Resourceful 2012 ANNUAL REPORT

Transcription

1 Resourceful 2012 ANNUAL REPORT

2 FINANCIAL AND OPERATING HIGHLIGHTS INSIDE THIS REPORT 2012 results All references to dollars or C$ are in Canadian dollars and all references % to US$ are in United States dollars change 02 President s Message 08 Strategic Scorecard 10 Financial Review 1 1 Management s Discussion and Analysis 4 1 Management s Report 42 Independent Auditor s Report 44 Consolidated Financial Statements 48 Notes to Consolidated Financial Statements 73 Advisory 75 Glossary and Abbreviations 76 Statistical Summary IBC Shareholder Information FINANCIAL ($ millions, except per share amounts) Sales, after crude oil purchases and transportation expense 3,566 3,934 9% Cash flow from operations 1,4 1,581 1,897 17% Per share % Net income 981 1,144 14% Per share, basic and diluted % Dividends % Per share % FINANCIAL RATIOS 3 Net debt to cash flow from operations (times) Net debt to total net capitalization (%) 5 9 Return on average shareholders equity (%) Return on average productive capital employed (%) OPERATIONS Sales volumes, net of crude oil purchases 2 Total (mmbbls) % Daily average (bbls) 105, ,015 0% Operating expenses ($/bbl) % Capital expenditures ($ millions) 1, % Net realized selling price ($/bbl) % Average West Texas Intermediate (US$/bbl) % Average foreign exchange rate (US$/C$) % SHARE INFORMATION Closing price on December 31 ($/share) % Number of shares outstanding (in millions) % Total shareholder return 3 (%) 8 8 0% S&P/TSX Oil & Gas Index (%) Certain calculations displayed above are non-gaap or additional GAAP financial measures. Please see the Management s Discussion and Analysis section of this report for a discussion of non-gaap and additional GAAP financial measures. A five-year statistical summary is provided on page 76. CASH FLOW FROM OPERATIONS 1,4 (in millions) 2,500 2,000 1,500 1, results reflected lower pricing for our product. RETURN ON EQUITY 3 (%) COS continues to demonstrate strong profitability , Cash flow from operations is calculated as cash from operating activities, as reported on the Consolidated Statements of Cash Flows, before changes in non-cash working capital. 2 The Corporation s sales volumes differ from its production volumes due to changes in inventory, which are primarily in-transit pipeline volumes, and are after purchased crude oil volumes. 3 Non-GAAP measure(s). 4 Additional GAAP measure.

3 Resourceful Canadian Oil Sands (COS) is a pure investment opportunity in light, sweet crude oil. Through our per cent interest in the Syncrude project, we offer a robust production stream of fully upgraded crude oil. With strategic resources that include a strong balance sheet, billions of barrels in reserves and resources on high-quality leases, and a management team committed to maximizing the value of our Syncrude asset, COS is well positioned to deliver long-term value to shareholders. IMPORTANT: Please read the Advisories regarding forward-looking information on page 73 and non-gaap and additional GAAP financial measures on page 74. COVER: Over 5,000 employees work at Syncrude, which is consistently recognized as one of Alberta s top employers and best places to work. THIS PAGE: Syncrude is a fully integrated facility that upgrades lowvalue bitumen to produce a stream of 100 per cent synthetic crude oil. SYNCRUDE S PRODUCT IS A HIGH-QUALITY, LIGHT SWEET SYNTHETIC CRUDE OIL.

4 PRESIDENT S MESSAGE Fellow shareholders, Canadian Oil Sands performance in 2012 reflected both progress and challenge. We made good progress on our major projects at Syncrude, which are expected to sustain decades of production as well as improve environmental performance. We generated one of the highest yields among Canadian energy producers with an increase in our dividend that returned a total of $1.35 per share to investors. That was possible through solid cash flow from operations of $1.6 billion, the support of one of the strongest balance sheets in our industry, and a clear line-of-sight on capital expenditures. These results were achieved despite several challenges. At Syncrude, production fell short of our objectives. There remain cost pressures in the oil sands sector and, industry-wide, Canadian producers are experiencing a lack of pipeline capacity for crude oil transport. These factors have weighed on our stock price as well as those of our peers. Amid a dynamic industry landscape, our core value remains unchanged. We are a pure-play, long-term investment in crude oil. We are focused on efficient cash management, which means reinvesting in our business for continued economic returns, returning excess cash to shareholders in the form of dividends and maintaining a strong balance sheet. This strategy has delivered strong returns to shareholders over the long term. COS remains well positioned with strong financial resources to weather volatility, even as we continue to advance our major multiyear capital investment program. All of our capital projects are aimed at long-term benefits encompassing more stable and long-life production, operational efficiencies and improved environmental performance. Marcel R. Coutu President and Chief Executive Officer Major projects on track We have four major projects underway, two mine train projects and two tailings reclamation projects. Across all four projects, we are confident in the cost estimates and schedules based on progress to date. By the end of 2013, with two projects scheduled to be largely complete, only about one-third of the total cost of our major projects will remain. The largest of our investments is the construction of two new mine trains at our Mildred Lake mine with a projected total cost of $1.6 billion (net to COS). This project was about 35 per cent complete at the end of 2012 and has an anticipated in-service date of Q Each of the mine trains will incorporate novel wet crushing technology and feature greater productive capacity than our existing mine trains. These improvements are expected to add flexibility to our mining operations, increase bitumen recovery and lower maintenance requirements. Our second major project will relocate two mine trains at our Aurora North Mine at an expected cost of $400 million (net to COS) and an anticipated in-service date of Q Once both mine train projects are complete, Syncrude s current mines will be poised to operate for decades. 02 CANADIAN OIL SANDS LIMITED

