instability, disputes and social unrest, and military or rebel
hostilities. The potential deterioration of socio-political security situations (i.e. political instability and/or disputes) poses increased risk, which may result in the cessation of
operations as well as the delay in payment or exports; for example, in the Kurdistan Region of Iraq with respect to the negotiation of Iraq Federal Oil and Gas Law, and in Vietnam and Malaysia with
respect to China's claim over disputed waters in the South China Sea. In addition, Talisman regularly evaluates opportunities worldwide, and may in the future engage in projects or acquire properties
in other nations that are experiencing economic or political instability, social unrest, military hostilities or United Nations, US or other international sanctions. Some of the foregoing government
actions may lead to political or reputational pressures on the Company from non-governmental organizations, home governments and investors.

Stakeholder Opposition

Talisman's planned activities may be adversely affected if there is strong community opposition to its operations. For example, local community
concerns in parts of Colombia, the Kurdistan Region of Iraq and Papua New Guinea could potentially result in development and production delays in those operations. There is also heightened
public concern regarding hydraulic fracturing in parts of North America which could materially affect the Company's shale operations. In some circumstances,
this risk of community opposition may be higher in areas where Talisman operates alongside indigenous communities who may have additional concerns regarding land ownership, usage or claim
compensation.

Non-Operatorship and Partner Relations

Some of Talisman's projects are conducted in joint venture environments where Talisman has a limited ability to influence or control operations or
future development, safety and environmental standards, and amount of capital expenditures. Companies which operate these properties may not necessarily share Talisman's health, safety and
environmental standards or strategic or operational goals or approach to partner relationships, which may result in accidents, regulatory noncompliance, project delays or unexpected future costs, all
of which may affect the viability of these projects and Talisman's standing in the external market.

Talisman
is also dependent on other working interest co-participants of these projects to fund their contractual share of the capital expenditures. If these co-participants are
unable to fund their contractual share of, or do not approve, the capital expenditures, the co-participants may seek to defer programs, resulting in strategic misalignments and a delay of
a portion of development of Talisman's programs, or the co-participants may default such that projects may be delayed and/or Talisman may be partially or totally liable for
their share.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       33

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Some
of Talisman's projects involve transition of operatorship as part of a joint venture arrangement, which requires a significant amount of effort and coordination. Successful handover of the
operations to the partners is dependent on Talisman's ability to maintain equal governance and active involvement in the operations.

Attraction, Retention and Development of Personnel

Successful execution of the Company's plans is dependent on Talisman's ability to attract and retain talented personnel who have the skills necessary
to deliver on the Company's strategy and maintain safe operations. This includes not only key talent at a senior level, but also individuals with the professional and technical skill sets critical for
Talisman's business, particularly geologists, geophysicists, engineers and other specialists. As labour demand remains high and a greater percentage of the population reaches retirement age, retention
concerns are also heightened. In North America, Talisman competes for talent in two very competitive markets  Calgary and Houston. If the Company is unable to
attract and retain highly qualified petrotechnical people in these markets, its ability to deliver may be significantly compromised. In addition, in the North Sea, high project activity has compounded
competition for labour, posing an increased retention risk. In Asia, energy demand driven by economic growth has resulted in higher levels of activity in the sector and created strong competition for
skilled technical staff. National oil companies and joint venture activities may also impose requirements to develop their national talent, increase secondee assignments, and employ local nationals.

