The operating cost table indicates the most significant changes in 2006 over 2005 resulted from the increases in bitumen processing and upgrading costs, including the amounts from the change in treated and untreated inventory, partially offset by reduced purchased energy costs in the bitumen and upgrading areas of the operation. As a result of the new Stage 3 facilities, more infrastructure and a larger workforce were in place in 2006 than 2005. However, since production from the new facilities did not come on stream until the last four months of 2006, the per barrel production costs increased. In addition, costs were generally higher in 2006 compared to 2005 due to the inflationary pressures in the Fort McMurray area.

Purchased natural gas is a significant component of the bitumen production and upgrading processes. Year-over-year, the decline in purchased energy costs of approximately $1 per barrel, as shown in the following table, reflects the reduction in natural gas prices of $2.14 per GJ, which more than offset the increase in consumption. The increase in consumption to 0.98 GJs per barrel is attributable to increased bitumen volumes sourced at the Aurora mine, and increased use of purchased natural gas for items such as steam generation during start-up of the Stage 3 facilities, which are highly integrated. Purchased energy consumption per barrel is expected to decline from levels recorded in 2006 once the Stage 3 operations have stabilized but consumption is expected to remain higher than historical norms. We estimate that long-term consumption going forward will be about 0.85 GJs per barrel as additional hydrogen, which is derived from natural gas, will eventually be used to increase product quality from SSB to “Syncrude™ Sweet Premium” (“SSP”) and as bitumen is increasingly sourced from the Aurora mine. The Aurora mine relies mainly on purchased natural gas for its energy needs as process heat from the upgrader is unavailable due to the mine’s distance from the Mildred Lake plant.

Included in “Other and research” in the operating cost table is the cost of Syncrude’s incentive compensation and employee retention programs. Syncrude’s incentive compensation is based on the market return of some of the Syncrude owners’ units/shares, and therefore, can fluctuate from year-to-year. Such amounts were lower in 2006 than the prior year, reflecting lower performance of the owners’ units/shares relative to 2005. Offsetting this reduction were costs accrued for the new employee retention program Syncrude introduced in 2006. Many oil sands operators have introduced similar programs, which are designed to retain experienced employees in the competitive Fort McMurray labour market.