Review of Consolidated Results

Depreciation, Depletion and Accretion Expense

We depreciate and deplete our production assets and future development costs on a unit-of-production basis, based on proved plus probable reserves as National Instrument 51-101 provides that the total of proved plus probable reserves is the most likely estimate of an entity’s reserves base.

Annually, the $77 million increase to D&D expense reflects the 21% increase in Syncrude production and a higher 2006 per barrel D&D rate. The 2006 D&D rate was approximately $7.34 per barrel, compared to $6.11 per barrel in 2005, which primarily reflects higher actual Stage 3 capital expenditures and increased estimates of other future development costs, as provided for in the Trust’s December 31, 2005 independent reserves report.

Subsequent to December 31, 2006, Canadian Oil Sands’ 2006 reserves report was completed by independent reserve evaluators. Other than 2006 production, the reserves report resulted in no significant revisions in our reserves base with proved plus probable reserves totalling 1.8 billion barrels, based on the Trust’s 35.49% working interest at December 31, 2006. We anticipate our D&D rate to increase to approximately $8 per barrel for 2007, or approximately $330 million based on our 2007 production outlook of 40.4 million barrels net to the Trust. An increase in future development cost estimates in our 2006 reserves report, mainly as a result of the higher cost environment, and the January 2, 2007 working interest acquisition from Talisman, which increased the Trust’s assets, are the main factors contributing to the expected D&D rate increase in 2007. The Trust’s December 31, 2006 independent reserves report is summarized in the Trust’s Annual Information Form and can be found at www.sedar.com, or on our website at www.cos-trust.com.

Accretion expense, which relates to our ARO liability, was significantly lower in 2006 compared to 2005 as the prior year included a $27 million adjustment to correct accretion expense. Excluding the prior year adjustment, accretion expense in 2006 was slightly higher than 2005 as a result of the higher ARO liability outstanding at December 31, 2005. 

The Trust recorded an $18 million increase to its ARO liability and corresponding asset at December 31, 2006, which reflects increased cost estimates for its share of Syncrude’s future reclamation costs. In addition, the acquisition of the additional working interest on January 2, 2007 will increase the Trust’s ARO liability and related asset in 2007 by approximately $6 million. As a result, total accretion expense in 2007 is expected to be marginally higher compared to 2006 at approximately $11 million. 

Canadian Oil Sands deposits $0.1322 per barrel of production into a mining reclamation trust account for its 35.49% Syncrude working interest. Including interest earned on the trust account, the reclamation fund account totalled $30 million at December 31, 2006, as shown on the Consolidated Balance Sheet under the heading “Reclamation trust”. We anticipate increasing our reclamation funding starting in 2007 for the additional 1.25% Syncrude working interest we acquired on January 2, 2007.