Talisman Energy Generates $2.9 Billion in Cash Flow in 2004

Talisman Energy Inc. (TSX:TLM)(NYSE:TLM) has released its 2004 consolidated financial and operating results. Highlights include continuing strong growth in proved reserves and production, a sixth consecutive year of record cash flow and cash flow per share and a very strong balance sheet.

Cash flow increased 7% to $2,931 million ($7.65/share), compared to $2,729 million ($7.07/share) a year ago. Cash flow per share was $1.78 in the fourth quarter, up 6% from the same period a year earlier. Net income was down in 2004, reflecting the sale of Talisman's Sudan assets and a number of tax changes in 2003. Total net income in 2004 was $663 million ($1.77/share) versus $1,012 million ($2.56/share) a year earlier. Net income per share increased 19% to $0.32 in the fourth quarter, compared to the same period a year ago.

In order to better illustrate Talisman's operating performance on an internally consistent basis, the Company has calculated an earnings from operations number. This metric adjusts for significant one-time events such as the sale of Talisman's assets in Sudan. It also adjusts for other non-operational impacts on earnings such as the mark-to-market effect of changes in share prices on stock based compensation expense and changes to tax rates. This calculation however, still does not reflect differing accounting policies and conventions between companies.

Talisman's earnings from operations increased 15% to $773 million ($2.02/share), compared to $673 million ($1.74/share) in 2003. On a per share basis, earnings from operations were $0.39 in the fourth quarter, compared to $0.38 a year earlier.

Production averaged 438,000 boe/d, an increase of 10% over 2003, setting a new record for production per share. Talisman grew its natural gas production by 16% to 1,259 mmcf/d. Oil and liquids production increased by 5% to 228,434 bbls/d. Talisman increased volumes in all of its core operating areas with significant growth in Southeast Asia (a full year of production from the PM-3 CAA in Malaysia/Vietnam) and Algeria (a full year of production from the MLN field). Production in the fourth quarter averaged 451,000 boe/d. References to production and reserves in this news release are gross numbers, unless otherwise indicated.

"2004 was a very strong year for Talisman, both operationally and financially, and 2005 promises to be better still," said Dr. Jim Buckee, President and Chief Executive Officer. "World oil demand continues to press upwards against a limited amount of surplus capacity and prices may have to go higher yet to restrain consumption. Talisman is virtually unhedged in 2005 and the effects of these high prices will fully benefit our shareholders.

"Talisman grew its proved reserves by 9% to 1.5 billion boe. The Company added a total of 286 mmboe of proved reserves from all sources in 2004, 93% through the drill bit. Total capital spending (excluding Syncrude and midstream but including net acquisitions) was $2.6 billion. We increased natural gas reserves by 11% to 5.2 trillion cubic feet. Crude oil and liquids reserves increased 7% to 618 mmbbls. Our crude oil reserves are predominantly high quality so they were not negatively affected by the year end dip in heavy oil prices caused by very wide differentials.

"Cash flow was $2.9 billion last year and we are predicting $3.6-3.8 billion in 2005, based on an average US$40/bbl WTI price for the year.(i)

"Talisman increased production by 10% last year, 14% if you remove Sudan production from our 2003 volumes. The result was record high production per share in 2004, and our objective is to continue to grow production per share by 5-10% annually. Looking ahead, these growth rates should be achievable for at least the next three years with new production in Trinidad, a major expansion at Corridor, continuing development in Algeria, development of the Tweedsmuir field in the North Sea, South Angsi startup in Malaysia and the continuing success of our deep gas programs in North America.

"We have maintained a very strong balance sheet with a year end debt to cash flow ratio of approximately 0.8 times, the lowest amongst our Canadian peer group. We reduced our total debt in 2004, while increasing spending on exploration and development, increasing dividends and repurchasing nearly nine million Talisman shares. These repurchases have continued in 2005, as we continue to create value for our shareholders."

(i) Talisman guidance release of January 11, 2005; assuming production of 445,000 - 475,000 boe/d, US$40/bbl WTI price, US$6.25/mmbtu NYMEX gas price, US$/C$ 0.80, C$/Pounds Sterling $2.25. Excludes volumes from the recent acquisition in Norway.

Six Consecutive Years of Record Cash Flow

Talisman generated record high cash flow and cash flow per share for the sixth consecutive year. Cash flow was $2,931 million on gross sales of $6,394 million. Cash flow per share increased 8% to $7.65 from $7.07 a year earlier ($6.87 excluding the cash flow generated by our Sudan interests in 2003).