Egress and Gas & Liquids Buyers

As increasing volumes of natural gas and liquids are brought onstream by Talisman and others, transportation infrastructure capacity may at times be
exceeded before capacity additions become available. In such an event, there is a risk that the transportation of some of the Company's production may be restricted or delayed until pipeline
connection or infrastructure additions are complete. In particular, Colombia's oil export infrastructure generally continues to operate close to or at capacity, pending capacity additions which are at
various stages of approval and construction, including Phase 1 of the Bicentenario pipeline, which is due to come onstream later in 2013. While Talisman and Equión currently have
access to sufficient capacity in the key Ocensa and Oleoducto de Colombia (ODC) pipelines allowing access to the Covenas terminal and international markets, as Talisman's production grows, the Company
may not be able to secure sufficient upstream pipeline access into Ocensa. If Talisman is unable to negotiate access to additional pipeline capacity or to employ trucking as an alternative, Talisman's
production may be restricted or delayed and/or netbacks may be reduced on a portion of Talisman's production. In the Eagle Ford play, Talisman has acquired sufficient access to infrastructure for both
liquids and gas for the near and medium term (through January 2017); however, in the longer term, additional capacity and infrastructure will be required. However, in the event there are delays in the
ongoing construction of new pipelines and processing projects in the Eagle Ford Play, Talisman's access to additional pipeline capacity could be delayed. Another associated risk will be the
availability and diversity of contract and credit-enabled buyers depending upon the pipeline and infrastructure project with which Talisman obtains capacity to take the product to market. Should
Talisman be unable to secure access to infrastructure and qualified buyers for its production, the Company could face reduced production and/or materially lower prices on some portion of production,
which in turn could adversely affect the Company's operating results.

Competitive Risk

The global oil and gas industry is highly competitive. Talisman faces significant competition and many of the Company's competitors have resources in
excess of Talisman's available resources. The Company actively competes for the acquisition of properties, the exploration for and development of new sources of supply, the contractual services for
oil and gas drilling and production equipment and services, the transportation and marketing of current production, and industry personnel, including, but not limited to, geologists, geophysicists,
engineers and other specialists that enable the business. Many of Talisman's competitors have the ability to pay more for seismic and lease rights in crude oil and natural gas properties and
exploratory prospects. They can define, evaluate, bid for and purchase a greater number of properties and prospects than Talisman's financial or human resources permit. If the Company is not
successful in the competition for oil and gas reserves or in the marketing of production, Talisman's financial condition and results of operations may be adversely affected. Many of the Company's
competitors have resources substantially greater than Talisman's and have established positions in countries in which Talisman may seek new entry and, as a consequence, the Company may be at a
competitive disadvantage. Typically during times of high commodity prices or increased industry activity, drilling and operating costs will also increase. These competitive forces may also lead to an
overall increase in costs, which could have a negative impact on the Company's financial results.

Credit and Liquidity

From time to time, the Company may finance capital expenditures in whole or in part with debt. The volatility of credit markets can result in market
conditions that may restrict timely access and limit the Company's ability to secure and maintain cost-effective financing on acceptable terms and conditions. In addition, if any lender
under Talisman's syndicated bank credit facility is unable to fund its commitment, the Company's liquidity will be reduced by an amount up to the aggregate amount of such lender's commitment. See also
'Risk Factors  Counterparty Credit Risk.' Talisman's financial
performance and cash flow is highly sensitive to the prevailing prices of crude oil and natural gas, which fluctuate in response to a variety of factors beyond the Company's control. A

34TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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substantial
and extended decline in the prices of crude oil or natural gas could negatively impact the Company's liquidity and/or credit ratings, adversely affect the Company's ability to comply with
covenants under denominated long-term notes and credit facilities, and/or affect the Company's ability to pay dividends. See also 'Risk
Factors  Volatility of Oil and Natural Gas Prices.'

The
credit rating agencies regularly evaluate the Company, and their ratings of the Company's securities are based on a number of factors not entirely within the Company's control, including
conditions affecting the oil and gas industry generally, and the wider state of the economy. There can be no assurance that one or more of the Company's credit ratings will not be downgraded. A
reduction in any of the Company's current investment-grade credit ratings to below investment-grade could adversely affect the cost of borrowing and/or access to sources of liquidity and capital,
reduce the financing options available to the Company and increase the interest paid on its bank credit facilities. In addition, the Company relies on access to letters of credit in the normal course
of business in order to support some of its operations. There can be no assurance that the Company will be able to obtain the necessary letters of credit. See also 'Risk
Factors  Capital Allocation and Project Decisions.'

