Petro-canada Inactive 6-K Form 6K Petro-canada

The average New York Harbor 3-2-1 refinery crack spread was $11.82 US/bbl in the third quarter of 2008, down from $12.41 US/bbl in the third quarter of 2007. The average international light/heavy crude price differential was $8.34 US/bbl in the third quarter of 2008, compared with $11.80 US/bbl in the third quarter of 2007.

Downstream Net Earnings

	Third Quarter 2008				Third Quarter 2007
Refining and Supply net earnings (loss) (millions of Canadian dollars)		$	(81	)	$	58
New York Harbor 3-2-1 crack spread (US$/bbl)		$	11.82		$	12.41
Chicago 3-2-1 crack spread (US$/bbl)		$	16.44		$	17.91
Seattle 3-2-1 crack spread (US$/bbl)		$	14.70		$	14.55
Marketing net earnings (millions of Canadian dollars)		$	54		$	47

In the third quarter of 2008, total sales of refined petroleum products decreased 2% to 4.8 billion litres, compared with the same period last year. The decrease reflected lower Marketing sales and reduced low-margin Refining and Supply sales, partially offset by higher lubricants sales volumes.

Refining and Supply recorded a net loss of $81 million in the third quarter 2008, down from net earnings of $58 million in the same quarter of 2007. Results were negatively impacted by the following five items, listed in order of impact. First, costs of sales were higher while using a FIFO inventory valuation methodology in a declining crude oil feedstock cost environment. Second, refinery yields in Edmonton were lower due to operational upsets and planned turnaround activity for the RCP. Third, operating costs increased because of maintenance and repair activity, planned turnarounds and environmental costs associated with the Quebec green levy. Fourth, fuel costs were higher. Fifth, gasoline cracking margins were lower. These factors were partially offset by higher realized refining margins for asphalt, lubricants and petrochemical and light oil products, and by higher distillate cracking margins.

Marketing contributed third quarter 2008 net earnings of $54 million, up compared with $47 million in the same quarter of 2007. In the third quarter of 2008, Marketing results reflected higher fuel margins, an increase in lubricants sales volumes and rising non-petroleum revenue. These factors were partially offset by increased operating expenses due to higher fuel costs associated with delivery and card fees.

Downstream Turnaround Activity

No major turnarounds are planned for the remainder of 2008.

Edmonton Refinery Conversion Project (RCP)

At the Edmonton refinery, the Company has invested to convert the facility to run oil sands-based feedstock. The RCP will enable Petro-Canada to directly upgrade up to 26,000 b/d of bitumen and process up to 48,000 b/d of sour synthetic crude oil, replacing the more expensive conventional light crude feedstock currently refined.

At the end of the third quarter of 2008, Petro-Canada had completed construction of the RCP and the refinery is on track for startup in the fourth quarter of 2008. During the turnaround period, the refinery operated under modified operations at approximately 35% of normal levels to limit the shortfall in light oil production. To accommodate the turnaround, the Company mitigated the impact of lost production on customers by entering time trades and purchasing additional finished product. Expenses associated with the turnaround are expected to be about $20 million after-tax.

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Change in Accounting for Inventory and Crude Oil and Product Purchases

On January 1, 2008, Petro-Canada adopted the FIFO method for valuing its crude oil and refined product inventories. The change is due to the “last-in, first-out” (LIFO) method no longer being permitted under Canadian generally accepted accounting principles (GAAP). As a result of changing from the LIFO inventory costing method to FIFO, a one-time adjustment to increase inventories by $812 million, future income tax liabilities by $256 million and retained earnings by $556 million was recorded. This adjustment occurred on January 1, 2008 and increased the Company’s working capital and Downstream capital employed values. A second impact relates to reported cost of crude oil and product purchases. The change in methodology reflects historic crude oil prices at the time the crude oil is purchased. Reported operating revenues continue to reflect current market prices when the crude oil is refined and sold. As a result of the lag between when crude oil is purchased and when product is sold, and fluctuating crude oil prices, future reported Downstream earnings may be more volatile.

CORPORATE

Shared Services and Eliminations	Three months ended September 30,					Nine months ended September 30,
(millions of Canadian dollars)	2008		2007			2008			2007
Net earnings (loss)	$	24	$	13		$	(117	)	$	(59	)
Cash flow from (used in) operating activities	$	131	$	(64	)	$	422		$	(92	)

Shared Services and Eliminations recorded net earnings of $24 million in the third quarter of 2008, compared with $13 million for the same period in 2007. Net earnings in the third quarter of 2008 included a $160 million recovery related to the mark-to-market valuation of stock-based compensation and an $18 million recovery related to the Downstream’s expected future margins for inventory purchased for line fill for the Edmonton RCP, partially offsetting inventory write-downs in Oil Sands. These factors were partially offset by a $103 million foreign currency translation loss on long-term debt and foreign exchange gains from transacting in U.S. dollars during the third quarter of 2008. The net loss in the third quarter of 2007 included a $10 million charge related to the mark-to-market valuation of stock-based compensation and a $78 million foreign currency translation gain on long-term debt.

Interest expense was $61 million before-tax during the third quarter of 2008, up from $39 million in the third quarter of the prior year. The Company capitalized $17 million of interest expense during the quarter, compared with $8 million in the third quarter of 2007.

Cash flow from operating activities was affected by tax deferrals, resulting from the Company’s upstream partnership. These deferrals increased cash flow from operating activities by about $70 million in the quarter, compared with an increase of $3 million in the same period last year. On January 1, 2008, the Company adopted the FIFO costing method for valuing its Downstream inventories, which is consistent with the method prescribed for income tax purposes, thereby eliminating the difference in earnings and cash flow from operating activities.

