Critical Accounting Estimates

A critical accounting estimate is considered to be one that requires us to make assumptions about matters that are uncertain at the time the accounting estimate is made, and if different estimates were used, would have a material impact on our financial results. Canadian Oil Sands makes numerous estimates in its financial results in order to provide timely information to users. However, the following estimates are considered critical:

a)

Canadian Oil Sands must estimate the reserves it expects to recover in the future. Our reserves are evaluated and reported on by independent petroleum reserve evaluators. They evaluate the reserves using various factors and assumptions, such as forecasts of mining and extraction recovery and upgrading yield based on geological and engineering data, projected future rates of production, projected operating costs and oil price differentials, and timing and amounts of future development costs, all of which are subjective. Although reserves and forecasts of future net revenue are estimates, we believe that the factors and assumptions used in the estimates are reasonable based on the information available at the time the estimates are prepared. The reserves data is reviewed by management, our own engineer, our Audit Committee, which acted as our reserves committee in 2006, and our Board of Directors. (Effective January 1, 2007, the reserves function was separated from the Audit Committee and a new Reserves, Marketing Operations and Environmental, Health and Safety Committee was created.)

As circumstances change and new information becomes available, the reserves data could change. Future actual results could vary greatly from our estimates, which could cause material changes in our unit-of-production D&D rates and asset impairment tests, all of which use the reserves and/or future net cash flows in the respective calculations. If proved plus probable reserves were 10% lower, DD&A expense would have been approximately $27 million higher in 2006. Our impairment test is based on proved reserves for our 35.49% working interest at December 31, 2006, and had such reserves been 10% lower, there would not have been any impairment at year-end.

b)

In 2006, Canadian Oil Sands recorded its asset retirement obligation and corresponding asset based on the estimated discounted fair value of its 35.49% share of Syncrude’s future expenditures that will be required for reclamation of each of Syncrude’s mine sites. In determining the fair value, Canadian Oil Sands must estimate the amount of the future cash payments, the timing of when those payments will be required, and then apply an appropriate credit-adjusted risk free rate. Given the long reserves life of Syncrude’s leases, the reclamation expenditures will be made over approximately the next 60 years, and it is difficult to estimate the timing and amount of the reclamation payments that will be required as they will occur far into the future.

Any changes in the anticipated timing or the amount of the payments subsequent to the initial obligation being recorded result in a change to our asset retirement obligation and corresponding asset. Such changes will impact the accretion of the obligation and the depreciation of the asset and will correspondingly impact net income. The asset retirement obligation is more fully described in Note 9 to the audited Consolidated Financial Statements.

In addition, due to the indeterminate useful life of Syncrude’s upgrader facilities and the uncertainty in estimating the timing and amount of the reclamation expenditures, if any, related to Syncrude’s sulphur blocks, no amounts have been recognized in the Trust’s asset retirement obligation for those components. Actual future reclamation costs related to the upgrading facilities and the sulphur block may materially impact the Trust’s cash from operating activities in the years the reclamation costs are incurred.

c)

Canadian Oil Sands accrues its obligations for Syncrude Canada’s post-employment benefits utilizing actuarial and other assumptions to estimate the projected benefit obligation, the return on plan assets, and the expense accrual related to the current period. The basic assumptions utilized are outlined in Note 6(a) to the audited Consolidated Financial Statements. A 0.25% change in the discount rate related to Syncrude’s defined benefit pension plan would result in an approximate increase/decrease of $25 million in our employee future benefit liability. 

In addition, actuarial gains and losses are deferred and amortized into income over the expected average remaining service lives of employees, which was estimated to be 12 years. Actual costs related to Syncrude Canada’s employee benefit plans could vary greatly from the amounts accrued for the pension obligation and the plan assets. If Canadian Oil Sands had recognized the actuarial losses immediately into income, pension and other post-employment expense would have increased from $32 million to approximately $40 million in 2006. In addition, the accrued benefit liability on the Consolidated Balance Sheet would have increased from $108 million to $234 million. Canadian Oil Sands does not have a pension plan for its own employees. Therefore, all of the employee future benefit liabilities and expenditures relate to its working interest share of Syncrude Canada’s pension benefit plan and post-employment plan obligations.

d)

Canadian Oil Sands must estimate its future tax liability at the end of each reporting period based on estimates of temporary differences, when those temporary differences are expected to reverse, and the tax rates at which they will reverse. However, actual tax rates at which the temporary differences will reverse and the amount of the temporary differences may differ from our estimates, which may result in material changes in our future income tax liability and future income tax expense or recovery.