Nexen’s near-term strategy for managing its emissions is based on five elements:

• • Physically reduce emissions (e.g., by reducing vent gas, improving energy efficiency)
• • Self-generate 95,000 tonnes per year of carbon credits from wind power
• • Acquire 500 kilotonnes of credits through qualified offshore projects (such as the Natsource GHG credit pool, see page 26)
• • Participate in domestic offset projects (such as methane capture from landfills)
• • Purchase carbon credits on the spot market

In addition, Nexen is investing in carbon capture and sequestration research at the University of Calgary and is also an active participant in the Integrated CO2 Network (see page 27). Nexen has also been involved in the GeoPOS (GeoPowering the Oil Sands) consortium since 2004. This is a deep, hot dry rock project aimed at lowering natural gas demand by augmenting energy needs with geothermal energy.

Draft Alberta regulations call for a 12% reduction in CO2e intensity from larger facilities in the province between 2007 and 2014. Initially, this will apply to our interest in the Balzac gas plant and power station, our 7% share of Syncrude and our 50% interest in the Long Lake project (following a three-year period necessary to establish a baseline). For new facilities, emission intensity improvements are required after the fourth year of operation and are at 2% per year until 12% is reached.

Nexen has a range of carbon management options for Long Lake including purchased offsets, efficiency improvements and technology improvements. The gasification technology at Long Lake will enable us to capture CO2 pre-combustion, a significant advantage over other projects. Long Lake features the first gasifier in Canada; we will be leading its use here.

At the Balzac gas plant, energy efficiency upgrades are expected to significantly reduce fuel consumption and emission intensity. In the event that Nexen’s emission reduction programs do not meet the 12% intensity reduction, we will contribute to the Alberta Technology Fund announced in March 2007.

In 2010, Canadian federal GHG regulations will come into effect. Like the Alberta system, the regulations are based on emission intensity improvements. The main elements of the federal system are:

• • An 18% reduction below the 2006 baseline intensity in 2010
• • Continuous improvement in emission intensity of 2% per year for subsequent years

Compliance may be achieved through a combination of:

• • Direct emission reductions at the facility
• • Payment into a technology fund to foster development of new technologies to address GHG emissions
• • Purchase of certified emission reduction credits from developing countries (eligible offsets through the UN Clean Development Mechanism)
• • Emissions trading and purchase of qualified domestic offsets

We expect that the differences between the provincial and federal systems will be resolved prior to the federal regulations coming into force so that we are subject to a single harmonized regulation.

Investors are increasingly seeking information on the potential effects of climate change on their investments. Nexen has responded to the Carbon Disclosure Project (CDP) survey to enhance its disclosure on this issue. The CDP provides a secretariat for the world’s largest institutional investor collaboration on the business implications of climate change. CDP represents an efficient process whereby many institutional investors collectively sign a single global request for disclosure of information on greenhouse gas emissions. The CDP website is the largest registry of corporate greenhouse gas emissions information in the world. Responses from Nexen and more than 1,000 corporations can be downloaded without charge from www.cdproject.net. Nexen responded to the questionnaire in 2006 and 2007.

On October 17, 2006, Nexen co-hosted the grand opening of its first wind farm. Nexen and Canadian Hydro Developers are 50/50 partners in Soderglen, a $113 million project that will produce 70.5 megawatts per hour of clean electricity. The project includes 47 wind towers, each with a 1.5 megawatt turbine. It produces enough power to provide electricity to 25,000 homes and will offset 95,000 tonnes of CO2e per year. Wind farms are an innovative and environmentally friendly way to add power to the power grid. At the same time, generated Renewable Energy Certificates will help Nexen offset the greenhouse gas emissions that we produce elsewhere in the company.

The Greenhouse Gas-Credits Aggregation Pool (GG-CAP) was created by Natsource Asset Management Corp. to provide investors with greenhouse gas emission reductions that can be applied against their emissions limitations. Similar to a mutual fund, the Pool aggregates individual buyers’ demand and diversifies risk by acquiring a portfolio of GHG reduction projects around the world. Nexen has committed to purchase 500,000 tonnes of GHG credit through GG-CAP over the period 2008 through 2012.

Nexen has implemented a new system to estimate and manage air emissions (greenhouse gases, criteria air contaminants and hazardous air pollutants). This system has been configured for all of our Canadian operations where we have, or will have, regulations that will limit our emissions of greenhouse gases and other air pollutants. In the future, the system will be expanded to our international operations.

Some of the benefits of our emission reporting system include:

• • Standardized air emission estimation methodologies used across all business units
• • An audit trail of all additions, deletions and changes including when the changes were made and by whom
• • Allowing a monthly assessment of emissions to better manage our response to regulatory requirements

The European Union (EU) emission trading system is based on allowances, each of which is equivalent to one tonne of CO2. In the UK to date, Nexen has received an allocation for Phase 2 of the Scott production platform, and manages that allocation on behalf of the project partners. We have not yet applied for an allocation for Phase 2 at Buzzard. We plan to do that when Buzzard has been operating long enough to achieve a steady state that gives us an accurate emissions baseline.

Renewable energy certificates (RECs) are earned when a company reduces greenhouse gases by producing energy from a renewable source instead of a non-renewable, carbon-based source. This produces carbon offsets, which can be recognized informally within a company or formally through one of several voluntary certification programs. In 2006, Nexen’s wind turbines at Soderglen, Alberta became EcoLogo certified through a Government of Canada program. Certification enables us to sell carbon offsets, RECs and certified green power to a growing number of energy consumers.

ICO₂N stands for Integrated CO₂ Network, a proposed system for the capture, transport, distribution and storage of carbon dioxide. Studies indicate ICO₂N can realistically capture and sequester up to 20 million tonnes of CO₂ per year – the equivalent of annually removing about four million cars from the road.

The proposed project has three key elements:

1. 1. Capturing CO₂ at the source; these sources include coal or natural gas fired power plants, bitumen upgraders, oil and natural gas processing facilities, chemical and fertilizer plants, and other industrial users of hydrocarbon fuels
2. 2. Transporting the CO₂ through an underground pipeline system from the emission source to the storage site
3. 3. Storing the CO₂ in deep underground geological formations such as saline aquifers, mature oil pools (for enhanced recovery) and depleted natural gas reservoirs

ICO₂N has the potential to help Canada meet its climate change objectives while supporting economic growth. It is a ‘made-in- Canada’ solution – the infrastructure would be built here and the CO₂ emission reductions will be realized here.

In addition to reducing emissions, carbon capture and sequestration is expected to generate economic opportunities, including the creation of a market through which companies could purchase captured CO₂ for enhanced oil recovery. This, in turn, is expected to provide revenue to help offset the costs of capture, transportation and storage. ICO₂N would also increase economic activity throughout Canada by promoting technological innovation and creating new construction and maintenance jobs. See www.ico2n.com for more information.

Nexen established its eco-efficiency team in early 2006 to reduce environmental impacts and improve operating efficiencies. We identified and prioritized 75 opportunities and conducted a preliminary assessment of expected costs, benefits and environmental performance associated with each opportunity. Examples of projects we will examine in 2007 include fresh water consumption and burner/heater efficiencies.