LIQUIDITY AND CAPITAL RESOURCES

Summary of Cash Flows

	Three months ended September 30,						Nine months ended September 30,
(millions of Canadian dollars)	2008			2007			2008			2007
Cash flow from operating activities	$	1,279		$	1,340		$	5,193		$	3,941
Net cash (outflows) inflows from:
Investing activities		(1,503	)		(877	)		(3,674	)		(2,450	)
Financing activities		(96	)		(277	)		171			(900	)
Increase (decrease) in cash and cash equivalents		(320	)		186			1,690			591
Cash and cash equivalents	$	1,921		$	1,090		$	1,921		$	1,090

Petro-Canada’s financing strategy is designed to maintain financial strength and flexibility to support profitable growth in all business environments. Two key measures that Petro-Canada uses to measure the Company’s overall financial strength are debt-to-cash flow from operating activities and debt-to-debt plus equity. Petro-Canada’s debt-to-cash flow from operating activities ratio, a key short-term leverage measure, was 0.9 times at September 30, 2008. This was within the Company’s target range of no more than 2.0 times. Debt-to-debt plus equity, the long-term measure for capital structure, was 20.4% at September 30, 2008, below the Company’s target range of 25% to 35%.

– 16 –

The operating working capital surplus was $501 million at the end of the third quarter of 2008, excluding cash and cash equivalents, the current portion of long-term debt and short-term notes payable, compared with an operating working capital deficiency of $565 million at December 31, 2007. The operating working capital surplus at September 30, 2008 primarily resulted from the increase in inventories due to the adoption of the FIFO method for valuing its inventories, the increase to accounts receivable due to the effective unwinding of the accounts receivable securitization program and the decrease in accounts payable and accrued liabilities due to the recovery related to the mark-to-mark valuation of stock-based compensation.

Financial Ratios	September 30, 2008	December 31, 2007	September 30, 2007
Debt-to-cash flow from operating activities (times) 1	0.9	1.0	0.5
Debt-to-debt plus equity (%)	20.4	22.5	17.1

1	Calculated on a 12-month rolling basis.

Operating Activities

Investing Activities

	Three months ended September 30,				Nine months ended September 30,
(millions of Canadian dollars)	2008		2007		2008		2007
Upstream
North American Natural Gas	$	199	$	176	$	457	$	497
Oil Sands		286		101		689		297
International & Offshore
East Coast Canada		112		40		194		126
International		283		209		1,803		538
		880		526		3,143		1,458
Downstream
Refining and Supply		499		312		1,318		809
Sales and Marketing		49		68		104		104
Lubricants		4		8		11		15
		552		388		1,433		928
Shared Services and Eliminations		7		5		20		17
Total property, plant and equipment and exploration		1,439		919		4,596		2,403
Other assets		–		73		–		105
Total	$	1,439	$	992	$	4,596	$	2,508

Financing Activities

At the end of the third quarter of 2008, the Company’s syndicated committed credit facilities and bilateral demand facilities totalled $3,570 million and $842 million, respectively, of which $292 million was used for letters of credit and overdraft coverage. The syndicated facilities also may be used to provide liquidity support to a commercial paper program. No commercial paper was outstanding at September 30, 2008.

During the first nine months of 2008, the Company issued $600 million US of 10-year notes and $900 million US of 30-year notes under its previously filed base shelf prospectus. The base shelf prospectus provides for the offering of up to $4 billion US of debt securities in Canada or the U.S. over the course of a 25-month period from the date of issue, March 31, 2008.

During the third quarter of 2008, Petro-Canada’s $480 million accounts receivable securitization program was effectively unwound as it was no longer a cost-effective means of borrowing.

Current credit ratings for the Company’s unsecured long-term debt are Baa2, with a stable outlook by Moody’s Investors Service, BBB with a stable outlook by Standard & Poor’s and A (low) under review with negative implications by Dominion Bond Rating Service.

The Company’s financial capacity and flexibility have not been significantly impacted by the recent turmoil in the financial markets due to Petro-Canada’s continuing ability to generate strong cash flow, existing cash balances, significant credit facility capacity and lack of near-term refinancing requirements. For 2009 and beyond, spending on future large projects may result in annual capital expenditures exceeding operating cash flow. The Company anticipates that additional funding requirements will be met by external financing and that additional financial leverage can be managed in the context of Petro-Canada’s target ranges.

– 17 –

Returning Cash to Shareholders

Petro-Canada’s priority uses of cash are to fund the capital program and profitable growth opportunities, and to return cash to shareholders through dividends and a share buyback program.

Petro-Canada regularly reviews its dividend strategy to ensure the alignment of dividend policy with shareholder expectations, and financial and growth objectives. Consistent with this objective, on July 24, 2008, the Company declared a 54% increase in its quarterly dividend to $0.20/share, commencing with the dividend payable on October 1, 2008.

Petro-Canada’s current NCIB program entitles the Company to repurchase up to 5% of its outstanding common shares from June 22, 2008 to June 21, 2009, subject to certain conditions. In the third quarter of 2008, the Company did not repurchase any of its shares, compared with 4.0 million in the same period last year. Future share repurchases will depend on excess cash available after consideration of the Company’s priority uses of cash.

	Shares Repurchased				Average Price				Total Cost ($ millions)
Period	2008		2007		2008		2007		2008		2007
First quarter		–		2,000,000	$	–	$	43.63	$	–	$	87
Second quarter		–		8,000,000	$	–	$	53.44	$	–	$	428
Third quarter		–		3,998,000	$	–	$	55.15	$	–	$	220
Year-to-date		–		13,998,000	$	–	$	52.53	$	–	$	735

Contingent Liabilities and Contractual Obligations

Contractual obligations are summarized in the Company’s 2007 annual MD&A and contingent liabilities are disclosed in Note 24 of the 2007 annual Consolidated Financial Statements. Total contractual obligations at September 30, 2008 were $40.7 billion. During the third quarter of 2008, contractual obligations increased by $1.3 billion primarily due to increased product purchase commitments.

