Canadian Natural Resources Sees Strong Results in 1Q06

In commenting on first quarter 2006 results, Canadian Natural's Chairman, Allan Markin stated, "The execution of our defined plan for profitable growth continues on track. In the first quarter we executed a record drilling program in a challenging environment due to unseasonably warm weather and limits in the availability of rigs and services, all the while achieving a 90% overall success rate. On our major projects we saw first production from Primrose North which reached 15,000 bbl/d during the quarter, we received government approval of the Olowi Field development plan offshore Gabon, and we started seeing positive production results from the waterflood and polymer floods at Pelican Lake. At the Horizon Project, our team continues to execute and as a result, we remain slightly ahead of project targets with all critical path items remaining on track. We are extremely proud of the work of our people in meeting the challenges that we face on a daily basis, both on the conventional side of the business and on the Horizon Project."

John Langille, Vice-Chairman, commented "Much wider than normal heavy crude oil differentials combined with a decrease in natural gas pricing and a stronger Canadian dollar reduced average selling prices received for our products in the first quarter. Heavy oil differentials have improved markedly in recent weeks, due in part to our heavy oil marketing strategy and in particular our participation in certain pipeline reversals which access new markets. Today, based on current strip pricing we would expect to generate cash flow in the range of $5.4 billion to $5.6 billion, as forecast in our 2006 budget. This strong cash flow, combined with the continued management of our capital costs in this very heated environment means that we will still expect to exit 2006 with an exceptionally strong balance sheet, with debt to cash flow targeted under 1x and debt to book capitalization targeted in the low 30% range."

Canadian Natural's President and Chief Operating Officer, Steve Laut, in commenting on the Company's quarter end and winter drilling program stated, "The 2006 winter drilling program was challenging in terms of managing both the impacts of unusual weather patterns and general cost pressures. The abnormally warm weather resulted in the majority of our drilling program being executed in March, which is more typically expected in January. The results of the drilling program were excellent; however the timing of the drilling and tie-ins has left at the end of the quarter 70 mmcf/d of natural gas unconnected to sales lines when compared to plan. Due to cost pressures, the Company has made the strategic decision to maintain its planned capital expenditure level which will result in a slight reduction in overall drilling activity. This reduction will be focused primarily on natural gas activity as a result of the significant change in relative pricing between crude oil and natural gas. On the other hand, at the Horizon Project, the warm winter weather has allowed us to achieve progress ahead of plan. To date we have awarded in excess of C$4 billion in contracts compared to a target construction cost of C$6.8 billion, providing a greater degree of cost certainty in this highly inflationary environment."


                                            Three Months Ended
                                        Mar 31     Dec 31     Mar 31
($ millions, except as noted)             2006       2005       2005
Net earnings (loss)                   $     57   $  1,104   $   (424)
 per common share, basic(1)           $   0.11   $   2.06   $  (0.79)
Adjusted net earnings from
 operations(2)                        $    268   $    601   $    380
 per common share, basic(1)           $   0.50   $   1.12   $   0.71
Cash flow from operations(3)          $  1,039   $  1,490   $  1,009
 per common share, basic(1)           $   1.93   $   2.78   $   1.88
Capital expenditures, net of
 dispositions                         $  2,309   $  1,679   $  1,372
Debt to book capitalization(4)              34%        29%        37%
Daily production, before royalties
 Natural gas (mmcf/d)                    1,436      1,423      1,455
 Crude oil and NGLs (bbl/d)            323,662    340,268    287,803
 Equivalent production (boe/d)         563,027    577,505    530,316
(1) Restated to reflect two-for-one common share split in May 2005.
(2) Adjusted net earnings from operations is a non-GAAP term that the
    Company utilizes to evaluate its performance. The derivation of
    this item is discussed in Management's Discussion and Analysis
(3) Cash flow from operations is a non-GAAP term that the Company
    considers key as it demonstrates its ability to fund capital
    reinvestment and debt repayment. The derivation of this item is
    discussed in the MD&A.
(4) Includes current portion of long-term debt.

Quarterly cash flow of $1,039 billion, neutral compared to Q1/05 and a 30% decrease from Q4/05 due to lower price realizations and, as expected, lower sales volumes from Primrose and high netback International operations.

Quarterly net earnings of $57 million compared to a loss of $424 million in Q1/05. First quarter net earnings included:

-- A charge of $110 million for the effect of the UK statutory tax rate changes on future income tax liabilities.

