The Gulf of Mexico is an integral part of our growth strategy. Large discoveries, relatively high success rates, expanding production infrastructure and attractive fiscal terms make the deep-water Gulf of Mexico one of the world’s most prospective sources for oil and gas. While costs of deep-water exploration are high relative to other basins, deep-water prospects generally have multiple sands and high production rates—factors which reduce risk and improve economics. Technology to find, drill, and develop discoveries is rapidly progressing and becoming more cost effective. The deep-water Gulf is near infrastructure and continental US markets, so discoveries can be brought on stream in reasonable time.

Strategy
Our strategy in the Gulf is to explore for new reserves, exploit our existing asset base and acquire assets with upside potential. We focus our exploration program on three strategic play types:

• deep-water prospects near existing infrastructure;
• deep-water, Miocene and Lower Tertiary sub-salt plays with the potential to become new core areas; and
• deep-water, Norphlet targets in the eastern Gulf of Mexico.

These plays are relatively under-explored, hold potential for large discoveries and have attractive fiscal terms. The relatively shorter cycle-times for deep-water prospects near infrastructure complement the longer cycle-times for deepwater sub-salt and Norphlet plays. Although competition in the Gulf is strong, we have built a large inventory of deepwater acreage and are now the eighth largest leaseholder in the deep-water.

Capital Programs
In 2007, we invested $793 million on exploration, development and acquisitions in the Gulf. This resulted in three discoveries at Desoto Canyon Block 353 (Vicksburg), South Marsh Island 257 and Mississippi Canyon 72 as well as a successful appraisal well at Longhorn. Additionally, we acquired three producing deepwater fields and enhanced our deep-water acreage position. However, some of our development drilling in 2007 did not meet expectations. In 2008, we plan to invest approximately $390 million in the Gulf to further our growth strategies. This includes development of our Longhorn discovery, drilling of proved undeveloped reserves, exploration drilling and land acquisition.

Production & Reserves
In 2007, we produced approximately 33,300 boe/d before royalties (23,900 after royalties), representing about 13% of Nexen's total production. At year end, proved reserves of 62 mmboe before royalties (53 after royalties) in the Gulf of Mexico represented about 6% of our total proved oil and gas and Syncrude reserves. Our Gulf production and reserves are primarily concentrated in four deepwater and five shallow-water (shelf) areas. We operate most of this production.

Fiscal Terms
In 2007, royalty rates on our US production averaged 16.5% for shelf volumes and 10.6% for deep-water volumes. The US government has increased royalty rates from 12.5% to 16.7% for new deep-water leases awarded after July 2007. We qualify for royalty relief at our deep-water Aspen and Gunnison fields on the first 87.5 mmboe of production. However, we may be subject to royalties at Gunnison if annual commodity prices are higher than threshold prices set by the US Department of the Interior’s Minerals Management Service (MMS). The oil and gas industry is currently litigating the enforceability of these price thresholds. In October 2007, a US District Court ruled that the price thresholds were unenforceable. The MMS has since appealed this ruling and a decision is expected by the end of 2008. In 2007, commodity prices exceeded these thresholds and we were assessed a royalty at Gunnison of 12.5% by the MMS. If the litigation is not successful, royalties that we have accrued on our Gunnison production will be payable. Our Aspen field is not subject to the minimum price threshold. Although several bills were recently proposed burdening leases awarded in 1998 and 1999 with royalties or severance taxes, no such legislation was passed by US Congress.

US taxable income is subject to federal income tax of 35% and state taxes ranging from 0% to 12%.