The Company has certain retail licensee agreements that qualify as variable interest entities, as described in Note 25 to the 2007 annual Consolidated Financial Statements. These entities were not consolidated as Petro-Canada is not the primary beneficiary and the Company’s maximum exposure to losses from these arrangements was not expected to be material.

RISK

As at September 30, 2008, there were no material changes in the Company’s risks or risk management activities since December 31, 2007. Petro-Canada’s risk management activities are conducted in accordance with the policies and guidelines established by the Board of Directors. Readers should refer to Petro-Canada’s 2007 AIF and the risk management section of the 2007 annual MD&A for further discussion of risks relating to Petro-Canada’s business.

INTERNATIONAL FINANCIAL REPORTING STANDARDS

In 2006, Canada’s Accounting Standards Board ratified a strategic plan that will result in Canadian GAAP, as currently used by the Company, being converged with International Financial Reporting Standards (IFRS) over a transitional period, with a changeover date for the fiscal year beginning on January 1, 2011. The Company completed the scoping phase of its IFRS changeover plan, including a detailed timeline for assessing resources and training and analyzing key differences. The Company is in the process of assessing the impact on accounting policies, data systems, internal controls over financial reporting and business activities.

SHAREHOLDER INFORMATION

As at September 30, 2008, Petro-Canada’s outstanding common shares totalled 484.4 million and averaged 484.4 million during the third quarter of 2008. These figures compare with outstanding common shares of 485.2 million as at September 30, 2007 and average shares outstanding of 487.6 million for the quarter ended September 30, 2007.

Petro-Canada will hold a conference call to discuss these results with investors on Thursday, October 23, 2008 at 9:00 a.m. eastern daylight time (EDT). To participate, please call 1-866-898-9626 (toll-free in North America), 00-800-8989-6323 (toll-free internationally), or 416-340-2216 at 8:55 a.m. EDT. Media are invited to listen to the call by dialing 1-866-540-8136 (toll-free in North America) or 416-340-8010. Media are invited to ask questions at the end of the call. A live audio broadcast of the conference call will be available on Petro-Canada's website at http://www.petro-canada.ca/en/investors/845.aspx on October 23, 2008 at 9:00 a.m. EDT. Those who are unable to listen to the call live may listen to a recording of the call approximately one hour after its completion by dialing 1-800-408-3053 (toll-free in North America) or 416-695-5800 (pass code number 3269226#). Approximately one hour after the call, a recording will be available on Petro-Canada’s website.

– 18 –

SELECT UPSTREAM OPERATING DATA

	Three months ended September 30,		Nine months ended September 30,
	2008	2007	2008	2007
Before Royalties
Crude oil and NGL production net (Mb/d)
North American Natural Gas	13.0	12.6	13.1	12.5
Oil Sands	66.9	63.8	58.8	58.6
International & Offshore
East Coast Canada	90.6	102.1	91.1	102.6
International
North Sea	85.7	87.5	90.9	79.0
Other International	49.6	49.1	49.9	47.3
	305.8	315.1	303.8	300.0
Natural gas production net, excluding injectants (MMcf/d)
North American Natural Gas	596	599	588	601
International
North Sea	54	59	57	58
Other International	59	65	64	71
	709	723	709	730
Total production (Mboe/d) net before royalties 1	424	436	422	422
After Royalties
Crude oil and NGL production net (Mb/d)
North American Natural Gas	10.0	10.1	10.1	9.9
Oil Sands	60.2	57.1	53.3	53.3
International & Offshore
East Coast Canada	67.7	83.7	68.6	88.4
International
North Sea	85.7	87.5	90.9	79.0
Other International	28.3	44.9	30.9	42.7
	251.9	283.3	253.8	273.3
Natural gas production net, excluding injectants (MMcf/d)
North American Natural Gas	466	476	463	473
International
North Sea	54	59	57	58
Other International	59	43	64	67
	579	578	584	598
Total production (Mboe/d) net after royalties 1	348	380	351	373

1	Natural gas converted at six Mcf of natural gas to one bbl of oil.

– 19 –

AVERAGE UPSTREAM PRICE REALIZED

	Three months ended September 30,		Nine months ended September 30,
	2008	2007	2008	2007
Crude oil and NGL ($/bbl)
North American Natural Gas	105.31	69.98	102.19	63.97
Oil Sands	108.25	64.80	99.69	58.21
International & Offshore
East Coast Canada	114.76	76.83	112.85	72.83
International
North Sea	117.87	77.19	108.04	71.88
Other International	126.47	77.59	115.03	73.32
Total crude oil and NGL	114.11	74.32	107.85	69.42
Natural gas ($/Mcf)
North American Natural Gas	8.41	5.17	8.52	6.47
International
North Sea	12.01	6.87	11.30	7.70
Other International	7.85	4.19	5.88	4.60
Total natural gas	8.68	5.28	8.60	6.47

EFFECTIVE ROYALTY RATES

	Three months ended September 30,		Nine months ended September 30,
(% of sales revenues)	2008	2007	2008	2007
North American Natural Gas	22%	20%	21%	21%
Oil Sands	10%	10%	9%	9%
International & Offshore
East Coast Canada	25%	18%	25%	14%
International
North Sea	–	–	–	–
Other International 1	36%	13%	31%	9%
Total	18%	13%	17%	12%

1	Royalty rates reflect a portion of the NOC's take under the new Libya EPSAs and should be read in conjunction with the Libya EPSAs Fact Sheet referenced in the December 10, 2007 press release announcing the signing of the binding heads of agreement with the NOC.