                                  Three months ended      Year ended
                                         December 31     December 31
                                 ------------------------------------
                                        2004    2003    2004    2003
                                 ------------------------------------
Cash flow ($mm)(1)                       679     644   2,931   2,729
Cash flow per share ($)(1)              1.78    1.68    7.65    7.07
                                 ------------------------------------
Net income ($mm)                         121     108     663   1,012
Income per share ($)                    0.32    0.27    1.77    2.56
                                 ------------------------------------
Earnings from operations ($mm)(1)        147     147     773     673
Earnings from operations
 ($/share)(1)                           0.39    0.38    2.02    1.74
                                 ------------------------------------
Long term debt ($mm at year end)                       2,457   2,203
Preferred securities ($mm at year end)                    --     431
Shares outstanding (mm at year end)                      375     384

(1) non-GAAP measure

Higher volumes and prices resulted in gross sales (before hedging) increasing by $1.2 billion compared to 2003. These gains were partly offset by higher royalties and cash taxes ($531 million), higher operating costs ($159 million) and increased hedging losses ($286 million).

Cash flow in the fourth quarter came in lower than expected. The Company issued guidance in early January, which assumed approximately $775 million in cash flow in the fourth quarter of 2004. The $95 million difference was the result of lower than expected prices at year end, higher than expected cash taxes and an insurance expense adjustment.

The Company no longer calculates a diluted cash flow per share amount. Since the introduction in mid-2003 of a cash payment feature attached to the outstanding stock options, approximately 98% of options have been exercised using the cash payment feature. Since the diluted per share calculation assumes all options will be exercised for shares, with no adjustment to account for the fact that actual options exercised for cash have resulted in a reduction of cash flow, management feels that the diluted cash flow per share figure is not relevant as the underlying assumptions are not a realistic view of expected results.

Net income for the year was $663 million ($1.77/share) versus $1,012 million ($2.56/share) in 2003. The major reason for the decrease in 2004 was a $296 million after tax gain associated with the sale of Talisman's properties in Sudan in 2003. Depreciation, depletion and amortization (DD&A) expense increased by $215 million, compared to 2003. Most of the increase was the result of higher production volumes. On a $/boe basis, DD&A was only up 4%.

Net income in the fourth quarter was $0.32/share, an increase of 19% over the same period in 2003.

The differences between the full cost and successful efforts methods of accounting make it difficult to compare net income between companies. In periods of growth and high exploration spending, it is likely that net income determined using the full cost method would be higher than net income determined using the successful efforts method.

Earnings from operations totalled $773 million ($2.02/share), an increase of 15% over 2003. The Company calculates earnings from operations to better illustrate core operating performance on a consistent basis. This metric adjusts for significant events such as the sale of Talisman's assets in Sudan and changes to tax rates in 2003.

Earnings from operations

To assist in understanding the Company's earnings from operations, the following table adjusts the Company's net income per the consolidated financial statements, for certain items of a non-operational nature, on an after-tax basis. This term is not defined by Generally Accepted Accounting Principles (GAAP) in either Canada or the US. Consequently, it is referred to as a non-GAAP measure. Our reported results may not be comparable to similarly titled measures by other companies. The Company uses this data to evaluate performance of core operational activities on a comparable basis between periods.


($ millions, except per share amounts)

                                  Three months ended      Year ended
                                 ------------------------------------
December 31,                            2004    2003    2004    2003
---------------------------------------------------------------------
Net income                               121     108     663   1,012
Gain on sale of Sudan operations(1)        -       -       -    (296)
Sudan operating income(1)                  -       -       -     (44)
Stock-based compensation(2)                5      42     119     130
Insurance expenses(3)                     12       -      12       -
Tax effects of unrealized foreign
 exchange gains on foreign
 denominated debt(4)                      15      (3)     37      32
Tax rate reductions and other(4)          (6)      -     (58)   (161)
                                 ------------------------------------
Earnings from operations(5)              147     147     773     673
                                 ------------------------------------
Amounts per share - basic               0.39    0.38    2.02    1.74
                                 ------------------------------------
Amounts per share - diluted             0.38    0.38    1.98    1.72
                                 ------------------------------------
                                 ------------------------------------

