Executive Overview

Canadian Oil Sands is responsible for funding our share of Syncrude’s operations, expansions, and our own administrative costs. Funding sources include cash from operating activities, generated from the sale of our portion of SSB produced at the Syncrude plant and, as required and deemed appropriate, debt and equity financing. Free cash flow, which is calculated as cash from operating activities, less capital expenditures and reclamation trust contributions, is a key indicator of the Trust’s ability to repay debt and pay Unitholder distributions.

Cash from operating activities is highly dependent on the net selling price received for our SSB, production and sales volumes, operating costs and other expenses, including Crown royalties. The price we receive for our product, net of crude oil purchases, transportation and marketing fees, reflects the realized selling price at the Syncrude plant gate for sales of SSB production. Historically, it has correlated closely to the U.S. West Texas Intermediate (“WTI”) benchmark oil price, and also was impacted by movements in U.S./Canadian foreign exchange rates. World events and supply and demand fundamentals create volatility in crude oil prices, in addition to impacting the price differential of our SSB product relative to Canadian dollar WTI prices. The differential can move from a premium to a discount depending on the supply/demand dynamics in the market.

Production volumes reflect the capacity of the Syncrude facility and reliability of its operations. The process of mining, extracting and upgrading bitumen is a highly technical and complex operation requiring regular maintenance of the various operating units, which can affect production volumes, and consequently, revenues. Production volumes have a significant impact on per barrel operating costs as a large proportion of the costs are fixed and, if the plant is not operating, repair costs typically are also being incurred. One of the most significant production costs is natural gas; accordingly, operating costs are also sensitive to changes in natural gas prices and the consumption level of natural gas volumes in the production process.

The Trust’s sales volumes will differ modestly from its share of Syncrude’s production volumes due to changes in inventory, which are primarily in-transit pipeline volumes. These in-transit volumes vary with current production. The growth in SSB production from the Stage 3 facilities also has required Canadian Oil Sands to access more distant markets to sell its share of SSB production, which generally increases in-transit pipeline volumes.

In addition to funding sustaining capital expenditures, our cash from operating activities is used to pay distributions to our Unitholders, manage debt levels relative to our net debt target, and to finance acquisitions or our share of Syncrude’s expansion projects.

Management continually explores for acquisition opportunities of oil sands related assets to identify opportunities that may add value for our Unitholders. We also seek to maximize long-term Unitholder value by optimizing distributions to Unitholders. Distributions are dependent upon free cash flow, financing requirements for major sustaining capital projects and expansions, and our objective of maintaining an investment grade credit rating. Management and Canadian Oil Sands’ Board of Directors feel that it is necessary to have a strong credit rating in order to finance future expansion and acquisition opportunities with minimal equity dilution, while remaining unhedged to oil prices.

In late 2006, the federal government announced its intention to impose a new tax on certain distributions from existing income and royalty trusts effective in 2011. If the proposed changes are enacted, the Trust’s Unitholder distributions will be materially impacted once the new rules are in effect. In response to these proposed trust tax rules, the larger asset base resulting from the recent acquisition of the 1.25% Syncrude working interest and the completion of the Stage 3 project, Canadian Oil Sands has adjusted its financing strategy and correspondingly revised its net debt target to about $1.6 billion, up from $1.2 billion. The increase in the net debt level should reduce the cost of capital and assist in optimizing value to the Trust’s Unitholders by positioning the Trust to accelerate fuller payout of free cash flow during the transition period until the new tax rules take effect.

More information regarding Canadian Oil Sands, including our Annual Information Form (“AIF”), is available at www.sedar.com or on our website at www.cos-trust.com.