Canadian Oil Sands Announces Second Quarter 2012 Financial Results 

Canadian Oil Sands Announces Second Quarter 2012 Financial Results

CALGARY, ALBERTA, Jul 27, 2012 (Menafn - MARKETWIRE via COMTEX) --Canadian Oil Sands Limited (otcqx:COSWF)

All financial figures are unaudited and in Canadian dollars unlessotherwise noted.

Highlights for the three and six-month periods ended June 30,2012:

--COS has declared a quarterly dividend of 0.35 per Share. The dividend
will be paid on August 31, 2012 to Shareholders of record on August 27,
2012.
--Cash flow from operations decreased 55 per cent to 245 million (0.51
per Share) in the second quarter of 2012 from 544 million (1.12 per
Share) in the second quarter of 2011. The decrease was due mainly to
lower sales volumes, a lower average realized selling price and higher
operating expenses, partially offset by lower Crown royalties. Year-to-
date cash flow from operations decreased 32 per cent to 699 million
(1.44 per Share) in 2012 from 1,022 million (2.11 per Share) in the
same 2011 period. The decline is due mainly to lower sales volumes and a
lower average realized selling price, partially offset by lower Crown
royalties.
--Net income decreased to 101 million (0.21 per Share) in the second
quarter of 2012 from 346 million (0.71 per Share) in the second
quarter of 2011. Year-to-date net income decreased to 422 million
(0.87 per Share) in 2012 from 670 million (1.38 per Share) in 2011.
In addition to the factors affecting cash flow from operations, 2012 net
income was impacted by variances in deferred taxes and foreign exchange
gains and losses.
--The second quarter 2012 realized selling price averaged 90.45 per
barrel compared with 111.00 per barrel in the 2011 second quarter,
reflecting a 5.45 per barrel weighted-average Synthetic Crude Oil
("SCO") discount to WTI and a lower WTI crude oil price, partially
offset by a weaker Canadian dollar in 2012. The realized selling price
in the first six months of 2012 averaged 94.06 per barrel compared with
101.34 per barrel in the 2011 comparative period, reflecting a
weighted-average SCO to WTI discount of 5.70 per barrel and a lower WTI
crude oil price, partially offset by a weaker Canadian dollar in 2012.
--Sales volumes averaged about 90,000 barrels per day in the second
quarter of 2012 compared with 103,000 barrels per day in the 2011 second
quarter, reflecting the planned Coker 8-3 and Vacuum Distillation Unit
turnarounds in 2012. Year-to-date, sales volumes averaged about 99,000
barrels per day compared with 112,000 barrels per day in the 2011
period.
--Operating expenses in the second quarter of 2012 increased to 50.66 per
barrel from 37.07 per barrel in the second quarter of 2011, primarily
reflecting lower production volumes and higher turnaround expenses due
to the planned major maintenance in 2012. Year-to-date, operating
expenses in 2012 increased to 40.83 per barrel from 36.24 per barrel
in the comparative 2011 period due to lower production volumes in 2012.
Total operating expenses year-to-date in 2012 were unchanged from 2011.

"Our second quarter results are in-line with our expectations, andreflect the successful planned turnarounds of the Coker 8-3 complexand the Vacuum Distillation Unit. With these main upgrading units nowback in operation and no major maintenance planned for the remainderof the year, we expect robust production over the balance of 2012,"said Marcel Coutu, President and Chief Executive Officer. "Wecontinue to be well positioned with a strong balance sheet to fundremaining expenditures for Syncrude's major capital projects,including the centrifuge project announced today."

Mr. Coutu added: "Our strategy has always been to manage a strongbalance sheet to support our unhedged crude oil position and evenmore so during high capex periods such as now. As our current majorcapital projects approach completion in 2014, we expect our net debtposition to return to a range of 1 billion to 2 billion while wedeploy our outstanding cash balances of 1.6 billion to help fundexpenditures and dividends."

Highlights

Three Months EndedSix Months Ended
June 30June 30
( millions, except per Share
and volume amounts)2012201120122011
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Cash flow from operations(1)245 544 699 1,022
Per Share(1)0.51 1.12 1.44 2.11
Net income101 346 422 670
Per Share, Basic and Diluted0.21 0.71 0.87 1.38
Sales volumes(2)
Total (mmbbls)8.29.318.020.2
Daily average (bbls)89,597102,93898,853111,867
Realized SCO selling price
(/bbl)90.45 111.00 94.06 101.34
West Texas Intermediate (average
US/bbl)93.35 102.34 98.15 98.50
Operating expenses (/bbl)50.66 37.07 40.83 36.24
Capital expenditures292 140 433 249
Dividends170 145 315 242
Per Share0.35 0.30 0.65 0.50
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(1) Cash flow from operations and cash flow from operations per Shareare non-GAAP measures and are defined on page 5 within theManagement's Discussion and Analysis ("MD&A") section of this report.

(2) The Corporation's sales volumes differ from its productionvolumes due to changes in inventory, which are primarily in-transitpipeline volumes. Sales volumes are net of purchases.