-- A charge of $88 million after tax for revaluation of the stock option liability to reflect stock price appreciation during the quarter.

- Strong quarterly adjusted net earnings from operations of $268 million.

- Strong balance sheet with debt to book capitalization exiting what has historically been our highest capital quarter and lowest cash flow quarter at 34% and debt to EBITDA at 0.8x compared with 37% and 0.9x, respectively, at the end of Q1/05.

- Quarterly production volumes 6% higher than Q1/05.

- North America natural gas production in Q1/06 increased 1% over Q4/05 but decreased 1% from Q1/05 reflecting the impact of delays in the 2006 winter drilling program where more wells were drilled later in the season than originally planned.

- Completed a record first quarter drilling program of 593 net wells, excluding stratigraphic test and service wells, with a 90% success ratio, reflecting Canadian Natural's strong, predictable, low-risk asset base.

- Maintained our strong undeveloped conventional land base in Canada of 11.0 million net acres - a key asset in today's highly competitive industry.

- Continued production improvements at Pelican Lake Field arising from new drilling activity and expansion of enhanced oil recovery strategies. Pelican Lake crude oil production averaged 29 mbbl/d during the quarter, up 62% or 11 mbbl/d from Q1/05 and up 1 mbbl/d from Q4/05. During the quarter, the Company installed the first two polymer skids as part of the commercial polymer flood.

- Completed drilling at East Espoir and are currently mobilizing the drilling rig to the West Espoir tower, which targets production of 13 mboe/d later this year.

- The Development Plan for the Olowi Field was approved by the Government of Gabon for this offshore crude oil development targeting first production in the last quarter of 2008.

- The Horizon Oil Sands Project remained on budget and ahead of schedule, with site preparation and construction work benefiting from a warmer and drier than normal first quarter.

- The first quarter dividend was increased 25% from $0.06 per common share to $0.075 per common share commencing with the April 1, 2006 dividend payment.


In order to facilitate efficient operations, Canadian Natural focuses its activities into core regions where it can dominate the land base and infrastructure. Undeveloped land is critical to our ongoing growth and development within these core regions. Land inventories are maintained to enable continuous exploitation of play types and geological trends, greatly reducing overall exploration risk. By dominating infrastructure, the Company is able to maximize utilization of its production facilities, thereby increasing control over production costs. Further, the Company maintains large project inventories and production diversification among each of the commodities it produces; namely natural gas, light / medium crude oil and NGLs, Pelican Lake crude oil, primary heavy crude oil and thermal heavy crude oil. A large diversified project portfolio enables the effective allocation of capital to higher return opportunities.

Cost pressures and significant changes in relative commodity prices have allowed Canadian Natural the opportunity to utilize its large drilling inventory to maximize value in the short and long-term. Natural gas pricing has softened significantly in early 2006, whereas crude oil prices have remained strong and heavy crude oil differentials have narrowed from over 45% of WTI in the first quarter of 2005 to the current differential of approximately 29% of WTI range in Q2/06 resulting in record heavy oil pricing at the wellhead.

As a result of increased drilling and completion costs, Canadian Natural has made the strategic decision to maintain its planned capital expenditure level which will result in a slight reduction in overall drilling activity. This reduction will be focused primarily on natural gas activity as a result of the significant change in relative pricing between crude oil and natural gas.

As a result of this strategic decision, Canadian Natural will drill 150 fewer natural gas wells than originally planned in 2006, a 13% reduction, while maintaining crude oil drilling at planned 2006 levels. This will allow Canadian Natural to maximize near term returns in a high crude oil price environment, and reduce overall activity in a highly inflationary cost environment.

- Q1/06 natural gas production represented a 1% increase over the previous quarter despite warmer than normal weather influencing the winter drilling program. As such the Company drilled more wells in March than in January. Despite these challenges Canadian Natural completed the majority of its winter drilling program with a high success rate. However, the shift in the timing of drilling from early in the season to later in the season significantly delayed tie-ins of many of these new wells.

- As a result of the back loaded drilling program, approximately 70 mmcf/d of natural gas production remained behind pipe at the end of the quarter. Some locations will be tied-in during the second, third and fourth quarters, however it is estimated that 20-30 mmcf/d will remain stranded until freeze up in late Q4/06 or early Q1/07.

