Strategy
Our strategy in Canada is two fold: 1) develop unconventional resource opportunities (oil sands, CBM and shale gas) and 2) maximize value from our established operations through disciplined or selective conventional development and enhanced recovery methods. In 2008, we produced 41,900 boe/d before royalties (34,300 after royalties) in Canada, which was approximately 17% of our total production including Syncrude. At year end 2008, Canadian proved reserves (including bitumen and excluding Syncrude) of 375 mmboe before royalties (362 after royalties) were approximately 38% before royalties (39% after royalties) of our total proved oil and gas and Syncrude reserves.

Conventional Assets
Our Canadian conventional assets include heavy oil production in east-central Alberta and west-central Saskatchewan, and natural gas near Calgary and in southern Alberta and Saskatchewan. We operate most of our producing properties and hold almost one million net acres of undeveloped land across western Canada. These assets provide predictable production volumes and earnings while we advance the following initiatives for future growth:

• Athabasca oil sands—to produce and upgrade bitumen into synthetic crude;
• shale gas—to evaluate natural gas from organic shales;
• coalbed methane (CBM)—to extract natural gas primarily from Upper Mannville and Horseshoe Canyon coals; and
• enhanced oil recovery (EOR)—to increase recovery in our heavy oil fields.

For more information on the Canadian operations, view the factsheet.

Fiscal Terms
In Canada, we pay two types of royalties to federal and provincial governments on production from lands where they own the petroleum and natural gas rights. The first type of royalty, Net Profits Interest (NPI), applies to our oil sands projects. The second type is a gross royalty (Gross Royalty) system whereby we pay royalties ranging from 5% to 40% depending upon drilling date, production rate and product sales price.

During 2008, the Alberta government legislated a new royalty framework for NPI and Gross Royalty structures effective January 1, 2009. The new NPI royalty rates for oil sands projects will range from 1% to 9% of gross revenue for projects that are pre-payout of costs, and from 25% to 40% of net profit for projects that are post-payout. These royalty rates vary depending on Canadian dollar equivalent of WTI (CAD$55/bbl to CAD$120/bbl). The amended Gross Royalty system increases the upper royalty rate limit to 50% and reduces the lower limit for conventional oil to nil, depending on production rates and sales price. most of our conventional Alberta production qualifies for lower productivity rates and we expect royalties to range between 5% and 25%.

In addition to royalties, some provinces impose taxes on production from lands where they do not own the mineral rights. The Saskatchewan government assesses a resource surcharge on gross Saskatchewan resource sales that are subject to crown royalties, ranging from 1.7% to 3.0%. In Alberta, we are subject to a freehold mineral tax of approximately 4%.

Profits earned in Canada from resource properties are subject to federal and provincial income taxes. In 2007, the federal government reduced the federal corporate income tax rate, ultimately to 15% by 2012. In 2008, federal taxable income is taxed at 19.5%. Provincial income tax rates vary from approximately 10% to 16%.