Syncrude operations

Syncrude produced an average 239,000 barrels per day (total 21.7million barrels) during the second quarter of 2012 compared with281,000 barrels per day (total 25.6 million barrels) during the same2011 period. The decrease reflects the planned turnaround of Coker8-3 and the Vacuum Distillation Unit compared with no majormaintenance activity during the 2011 second quarter. Coker 8-3 andthe Vacuum Distillation Unit returned to service in early July 2012.

Syncrude reached another important target in its efforts to increasecapacity utilization rates by achieving a run length of 36 months forCoker 8-3. This is the second time in the past 12 months thatSyncrude has achieved a coker run length of 36 months, with Coker 8-2achieving this milestone in the fall of 2011. Coker run lengths of 36months are a marked improvement over average coker run lengths atSyncrude of 28 months for the past five years, and are fundamental inincreasing overall production rates.

Year-to-date, Syncrude produced an average 267,000 barrels per day(total 48.5 million barrels) in 2012 compared with 301,000 barrelsper day (total 54.5 million barrels) in 2011. In addition to thefactors affecting second quarter production, volumes for the firsthalf of 2012 reflect maintenance on Coker 8-1 in the first quarterwhile production in the first half of 2011 had no interruptions formajor maintenance.

Centrifuge Project Update

Syncrude is planning to construct a centrifuge plant as part of itsmulti-pronged approach to manage tailings and comply with governmentregulations, as specified in the Energy Resources and ConservationBoard (ERCB) Directive 074. The plant is estimated to cost 1.9billion (0.7 billion net to COS), reflecting a fully-engineered costestimate with an estimated accuracy range of plus or minus 15 percent. Construction of the plant is expected to be completed in thefirst half of 2015.

Syncrude has piloted centrifuge technology, compared it toalternative methods for processing tailings and believes centrifugetechnology is an effective solution for meeting the requirements ofits plan submitted under Directive 074. Centrifuge technologyproduces a soft, clay-rich soil that can be used in Syncrude'sreclamation efforts. Syncrude continues to work with other oil sandsoperators as part of the Canadian Oil Sands Innovation Alliance(COSIA) to research and develop tailings management technologies.

More information on Syncrude's tailings management plan, includingvideos on centrifuge technology, is available at:http://www.cdnoilsands.com/sustainability/Environmental-Sustainability/Tailings-Management/default.aspx

2012 Outlook

Canadian Oil Sands has revised its outlook for 2012, which includesthe following estimates and assumptions:

--Annual Syncrude production of 110 million barrels (301,000 barrels per
day) with a range of 106 to 112 million barrels. Net to Canadian Oil
Sands, this is equivalent to 40.4 million barrels (110,000 barrels per
day). The 110 million barrel estimate assumes robust production without
major interruptions for the remainder of the year. No major maintenance
is planned for the second half of 2012.
--We are estimating an 84 per barrel plant-gate realized selling price,
which assumes a U.S. 90 per barrel WTI oil price, a SCO discount to Cdn
dollar WTI of 7 per barrel and a foreign exchange rate of 0.99
U.S./Cdn.
--We estimate 2012 operating expenses of 1,514 million, or 37.46 per
barrel, reflecting actual costs incurred to date and a reduced natural
gas price assumption of 2.50 per gigajoule.
--Our estimate for 2012 capital expenditures has decreased by 95 million
to 1,124 million. The expected completion dates and estimated costs for
the major projects are not affected.
--We expect current taxes of approximately 40 million in 2012 and
approximately 350 million in 2013, based on the assumptions in our 2012
outlook and the estimated timing of tax deductions for capital
expenditures.
--We are estimating 2012 cash flow from operations of 1,461 million, or
3.02 per Share. After deducting forecast 2012 capital expenditures, we
estimate 337 million in remaining cash flow from operations for the
year, or 0.69 per Share.
--We expect cash levels to decrease significantly from the current 1.6
billion as we fund the major capital projects, repay the 2013 debt
maturity and fund dividends. As a result, net debt levels should rise to
a more normalized level of 1 billion to 2 billion by the end of 2014,
coincident with the reduced capital risk from the completion of our
major capital projects.

More information on the outlook is provided in the Management'sDiscussion and Analysis ("MD&A") section of this report and the July27, 2012 guidance document, which is available on our web site atwww.cdnoilsands.com under "Investor Information".

The 2012 Outlook contains forward-looking information and users arecautioned that the actual amounts may vary from the estimatesdisclosed. Please refer to the "Forward-Looking Information Advisory"in the MD&A section of this report for the risks and assumptionsunderlying this forward-looking information.

Management's Discussion and Analysis

The following Management's Discussion and Analysis ("MD&A") wasprepared as of July 27, 2012 and should be read in conjunction withthe unaudited consolidated financial statements and notes thereto ofCanadian Oil Sands Limited (the "Corporation") for the three and sixmonths ended June 30, 2012 and June 30, 2011, the auditedconsolidated financial statements and MD&A of the Corporation for theyear ended December 31, 2011 and the Corporation's Annual InformationForm ("AIF") dated February 23, 2012. Additional information on theCorporation, including its AIF, is available on SEDAR atwww.sedar.com or on the Corporation's website at www.cdnoilsands.com.References to "Canadian Oil Sands" or "we" include the Corporation,its subsidiaries and partnerships. The financial results of CanadianOil Sands have been prepared in accordance with Canadian GenerallyAccepted Accounting Principles ("GAAP") and are reported in Canadiandollars, unless stated otherwise.