- High success rates reflect Canadian Natural's low-risk exploitation approach and high quality land base. The Q1/06 drilling program represented an active program across the Company's core regions. In Northeast British Columbia 191 net wells targeting natural gas were drilled, while in Northwest Alberta 80 net wells were drilled, including 37 Cardium targets. In Northern and Southern Plains, a total of 26 coal bed methane, 23 shallow natural gas and 179 conventional net wells were drilled.

- The results of our Q1 natural gas program met expectations in terms of reserve and rate expectations, and were within our economic criteria. However, with service costs continuing to escalate and relatively strong crude oil prices compared to natural gas prices, the Company has made the strategic decision to drill 150 fewer (13% less than originally planned) natural gas wells in 2006.

- This reduction in planned drilling activity and the delays in getting our Q1/06 drilling program tied in have resulted in a small adjustment of less than 2% to the mid point of our annual corporate guidance for natural gas production volumes reflecting the strength and quality of our natural gas drilling program.

- Planned drilling activity for the second quarter of 2006 includes 66 wells targeting natural gas.

- During the quarter, drilling activity included 33 wells targeting heavy crude oil and 15 wells targeting light crude oil. The majority of the wells, 79 of 90 net wells, targeting crude oil during Q1/06 were drilled in the Northern Plains core region.

- The Primrose Field development continued with the drilling of 20 net wells in Q1/06. Production from the pads at Primrose is subject to the cycling of steam injection and crude oil production. Due to normal cycling activities as well as the addition of new well pads from Primrose North, average thermal crude oil production levels in Q1/06 were 8 mbbl/d or 14% lower than Q4/05 but slightly better than originally anticipated. Production volumes are expected to increase in Q2/06 and will ramp up to approximately 75 mbbl/d in Q3/06 resulting in peak production from the area as the crude oil processing plant approaches its design capacity.

- The Primrose East expansion program continues through the regulatory phase and, if approved, will see the expansion of the crude oil processing facility from 80 mbbl/d to 120 mbbl/d ,as well as, the construction of a steam generation plant and new pad drilling which will add production gains targeted at 30 mbbl/d in 2009.

- At Pelican Lake the development of new acreage and secondary recovery conversion projects continued as planned. Drilling consisted of 22 horizontal producing wells, 13 stratigraphic wells and four water source wells. During the remainder of 2006 the Company plans to drill an additional 117 wells at Pelican Lake. Production increased from 28 mbbl/d in Q4/05 to 29 mbbl/d in Q1/06. The North Brintnell waterflood conversion project was expanded by 744 acres. Pressure response data from the polymer flood pilot remains on track with expectations. Also at the project, Canadian Natural commenced installation of the first two polymer skids as part of the commercial polymer flood project.

- Planned drilling activity for the second quarter includes 87 net crude oil wells.

Canadian Natural Upgrader Project

Originally announced in the fall of 2005, the Company remains on track with its plans to design, construct and operate a heavy oil upgrader to process its conventional heavy and thermal heavy crude oil production. The Scoping Study for the Canadian Natural Upgrader was initiated during the quarter. The terms of reference for this study will evaluate end product alternatives, location, technology, gasification and integration with existing assets. Recommendations are expected in late 2006 / early 2007 and represent the first stage of front end loading for the project. This is the same disciplined approach utilized in the Horizon Project. Following this Study, the Design Basis Memorandum and Engineering Design Specification will be completed prior to construction and sanctioning of the project by the Board of Directors.

This upgrader is expected to enable the Company to unlock significant shareholder value through the development and upgrading of over 3 billion barrels of thermal in-situ oil sands resources over the next 15 years. The project is expected to be undertaken in two phases with the first phase targeting upgrading capacity of 125 mbbl/d of SCO with a current forecast start-up date in 2012.


The Company operates in the North Sea and Offshore West Africa where production of lighter quality crude oil is targeted, but natural gas may be produced in association with crude oil production.

North Sea

- Canadian Natural continues to execute its exploitation strategy in the North Sea. The first stage of this exploitation program is based upon optimizing existing facilities and waterfloods. Canadian Natural continues to apply this first stage of exploitation on its holdings in the North Sea. The second stage of exploitation incorporates more near pool development and exploration in order to maximize utilization of the common facilities and ultimately extend all fields' economic lives. In 2006 and beyond, increasing emphasis on this type of work is evidenced by the ongoing development at the Columba Terraces and the Lyell Field.