5 In 2012, we started construction on a full-scale centrifuge plant that is expected to begin operating in This technology produces a soft, clay-rich material that can be used as the landform foundation in oil sands reclamation areas. SYNCRUDE S MAJOR PROJECTS REMAIN ON TIME AND ON BUDGET. Two other major projects involve tailings reclamation as part of our commitment to meet the Alberta government s stringent tailings regulations. The first is the construction of a $300 million (net to COS) Composite Tails (or CT) plant at Aurora North, where fluid fine tails (or FFT) are mixed with coarse tailings sand and some gypsum to transform the FFT into solid material suitable for reclamation. A similar plant has been operating at the Mildred Lake mine for over a decade. We have now accumulated sufficient FFT at Aurora North after 10 years of operations to start up a CT plant. Construction is expected to be largely complete by the end of this year. We also are investing $700 million (net to COS) in a centrifuge plant at the Mildred Lake mine. The system is designed to accelerate the reclamation of tailings by extracting water from the FFT to allow for the restoration of a solid surface. Syncrude has successfully demonstrated this technology with a commercial-scale plant operating on-site. Construction on this centrifuge project began late last year and is scheduled for completion in the first half of Focused on enhancing production Last year Syncrude produced million barrels of synthetic crude oil (SCO), essentially equal to the million barrels produced in 2011 but seven per cent lower than our target of 113 million barrels. While we have not yet seen the expected increases in production at Syncrude, production has been stable over the last six years, and we continue to believe there are gradual and steady gains to be achieved. In 2012, we experienced fewer slurry system failures and bitumen furnace tube leaks, which are key performance indicators for reliability. We have also made unit modifications to reduce solids content in the feed going to the upgrader. These abrasive solids were causing unplanned downtime and contributed to significant loss in production over the last few years. Two of our three cokers have achieved optimal 36-month run lengths, up from an average of 28 months. Also, Syncrude is focused on implementing reliability improvement plans for each business area of the facility based on Imperial Oil and ExxonMobil s best-in-class systems. Our goal is to gradually and safely achieve industry-leading utilization rates by drawing on the strengths of ExxonMobil s Global Reliability Management System and Syncrude s experienced operations team. With largely fixed operating costs, achieving organic growth from our current facilities is highly economic and therefore a priority at Syncrude. FIVE REASONS TO INVEST IN COS 01 Superior Quality Our light, sweet synthetic crude is a desirable refinery feedstock for conversion into valuable products such as diesel and jet fuel. Having secured its leases early in the development of the oil sands industry, Syncrude possesses premium bitumen-rich deposits with sufficient reserves to produce at current rates for the next 40 years with the potential for future growth through undeveloped resources. Further, COS is the only oil sands company whose assets are undiluted with lower-value heavy oil or natural gas products. Upgrader CNRL Horizon Total Joslyn Suncor Mildred Lake Mine Shell Suncor Fort Hills Aurora North Mine Shell CNRL Jackpine Phase 1 CNRL Shell Shell Jackpine Phase 2 Imperial Aurora South SYNCRUDE OIL SANDS LEASES Suncor Athabasca River Suncor Fort McMurray 40 km 2012 ANNUAL REPORT 03

6 PRESIDENT S MESSAGE PRODUCTION SINCE LAST EXPANSION (barrels per day, gross to Syncrude) 300, , , ,000 While production has been stable over the past several years, Syncrude is actively focused on optimizing operations and gradually increasing production rates. 150, ,000 50, FIVE REASONS TO INVEST IN COS 02 Essential Global demand for crude oil is expected to remain strong for decades, and Canada s oil sands are a significant, growing and secure source of supply. More broadly, Canada s oil sands deposits represent 55 per cent of all available crude oil reserves accessible for private sector investment. COS represents a unique opportunity for upside exposure to rising oil prices as an independent, pure-play oil sands company marketing a high-quality product. PROJECTED WORLD OIL DEMAND (millions of barrels/day) Managing costs key to strong profit margins One aspect of our business that is not fully appreciated is our profit margin. Syncrude s operating expenses are competitive with other oil sands producers, yet 100 per cent of Syncrude s production is a high-quality, light sweet crude oil blend, for which we have historically received a higher price. Other oil sands producers operating expenses reflect the cost to produce a slate of products, which include lower quality products that fetch a lower price than SCO. Our internal analysis indicates that Syncrude, on average, is the lowest cost producer of light sweet synthetic crude oil from the oil sands. This results in a significantly higher margin per barrel for our product, illustrating that our upgrading facility provides a significant competitive advantage. That said, cost inflation continues to be a challenge for the oil sands industry. As I noted, our operating costs are relatively fixed, so spreading these costs over more barrels as a result of higher production is a key objective. We recognize that we must be vigilant in controlling costs to preserve Syncrude s profit margins, and we have a system-wide process underway to pursue opportunities for cost efficiencies. Pipeline access critical An increasingly important factor in the success of our business is market access. The entire industry is experiencing a lack of pipeline transportation to markets across North America, and this is having a significant impact on the price producers receive for their crude oil, including our SCO. Historically, our product has traded at a slight premium or discount to West Texas Intermediate (WTI). At the same time, WTI generally tracked closely to Brent and other world oil prices. But recently, both trends have changed. First, we have seen the difference or differential between the price of SCO and WTI become more volatile. In 2011, our SCO averaged a $7 per barrel premium to WTI, and in 2012 it sold at an average discount of $2.50 per barrel. A lack of market access has also changed the historical trend between WTI and Brent oil prices. The two began to diverge in late 2010 and WTI averaged a discount to Brent of $18 per barrel in We expect the volatility in the differential of SCO to WTI to continue at least over the next few years, reflecting North American supply and demand fundamentals for crude oil. On the supply side, increasing production of synthetic oil and bitumen from the oil sands, as well as light crude oil from tight oil formations such as the Bakken, have reduced space available on pipelines and driven down pricing of crude from Western Canada. Meanwhile, modifications at some U.S. refineries to process heavier crude oil will ultimately push light crude sales, including SCO, to more distant refineries, which increases transportation costs. SOURCE: International Energy Agency, At present, various pipeline projects are proposed that will expand our reach to North American markets, including refineries in eastern Canada. The completion of these projects should help to reduce pricing volatility between SCO and WTI. 04 CANADIAN OIL SANDS LIMITED

