Petro-Canada's 2006 Capital Program: Shifting to Growth

Petro-Canada's board of directors approved a capital and exploration expenditure program totalling $3.4 billion for 2006, about equal to the program in 2005.

"We are beginning to see the fruits of our building program, with a return to production growth over the next few years and a shift to value-adding conversion projects in our Downstream," said Ron Brenneman, president and chief executive officer.

The 2006 capital program includes: $1.8 billion directed to growth projects, exploration and new venture developments; $1.0 billion to replace reserves in core areas; $395 million to enhance existing assets and to improve profitability in the base business; and $265 million to comply with new regulations. The 2006 capital expenditure program is expected to be funded from cash flow.

Petro-Canada's upstream production is expected to be in the range of 425,000 to 450,000 barrels of oil equivalent per day (boe/d) in 2006. Production for the full year 2005 is expected to be 415,000 to 430,000 boe/d, in line with previous guidance. The expected growth in 2006 production is largely due to additional volumes from White Rose, the Syncrude Stage III expansion, De Ruyter start-up and a new well pad at MacKay River.

Brenneman continued, "The 2006 program funds projects in all of our businesses, Upstream and Downstream. With such a broad range of opportunities in our portfolio, we have been able to select those that are most value-adding for next year's program." OUTLOOK - CAPITAL EXPENDITURES

Capital Expenditures By Priorities

In 2006, nearly 90% of the capital program will support delivering profitable growth and improving base business profitability. This is up from nearly 80% in these categories in 2005. The remaining 10% of the 2006 capital program is directed toward complying with regulations and enhancing existing assets. This portion of the program was larger in 2005 primarily due to investments to produce clean burning fuels in the Downstream business.

         Capital           2005 Outlook   2006 Outlook
        Investment            As at          As at              2006
        Priorities           Jul. 26,       Dec. 15,         Highlights
    (millions of dollars)     2005(1)        2005(1)
                                                        Producing clean
    Regulatory compliance   $    630       $    265     burning diesel fuel
    Enhancing existing                                  Improving reliability
     assets                      135            155     at key facilities
                                                        Developing the retail
                                                        and wholesale
                                                        marketing networks;
                                                        de-bottlenecking the
                                                        lubricants plant; and
    Improving base business                             improving refinery
     profitability               150            240     yield
                                                        Investing for
                                                        immediate impact
    Reserve replacement in                              across the four
     core areas                1,110          1,025     upstream businesses
                                                        Adding future
                                                        production with
                                                        medium-term growth
    New growth projects        1,035          1,375     projects
                                                        Investing in
                                                        exploration activity
                                                        in Western Canada,
                                                        International, and
                                                        the U.S. Rockies; and
    Exploration and new                                 evaluating new
     ventures for long-term                             in situ oil sands
     growth                      385            375     developments
    Total                   $  3,445       $  3,435

    Capital Expenditures By Business

Spending will occur across all four upstream business units and in the Downstream business, reflecting quality investment opportunities in each business.

                                      2005 Outlook          2006 Outlook
                                          As at                 As at
    (millions of dollars)           July 26, 2005(1)    December 15, 2005(1)
      North American Natural Gas        $    700              $    850
      East Coast Oil                         350                   305
      Oil Sands                              490(2)                355
      International                          795                   865
                                    ----------------      ----------------
    Subtotal                               2,335                 2,375
      Refining                               915                   840
      Marketing                              115                   150
      Lubricants                              50                    40
                                    ----------------      ----------------
    Subtotal                               1,080                 1,030
    Corporate                                 30                    30
    Total                               $  3,445              $  3,435
    (1) Effective January 1, 2005, the Company changed the presentation of
        cash flow in the Consolidated Statement of Cash Flows pursuant to
        recent interpretations from the United States (U.S.) Securities and
        Exchange Commission (SEC). Previously, all exploration expenses were
        classified as investing activities. With the change, general and
        administrative, and geological and geophysical (including seismic)
        exploration expenses are treated as a reduction of cash flow from
        operating activities. Capital expenditures in the table are shown on
        this basis. The 2005 outlook has been restated to reflect the change
        in presentation of cash flow, resulting in a decrease in 2005 capital
        expenditures of $170 million from that previously disclosed in the
        Q2 2005 Quarterly Report.
    (2) Excludes the initial purchase obligation ($264 million on a
        discounted basis) in connection with the Company's acquisition of an
        interest in the Fort Hills oil sands project. This purchase
        obligation will be reduced over time by Petro-Canada funding a
        portion of UTS Energy Corporation's (UTS) share of the next
        $2.5 billion of development capital. Petro-Canada's 2005 estimated
        expenditures incremental to the initial purchase obligation are
        included in the outlook. On November 30, 2005, Petro-Canada and UTS
        finalized agreements with Teck Cominco Limited (Teck Cominco) that
        allow Teck Cominco to acquire a 15% interest in the Fort Hills oil
        sands project. Petro-Canada remains the project operator with a 55%
        interest, with UTS holding a 30% stake. Teck Cominco will pay for
        their interest by funding $475 million of Petro-Canada's and UTS'
        future capital expenditures.


