Review of Syncrude Operations

Syncrude’s production in 2006 was marked by the start-up of the Stage 3 facilities, which resulted in 94.3 million barrels, or approximately 33 million barrels net to the Trust, being produced. On a daily basis, 2006 production was approximately 258,000 barrels per day, or 91,600 barrels per day net to the Trust based on its 35.49% working interest. In our original 2006 guidance provided in the fourth quarter of 2005, we had anticipated production from the new Stage 3 facilities to begin the second quarter of 2006. However, during the initial start-up of the new Coker 8-3 in May 2006, odorous emissions were detected that resulted in the shutdown of that coker 10 days later. The source of the issue was identified and remediated, and by the end of August, Syncrude successfully restarted the Stage 3 operations, with Coker 8-3 running at near-design capacity rates for a portion of the third quarter. That quarter was also supported by better reliability and operating performance of the original Mildred Lake upgrading facility (the “Base Plant”). However, late in November 2006, Coker 8-2 underwent unscheduled maintenance, including a complete outage of the unit to clean internal coke deposits before it was returned to service in January 2007.  This unplanned maintenance, in addition to an extended Coker 8-1 turnaround in the first quarter of 2006, reduced the impact of the incremental Stage 3 production.

Production in 2006 exceeded the prior year by 16.2 million barrels, or 5.7 million barrels net to the Trust, primarily as a result of the incremental Stage 3 production and better reliability and throughput rates from the other upgrading units in the third quarter of the year. By comparison, the prior year’s lower production level reflects an extended Coker 8-2 turnaround, sulphur plant pump problems, maintenance activity on the heavy gas oil hydrotreaters, the vacuum distillation unit shutdown and throughput restrictions.

Now that the Stage 3 project is complete, with the exception of some final clean-up work, Syncrude’s current focus is to reach sustained annual production of 128 million barrels, or 47 million barrels net to the Trust. To assist in achieving this objective, Syncrude Canada, as operator of the joint venture, entered into a Management Services Agreement with Imperial Oil Resources (“Imperial”) on November 1, 2006. Under the agreement, Imperial will provide operational, technical and business management services to Syncrude Canada by utilizing its global expertise and association with ExxonMobil, with the goal of improving Syncrude’s operating reliability and performance. Imperial has a vested interest through its 25% ownership in Syncrude.

The agreement is effective November 1, 2006 and has an initial term of 10 years with five-year renewal provisions, but can be cancelled at any time by either Imperial or Syncrude Canada upon 24 months notice.  An opportunity assessment team (“OAT”) comprised of experts from Syncrude, Imperial, ExxonMobil, and some of the other Syncrude owners, including Canadian Oil Sands, has been formed and is conducting a comprehensive onsite assessment of the Syncrude operations in the first quarter of 2007. The mandate of this team is to better understand, prioritize and define best approaches for implementing potential opportunities. In the second quarter of 2007, the OAT is expected to make specific recommendations to the Syncrude owners. If the recommendations that are approved by the Syncrude owners are not to the reasonable satisfaction of Imperial, then Imperial can terminate the Management Services Agreement.

For the first 10 years of the agreement, Canadian Oil Sands is committed to pay its 36.74% pro-rata share of the approximately $47 million annual fixed service fees, or $17 million net to Canadian Oil Sands, in addition to its share of the direct costs incurred by Imperial in providing the services to Syncrude Canada. Following the initial 10 year period, the annual fixed service fees drop to $33 million, or approximately $12 million net to the Trust. After the first three years and to the end of the tenth year, variable fees based on the achievement of certain performance targets also apply. Syncrude Canada would be required to pay such variable fees, in a range comparable to the fixed fee component, to the extent there was a corresponding benefit realized through higher production and/or lower per barrel operating costs in each year. The fixed fee component for the first 10 years of the agreement has been included as a commitment of the Trust in the “Contractual Obligations and Commitments” section of this MD&A.

The agreement also promotes Syncrude’s growth plans to increase its productive capacity to over 500,000 barrels per day by engaging the Syncrude owners to pursue the scope design of the currently proposed Stage 3 debottleneck and Stage 4 expansions.