7 COS offers compelling value compared to new projects in our industry. COS market value at year-end 2012 was $10 billion, which equates to about $80,000 per flowing barrel of production capacity. New oil sands mining infrastructure is expected to come on-stream in 2013 at a cost of about $115,000 per flowing barrel of lower-value bitumen production capacity. In addition to our high-value production stream of light sweet crude oil, COS offers substantial reserves and resources and an attractive dividend. GIVEN THE ECONOMIC CHALLENGES IN BUILDING AN UPGRADER IN ALBERTA TODAY, OUR EXISTING INTEGRATED FACILITY IS A SIGNIFICANT COMPETITIVE ADVANTAGE. In the meantime, we are working to identify new opportunities to ship our product. We are taking a portfolio approach to securing pipeline access, meaning that we are pursuing committed capacity on multiple routes to enhance our marketing flexibility. Expanding our markets I am often asked if rising U.S. oil production from tight formations, which have only been unlocked in the last few years with technological advances, will displace Canadian synthetic oil products. According to the U.S. Energy Information Administration, the U.S. will still require crude imports even under optimistic forecasts for North American supply. We see Canadian exports remaining strong and increasingly displacing crude oil from places such as the Middle East, Mexico and Venezuela. FIVE REASONS TO INVEST IN COS 03 Responsible Syncrude was formed nearly 50 years ago with a focus on researching the most sustainable means of developing the oil sands. Since then, Syncrude has continuously applied innovative thinking to its relentless pursuit of responsible oil sands development. Achievements to date include: Reclamation of approximately 3,200 hectares of mined lands and another 1,200 hectares are ready for revegetation. Planting of nearly seven million trees and shrubs. Use of 85 per cent recycled water in our operations. A far more significant factor is affecting Canadian crude oil producers a lack of access to international markets and the world s strongest growth economies. As discussed earlier, Canadian oil producers are receiving an excessive price discount to world oil price benchmarks such as Brent. This gap is primarily due to a lack of available shipping routes for Canadian crude oil to reach coastal refineries and international customers. We expect the gap between WTI and Brent to be reduced in the near-term with new capacity to the U.S. Gulf Coast being brought on with the reversal of the Seaway pipeline, the construction of the Keystone XL Southern Leg expected to be completed by the end of 2013, and the twinning of the Seaway pipeline anticipated in mid ANNUAL REPORT 05

8 PRESIDENT S MESSAGE Syncrude continues to make significant advances in reducing air emissions and water use, as well as in the development of reclamation technologies to return disturbed land to a productive state that is capable of supporting biologically self-sustaining communities of plants and animals. For more information about Syncrude sustainability, visit COS HAS BEEN INCLUDED IN THE DOW JONES SUSTAINABILITY INDEX SINCE FIVE REASONS TO INVEST IN COS 04 Dependable COS has a strong production stream of high-quality crude oil and long-life resources for future development. The value of this significant asset base translates into a strong return on equity and dividends. In 2012, COS returned to investors $1.35 per share, which at the end of the year equated to a 7 per cent yield. Over the past 11 years, COS has paid over $6 billion in dividends to investors. CUMULATIVE DIVIDEND PAYMENTS ($ billions) The International Energy Administration projects moderate growth in global demand for oil of about 14 per cent between now and Almost all of this incremental demand is anticipated to come from the world s emerging economies. This underscores the need for pipeline infrastructure to reach tidewater ports and the ability to ship our crude oil to markets such as China and India. Access to markets impacts Canadians The lack of available pipeline space and the discount for Canadian oil is important not just to our industry, but to all Canadians. Last year, research by the Canadian Imperial Bank of Commerce suggested that the Canadian oil discount equates to about $18 billion annually, or $50 million per day and the differentials for heavy oil to world oil prices have risen significantly since then. The beneficiaries of this discount are primarily U.S. refineries, which are taking advantage of cheap feedstock that we, as Canadians, are subsidizing. When Canadian producers don t receive a globally competitive price for their oil, hundreds of millions of tax and royalty dollars are lost funds that could build schools, hospitals and other infrastructure as well as provide transfer payments to other provinces. Given these factors, there is a need for a balanced national discussion on how to move these pipelines forward, quickly, safely and responsibly, enabling Canadians to benefit from the fair value of our nation s valuable natural resources Syncrude: A leader in sustainable development Syncrude recently published an extensive report on their sustainability efforts that asked: Are the oil sands being responsibly developed? This is an important question, and I personally believe that the answer is yes. When Syncrude was incorporated in 1964, an environmental group was established to study regional baseline metrics for land, air and water quality before construction even began. Since operations started, we have followed a path of continuous improvement to mitigate the impacts 06 CANADIAN OIL SANDS LIMITED