- During Q1/06, 2.8 net wells, including 0.9 net water injectors, were drilled with an additional 3.9 net wells drilling over quarter end. Production levels were in line with expectations and reflected growth at Columba D Terrace and Ninian Field and expected temporary curtailments at the Lyell Field and the Columba E Terrace as well as temporary restrictions at B-Block and Playfair Fields.

- The prolific new well drilled into the Columba D Terrace during Q4/05 declined in line with expectation. In February, additional pay was perforated in this well which yielded a 6 mbbl/d initial uplift, net to Canadian Natural, and a water injector to support this developed production was completed during the quarter. At quarter end, an early positive waterflood re-pressuring response was observed.

- On the Ninian Field, the platform rig completed a Ninian Central producer, which was brought onstream towards the end of the quarter at a rate of 8.7 mbbl/d, net to Canadian Natural.

- Construction of the subsea water injection pump at Columba E Terrace progressed during the quarter. This will be tied into 2 additional subsea water injection wells that will be drilled late in 2006. This repressurization of the pool, combined with artificial lift will result in increased productive capacity from the existing long reach wells.

- Plans for the further development of the Lyell Field progressed, which entails drilling 4 net wells and working over 2 existing net wells in 2006/7. At its plateau, new production of approximately 20 mboe/d is forecast from this field.

- During Q1/06, 4.2 net wells were drilled with an additional 3.9 net wells drilling at quarter end. Production levels were in line with expectations and reflected expected curtailments at the Lyell Field and the Columba B and E Terraces as well as continued restrictions at Murchison due to facilities maintenance and normally expected production declines at the satellite Playfair well.

Offshore West Africa

- During Q1/06, 2.3 net wells were drilled with an additional 0.6 net wells drilling over quarter end. Production levels were ahead of expectation, primarily due to early delivery of planned wells at both Baobab and East Espoir. Some curtailment of production was experienced due to planned outages to tie these wells in.

- At Baobab, peak crude oil production reached 52 mbbl/d (33 mmbbl/d net to Canadian Natural) during the quarter and averaged 25 mbbl/d net to Canadian Natural. The eighth production well continues to experience production restrictions due to limitations resulting from monitoring sand screen effectiveness. During the first quarter two additional production wells were drilled resulting in an initial uplift of 10 mbbl/d net to Canadian Natural. Production is expected to remain constant at Q1 average levels until the sand screen effectiveness issues are resolved on the eighth producer and as cleanup continues on the new wells.

- Net production at East Espoir was in line with Q4/05, and averaged 15 mboe/d during Q1/06 following the build-up of production from the infill drilling program. The infill drilling program consisted of 4 wells, with the 2 remaining wells now completed and the field currently producing at a record level of 20 mbbl/d, net to Canadian Natural.

- At Espoir, drilling is now complete on the East Espoir Field with the rig being moved from East Espoir tower to the West Espoir tower in Q2. The West Espoir project continues on time and on budget with first crude oil production expected in the second half of 2006, ramping up to 13 mboe/d when fully developed. During the quarter, the West Espoir drilling tower, which will facilitate development drilling of this reservoir, was installed and the drilling conductors were driven to depth.

- Following the review of 3-D seismic previously acquired on Block CI-400, located offshore Cote d'Ivoire, the Company has relinquished its rights.

- In Gabon, a development plan comprising a Floating Production Storage and Offtake Vessel and four drilling towers was approved for execution by the Government in the first quarter of 2006. The development is expected to commence in late 2006 with first production targeted for late 2008 to reach a plateau rate of 20 mbbl/d. The permit comprises a 90% interest in the production sharing agreement for the block containing the Olowi Field, located about 20 kilometers from the Gabonese coast and in 30 meters water depth. Olowi has been delineated by the drilling of 15 wells on the block and potentially contains as much as 500 million barrels of 34 degree API light crude oil originally in place. The crude oil reservoir is overlain by a large gas cap with potentially one trillion cubic feet of gas originally in place.

Horizon Oil Sands Project ("Horizon Project")

- Phase 1 of the Horizon Project continues on plan and on budget. First production of 110 mbbl/d of light, sweet Synthetic Crude Oil from Phase 1 construction is targeted to commence in the second half of 2008. Production is targeted to increase to 155 mbbl/d following completion of Phase 2 in 2010. Production levels of 232 mbbl/d are targeted for 2012, following completion of Phase 3 construction. The Company is currently evaluating the opportunity to combine Phase 2 and 3 for a targeted joint operational date of 2011.