(1) On March 12, 2003, Talisman completed the sale of its indirectly
    held interest in the Greater Nile Oil Project in Sudan for net
    proceeds of $1,012 million and a gain of $296 million. During the
    period January 1, 2003 through March 12, 2003, the Sudan
    operations had after tax operating income of $44 million.
(2) Stock-based compensation expense relates to the appreciated value
    of the Company's outstanding stock options and cash units at
    December 31, 2004, which was first expensed during the second
    quarter of 2003. The Company's stock-based compensation expense
    is based on the difference between the Company's share price and
    its stock options or cash units exercise price.
(3) Insurance costs relate to the current liability associated with
    past claims experience that is expected to be billed in future
    premiums.
(4) Tax adjustments include the impact of Canadian corporate tax rate
    reductions in 2004 and 2003, as well as future taxes relating in
    part to unrealized foreign exchange gains associated with the
    impact of a stronger Canadian dollar on foreign currency
    denominated debt.
(5) This is a non-GAAP measure.

A Very Strong Balance Sheet

Talisman's long-term debt at year end was $2.5 billion, down from a total of $2.6 billion ($2.2 billion debt and $431 million preferred securities) at the end of last year. During 2004, the Company generated $3.1 billion of cash provided by operating activities, while spending $2.5 billion on exploration and development and a net $242 million on acquisitions. In addition, Talisman financed the redemption of its preferred securities, repurchased nine million common shares and paid dividends of $114 million. At year end, Talisman's debt to cash flow ratio was 0.84.


Talisman Increased Production by 10%

                                  Three months ended      Year ended
                                         December 31     December 31
                                 ------------------------------------
                                        2004    2003    2004    2003
                                 ------------------------------------
Oil and liquids (bbls/d)
North America                         57,322  57,527  57,392  59,578
North Sea                            127,943 128,697 121,861 113,075
Southeast Asia                        35,018  31,138  35,644  24,430
Algeria                               15,329  11,804  13,537   6,594
Sudan                                     --      --      --  13,039
---------------------------------------------------------------------
                                     235,612 229,166 228,434 216,716
---------------------------------------------------------------------
Natural gas (mmcf/d)

North America                            891     867     885     864
North Sea                                121     118     114     109
Southeast Asia                           280     153     260     117
---------------------------------------------------------------------
                                       1,292   1,138   1,259   1,090
---------------------------------------------------------------------
000 boe/d                                451     419     438     398
---------------------------------------------------------------------
000 boe/d (net of royalties)             379     353     365     334
boe per share (gross)                                   0.42    0.38
---------------------------------------------------------------------

Production for the year averaged 438,000 boe/d, an increase of 10% (14% excluding Sudan), and the Company set a new production per share record. Production in the fourth quarter was 451,000 boe/d, an increase of 8% over the fourth quarter of 2003 and 5% above the third quarter of 2004.

Liquids production averaged 228,434 bbls/d, an increase of 5%. North Sea liquids production increased 8% with the startup of the Tartan North field, ahead of schedule, and minor asset acquisitions. Production from Southeast Asia increased by 46% with a full year of production from the PM-3 CAA project in Malaysia/Vietnam (22,388 bbls/d in 2004 versus 8,672 bbls/d in 2003). Algerian production more than doubled with a full year of production from the MLN field.

Natural gas production increased 16%, averaging 1,259 mmcf/d for the year. Production in the fourth quarter was 1,292 mmcf/d, an increase of 14% over the fourth quarter of 2003 and 2% over the previous quarter. Talisman's North American gas production averaged 885 mmcf/d, an increase of 2% over the previous year. New production records were set in the northeastern US, Alberta Foothills, Deep Basin, southern Alberta Foothills and Bigstone/Wild River regions. North Sea natural gas volumes increased 5% to 114 mmcf/d. Natural gas production in Southeast Asia increased by 122%. Natural gas sales in Malaysia/Vietnam increased from 5 mmcf/d in 2003 to 119 mmcf/d in 2004, with a full year of production from the PM-3 CAA project. Natural gas sales in Indonesia averaged 141 mmcf/d, compared to 112 mmcf/d in 2003, the result of increased sales volumes to Singapore.

Talisman expects production to average between 445,000-475,000 boe/d in 2005. For additional information please see Talisman's guidance release of January 11, 2005. The current guidance does not reflect the acquisition of assets in Norway announced February 1, 2005.