9 of industrial development on the environment. New processes have been introduced to reduce water and energy consumption, reclaim the land faster and to minimize air emissions. While proud of what has been accomplished, we are determined to improve our performance. COS has joined forces with other oil sands producers to accelerate innovation in environmental performance under the Canadian Oil Sands Innovation Alliance (COSIA). COSIA brings together thought leaders in industry, government, academia and the broader public to improve measurement, accountability and environmental performance. Today, Syncrude alone invests more than $60 million in research and development every year as a means to achieve environmental and operating excellence. These efforts continue to bear fruit, as reflected by COS inclusion in the Dow Jones Sustainability Index North America since Outlook for dividends As we look to the upcoming year, we have significant financial resources to support our capital program as well as our dividend. Based on the assumptions provided in our Outlook, we expect to maintain a quarterly dividend of $0.35 per share. At year-end 2012, this level of dividend generated one of the highest yields among Canadian energy producers. Our core strategy remains to provide our investors with long-term oil price exposure and to pay a healthy dividend based on our cash flow over time. Because we do not hedge our oil production, changes in oil prices could have a material impact on our plans. That said, we take a longer-term view of our finance plan to avoid short-term adjustments to the dividend. Assuming continued strength in world oil prices, after 2014 we see the potential for expanded free cash flow (cash flow from operations less capital expenditures), when our major project spending tapers off. Well-positioned for the future The theme for this year s annual report is resourceful, a word that I think describes COS very well. In a literal sense, the word resourceful describes our established and stable operations and significant production of about 105,000 barrels per day net to COS. Investments previously made in our upgrading capacity are also an important resource, as we continue to benefit from premium pricing for our product relative to heavy oil producers. What s more, we have sufficient reserves and resources to produce for decades to come. COS benefits from a highly experienced and committed Board of Directors. In 2012, Board member Chuck Shultz was one of only four individuals recognized for his leadership in corporate governance with the prestigious Fellowship award from the Institute of Corporate Directors. FIVE REASONS TO INVEST IN COS 05 Track Record An oil sands pioneer, Syncrude has produced more than two billion barrels of high-quality crude oil to date. Leveraging its significant technical and operating experience gained over several decades, Syncrude is actively working to identify and develop new ways to achieve operational efficiencies and minimize our impact on the environment. Syncrude s expertise is further enhanced by ExxonMobil/Imperial Oil, which contribute global bestin-class operating systems and procedures as a foundation for strong, stable production. In closing, I d like to recognize the resourceful people with whom I have the privilege of working. There are only about 30 of us in total, with approximately one third of the team marketing our product, and most of the rest providing the operations insight and accounting, legal and finance support that is required to run a publicly traded oil company. We are focused on maintaining our low administrative cost base, thereby allowing investors the opportunity to benefit from a high-quality, pure-play oil sands investment. I would like to thank all of our investors for their support. (signed) Marcel R. Coutu President and Chief Executive Officer February 21, ANNUAL REPORT 07

10 STRATEGIC SCORECARD Accomplishments and objectives 2012 Progress In 2012, we achieved most of our goals. Importantly, we reached some important milestones in our commitment to responsible development of the oil sands. We were able to deliver a higher dividend and a stronger balance sheet by year-end than originally expected. This was balanced by essentially flat year-over-year production and mid-tier total shareholder returns. MAXIMIZING THE VALUE OF YOUR COS INVESTMENT OPTIMIZING OPERATIONS DEVELOPING THE CAPACITY FOR LONG-TERM GROWTH We exceeded our commitment to pay a minimum of $0.30 in quarterly dividends per share to investors and raised it to $0.35 per share for a total of $1.35 in dividends per share in With $1.6 billion in cash at year-end, we maintained a strong balance sheet while remaining unhedged in our production, allowing investors full exposure to crude oil prices. We fell short of our goal to achieve a top-quartile total shareholder return (dividends plus capital appreciation) with results that placed us in the middle of our peer group. Production was flat year-over-year, and less than our growth target of 113 million barrels. We successfully achieved our goal of a 36-month run-time for Coker 8-3; however, we had unplanned downtime on Coker 8-1 and in our mining operations. We achieved similar total operating expenses year-over-year. Due to lower production, however, per barrel operating expenses were higher than expected. As planned, we completed detailed engineering and announced total expected cost of mine train relocations and replacements, and began construction of these projects. Continued implementation of the Management Services Agreement (MSA) with ExxonMobil. In 2012, we continued to assess the economics for execution of the Aurora South project in the next decade. We announced the proposed Mildred Lake mine extension (MLX) project, which is expected to provide a low-cost source of new bitumen production into the 2030s. We evaluated oil sands-related assets but did not identify an attractive opportunity to add value for our shareholders. We are very disciplined in our approach to acquisitions and careful to not dilute the value of our Syncrude asset. 08 CANADIAN OIL SANDS LIMITED