Upstream production is expected to average between 425,000 to 450,000 boe/d in 2006. Petro-Canada's production range is higher than in 2005, primarily due to additional production from White Rose, DeRuyter start-up, the Syncrude Stage III expansion and a new well pad at MacKay River. Factors that may impact production during 2006 include reservoir performance, drilling results, facility reliability, the ramp up of production at White Rose and the successful execution of the turnaround at Terra Nova.

                                     2005 Outlook (+/-)    2006 Outlook (+/-)
                                           As at                 As at
    (thousands of boe/d)               July 26, 2005       December 15, 2005
    North American Natural Gas
      - Natural gas                          113                   106
      - Liquids                               14                    14
    East Coast Oil                            75                    94
    Oil Sands
      - Syncrude                              26                    34
      - MacKay River                          21                    25
      - North Africa/Near East               115                   113
      - Northwest Europe                      45                    43
      - Northern Latin America                12                    12
    Total                                 415 - 430             425 - 450

    North American Natural Gas

This business continues its shift to unconventional natural gas production, with a target of 50% of its production coming from unconventional production by 2010. North American Natural Gas will also have a stronger focus on exploration in 2006.

The North American Natural Gas business will have a capital program of approximately $850 million in 2006. Approximately $440 million will be used to replace reserves in core areas of Western Canada. Exploration and new ventures investments of about $235 million will be spent to develop longer-term supply opportunities in Western Canada, the U.S. Rockies, and the frontier areas of Alaska and the Mackenzie Delta/Corridor. Spending on new unconventional growth opportunities in the U.S. Rockies and the proposed Gros-Cacouna LNG re-gasification terminal are estimated to be $150 million. Other expenditures, including maintenance of existing assets, will total approximately $25 million.

North American Natural Gas production is expected to decline to 120,000 boe/d, compared with estimates of 127,000 boe/d in 2005. Anticipated natural declines in conventional production in Western Canada will be partially offset by additional U.S. Rockies volumes. In 2006, unconventional gas production is expected to be 25% of production. U.S. Rockies production will double to 100 million cubic feet/day of natural gas equivalent by 2007.

East Coast Oil

In 2006, East Coast Oil capital is focused on: development drilling at Hibernia, Terra Nova and White Rose; improving Terra Nova reliability; and progressing the Hebron project.

The East Coast Oil business will have a $305 million capital program in 2006. It is expected about $275 million will be spent on drilling to replace reserves at Hibernia, Terra Nova and White Rose, and developing Terra Nova's Far East block. About $30 million will fund growth opportunities such as the Hebron development, and exploration and new ventures.

East Coast Oil production is expected to be 94,000 boe/d, compared with an estimate of 75,000 boe/d in 2005. The 2006 production estimate reflects the ramp up of the White Rose project and a planned 14-day turnaround. At peak production levels, White Rose is expected to contribute 25,000 boe/d to East Coast Oil volumes. Partially offsetting this 2006 production increase will be a 70- to 90-day turnaround at Terra Nova. There is no major turnaround planned for Hibernia in 2006.

Oil Sands

In 2006, Oil Sands moves further toward fully integrated, long-life production with Syncrude's Stage III expansion, and progress on the Fort Hills project and the MacKay River expansion.

The Oil Sands business has a capital program of about $355 million in 2006. Spending to enhance existing operations, comply with regulations at Syncrude and improve base business profitability at MacKay River is expected to be approximately $135 million. Capital for new growth opportunities of $165 million includes funding the preliminary engineering and design for the Fort Hills project ($125 million) and the Syncrude Stage III expansion ($30 million). Approximately $40 million of exploration and new ventures capital will further evaluate the leases at MacKay River. Investments of $15 million will replace reserves through ongoing pad development at MacKay River.