179% Production Replacement

                             Oil &    Natural
                            NGLs(1)     Gas(1)
Talisman Proved Reserves  (million   (billion       BOE(1) Net BOE(2)
(excluding Syncrude)       barrels)     cu ft)  (millions) (millions)
---------------------------------------------------------------------
Dec 31, 2003                   579      4,695       1,362      1,086
Discoveries, additions
 and extensions                 74      1,252         283        204
Net acquisitions
 (dispositions)                 30        (50)         21         24
Revisions                       17       (212)        (19)        22
Production                     (82)      (462)       (159)      (129)

---------------------------------------------------------------------
Total Proved                   618      5,223       1,488      1,207
Dec 31, 2004

---------------------------------------------------------------------
Total Probable                 383      2,624         820        634
Dec 31, 2004
---------------------------------------------------------------------
(1) Talisman working interest reserves before royalties payable, plus
    royalty interests and net profits interest
(2) Talisman working interest net of royalties, plus royalty
    interests and net profits interest

Talisman increased its total proved reserves by 9% to 1,488 mmboe at the end of 2004. The Company replaced 179% of conventional production from all sources and 166% through the drill bit. Talisman's net proved reserves increased by 11% to 1,207 mmboe. Capital spending totalled $2,375 million for exploration and development (excludes Syncrude, capitalized interest, midstream). Drilling related reserve additions totalled 265 mmboe. Talisman spent $241 million on net acquisitions, adding 21 mmboe of proved reserves.

Proved oil and liquids reserves increased 7% to 618 mmbbls. Talisman added a total of 121 mmbbls, including 85 mmbbls in the North Sea, 18 mmbbls in Southeast Asia, 13 mmbbls in Algeria and 13 mmbbls in North America, partially offset by an 8 mmbbl reduction in Trinidad. The majority (75%) of these reserve additions were through discoveries, additions and extensions. North America (30%) and the North Sea (48%) account for the majority of Talisman's oil reserves. These are predominantly high quality crude oil and natural gas liquids. Talisman has virtually no heavy oil or bitumen reserves.

Talisman's proved natural gas reserves increased by 11% in 2004, totaling 5.2 tcf at year end. Talisman's North American natural gas reserves were 2.6 tcf at year end, unchanged from the previous year. In North America, the Company added a record 479 bcf through the drill bit (147% of production), offset by record natural gas production (325 bcf), minor asset sales (50 bcf) and downward revisions to existing reserves (113 bcf). These numbers include Fortuna's natural gas reserves in the northeastern US, which totalled 153 bcf (an increase of 40%) at year end, with the addition of 59 bcf through drilling activities.

Talisman's proved international natural gas reserves increased 26% to 2.6 tcf at year end. The majority of this increase came from the addition of 695 bcf of proved undeveloped reserves in Indonesia as a result of an agreement to sell gas to PT Perusahaan Gas Negara (Persero), Tbk ("PGN"), the Indonesian national gas transmission and distribution company. These reserves will be developed over the next two years, in anticipation of sales commencing in the first quarter of 2007.

Over the past three years, Talisman has added 565 mmboe of proved reserves through discoveries, additions and extensions (including revisions) and acquired 58 million boe of proved reserves (not including the impact of the sale of Talisman's indirect interest in the Greater Nile Oil Project in Sudan). During this period exploration and development spending was $6,153 million. Net spending on acquisitions and divestitures (excluding Sudan) was $1,013 million. Approximately 90% of Talisman's proved reserves have been independently evaluated over the past three years. Detailed reserve reconciliation tables are provided elsewhere in this news release.

The reserves replacement ratio of 166% was calculated by dividing the sum of changes (revisions of estimates, improved recovery and discoveries) to estimated proved oil and gas reserves during 2004 by the Company's 2004 conventional production. The reserves replacement ratio of 179% was calculated by dividing the sum of changes (revisions of estimates, improved recovery, discoveries, acquisitions and dispositions) to estimated proved oil and gas reserves during 2004 by the Company's 2004 conventional production.

The Company's management uses reserve replacement ratios, as described above, as an indicator of the Company's ability to replenish annual production volumes and grow its reserves. It should be noted that a reserve replacement ratio is a statistical indicator that has limitations. As an annual measure, the ratio is limited because it typically varies widely based on the extent and timing of new discoveries, project sanctioning and property acquisitions. Its predictive and comparative value is also limited for the same reasons. In addition, since the ratio does not imbed the cost, value or timing of future production of new reserves, it cannot be used as a measure of value creation.