– 20 –

SELECT DOWNSTREAM OPERATING DATA

AVERAGE DOWNSTREAM PRICES

	Three months ended September 30,				Nine months ended September 30,
	2008			2007	2008	2007
Petroleum product sales (thousands of cubic metres/day – m3/d)
Gasoline
Eastern Canada		13.5		14.6	13.2	13.9
Western Canada		9.6		11.0	10.1	10.4
		23.1		25.6	23.3	24.3
Distillate
Eastern Canada		8.1		7.5	8.4	8.5
Western Canada		10.6		10.6	10.2	11.0
		18.7		18.1	18.6	19.5
Other, including petrochemicals		10.9		9.9	10.3	9.0
Total petroleum product sales		52.7		53.6	52.2	52.8
Crude oil processed by Petro-Canada (thousands of m3/d)
Eastern Canada		19.8		19.8	19.6	19.8
Western Canada		10.3		20.4	17.1	20.3
Total crude oil processed by Petro-Canada		30.1		40.2	36.7	40.1
Average refinery utilization (%)		75		99	90	99
Downstream net earnings (loss) after-tax (cents/litre)		(0.6	)	2.1	3.2	3.8

	Three months ended September 30,		Nine months ended September 30,
	2008	2007	2008	2007
Rack prices (Canadian cents/litre)
Gasoline
Eastern Canada	89.59	63.78	83.01	63.93
Western Canada	92.43	67.09	84.20	65.67
Distillate
Eastern Canada	101.01	64.45	93.67	62.50
Western Canada	99.56	65.47	93.84	65.04
Pump prices (Canadian cents/litre, excluding taxes)
Gasoline
Eastern Canada	96.21	68.90	88.85	67.87
Western Canada	103.85	76.54	94.47	76.02

– 21 –

SHARE INFORMATION

	Three months ended September 30,		Nine months ended September 30,
	2008	2007	2008	2007
Weighted-average common shares outstanding (millions)	484.4	487.6	484.0	491.6
Weighted-average diluted common shares outstanding (millions)	487.9	492.6	488.0	496.7
Net earnings – basic ($/share)	2.58	1.59	7.90	4.50
– diluted ($/share)	2.56	1.58	7.84	4.45
Cash flow from operating activities ($/share)	2.64	2.75	10.73	8.02
Dividends ($/share)	0.20	0.13	0.46	0.39
Toronto Stock Exchange:
Share price 1 – High	55.75	61.25	60.00	61.25
– Low	33.70	50.97	33.70	41.02
– Close at September 30	35.40	57.07	35.40	57.07
Shares traded (millions)	166.5	111.0	469.2	399.3
New York Stock Exchange:
Share price 2 – High	56.90	58.41	61.03	58.41
– Low	32.35	47.51	32.35	34.91
– Close at September 30	33.35	57.39	33.35	57.39
Shares traded (millions)	135.4	47.9	310.3	129.6

1	Share prices are in Canadian dollars and represent the closing price.

2	Share prices are in U.S. dollars and represent the closing price.

SELECT FINANCIAL DATA

(unaudited, millions of Canadian dollars)

	Three months ended September 30,					Nine months ended September 30,
	2008			2007		2008			2007

Net earnings (loss)
Upstream
North American Natural Gas	$	165		$	55	$	339		$	248
Oil Sands		209			110		498			187
International & Offshore
East Coast Canada		397			293		1,157			883
International		483			200		1,491			404
Downstream		(27	)		105		457			548
Shared Services and Eliminations		24			13		(117	)		(59	)
Net earnings	$	1,251		$	776	$	3,825		$	2,211

Cash flow from operating activities	$	1,279		$	1,340	$	5,193		$	3,941

Average capital employed 1
Upstream						$	9,457		$	7,967
Downstream							6,787			4,910
Shared Services and Eliminations							748			398
Total Company						$	16,992		$	13,275

Return on capital employed (%) 1
Upstream							41.0			26.7
Downstream							7.9			12.9
Total Company							26.4			20.3

Return on equity (%) 1							32.1			24.2

Debt						$	4,098		$	2,367
Cash and cash equivalents						$	1,921		$	1,090
Debt-to-cash flow from operating activities (times) 1							0.9			0.5
Debt-to-debt plus equity (%)							20.4			17.1

1	Calculated on a 12-month rolling basis.

– 22 –

CONSOLIDATED STATEMENT OF EARNINGS (unaudited)

(millions of Canadian dollars, except per share amounts)

	Three months ended September 30,					Nine months ended September 30,
	2008		2007			2008			2007

Revenue
Operating	$	8,068	$	5,549		$	22,451		$	15,945
Investment and other income (expense) (Notes 4 and 6)		218		(52	)		67			(129	)
		8,286		5,497			22,518			15,816
Expenses
Crude oil and product purchases		4,518		2,562			11,256			7,392
Operating, marketing and general		741		919			2,676			2,732
Exploration		143		65			471			307
Depreciation, depletion and amortization		513		498			1,508			1,455
Unrealized (gain) loss on translation of foreign currency denominated long-term debt		119		(93	)		189			(234	)
Interest		61		39			156			122
		6,095		3,990			16,256			11,774

Earnings before income taxes		2,191		1,507			6,262			4,042

Provision for income taxes
Current		808		607			2,465			1,704
Future (Note 5)		132		124			(28	)		127
		940		731			2,437			1,831

Net earnings	$	1,251	$	776		$	3,825		$	2,211

Earnings per share (Note 7)
Basic	$	2.58	$	1.59		$	7.90		$	4.50
Diluted	$	2.56	$	1.58		$	7.84		$	4.45

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007

Net earnings	$	1,251		$	776		$	3,825		$	2,211
Other comprehensive income, net of tax
Change in foreign currency translation adjustment		(196	)		(60	)		(38	)		(256	)
Comprehensive income	$	1,055		$	716		$	3,787		$	1,955