Interest Rates

The Company is exposed to interest rate risk principally by virtue of its borrowings. Borrowing in floating rates exposes Talisman to
short-term movements in interest rates. Borrowing in fixed rates exposes Talisman to reset risk associated with debt maturity. Most of the Company's debt is issued at fixed interest rates;
therefore, the Company's main exposure to changes in interest rates would occur in respect of short-term investments or borrowings in the event that substantial cash balances are invested
in or owed to the Company.

Counterparty Credit Risk

In the normal course of business, Talisman enters into contractual relationships with counterparties in the energy industry and other industries,
including suppliers and coventurers, counterparties to interest rate hedging, foreign exchange hedging and commodity derivative arrangements. If such counterparties do not fulfil their contractual
obligations or settle their liabilities to the Company, the Company may suffer losses, may have to proceed on a sole risk basis, may have to forgo opportunities or may have to relinquish leases or
blocks. The Company also has credit risk arising from cash and cash equivalents held with banks and financial institutions. While the Company maintains a risk management system that limits exposures
to any one counterparty, losses due to the failure by counterparties to fulfil their contractual obligations may adversely affect Talisman's financial condition.

Hedging Activities

Talisman uses derivative instruments to hedge a portion of the Company's expected production so as to manage the impact of fluctuations in crude oil
and natural gas prices on the Company's results of operations and cash flow. Fluctuations in crude oil and gas prices could have a material effect on the volatility of the Company's earnings. To the
extent that Talisman engages in hedging activities to protect itself against commodity price declines, Talisman may be prevented from fully realizing the benefits of increases in crude oil and natural
gas prices above the prices established by the Company's hedging contracts. See also 'Risk Factors  Volatility of Oil and Natural Gas Prices.' When considered
appropriate, the Company may also use currency swaps to manage fluctuations in exchange rates and interest rate swaps to manage Talisman's exposure to interest rate changes through the Company's
borrowings. See also 'Risk Factors  Exchange Rate Fluctuations' and 'Risk Factors  Interest Rates.'

Additionally,
Talisman's hedging portfolio may expose it to financial losses in certain circumstances, such as the recognition of certain mark-to-market gains and losses on
derivative instruments. The fair value of the Company's natural gas and oil, exchange rate or interest rate derivative instruments can fluctuate significantly between periods.

Corruption

Talisman's operations are governed by the laws of many jurisdictions, which generally prohibit bribery and other forms of corruption. Talisman
requires all employees to participate in ethics awareness training, which includes Talisman's policies against giving or accepting money or gifts in certain circumstances. Despite the training and
policies, it is possible that Talisman, or some of its employees or contractors, could be charged with bribery or corruption. If Talisman is found guilty of such a violation, which could include a
failure to take effective steps to prevent or address corruption by its employees or contractors, Talisman could be subject to onerous penalties. A mere investigation itself could lead to significant
corporate disruption, high legal costs and forced settlements (such as the imposition of an internal monitor). In addition, bribery allegations or bribery or corruption convictions could impair
Talisman's ability to work with governments or non-governmental organizations. Such convictions or allegations could result in the formal exclusion of Talisman from a country or area,
national or international lawsuits, government sanctions or fines, project suspension or delays, reduced market capitalization and increased investor concern.

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       35

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Information Systems

Many of Talisman's business processes depend on the availability, capacity, reliability and security of the Company's information technology
infrastructure (IT) and Talisman's ability to expand and continually update this infrastructure in response to the Company's changing needs. The Company's IT systems are increasingly concentrated and
integrated in terms of geography, number of systems, and key contractors supporting the delivery of IT systems. The performance of Talisman's key suppliers is critical to ensure appropriate delivery
of key services. Any failure to manage, expand and update the Company's information technology infrastructure, any failure in the extension or operation of this infrastructure, or any failure by the
Company's key contractors in the performance of their services could materially and adversely harm Talisman's business.