11 OUR GOAL IS TO DELIVER THE FULL VALUE OF THE SYNCRUDE ASSET BY OPTIMIZING THE RESOURCE POTENTIAL AT SYNCRUDE, PROFITABLY AND RESPONSIBLY GROWING PRODUCTION, AND MAXIMIZING CAPITAL EFFICIENCY. Looking ahead to 2013 In 2013, we expect to significantly advance our major projects. We anticipate gradual production growth, which should bring our per barrel operating costs down. We will continue to invest significantly in research and development, about half of which is dedicated to environmental projects. And, we plan to achieve these goals while maintaining a strong balance sheet and delivering a healthy dividend. BEING A RESPONSIBLE PRODUCER Invested $0.4 billion net to COS ($1.1 billion to Syncrude) in environmental projects. COS strengthened our participation in Syncrude s Safety, Health and Corporate Sustainability Committee to enable enhanced oversight of Syncrude s environmental performance. Commissioned the industry s first commercial-scale demonstration of an end-pit lake; Syncrude research into this technology since the 1980s has shown these lakes can support healthy communities of aquatic ecosystems. Completed planting of vegetation for fen wetland research project; active research will now begin on hydrology, wetland and terrestrial plant response, and climate conditions. Started construction of our centrifuge tailings management project, a new technology to accelerate tailings reclamation. Increase production by about five per cent, equivalent to five million barrels gross to Syncrude, over 2012 production. Improve per barrel operating expenses in 2013 over Complete the Aurora North Tailings Management project. Achieve 90 per cent completion on the Aurora mine train relocations. Achieve 75 per cent completion on the Mildred Lake mine train replacements. Invest $25 million ($70 million gross to Syncrude) in research and development, directed at reducing operating expenses, improving reliability, enhancing environmental performance and realizing potential cost savings in environmental initiatives. Aim to maintain a quarterly dividend of $0.35 per share in 2013, based on the assumptions outlined in the 2013 guidance. Maintain a strong balance sheet while remaining unhedged on oil prices, thereby providing investors with the full potential of this commodity ANNUAL REPORT 09

12 FINANCIAL REVIEW CONTENTS Measuring performance 11 Management s Discussion and Analysis 11 Forward-Looking Information Advisory 12 Non-GAAP and Additional GAAP Financial Measures 13 Business Description 14 Overview 15 Review of Financial Results 22 Summary of Quarterly Results 23 Capital Expenditures 24 Contractual Obligations and Commitments 24 Dividends 25 Liquidity and Capital Resources 26 Shareholders Capital and Trading Activity 27 Critical Accounting Estimates and Judgements 29 Changes in Accounting Policies 29 Accounting Pronouncements Not Yet Adopted 30 Financial Instruments 30 Risk Management Actual Results Compared to Outlook Outlook 41 Management s Report 42 Independent Auditor s Report 44 Consolidated Statements of Income and Comprehensive Income 45 Consolidated Statements of Shareholders Equity 46 Consolidated Balance Sheets 47 Consolidated Statements of Cash Flows 48 Notes to Consolidated Financial Statements 73 Advisory 75 Glossary and Abbreviations 76 Statistical Summary IBC Shareholder Information 10 CANADIAN OIL SANDS LIMITED