Netbacks up 21% in the Fourth Quarter

Total Company                     Three months ended      Year ended
                                         December 31     December 31
                                 ------------------------------------
                                        2004    2003    2004    2003
                                 ------------------------------------
WTI oil price US$/bbl                  48.29   31.19   41.40   30.99
NYMEX gas price US$/mcf                 6.87    4.89    6.09    5.44

---------------------------------------------------------------------
Talisman netback ($/boe)
Sales price                            43.88   34.97   42.75   38.51
Hedging loss                           (3.99)  (1.04)  (3.02)  (1.34)
Royalties                               6.80    5.34    7.04    6.18
Operating cost                          6.84    6.68    7.04    6.74
Transportation                          1.20    1.22    1.20    1.26
---------------------------------------------------------------------
Netback ($/boe)(1)                     25.05   20.69   24.45   22.99
---------------------------------------------------------------------
Oil and liquids netback ($/bbl)        24.46   20.81   24.42   21.66
Natural gas netback ($/mcf)             4.30    3.42    4.08    4.11
---------------------------------------------------------------------

(1) Netbacks do not include synthetic oil and pipeline operations.
    Additional netback information by major product type and region
    is contained elsewhere in this news release.

World oil prices continued to increase during 2004, with WTI prices averaging US$41.40/bbl, a 34% increase over the 2003 average of US$30.99/bbl. North American natural gas prices increased 12% over 2003, with NYMEX prices averaging US$6.09/mcf in 2004.

Talisman's netbacks increased 6% to an average of $24.45/boe for 2004, on the strength of higher world oil and North American natural gas prices. The rise in US$ denominated commodity prices was partly offset by a 7% increase in the Canadian dollar compared to the US dollar. The strengthening of the Canadian dollar reduced Talisman's reported oil and liquids price by $3.62/bbl to $47.45/bbl.

Talisman's netbacks in the fourth quarter averaged $25.05/boe, an increase of 21%, compared to the fourth quarter of 2003. North American natural gas netbacks averaged $4.43/mcf for the year, an increase of 7% over 2003 and $4.74/mcf in the fourth quarter (up 44%). North Sea oil netbacks averaged $26.09/bbl (up 4%) for the year and $26.79/bbl in the fourth quarter (up 10%).

The Company hedged approximately 22% of its 2004 production volumes late in 2003. The resulting hedging loss was $3.02/boe in 2004. However, the Company currently has only about 2% of its production hedged for 2005.

Overall royalty rates were unchanged at about 16% in 2004.

Unit operating costs increased by 4% to $7.04/boe. Higher unit costs in North America and the North Sea were partially offset by lower costs in Southeast Asia and Algeria (full production volumes from the PM-3 CAA and MLN field). Unit transportation costs were down slightly.


Additional Information 

Capital Spending (1),(3)

                                       ------------------------------
(millions of dollars)                         2004      2003     2002
---------------------------------------------------------------------
North America                                1,500     1,580      939
North Sea                                      721       693      518
Southeast Asia                                 235       316      269
Algeria                                          8        34      107
Trinidad                                       191       130       78
Sudan                                            -         2       98
Other(2)                                       125        93       43
Corporate, IS and Administrative                26        38       26
---------------------------------------------------------------------
                                             2,806     2,886    2,078
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Includes exploration, development and net asset acquisitions
    expenditures but excludes corporate acquisitions and the Sudan
    disposition in 2003.
(2) Other includes Colombia, Peru, Qatar and North American 
    frontiers.
(3) Includes interest costs, which are capitalized on major
    development projects until facilities are completed and ready for
    use.

Natural gas continues to be the focus of the Company's capital investment activities in North America, supplemented by low risk oil projects and strategic acquisitions. Of the $1.5 billion of capital spending in North America, $590 million related to exploration activities, while development accounted for $862 million. The Company participated in 444 gross gas wells and 137 gross oil wells in North America and had a 94% success rate. Development spending was concentrated in the predominantly gas producing core areas in the Alberta Foothills, Greater Arch, Deep Basin, Edson area, Monkman/BC Foothills and Appalachia.