See accompanying Notes to Consolidated Financial Statements

– 23 –

CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007

Operating activities
Net earnings	$	1,251		$	776		$	3,825		$	2,211
Items not affecting cash flow from operating activities:
Depreciation, depletion and amortization		513			498			1,508			1,455
Future income taxes (Note 5)		132			124			(28	)		127
Accretion of asset retirement obligations		20			16			57			50
Unrealized (gain) loss on translation of foreign currency denominated long-term debt		119			(93	)		189			(234	)
(Gain) loss on sale of assets (Notes 4 and 6)		(121	)		(8	)		9			(78	)
Unrealized (gain) loss related to Buzzard derivative contracts		-			(107	)		-			21
Other		102			3			69			10
Exploration expenses		100			20			318			183
(Increase) decrease in non-cash working capital related to operating activities (Note 8)		(837	)		111			(754	)		196
Cash flow from operating activities		1,279			1,340			5,193			3,941

Investing activities
Expenditures on property, plant and equipment and exploration		(1,439	)		(919	)		(4,596	)		(2,403	)
Proceeds from sale of assets (Note 6)		188			83			233			177
Increase in other assets		-			(73	)		-			(105	)
(Increase) decrease in non-cash working capital related to investing activities		(252	)		32			689			(119	)
Cash flow used in investing activities		(1,503	)		(877	)		(3,674	)		(2,450	)

Financing activities
Decrease in short-term notes payable (Note 9)		-			-			(109	)		-
Proceeds from issue of long-term debt (Note 9)		-			-			1,482			-
Repayment of long-term debt (Note 9)		-			(3	)		(996	)		(6	)
Proceeds from issue of common shares (Note 10)		1			9			17			33
Purchase of common shares (Note 10)		-			(220	)		-			(735	)
Dividends on common shares (Note 13)		(97	)		(63	)		(223	)		(192	)
Cash flow from (used in) financing activities		(96	)		(277	)		171			(900	)

Increase (decrease) in cash and cash equivalents		(320	)		186			1,690			591
Cash and cash equivalents at beginning of period		2,241			904			231			499
Cash and cash equivalents at end of period	$	1,921		$	1,090		$	1,921		$	1,090

See accompanying Notes to Consolidated Financial Statements

– 24 –

CONSOLIDATED BALANCE SHEET (unaudited)

As at September 30, 2008

CONSOLIDATED STATEMENT OF RETAINED EARNINGS (unaudited)

	September 30, 2008				December 31, 2007
Assets
Current assets
Cash and cash equivalents		$	1,921			$	231
Accounts receivable			3,804				1,973
Income taxes receivable			-				280
Inventories (Note 3)			2,105				668
Future income taxes			44				26
			7,874				3,178

Property, plant and equipment, net (Notes 5 and 6)			22,056				19,497
Goodwill			747				731
Other assets			402				446
		$	31,079			$	23,852

Liabilities and shareholders' equity
Current liabilities
Accounts payable and accrued liabilities		$	4,177			$	3,512
Income taxes payable			1,275				-
Short-term notes payable (Note 9)			-				109
Current portion of long-term debt (Note 9)			2				2
			5,454				3,623

Long-term debt (Note 9)			4,096				3,339
Other liabilities			896				717
Asset retirement obligations			1,357				1,234
Future income taxes (Notes 3 and 5)			3,269				3,069

Shareholders' equity
Common shares (Note 10)			1,384				1,365
Contributed surplus (Note 10)			22				24
Retained earnings			14,850				10,692
Accumulated other comprehensive income
Foreign currency translation adjustment			(249	)			(211	)
			16,007				11,870
		$	31,079			$	23,852

	Three months ended September 30,						Nine months ended September 30,
	2008			2007			2008			2007

Retained earnings at beginning of period	$	13,696		$	9,826		$	10,692		$	8,565
Cumulative effect of adopting new accounting standards (Note 3)		-			-			556			-
Net earnings		1,251			776			3,825			2,211
Dividends on common shares (Note 13)		(97	)		(63	)		(223	)		(192	)
Excess cost for normal course issuer bid (Note 10)		-			(209	)		-			(254	)
Retained earnings at end of period	$	14,850		$	10,330		$	14,850		$	10,330

See accompanying Notes to Consolidated Financial Statements

– 25 –

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Three months ended September 30,

1. SEGMENTED INFORMATION

	Upstream
											International & Offshore
	North American Natural Gas					Oil Sands					East Coast Canada						International						Downstream						Shared Services						Eliminations4						Consolidated
	2008		2007			2008		2007			2008			2007			2008			2007			2008			2007			2008			2007			2008			2007			2008		2007