13 MANAGEMENT S DISCUSSION AND ANALYSIS Management s Discussion and Analysis The following Management s Discussion and Analysis ( MD&A ) was prepared as of February 21, 2013 and should be read in conjunction with the audited consolidated financial statements and notes thereto of Canadian Oil Sands Limited (the Corporation ) for the years ended December 31, 2012 and December 31, 2011 and the Corporation s Annual Information Form ( AIF ) dated February 21, Additional information on the Corporation, including its AIF, is available on SEDAR at or on the Corporation s website at References to Canadian Oil Sands, COS, or we include the Corporation, its subsidiaries and partnerships. The financial results of Canadian Oil Sands have been prepared in accordance with Canadian Generally Accepted Accounting Principles ( GAAP ) and are reported in Canadian dollars, unless stated otherwise. Forward-Looking Information Advisory In the interest of providing the Corporation s shareholders and potential investors with information regarding the Corporation, including management s assessment of the Corporation s future production and cost estimates, plans and operations, certain statements throughout this MD&A contain forward-looking information under applicable securities law. Forward-looking statements are typically identified by words such as anticipate, expect, believe, plan, intend or similar words suggesting future outcomes. Forward-looking statements in this MD&A include, but are not limited to, statements with respect to: the expectations regarding the 2013 annual Syncrude forecasted production range of 105 million barrels to 115 million barrels and the single-point Syncrude production estimate of 110 million barrels (40.4 million barrels net to the Corporation); the timing of the Coker 8-1 turnaround; the intention to maintain a quarterly dividend of $0.35 per Share in 2013 based on the assumptions in our 2013 Outlook; future dividends and any increase or decrease from current payment amounts; the establishment of future dividend levels with the intent of absorbing short-term market volatility over several quarters; the level of natural gas consumption and production in 2013 and beyond; the expected sales, operating expenses, development expenses, Crown royalties, capital expenditures and cash flow from operations for 2013; the anticipated amount of current taxes in 2013; expectations regarding current taxes beyond 2013; the expectation that proceeds from the March 2012 Senior Note offering will be used to repay U.S. $300 million of Senior Notes which mature on August 15, 2013, to fund major capital projects over the next few years and for general corporate purposes; expectations regarding the Corporation s cash levels for 2013 and 2014; the expected price for crude oil and natural gas in 2013; the expected foreign exchange rates in 2013; the expected realized selling price, which includes the anticipated differential to West Texas Intermediate ( WTI ) to be received in 2013 for the Corporation s product; the expectations regarding net debt; the anticipated impact of increases or decreases in oil prices, production, operating expenses, foreign exchange rates and natural gas prices on the Corporation s cash flow from operations; the expectation that regular maintenance capital costs will average approximately $10 per barrel for years after 2013; the expected amount of total major project costs, anticipated target in-service dates and estimated completion percentages for the Mildred Lake mine train replacements, the Aurora North mine train relocations, the composite tails plant at the Aurora North mine and the centrifuge plant at the Mildred Lake mine; the expectation that the Corporation will finance the major projects primarily with existing cash balances and cash flow from operations; the cost estimates for 2013 to 2015 major project spending; the expectation that the volatility in WTI and the Synthetic Crude Oil ( SCO ) to WTI differential is likely to persist for several years until additional planned pipeline or other delivery capacity is available to deliver crude oil from Western Canada to Cushing, Oklahoma, the U.S. Gulf Coast or the Canadian East or West Coasts; the views regarding the reinstatement of the Corporation s premium dividend, dividend reinstatement and optional share purchase plan; plans regarding crude oil hedges in the future; the belief that the mine train relocations/replacements will not impact production; the expectations regarding inflation and labour in the Wood Buffalo Region; the expectations regarding refining demand for SCO; the expectations regarding where SCO will be consumed in the future; the expectations regarding pipeline apportionment and capacity; the impacts of increased supplies of crude oil, refining demand for SCO, pipeline and rail access and capacity; and market access and price differentials on the realized selling price the Corporation receives for its SCO. You are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions or expectations upon which they are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties, both general and specific, that contribute to the possibility that the predictions, forecasts, projections and other forward-looking statements will not occur. Although the Corporation believes that the expectations represented by such forwardlooking statements are reasonable and reflect the current views of the Corporation with respect to future events, there can be no assurance that such assumptions and expectations will prove to be correct. The factors or assumptions on which the forward-looking information is based include, but are not limited to: the assumptions outlined in the Corporation s guidance document as posted on the Corporation s website at as of January 31, 2013 and as subsequently amended or replaced from time to time, including without limitation, the assumptions as to production, operating expenses and oil prices; the successful and timely implementation of capital projects; Syncrude s major project spending plans; the ability to obtain regulatory and Syncrude joint venture owner approval; our ability to either generate sufficient cash flow from operations to meet our current and future obligations or obtain external sources of debt and equity capital; the continuation of assumed tax, royalty and regulatory regimes and the accuracy of the estimates of our reserves and resources volumes ANNUAL REPORT 11

14 MANAGEMENT S DISCUSSION AND ANALYSIS Some of the risks and other factors which could cause actual results or events to differ materially from current expectations expressed in the forward-looking statements contained in this MD&A include, but are not limited to: the impacts of legislative or regulatory changes especially as such relate to royalties, taxation, the environment and tailings; the impact of technology on operations and processes and how new complex technology may not perform as expected; skilled labour shortages and the productivity achieved from labour in the Fort McMurray area; the supply and demand metrics for oil and natural gas; the impact that pipeline capacity and refinery demand have on prices for our SCO; the unanimous joint venture owner approval for major expansions and changes in product types; the variances of stock market activities generally; global economic conditions/volatility; normal risks associated with litigation, general economic, business and market conditions; the impact of Syncrude being unable to meet the conditions of its approval for its tailings management plan under Directive 074; volatility of crude oil prices; volatility of the SCO to WTI price differential; unsuccessful or untimely implementation of capital or maintenance projects and such other risks and uncertainties described in the Corporation s AIF dated February 21, 2013 and in the reports and filings made with securities regulatory authorities from time to time by the Corporation which are available on the Corporation s profile on SEDAR at and on the Corporation s website at You are cautioned that the foregoing list of important factors is not exhaustive. Furthermore, the forward-looking statements contained in this MD&A are made as of February 21, 2013, and unless required by law, the Corporation does not undertake any obligation to update publicly or to revise any of the included forward-looking statements, whether as a result of new information, future events or otherwise. The forward-looking statements contained in this MD&A are expressly qualified by this cautionary statement. Non-GAAP and Additional GAAP Financial Measures In this MD&A and the related press release, we refer to financial measures that do not have any standardized meaning as prescribed by Canadian GAAP. These financial measures include additional GAAP financial measures, which are line items, headings or subtotals in addition to those required under Canadian GAAP, and non-gaap financial measures. Additional GAAP and non-gaap financial measures provide information that we believe is meaningful regarding the Corporation s operational performance, its liquidity and its capacity to fund dividends, capital expenditures and other investing activities. Users are cautioned that additional GAAP and non-gaap financial measures presented by the Corporation may not be comparable with measures provided by other entities. We refer to one additional GAAP financial measure: cash flow from operations, which is calculated as cash from operating activities, as reported on the Consolidated Statements of Cash Flows, before changes in non-cash working capital. We believe cash flow from operations, which is not impacted by fluctuations in non-cash working capital balances, is more indicative of operational performance. The majority of our non-cash working capital is liquid and typically settles within 30 days. Cash flow from operations is reconciled to cash from operating activities as follows: ($ millions) Cash flow from operations $ 1,581 $ 1,897 Change in non-cash working capital Cash from operating activities 1 $ 1,864 $ 1,958 1 As reported in the Consolidated Statements of Cash Flows. Non-GAAP financial measures include cash flow from operations per Share, which is calculated as cash flow from operations divided by the weighted-average number of Shares outstanding in the period; net debt; total debt; total net capitalization; total capitalization; net debtto-total net capitalization; and total debt-to-total capitalization. In addition, the Corporation refers to various per barrel figures, such as net realized selling prices, operating expenses and Crown royalties, which also are considered non-gaap measures. We derive per barrel figures by dividing the relevant sales or cost figure by our sales volumes, which are net of purchased crude oil volumes in a period. 12 CANADIAN OIL SANDS LIMITED