Total capital spending in the North Sea of $721 million included $150 million for exploration and $357 million for development, with the remaining $214 million for net property acquisitions. Development activity included the start of the Tweedsmuir project and well operations within the Clyde, Buchan, Tartan, Piper and Claymore and Gyda (Norway) core areas. A total of 17 successful development wells were drilled during 2004 in the North Sea. Exploration drilling included the successful South Tweedsmuir appraisal, which added significant reserves to the Tweedsmuir development.

Malaysia/Vietnam accounted for a majority of the $235 million of total capital spending in Southeast Asia, due to the ongoing development of the PM-3 CAA project and the South Angsi field development in PM-305. Talisman participated in 14 successful development wells in Malaysia/Vietnam during 2004. In addition, one successful exploration well was drilled in Block PM-3 CAA.

Capital spending in Algeria totaled $8 million in 2004, as the Company participated in three successful wells during the year. In Trinidad, a total of $191 million was spent on Angostura exploration and development activity. Other areas accounted for $125 million.

 

Depreciation, Depletion and Amortization Expense
(includes accretion of asset retirement obligations)

                          -------------------------------------------
                                   2004                   2003(1)
                          -------------------------------------------
                           $/boe    $millions     $/boe    $millions
---------------------------------------------------------------------
North America              10.47          785      9.26          688
North Sea                  12.83          661     12.85          616
Southeast Asia              6.02          174      5.92           95
Algeria                     5.99           30      6.99           17
Sudan                          -            -      3.98           19
---------------------------------------------------------------------
                           10.29        1,650      9.87        1,435
---------------------------------------------------------------------
---------------------------------------------------------------------
(1) Restatement of prior year to effect retroactive adoption of the
    new accounting policy on asset retirement obligations as at
    January 1, 2004.

The Company's 2004 depreciation, depletion and amortization (DD&A) expense increased $215 million or 15% to $1.7 billion, or $10.29/boe. The DD&A rates in North America increased due to the inclusion of costs associated with US property acquisitions and the acquisition of Vista Midstream in 2003. In the North Sea, DD&A increased 7% with increased production, while the unit rate remained flat. Total DD&A expense for Southeast Asia increased primarily as a result of increased production from Malaysia/Vietnam.


Corporate and Other

                                          ---------------------------
(millions of dollars)                         2004             2003
---------------------------------------------------------------------
G & A expense                                  183              152
Interest expense                               158              137
Capitalized interest                            13               24
Stock-based compensation                       171              185
Preferred securities charges                    15               38
Other revenue                                   85               76
Other expense                                   89               16
---------------------------------------------------------------------
---------------------------------------------------------------------

On a per unit basis, G&A was $1.14/boe (2003 - $1.05/boe). Other revenue includes pipeline and custom treating revenues and miscellaneous income. Other expense for 2004 included foreign exchange losses of $30 million, property impairments in the North Sea of $31 million, a net loss on property dispositions of $30 million and a $20 million insurance adjustment expense partially offset by a gain on the unwinding of cross currency and interest rate swap contracts of $15 million.

Income Taxes

The Company's effective tax rate for 2004, after deducting Production Revenue Tax (PRT), was 36%, compared to 15% in 2003. A number of events in the past two years have significantly impacted the Company's effective tax rates including tax rate reductions in Canada and the sale of the Sudan operations in 2003.


Effective Income Tax Rate

                                    ---------------------------------
(millions of dollars)                        2004             2003(1)
                                    ---------------------------------
Income before tax                           1,165            1,285
Less PRT
 Current                                      124               72
 Future                                         5               20
                                         ----------         ---------
                                              129               92
                                    ---------------------------------
                                            1,036            1,193
---------------------------------------------------------------------
Income tax expense (recovery)
 Current                                      478              229
 Future                                      (105)             (48)
                                    ---------------------------------
                                              373              181
                                    ---------------------------------
Effective income tax rate (%)                  36               15
---------------------------------------------------------------------
1. Restatement of prior year to effect retroactive adoption of the
   new accounting policy on asset retirement obligations as at
   January 1, 2004.

A normalized effective tax rate after removing the impact of the Canadian and UK tax rate changes, the tax on unrealized foreign exchange gains on foreign denominated debt and the impact of the gain on disposal of the Sudan operations would have been 37% in 2004 and 34% in 2003.

Current income tax expense increased to $478 million in 2004, due to higher commodity prices and volumes, which resulted in increases in current taxes of $167 million in the North Sea, $50 million in Southeast Asia, $33 million in Algeria and $22 million in North America.

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