Revenue
Sales to customers	$	508	$	308		$	748	$	145		$	681		$	671		$	1,352		$	1,079		$	4,779		$	3,346		$	-		$	-		$	-		$	-		$	8,068	$	5,549
Investment and other income (expense) 1		14		1			-		(3	)		9			(5	)		136			(34	)		50			(3	)		9			(8	)		-			-			218		(52	)
Inter-segment sales		120		70			445		316			302			114			-			-			4			5			-			-			(871	)		(505	)		-		-
Segmented revenue		642		379			1,193		458			992			780			1,488			1,045			4,833			3,348			9			(8	)		(871	)		(505	)		8,286		5,497
Expenses
Crude oil and product purchases2		126		62			644		112			239			158			-			-			3,511			2,229			-			-			(2	)		1			4,518		2,562
Inter-segment transactions		2		2			13		1			3			2			-			-			851			500			-			-			(869	)		(505	)		-		-
Operating, marketing and general		134		124			203		149			68			68			99			144			443			390			(206	)		44			-			-			741		919
Exploration		20		25			3		1			-			5			120			34			-			-			-			-			-			-			143		65
Depreciation, depletion and amortization		124		108			32		33			102			105			174			180			81			72			-			-			-			-			513		498
Unrealized (gain) loss on translation of foreign currency denominated long-term debt		-		-			-		-			-			-			-			-			-			-			119			(93	)		-			-			119		(93	)
Interest		-		-			-		-			-			-			-			-			-			-			61			39			-			-			61		39
		406		321			895		296			412			338			393			358			4,886			3,191			(26	)		(10	)		(871	)		(504	)		6,095		3,990
Earnings (loss) before income taxes		236		58			298		162			580			442			1,095			687			(53	)		157			35			2			-			(1	)		2,191		1,507
Provision for income taxes
Current		33		55			49		5			185			163			645			379			(76	)		40			(28	)		(35	)		-			-			808		607
Future		38		(52	)		40		47			(2	)		(14	)		(33	)		108			50			12			62			23			(23	)		-			132		124
		71		3			89		52			183			149			612			487			(26	)		52			34			(12	)		(23	)		-			940		731
Net earnings (loss)	$	165	$	55		$	209	$	110		$	397		$	293		$	483		$	200		$	(27	)	$	105		$	1		$	14		$	23		$	(1	)	$	1,251	$	776
Expenditures on property, plant and equipment and exploration 3	$	199	$	176		$	286	$	101		$	112		$	40		$	283		$	209		$	552		$	388		$	7		$	5		$	-		$	-		$	1,439	$	919
Cash flow from (used in) operating activities	$	269	$	155		$	77	$	176		$	348		$	403		$	543		$	455		$	(89	)	$	215		$	131		$	(64	)	$	-		$	-		$	1,279	$	1,340
Total assets	$	4,197	$	3,986		$	4,693	$	3,121		$	2,193		$	2,333		$	7,641		$	5,661		$	11,315		$	7,668		$	1,090		$	871		$	(50	)	$	(8	)	$	31,079	$	23,632

1	Investment and other income (expense) for the International segment includes unrealized gains related to the Buzzard derivative contracts of $nil for the three months ended September 30, 2008 ($107 million for the three months ended September 30, 2007) (Note 4).

2	Downstream crude oil and product purchases account for substantially all of the Downstream inventories recognized as an expense during the period.

3	Consolidated expenditures include capitalized interest in the amount of $17 million for the three months ended September 30, 2008 ($8 million for the three months ended September 30, 2007).

4	Eliminations relate to sales between segments recorded at transfer prices based on current market prices, and to unrealized inter-segment profits and losses on inventories. Prior period figures have been reclassified to conform to the current period’s presentation.

– 26 –

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

Nine months ended September 30,

1. SEGMENTED INFORMATION

	Upstream
													International & Offshore
	North American Natural Gas						Oil Sands						East Coast Canada						International						Downstream						Shared Services						Eliminations4						Consolidated
	2008			2007			2008			2007			2008			2007			2008			2007			2008			2007			2008			2007			2008			2007			2008			2007

Revenue
Sales to customers	$	1,519		$	1,016		$	1,682		$	458		$	2,183		$	2,052		$	4,041		$	2,654		$	13,026		$	9,765		$	-		$	-		$	-		$	-		$	22,451		$	15,945
Investment and other income (expense) 1		(129	)		66			(1	)		(3	)		7			(11	)		133			(163	)		18			(7	)		39			(11	)		-			-			67			(129	)
Inter-segment sales		346			238			1,123			759			614			352			-			-			12			12			-			-			(2,095	)		(1,361	)		-			-
Segmented revenue		1,736			1,320			2,804			1,214			2,804			2,393			4,174			2,491			13,056			9,770			39			(11	)		(2,095	)		(1,361	)		22,518			15,816
Expenses
Crude oil and product purchases2		357			165			1,403			366			649			545			-			-			8,892			6,308			-			-			(45	)		8			11,256			7,392
Inter-segment transactions		5			6			27			11			7			6			-			-			2,054			1,338			-			-			(2,093	)		(1,361	)		-			-
Operating, marketing and general		394			368			577			436			180			186			341			421			1,257			1,100			(73	)		221			-			-			2,676			2,732
Exploration		91			122			8			25			-			14			372			146			-			-			-			-			-			-			471			307
Depreciation, depletion and amortization		396			325			85			112			284			319			509			478			233			213			1			8			-			-			1,508			1,455
Unrealized (gain) loss on translation of foreign currency denominated long-term debt		-			-			-			-			-			-			-			-			-			-			189			(234	)		-			-			189			(234	)
Interest		-			-			-			-			-			-			-			-			-			-			156			122			-			-			156			122
		1,243			986			2,100			950			1,120			1,070			1,222			1,045			12,436			8,959			273			117			(2,138	)		(1,353	)		16,256			11,774
Earnings (loss) before income taxes		493			334			704			264			1,684			1,323			2,952			1,446			620			811			(234	)		(128	)		43			(8	)		6,262			4,042
Provision for income taxes
Current		93			157			119			(5	)		547			488			1,805			1,005			14			157			(113	)		(95	)		-			(3	)		2,465			1,704
Future (Note 5)		61			(71	)		87			82			(20	)		(48	)		(344	)		37			149			106			62			21			(23	)		-			(28	)		127
		154			86			206			77			527			440			1,461			1,042			163			263			(51	)		(74	)		(23	)		(3	)		2,437			1,831
Net earnings (loss)	$	339		$	248		$	498		$	187		$	1,157		$	883		$	1,491		$	404		$	457		$	548		$	(183	)	$	(54	)	$	66		$	(5	)	$	3,825		$	2,211
Expenditures on property, plant and equipment and exploration 3	$	457		$	497		$	689		$	297		$	194		$	126		$	1,803		$	538		$	1,433		$	928		$	20		$	17		$	-		$	-		$	4,596		$	2,403
Cash flow from (used in) operating activities	$	847		$	561		$	405		$	405		$	1,503		$	1,230		$	2,080		$	1,088		$	(64	)	$	749		$	422		$	(92	)	$	-		$	-		$	5,193		$	3,941
Total assets	$	4,197		$	3,986		$	4,693		$	3,121		$	2,193		$	2,333		$	7,641		$	5,661		$	11,315		$	7,668		$	1,090		$	871		$	(50	)	$	(8	)	$	31,079		$	23,632

1	Investment and other income (expense) for the International segment includes unrealized losses related to the Buzzard derivative contracts of $nil for the nine months ended September 30, 2008 ($21 million for the nine months ended September 30, 2007) (Note 4).

