Acquisition
Since our acquisition in December 2004, the UK North Sea has become a key growth area for us. We acquired the following assets for US$2.1 billion:

• a 43.2% operated interest in the Buzzard development;
• operated interests in the Scott and Telford producing fields;
• the Scott production platform;
• interests in several satellite discoveries; and
• more than 700,000 net undeveloped exploration acres.

Attractiveness of Acquisition
This acquisition established us as a significant regional player with concentrated assets, infrastructure and exploration and development potential for future growth. It added high-margin reserves and production, diversified our worldwide portfolio by adding strong assets in a stable jurisdiction, and complemented our other longer cycle-time projects.

Strategy
Our UK strategy is to grow and sustain our existing North Sea production and capture new production hubs with exploration and exploitation opportunities near existing infrastructure. We have a number of exploitation opportunities in our existing fields and smaller undeveloped discoveries near infrastructure. Most of our unexplored acreage is near Scott/Telford, Buzzard or Ettrick. As a result, new discoveries can be tied-in quickly.

During the year, we produced 84,000 boe/d before royalties (84,000 after royalties) in the UK, which was approximately one-third of our total production. At year end, our UK proved oil and gas reserves of 207 mmboe before royalties (207 after royalties) represented about 20% of our total proved oil and gas and Syncrude reserves.

Fiscal Terms
UK fiscal terms are favourable. New discoveries pay no royalties and result in cash netbacks that are higher than our company average. Scott is subject to Petroleum Revenue Tax (PRT), although no PRT is payable until available oil allowances have been fully utilized, which isn’t expected before 2010. Once payable, PRT is levied at 50% of cash flow after capital expenditures, operating costs and an oil allowance. PRT is applicable to fields receiving development consent prior to March 1993. Buzzard, Ettrick, Farragon, Duart and Telford are not subject to PRT. PRT is deductible for corporate income tax purposes. The UK corporate income tax rate on oil and gas activities is 30% of taxable income and is also subject to a 20% supplemental charge. The amount and timing of income taxes payable depends on many factors including price, production, capital investment levels and available tax losses.