15 Business Description Canadian Oil Sands is the largest joint venture owner of the Syncrude Joint Venture ( Syncrude ), a major producer of high quality, low sulphur, light, synthetic crude oil ( SCO ). Canadian Oil Sands only producing asset is a per cent working interest in Syncrude, generating revenue from its share of production, and represents the only public opportunity for undiversified investment directly in Syncrude. The Syncrude Project is located near Fort McMurray, Alberta and is comprised of oil sands mines, utilities plants, bitumen extraction plants and an upgrading complex that processes bitumen into SCO. Syncrude Canada Ltd. ( Syncrude Canada ) operates Syncrude on behalf of the Syncrude owners and is responsible for selecting, compensating, directing and controlling Syncrude s employees, and for administering all related employment benefits and obligations. Each joint venture owner has an undivided interest in the assets of Syncrude, takes its production in kind, and funds its proportionate share of Syncrude s operating, development and capital expenditures on a daily basis. Oversight of Syncrude Canada is provided by a Syncrude Management Committee and various management sub-committees as well as Syncrude Canada s Board of Directors and Board committees, all of which are staffed by representatives of the Syncrude owners. In particular, the Syncrude Management Committee oversees and approves significant Syncrude expenditures and long-term strategies. Syncrude s leases are located in the Athabasca oil sands deposit. Syncrudes reserves and resources are all considered to be recoverable through surface mining, meaning that the layers of oil sands are found beneath a relatively shallow overburden layer. Based on evaluations performed in accordance with the COGE Handbook by our qualified independent petroleum reserve evaluators effective December 31, 2012, Canadian Oil Sands estimates Syncrude s proved plus probable reserves at 4.6 billion barrels (1.7 billion barrels net to the Corporation), best estimate contingent resources at 5.2 billion barrels (1.9 billion barrels net to the Corporation) and best estimate prospective resources at 1.6 billion barrels (0.6 billion barrels net to the Corporation) of SCO. Based on the current annual production outlook for 2013 of 110 million barrels, or 40.4 million barrels net to Canadian Oil Sands, Syncrude s estimated proved plus probable reserve life is approximately 42 years. More information regarding Canadian Oil Sands reserves and resources can be found in the Reserves Data and Other Information section in our 2012 AIF at or on our website at Syncrude produces SCO from the Athabasca oil sands deposits by open-pit mining the oil sands, extracting the bitumen from the sands, upgrading the recovered bitumen into lighter oil fractions and combining those component fractions into a single SCO product. Using proven open-pit mining technologies to access the oil sands deposits results in a recovery rate of 90 per cent or more of the bitumen in place. As a large, integrated facility, production volumes reflect the capacity of the facility and the reliability of Syncrude s operations. Reliability is a critical success factor for Syncrude because the operating costs are largely fixed. The aim is to maximize throughput and utilization of the various operating units in a safe and sustainable manner in order to increase production volumes and reduce per-barrel costs, thereby enhancing the economics of the Syncrude project. While regular maintenance of operating units is required, unplanned outages of units can occur, and these outages usually result in additional maintenance or repair costs and reduced production volumes, which consequently impacts revenues and operating expenses. Over the past six years, Syncrude s production has been fairly stable, averaging about 290,000 barrels per day. Syncrude s operations are subject to a number of risks that are discussed in further detail in the Risk Management section of this MD&A. Canadian Oil Sands cash flow from operations and net income are dependent on the selling price received for SCO, sales volumes, operating and other expenses, including Crown royalties. The dividends paid to Shareholders are likewise dependent on these factors and on the amount and timing of capital expenditures. The price we receive for our SCO, net of crude oil purchases and transportation expense, reflects the realized selling price at the Syncrude plant gate. Historically, our selling price has correlated closely with the West Texas Intermediate ( WTI ) benchmark oil price and has been impacted by movements in United States/Canadian ( U.S./Cdn ) currency exchange rates. However, supply and demand fundamentals are creating volatility in crude oil prices and are impacting the weighted-average price differential of our SCO product relative to Canadian dollar WTI as well as WTI prices relative to other crude oil benchmarks. These price differentials can change quickly, reflecting changes in the short-term supply and demand in the market and pipeline availability for transporting crude oil. Canadian Oil Sands prefers to remain unhedged on crude oil prices; however, during 2012 ANNUAL REPORT 13