2	Downstream crude oil and product purchases account for substantially all of the Downstream inventories recognized as an expense during the period.

3	Consolidated expenditures include capitalized interest in the amount of $45 million for the nine months ended September 30, 2008 ($21 million for the nine months ended September 30, 2007).

4	Eliminations relate to sales between segments recorded at transfer prices based on current market prices, and to unrealized inter-segment profits and losses on inventories. Prior period figures have been reclassified to conform to the current period’s presentation.

– 27 –

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(millions of Canadian dollars, unless otherwise stated)

2.	BASIS OF PRESENTATION

The note disclosure requirements for annual financial statements provide additional disclosure to that required for interim financial statements. Accordingly, these interim Consolidated Financial Statements should be read in conjunction with the December 31, 2007 audited Consolidated Financial Statements. The interim Consolidated Financial Statements are presented in accordance with Canadian generally accepted accounting principles (GAAP) and follow the accounting policies summarized in the notes to the annual Consolidated Financial Statements, except for changes as described in Note 3.

3.	CHANGES IN ACCOUNTING POLICIES

In 2006, Canada’s Accounting Standards Board ratified a strategic plan that will result in Canadian GAAP, as currently used by the Company, being converged with International Financial Reporting Standards (IFRS) over a transitional period, with a changeover date for the fiscal year beginning on January 1, 2011. The Company has completed the scoping phase of its IFRS changeover plan, including a detailed timeline for assessing resources and training and analyzing key differences. The Company is in the process of assessing the impact on accounting policies, data systems, internal controls over financial reporting, and business activities.

The Company adopted Canadian Institute of Chartered Accountants (CICA) Handbook Section 1535, Capital Disclosures; Section 3031, Inventories; Section 3862, Financial Instruments – Disclosures; and Section 3863, Financial Instruments – Presentation on January 1, 2008.

As a result of adopting CICA Section 1535, Capital Disclosures, the Company now discloses details about its capital management (Note 13).

As a result of adopting CICA Section 3031, Inventories, the Company now assigns costs to its crude oil and refined petroleum products inventories on a “first-in, first-out” (FIFO) basis. Previously, costs were assigned to these inventories on a “last-in, first-out” (LIFO) basis. In accordance with the transitional provisions of this new accounting standard, the Company has elected to adjust 2008 opening retained earnings by the difference in the measurement of 2008 opening inventory and not restate prior period amounts. As such, the following balance sheet categories were impacted on January 1, 2008:

	Increase
Inventories	$	812
Future income taxes liability		256
Retained earnings		556

As a result of adopting CICA Section 3862, Financial Instruments – Disclosures, the Company has expanded its financial risks and financial instruments disclosures (Note 14).

There is no other material impact on the Consolidated Financial Statements from adoption of these new standards.

4.	INVESTMENT AND OTHER INCOME (EXPENSE)

Investment and other income (expense) consists of the following amounts:

	Three months ended September 30,					Nine months ended September 30,
	2008		2007			2008			2007
Foreign exchange gains (losses)	$	26	$	(33	)	$	46		$	(59	)
Gain (loss) on Downstream derivative contracts		51		(6	)		7			(19	)
Net losses related to Buzzard derivative contracts1		-		(24	)		-			(152	)
Gain (loss) on sale of assets (Note 6)		121		8			(9	)		78
Other		20		3			23			23
Total investment and other income (expense)	$	218	$	(52	)	$	67		$	(129	)

Net losses related to Buzzard derivative contracts include unrealized gains (losses) of 107 million and $(21) million for the three and nine months ended September 30, 2007, respectively and realized gains (losses) of $(131) million for both the three and nine months ended September 30, 2007.

– 28 –

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(millions of Canadian dollars, unless otherwise stated)

5.	LIBYA EXPLORATION AND PRODUCTION SHARING AGREEMENTS

On June 19, 2008, the Company signed six new Exploration and Production Sharing Agreements (EPSAs) with the Libya National Oil Corporation (NOC) to convert its existing concession agreements and old EPSA into new EPSA IV agreements. The new EPSAs were ratified as of the signing with an effective date of January 1, 2008. The new EPSAs will have an expected duration of 30 years and will enable the Company to implement jointly with the NOC the redevelopment of major fields and conduct a 100% operated exploration program in the Libyan Sirte Basin.

The Company agreed to pay a signature bonus of $1 billion US in several installments with the first installment of $500 million US paid on July 17, 2008 and the remaining installments to be paid through 2013. This cost was discounted to $951 million based on this payout schedule using the Company's estimated cost of debt at the time of acquisition.

Net earnings for the nine months ended September 30, 2008 include a $230 million future income tax recovery, which the Company recognized on ratification of the new EPSAs on June 19, 2008.

6.	SALE OF ASSETS

In August 2008, the Company completed the sale of its pre-development assets in Denmark, which are part of the Company’s International business segment, for net proceeds of $140 million, resulting in a gain on sale of $107 million ($82 million after-tax).