The
ability of the IT function to support Talisman's business in the event of a disaster such as fire, flood or loss/denial of any of the Company's DataCentres or major office locations and Talisman's
ability to recover key systems from unexpected interruptions cannot be fully tested and there is a risk that if such an event actually occurs, the business continuity plan may not be adequate to
immediately address all repercussions of the disaster. In the event of a disaster affecting a DataCentre or key office location, key systems may be unavailable for a number of days, leading to
inability to perform some business processes in a timely manner.

In
addition, the increasing risk of information security breaches, including more sophisticated attempts often referred to as advanced persistent threats, requires Talisman to continually improve its
ability to detect and prevent such occurrences. Disruption of critical IT services, or breaches of information security, could have a negative effect on Talisman's operational performance and
earnings, as well as on the Company's reputation.

Advisories

Forward-Looking Statements

This MD&A contains information that constitutes "forward-looking information" or "forward-looking statements" (collectively "forward-looking
information") within the meaning of applicable securities legislation. Forward-looking information is included throughout this MD&A, including among other places, under the headings 'Outlook for 2013'
and 'Risk Factors'. This forward-looking information includes, but is not limited to, statements regarding:

Statements
concerning oil and gas reserves contained in this MD&A may be deemed to be forward-looking information as they involve the implied assessment that the resources described can be profitably
produced in the future.

The
factors or assumptions on which the forward-looking information is based include: assumptions inherent in current guidance; projected capital investment levels; the flexibility of capital spending
plans and the associated sources of funding; the successful and timely implementation of capital projects; the continuation of tax, royalty and regulatory regimes; ability to obtain regulatory and

36TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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partner
approval; commodity price and cost assumptions; and other risks and uncertainties described in the filings made by the Company with securities regulatory authorities. The Company believes the
material factors, expectations and assumptions reflected in the forward-looking information are reasonable but no assurance can be given that these factors, expectations and assumptions will prove to
be correct. Forward-looking information for periods past 2013 assumes escalating commodity prices. Closing of any transactions will be subject to receipt of all necessary regulatory approvals and
completion of definitive agreements.

Undue
reliance should not be placed on forward-looking information. Forward-looking information is based on current expectations, estimates and projections that involve a number of risks which could
cause actual results to vary and in some instances to differ materially from those anticipated by Talisman and described in the forward-looking information contained in this MD&A. The material risk
factors include, but are not limited to:

The
foregoing list of risk factors is not exhaustive. Additional information on these and other factors which could affect the Company's operations or financial results or strategy are included in the
Company's most recent AIF. In addition, information is available in the Company's other reports on file with Canadian securities regulatory authorities and the SEC.

Forward-looking
information is based on the estimates and opinions of the Company's management at the time the information is presented. The Company assumes no obligation to update forward-looking
information should circumstances or management's estimates or opinions change, except as required by law.

Reserves Data and Other Oil and Gas Information

Talisman's disclosure of reserves data and other oil and gas information in accordance with US disclosure standards is made in reliance on an
exemption granted to Talisman by Canadian securities regulatory authorities, which permits Talisman to provide such disclosure in order to allow comparison of oil and gas disclosure with that provided
by US and other peers. The primary differences between the US disclosure standards and the Canadian disclosure mandated under NI 51-101 are that:

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       37

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Further
information on the differences between the US standards and NI 51-101 requirements is set forth under the heading 'Note Regarding Reserves Data and Other Oil and Gas
Information' in Talisman's most recent AIF.

An
exemption granted to Talisman also permits it to disclose internally evaluated reserves data. Any reserves data contained in this MD&A reflects Talisman's internally-generated estimates of
its reserves.

Non-Core Assets/Properties

In this MD&A, all references to "core" or "non-core" assets and properties align with the Company's current public disclosures regarding
its assets and properties.

Gross Production

Throughout this MD&A, Talisman makes reference to production volumes. Such production volumes are stated on a gross basis, which means they are
stated prior to the deduction of royalties and similar payments. In the US, net production volumes are reported after the deduction of these amounts. US readers may refer to the table headed 'Net
Production After Royalties' in Talisman's most recent AIF for a statement of Talisman's net production volumes by reporting segment that are comparable to those made by US companies subject to SEC
reporting and disclosure requirements.