16 MANAGEMENT S DISCUSSION AND ANALYSIS periods of significant capital spending and financing requirements, the Corporation may hedge prices to reduce cash flow volatility. Overview Canadian Oil Sands recorded cash flow from operations of approximately $1.6 billion, or $3.26 per Share, in 2012, despite a business climate characterized by global economic concerns and crude oil pipeline capacity constraints in North America, both of which contributed to oil price volatility. In 2012, WTI crude oil prices averaged U.S. $94 per barrel, U.S. $18 per barrel below European Brent prices, reflecting an over-supply of crude oil and limited pipeline capacity in inland North American markets. The realized selling price of our SCO averaged $92 per barrel, a $2.50 per barrel discount to WTI. Syncrude s upgrader helped Canadian Oil Sands avoid the deeper discounts suffered by Western Canadian heavy oil producers. Syncrude production in 2012 was seven per cent lower than our original 2012 outlook, and totalled million barrels, or 286,500 barrels per day. This compares with million barrels, or 288,400 barrels per day, in Volumes in 2012 reflect maintenance on Coker 8-1, planned turnarounds of Coker 8-3 and the Vacuum Distillation Unit, and unplanned outages in mine trains. Volumes in 2011 reflect the planned Coker 8-2 turnaround and unplanned outages of Coker 8-1 and a hydrogen unit. Syncrude s operating expenses in 2012 were similar to 2011, reflecting the start-up of a pilot centrifuge plant to treat tailings, cost escalation, and higher maintenance costs in 2012, offset by lower purchased energy costs, due primarily to lower natural gas prices and diesel volumes, relative to Capital expenditures in 2012 increased over 2011 as Syncrude made significant progress on multi-year capital projects to replace or relocate mine trains and support tailings management plans. Total cost, progress and in-service date estimates for these projects, which remain on schedule and on budget, are as follows: Total Cost Total Cost Estimated % Target Estimate Estimate Complete at In-Service ($ billions) Accuracy (%) Dec 31, Date Mildred Lake Mine Train Replacement $ %/-15% 35% Q Aurora North Mine Train Relocation $ %/-15% 55% Q Aurora North Tailings Management $ %/-15% 70% Q Centrifuge Tailings Management $ %/-15% 10% H Costs include capital expenditures, excluding capitalized interest, and certain development expenses. Crown royalties decreased in 2012 from 2011, reflecting an increase in deductible capital expenditures, primarily due to spending on the major capital projects. In 2012, Canadian Oil Sands issued U.S. $700 million of long-term debt, providing increased liquidity to fund the major capital projects and the U.S. $300 million debt maturity in With cash of $1.6 billion and net debt, comprised of total debt less cash and cash equivalents, of $0.2 billion at December 31, 2012, we are well-positioned to manage risks associated with the capital program, even under an uncertain outlook for oil prices. We intend to fund our share of Syncrude s upcoming capital expenditures with existing cash balances and cash flow from operations, which remains strong at prevailing oil prices. During 2012, the Corporation paid dividends to Shareholders totalling $654 million, or $1.35 per Share. We are targeting a quarterly dividend of $0.35 per Share in CANADIAN OIL SANDS LIMITED

17 In 2013, we are estimating annual Syncrude production of 110 million barrels, a five per cent increase over 2012 levels. Total operating expenses in 2013 are forecast at $1.5 billion, similar to However, because of the relatively fixed-cost nature of the Syncrude operation, per barrel operating expenses in 2013 are forecast to decrease by six per cent with the higher production estimate. Total 2013 capital expenditures are estimated at $1.3 billion. We are forecasting continued progress on our major projects in 2013, with capital expenditures on those projects estimated at $0.8 billion. Review of Financial Results Canadian Oil Sands unaudited fourth quarter 2012 results were discussed and analyzed in our MD&A released on January 31, 2013 and filed with the Corporation s January 31, 2013 press release, which is available on our website at or at Highlights ($ millions, except per Share and volume amounts) Cash flow from operations 1 $ 1,581 $ 1,897 $ 1,232 Per Share 1 $ 3.26 $ 3.91 $ 2.55 Net income $ 981 $ 1,144 $ 1,189 Per Share, Basic and Diluted $ 2.02 $ 2.36 $ 2.46 Sales, after crude oil purchases and transportation expense $ 3,566 $ 3,934 $ 3,180 Sales volumes 2 Total (mmbbls) Daily average (bbls) 105, , ,280 Realized SCO selling price ($/bbl) 3 $ $ $ West Texas Intermediate ( WTI ) (average $US/bbl) $ $ $ Operating expenses ($/bbl) 3 $ $ $ Capital expenditures $ 1,086 $ 643 $ 582 Dividends $ 654 $ 533 $ 896 Per Share $ 1.35 $ 1.10 $ 1.85 Total assets $ 10,171 $ 8,620 $ 7,132 Net debt 4 $ 241 $ 414 $ 1,171 Total other long-term liabilities 5 $ 1,509 $ 1,488 $ Cash flow from operations and cash flow from operations per Share are additional GAAP and non-gaap measures, respectively, and are defined in the Non-GAAP and Additional GAAP Financial Measures section of this MD&A. 2 The Corporation s sales volumes differ from its production volumes due to changes in inventory, which are primarily in-transit pipeline volumes. Sales volumes are net of purchases. 3 These per barrel measures have been derived by dividing the relevant item by sales volume in the period. 4 Current and non-current portions of long-term debt less cash and cash equivalents. Net debt is a non-gaap measure. 5 Includes non-current portions of employee future benefits and the asset retirement obligation, as well as other liabilities ANNUAL REPORT 15