In June 2008, the Company completed the sale of its Minehead assets in Western Canada, which are part of the Company’s North American Natural Gas business segment, resulting in a loss on sale of $153 million ($112 million after-tax).

The gains and losses on the sales of these assets are included in investment and other income (expense) in the Consolidated Statement of Earnings.

7.	EARNINGS PER SHARE

The following table provides the number of common shares used in calculating earnings per share amounts:

	Three months ended September 30,		Nine months ended September 30,
(millions)	2008	2007	2008	2007
Weighted-average number of common shares outstanding – basic	484.4	487.6	484.0	491.6
Effect of dilutive stock options	3.5	5.0	4.0	5.1
Weighted-average number of common shares outstanding – diluted	487.9	492.6	488.0	496.7

8.	SECURITIZATION PROGRAM

On June 24, 2004, the Company entered into a securitization program, expiring on June 24, 2009, to sell an undivided interest of eligible accounts receivable to a third party on a revolving and fully serviced basis. From June 24, 2004 until June 30, 2008, the Company sold outstanding receivables under the program ($480 million outstanding receivables sold at June 30, 2008). During the three months ended September 30, 2008, the Company suspended all sales of receivables to the program and remitted all funds for receivables previously sold. At September 30, 2008, there were no outstanding receivables sold under the program.

– 29 –

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(millions of Canadian dollars, unless otherwise stated)

9.	LONG-TERM DEBT

	Maturity	September 30, 20088			December 31, 2007
Debentures and notes
6.80% unsecured senior notes ($900 million US)	2038	$	942		$	-
5.95% unsecured senior notes ($600 million US)	2035		620			577
5.35% unsecured senior notes ($300 million US)	2033		271			248
7.00% unsecured debentures ($250 million US)	2028		255			237
7.875% unsecured debentures ($275 million US)	2026		287			267
9.25% unsecured debentures ($300 million US)	2021		315			294
6.05% unsecured debentures ($600 million US)	2018		630			-
5.00% unsecured senior notes ($400 million US)	2014		420			391
4.00% unsecured senior notes ($300 million US)	2013		300			275
Syndicated credit facilities	2013		-			995
Capital leases	2008-2022		58			57
			4,098			3,341
Current portion			(2	)		(2	)
		$	4,096		$	3,339

On March 31, 2008, the Company filed a final shelf prospectus for the offering of up to $4 billion US of debt securities with the securities commission or equivalent regulatory authority in each of the provinces and territories of Canada. On April 1, 2008, the same was filed with the United States Securities and Exchange Commission. In May 2008, the Company completed a public offering of debt securities under this prospectus in the form of $600 million US 6.05% 10-year unsecured senior notes due May 15, 2018 and $900 million US 6.80% 30-year unsecured senior notes due May 15, 2038. The net proceeds of this offering were used to repay the Company’s short-term notes payable and indebtedness outstanding under its syndicated credit facilities. The balance was added to the Company’s working capital to fund future capital expenditures.

At September 30, 2008, the Company had in place revolving, committed syndicated credit facilities totalling $3,570 million (December 31, 2007 – $2,200 million) which mature in 2013 and revolving bilateral demand credit facilities of $842 million (December 31, 2007 – $1,500 million). As of September 30, 2008, the Company had repaid all amounts previously drawn on its syndicated and demand credit facilities. A total of $293 million of the credit facilities was used for letters of credit and overdraft coverage.

10.	SHAREHOLDERS’ EQUITY

Changes in common shares and contributed surplus were as follows:

	Shares		Amount		Contributed Surplus
Balance at December 31, 2007		483,459,119	$	1,365	$	24
Issued under employee stock option and share purchase plans		980,748		19		(2	)
Repurchased under normal course issuer bid		-		-		-
Balance at September 30, 2008		484,439,867	$	1,384	$	22

The Company has a normal course issuer bid (NCIB) program for the repurchase of its outstanding common shares. This program was renewed in June 2008 to repurchase up to 24 million outstanding common shares during the period from June 22, 2008 to June 21, 2009, subject to certain conditions. During the three and nine months ended September 30, 2008, the Company did not repurchase any common shares. For the three and nine months ended September 30, 2007, the Company repurchased 3,998,000 common shares at a cost of $220 million and 13,998,000 common shares at a cost of $735 million. The excess of the purchase price over the carrying amount of the shares repurchased was recorded as a $nil and $442 million reduction of contributed surplus and a $209 million and $254 million reduction of retained earnings for the three and nine months ended September 30, 2007, respectively.

– 30 –

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

(millions of Canadian dollars, unless otherwise stated)

11.	STOCK-BASED COMPENSATION

The total stock-based compensation expense (recovery) recorded was $(233) million and $(141) million for the three and nine months ended September 30, 2008, respectively, ($24 million and $163 million for the three and nine months ended September 30, 2007, respectively).

(a)	Stock Options and Performance Share Units (PSUs)

Changes in the number of outstanding stock options and PSUs were as follows:

	Stock Options					PSUs
	Number			Weighted-Average Exercise Price		Number
Balance at December 31, 2007		21,035,064		$	34		1,166,044
Granted		3,486,200			47		249,575
Exercised for common shares		(980,748	)		18		n/a
Surrendered for cash payment		(891,604	)		35		n/a
Cancelled/Expired		(230,510	)		47		(590,398	)
Balance at September 30, 2008		22,418,402		$	37		825,221

(b)	Stock Appreciation Rights (SARs)

Changes in the number of outstanding SARs were as follows:

	SARs
	Number			Weighted-Average Exercise Price
Balance at December 31, 2007		3,659,450		$	44
Granted		4,061,330			47
Exercised		(139,680	)		44
Cancelled		(276,152	)		47
Balance at September 30, 2008		7,304,948		$	46

– 31 –