Netbacks

Talisman discloses its Company netbacks in this MD&A. Netbacks per boe are calculated by deducting from sales price associated royalties, operating
and transportation costs.

Financial Outlook

Included in this MD&A is the Company's financial outlook. Its purpose is to enrich management's discussion and analysis. This information may not be
appropriate for other purposes.

38TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012

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Abbreviations and Definitions

The following abbreviations and definitions are used in this MD&A:

|AIF      |  | Annual Information Form                    
|-------- |  | -------------------------------------------
|bbl      |  | barrel                                     
|bbls     |  | barrels                                    
|bbls/d   |  | barrels per day                            
|bcf      |  | billion cubic feet                         
|boe      |  | barrels of oil equivalent                  
|boe/d    |  | barrels of oil equivalent per day          
|C$       |  | Canadian dollar                            
|CO2      |  | Carbon dioxide                             
|E&E      |  | Exploration and evaluation                 
|EU       |  | European Union                             
|G&A      |  | General and administrative                 
|GAAP     |  | Generally Accepted Accounting Principles   
|gj       |  | Gigajoule                                  
|IFRS     |  | International Financial Reporting Standards
|LIBOR    |  | London Interbank Offered Rate              
|LNG      |  | Liquefied Natural Gas                      
|mbbls/d  |  | thousand barrels per day                   
|mboe/d   |  | thousand barrels of oil equivalent per day 
|mcf      |  | thousand cubic feet                        
|mcf/d    |  | thousand cubic feet per day                
|mmbbls   |  | million barrels                            
|mmboe    |  | million barrels of oil equivalent          
|mmbtu    |  | million British thermal units              
|mmcf/d   |  | million cubic feet per day                 
|mmcfe/d  |  | million cubic feet equivalent per day      
|NGL      |  | Natural Gas Liquids                        
|NI       |  | National Instrument                        
|NOK      |  | Norwegian kroner                           
|NYMEX    |  | New York Mercantile Exchange               
|PGN      |  | PT Perusahaan Gas Negara (Persero), Tbk    
|PP&E     |  | Property, plant and equipment              
|PRT      |  | Petroleum Revenue Tax                      
|PSC      |  | Production Sharing Contract                
|PSU      |  | Performance share unit                     
|SEC      |  | US Securities and Exchange Commission      
|tcf      |  | trillion cubic feet                        
|UK       |  | United Kingdom                             
|UK£      |  | Pound sterling                             
|US       |  | United States of America                   
|US$ or $ |  | United States dollar                       
|WTI      |  | West Texas Intermediate                    

Gross acres means the total number of acres in which Talisman has a working interest. Net acres means the sum of the fractional working interests owned in gross
acres expressed as whole numbers and fractions thereof.

Gross
production means Talisman's interest in production volumes (through working interests and royalty interests) before the deduction of royalties. Net production means Talisman's interest in
production volumes after deduction of royalties payable by Talisman.

Gross
wells means the total number of wells in which the Company has a working interest. Net wells means the sum of the fractional working interests owned in gross wells expressed as whole numbers and
fractions thereof.

Conversion
and equivalency factors

|Imperial     |  | Metric                  
|------------ |  | ------------------------
|1 ton        |  | =    0.907 tonnes       
|1 acre       |  | =    0.40 hectares      
|1 barrel     |  | =    0.159 cubic metres 
|1 cubic foot |  | =    0.0282 cubic metres

TALISMAN ENERGYMANAGEMENT'S DISCUSSION AND ANALYSIS 2012       39

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LOGO

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TALISMAN ENERGY INC.

Suite 2000, 888  3rd Street SW
Calgary, Alberta, Canada T2P 5C5

P403.237.1234F403.237.1902 Etlm@talisman-energy.com

www.talisman-energy.com



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