Letter from Syncrude's Leaders

As business leaders, we aim to generate wealth from the Syncrude operation by cost effectively producing Syncrude Sweet Blend, our signature crude oil product.

As responsible producers, we see value in minimizing impacts of the Syncrude operation on air, land and water through the application of best practices, and new technologies and processes.

As citizens of our communities, we try to be involved in the things that make them better places for all who live there. And, as parents, we make every effort to shape a promising future for our children.

To us, these are all important sustainability measures. Each demands our collective attention and influence and that is why we discuss them in the pages of this report. As readers will learn, opportunity—and challenge—is presented in many forms. On the business front, for example, 2005 provided ample doses of both for Syncrude and our stakeholders.

We closed the year with Syncrude Sweet Blend production of 78.1 million barrels, down from 87.2 million barrels in 2004, due to extensive maintenance turnarounds on key operating units and operational difficulties on other units.

Operating costs were higher than anticipated at $26.59 per barrel, as compared to $18.61 in 2004. This was due to lower than planned production, higher costs for purchased energy and catalyst, and higher costs for maintenance activity.

Substantial progress was made on Syncrude’s Stage 3 expansion, the largest component of which is a nearly 50 per cent increase in production capacity at our Mildred Lake upgrader. Construction on the upgrader is now complete, and most of the new units have been placed into service.

The Stage 3 expansion will enable an increase in Syncrude’s production of our value-added product for decades to come and, at the same time, reduce costs by capturing volume efficiencies.

It also fuels a continued positive impact on the Alberta and Canadian economies. Indeed, the procurement of contracted services, materials and supplies comprised nearly 70 per cent of Syncrude’s total spending of $4.7 billion in 2005, while payments to governments totalled $281 million. Our payroll was valued at about $564 million. As these indicators suggest, a broad range of stakeholders see economic benefit from our business activities.

At the same time, continued investment in research and new technologies—Syncrude operates one of the oil sands industry’s few dedicated research facilities—is helping reduce Syncrude’s impact on our shared environment. By the end of 2006, for example, total emissions of sulphur compounds are expected to fall by 20 per cent from current regulated levels as a result of a major investment in flue gas scrubbing technology. By the end of the decade, these emissions will be reduced further, by 60 per cent from current approved levels, even as crude oil production rises. Emissions of particulate matter also will be significantly reduced.

Syncrude continues to become more efficient in its use of fresh water by increasingly relying on recycled water. In fact, about 80 per cent of our water needs are met by a continuous recycle system. This has reduced fresh water intake to about 2.3 cubic metres per cubic metre of crude oil produced, making Syncrude the industry leader in this area.

Our commitment to return former mining land to a natural state is also moving forward, with 22 per cent of total land disturbed now reclaimed. Toward continued progress, Syncrude regularly consults with local stakeholders to develop sustainable end land use designs. These designs reflect the best that traditional environmental knowledge and modern science have to offer.

Reclamation is just one subject among many that come to the fore through Syncrude’s ongoing work with local stakeholders. We seek input on all aspects of our development plans and are extensively involved in multi-party mechanisms to manage the regional effects of oil sands development.

Recently, one of the most topical subjects has been around the capacity of regional infrastructure to cope with rapid industrial growth. Syncrude, through the Regional Issues Working Group, and in cooperation with community leaders, has worked closely with the provincial government to take action on a variety of infrastructure needs. This includes provincial government funding commitments for roads and highways, the release of Crown land for housing and bridge financing for a wastewater treatment plant.

While stresses will continue to be felt for a few more years, Fort McMurray remains a thriving community. This is due in large part to a strong culture of voluntarism, which Syncrude employees help foster through their own extensive volunteer activities. The Syncrude Good Neighbours program encourages their involvement in community betterment by providing grants to the organizations for which they volunteer.

Similarly, Syncrude’s community investment program directed significant funding in 2005 to projects that will improve health care, put food on the table for the less fortunate and enhance educational outcomes, among other initiatives.

We also work with the region’s Aboriginal communities to create positive impacts from Syncrude’s presence. Recently, they helped shape a continued sustainable relationship with Syncrude through their involvement in a major review of our Aboriginal Development program. This review will ensure the program is targeted, focused and appropriately resourced, providing maximum benefit for Aboriginal people in the areas of employment, business procurement, community development, education and the environment.

In our view, the future holds much promise for the people of our company and our region. Syncrude is working to provide them with opportunity—and sustain our growing operation— by investing in initiatives that enhance the capability of people to contribute to our success.

In fact, our success in welcoming more than 550 new employees in 2005, about 70 per cent of who were hired locally, can be attributed in part to our ongoing work to build workforce capacity through many collaborative partnerships with educators, businesses, industry associations and governments.

During the year, Syncrude also provided scholarships for post-secondary studies to 409 children of current employees, and to other deserving students. As well, we supported the ongoing learning of 136 employees through tuition refunds.

Syncrude’s continuing efforts to be a good employer extend to many other areas, including an industry-leading compensation and benefits program, career development initiatives, and perhaps most important of all, a safe and healthy workplace. Toward the latter, diligence among employees and contractors once again resulted in stellar safety performance; in fact, our lost-time injury rate was the lowest ever, at 0.05 injuries per 100 person years worked, despite constructing major new units in and around an active operating environment.

Syncrude made substantial progress on enhancing internal business controls in 2005, and this work will be completed by the end of 2006 to ensure compliance with regulatory requirements. We also conducted a thorough review of all policies and procedures related to ethics and business conduct. As part of this, a new Corporate Conduct Committee was formed to steward their application. We are confident that these efforts will continue to ensure the highest level of ethical conduct within the Syncrude organization.

For opportunity to be realized, it must first be identified and then pursued. At Syncrude, that’s what we are doing in all our areas of endeavour. We recognize that opportunity means different things to different people, whether it is a challenge to overcome or simply the opportunity to do better.

Indeed, our corporate Vision and Values guide us on making responsible decisions that always respect our local communities, investors, customers, the environment and our people. To us, opportunity is the driving factor that will encourage all of our stakeholders to invest in our future.

Marcel Coutu Chairman	Charles Ruigrok Chief Executive Officer	Jim Carter President and Chief Operating Officer