In 2006, production from the Oil Sands business is expected to be 59,000 boe/d, compared with estimated production of 47,000 boe/d in 2005. Higher production in 2006 is due to the start-up of the Syncrude Stage III expansion and a new well pad at MacKay River. Syncrude's Stage III expansion is expected to be on-stream by mid-2006 and will increase Petro-Canada's share of production capacity from 28,000 to 42,000 boe/d. Production will reach this level following a ramp up period of two to three years. A new well pad at MacKay River will contribute to targeted production of 27,000 to 30,000 b/d by late 2006.


International is focused on delivering near-term growth projects, primarily in Northwest Europe, and building a portfolio of longer term growth opportunities through exploration and business development activities.

In 2006, the International business has a capital budget of about $865 million. Investment to replace reserves in core areas is expected to be approximately $260 million. About $515 million will be invested in new growth projects, with a focus on bringing on new North Sea projects such as De Ruyter (start-up late 2006), Buzzard (start-up late 2006) and Saxon (start-up late 2007). Approximately $90 million will be allocated to exploration.

Production from the International business is expected to be 168,000 boe/d in 2006, compared with estimated production of 172,000 boe/d in 2005. Lower production in 2006 reflects natural declines in Syria and Northwest Europe. Contributions from new development projects such as De Ruyter (10,000 boe/d), Buzzard (60,000 boe/d) and other projects (L5b-C, Saxon, Hejre and La Ceiba) are expected to reverse the decline and increase volumes to more than 200,000 boe/d in the 2007 to 2010 period.

United Kingdom Tax Regime

On December 5, 2005, the United Kingdom (U.K.) Chancellor of the Exchequer announced proposed changes to the tax regime for oil and gas exploration and production in the U.K. Proposed changes would increase the supplementary corporation tax from 10% to 20% effective January 1, 2006, raising Petro-Canada's marginal tax rate from 40% to 50%. As a result, Petro-Canada expects to record a non-cash tax expense of approximately $250 million to $300 million in 2006, reflecting higher future income taxes.

    Exploration Summary

                                                 General &
                                                Geological &
                                  2006           Geophysical
                               Exploration    (including seismic)
                                  and            Exploration
    (millions of dollars)     New Ventures         Expenses          Total
    Western Canada,
     U.S. Rockies
     and Oil Sands              $    255          $     55         $    310
     East Coast Oil,
     Alaska and
     Delta/Corridor                  120               130              250
    Total                       $    375          $    185         $    560

Total exploration and new ventures budget of $375 million includes traditional exploration spending of $255 million for Western Canada, the U.S. Rockies and Oil Sands. The balance of Petro-Canada's exploration budget of $120 million includes exploration spending for International, East Coast Oil, Alaska and the Mackenzie Delta/Corridor, which is managed on a global basis.

The $120 million exploration investment is part of Petro-Canada's strategy to build a balanced exploration program. This budget excludes $130 million for global general and administrative, and geological and geophysical (including seismic) exploration expenses. These additional expenses are an integral part of Petro-Canada's exploration program. International spending of about $90 million covers an expected program of 11 wells in the Northwest Europe and North Africa/Near East regions. In addition, a seismic program is focused on Trinidad and the U.K. sector of the North Sea. Spending of $16 million in Alaska and the Mackenzie Delta/Corridor is focused on advancing prospects, pending pipeline decisions. East Coast Oil spending of $14 million will be directed toward bringing add-on prospects up to drill- ready status in the Jeanne D'Arc basin.


Downstream capital spending shifts from regulatory requirements to growth during 2006, in particular: conversion of the Edmonton refinery; expansion of the lubricants plant; and a feasibility study for a Montreal coker.

The Downstream business will have a capital program of about $1,030 million in 2006. The business will invest approximately $245 million in regulatory compliance, primarily to produce clean burning diesel fuel at the Edmonton and Montreal refineries. This work is expected to be completed by mid-2006. Approximately $70 million will be directed to the enhancement of existing operations. This includes reliability and safety improvements at the facilities, as well as product storage and information technology upgrades within the wholesale and retail networks. A further $180 million will be invested to improve the profitability of the Downstream's base business. This includes continuing to develop the retail and wholesale network, and de-bottlenecking the lubricants plant. The majority of new growth projects funding of $535 million will go toward advancing the Edmonton refinery conversion to run oil sands feedstock by 2008.


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