- As a result of the mild winter weather conditions experienced in early 2006, the progress on major milestones, a key component in achieving critical path success, are slightly ahead of schedule.

- The high degree of up front project engineering and pre-planning has reduced the risks on "cost-plus" aspects of the project and will mitigate the risk of scope changes on the fixed bid portions (targeted at 68% of Phase 1 costs). The pre-engineering and lessons learned from predecessors have also enabled the Company to prepare a detailed development and logistical plan to reduce the scheduling risk. Geological risk is considered low on the Company's mining leases as over 16 delineation wells have been drilled per section with over 40 wells per section having been drilled on the south pit, which will be the first to be mined. Finally, technology risk is low as the Company is using existing proven technologies for mining, extraction and upgrading processes.

- Construction capital costs for Phase 1 of the Horizon Project are budgeted at $6.8 billion, including a contingency fund of $700 million, with $1.9 billion spent to date, $2.0 billion targeted to be incurred in the remainder of 2006 and $2.9 billion targeted to be incurred in 2007 and 2008.

- During the first quarter of 2006, major milestones were achieved sooner than expected and safety performance remained ahead of target. The placement of the four coke drums, each weighing 400 tonnes, was completed. The first piperack modules were also placed on foundations and we continue to place additional modules on an ongoing basis. The new 40m3 hydraulic shovel is being commissioned and sufficient overburden is expected to be removed to enable the start of construction of the Ore Preparation Plant during the second quarter.

Accomplished During the First Quarter

Detailed Engineering

- Completed 60% of detailed engineering model reviews in all areas.

- Completed hazard and operability reviews for all plants, a major hurdle to ensure scope changes are not required.


- Awarded in excess of C$200 million of contracts and purchase orders in the quarter bringing awards-to-date to over C$4 billion, with a further C$600 million in various stages of the tender process.

- Awarded key Mechanical contracts for Bitumen Production.

- Completed "Contractor Open House" sessions across Canada to attract new contractors and skilled trades people to the oil sands industry. Over 300 contractors participated in these sessions.

- Completed transport of naphtha reactor to site from the rail staging area south of Fort McMurray.

- Site assembly of gas oil and distillate reactors on track for completion in the fourth quarter.

- Issued purchase orders for long lead equipment (cokers and reactors) for Phase 2 and 3 upgrading.


- Delivered 164 oversized loads to site, out of approximately 1,500 total loads to be delivered during the construction period.


- Site safety performance remains ahead of benchmarked targets.

- Delivered four coke drums to site as planned and erected on schedule.

- Started setting of piperack modules on foundations.

- Commissioned operation of permanent water and waste water treatment plants.

- Main administration building, security building, plant maintenance shop and fire hall were completed and occupied.

- Mine overburden removal has moved 10.8 million bcm (bank cubic meters) compared to a plan of 10.4 million bcm with commissioning of a new 40m3 hydraulic shovel planned for the second quarter.

- Completed 98% of site preparation and undergrounds.

Second Quarter 2006 Milestones

- Overall detailed engineering to surpass 80% completion.

- Occupancy of the second of three camps.

- New 40m3 shovel expected to be in operation for mine overburden removal.

- Occupation of Mine Overburden Administration and Maintenance Facility to take place.

- Ore Preparation Plant site turnover by Mining to Bitumen Production.

Despite having averaged 45% of WTI during Q1/06, heavy crude oil differentials have narrowed significantly in the second quarter coincident with the reversal of the Corsicana and Spearhead Pipelines, a third party outage, as well as the start of the high demand paving season. The Company has committed to 25 mbbl/d of new pipeline capacity on the reversal of the Corsicana Pipeline which carries heavy crude oil from the terminus of the current pipeline sales lines at Patoka, Illinois to the east Texas refining complex near Nederland. This pipeline was commissioned in late March with Canadian Natural's first sales deliveries reaching Nederland on April 6, 2006.

- During the first quarter, the Company contributed approximately 156 mbbl/d of its heavy crude oil streams to the Western Canadian Select ("WCS") blend as market conditions resulted in this strategy offering the optimal pricing for bitumen.

- The price for natural gas was 20% lower than in the previous quarter, reflecting the warmest month of January on record for North America. The demand in the first quarter was unusually weak, which resulted in the highest gas inventory position at the end of March since 1991. Weather and relative value to crude oil pricing will greatly impact the pricing level over the next several months.


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