Forward Looking Information Advisory

In the interest of providing the Corporation's shareholders andpotential investors with information regarding the Corporation,including management's assessment of the Corporation's futureproduction and cost estimates, plans and operations, certainstatements throughout this MD&A and the related press release 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 wordssuggesting future outcomes.

Forward-looking statements in this MD&A and the related press releaseinclude, but are not limited to, statements with respect to: theexpectations regarding the 2012 annual Syncrude forecasted productionrange of 106 million barrels to 112 million barrels and thesingle-point Syncrude production estimate of 110 million barrels(40.4 million barrels net to the Corporation);future dividends andany increase or decrease from current payment amounts; theestablishment of future dividend levels with the intent of absorbingshort-term market volatility over several quarters; the level ofnatural gas consumption in 2012 and beyond; the expected sales,operating expenses, Crown royalties, capital expenditures and cashflow from operations for 2012; the anticipated amount of currenttaxes in 2012 and 2013; the expectation that proceeds from the March2012 senior note offering will be used to repay U.S. 300 million ofsenior notes which mature on August 15, 2013, to fund major capitalprojects over the next three years and for general corporatepurposes; expectations regarding the Corporation's cash levels overthe next several years; the expected price for crude oil and naturalgas in 2012; the expected foreign exchange rates in 2012; theexpected realized selling price, which includes the anticipateddifferential to West Texas Intermediate ("WTI") to be received in2012 for the Corporation's product; the expectations regarding netdebt; the anticipated impact of increases or decreases in oil prices,production, operating expenses, foreign exchange rates and naturalgas prices on the Corporation's cash flow from operations; theexpectation that regular maintenance capital costs will averageapproximately 10 per barrel over the next few years; the expectedamount of total major project costs, anticipated target in-servicedates and estimated completion percentages for the Mildred Lake minetrain replacements, the Aurora North mine train relocations, thecomposite tails plant at the Aurora North mine and the centrifugeplant at the Mildred Lake mine; the anticipated target in-servicedate for the Syncrude Emissions Reduction ("SER") project; theexpectation that the Corporation will finance the major projectsprimarily with cash flow from operations and existing cash balances;the cost estimates for 2012 to 2015 major project spending; theexpectation that the volatility in the SCO to WTI differential islikely to persist for several years until sufficient pipelinecapacity is available to deliver crude oil from western Canada toCushing, Oklahoma or the United States gulf coast; and the beliefthat centrifuge technology is an effective solution for meetingSyncrude's requirements of its plan submitted under Directive 074.

You are cautioned not to place undue reliance on forward-lookingstatements, as there can be no assurance that the plans, intentionsor expectations upon which they are based will occur. By theirnature, 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 representedby such forward-looking statements are reasonable and reflect thecurrent views of the Corporation with respect to future events, therecan be no assurance that such assumptions and expectations will proveto be correct.

The factors or assumptions on which the forward-looking informationis based include, but are not limited to: the assumptions outlined inthe Corporation's guidance document as posted on the Corporation'swebsite at www.cdnoilsands.com as of July 27, 2012 and assubsequently amended or replaced from time to time, including withoutlimitation, the assumptions as to production, operating expenses andoil prices; the successful and timely implementation of capitalprojects; the ability to obtain regulatory and Syncrude joint ventureowner approval; our ability to either generate sufficient cash flowfrom operations to meet our current and future obligations or obtainexternal sources of debt and equity capital; the continuation ofassumed tax, royalty and regulatory regimes and the accuracy of theestimates of our reserves and resources volumes.

Some of the risks and other factors which could cause actual resultsor events to differ materially from current expectations expressed inthe forward-looking statements contained in this MD&A and the relatedpress release include, but are not limited to: the impacts oflegislative or regulatory changes especially as such relate toroyalties, taxation, the environment and tailings; the impact oftechnology on operations and processes and how new complex technologymay not perform as expected; skilled labour shortages and theproductivity achieved from labour in the Fort McMurray area; thesupply and demand metrics for oil and natural gas; the impact thatpipeline capacity and refinery demand have on prices for ourproducts; the unanimous joint venture owner approval for majorexpansions and changes in product types; the variances of stockmarket activities generally; global economic conditions/volatility;normal risks associated with litigation, general economic, businessand market conditions; the impact of Syncrude being unable to meetthe conditions of its approval for its tailings management plan underDirective 074; volatility of crude oil prices; volatility of the SCOto WTI price differential; unsuccessful or untimely implementation ofcapital or maintenance projects and such other risks anduncertainties described in the Corporation's AIF dated February 23,2012 and in the reports and filings made with securities regulatoryauthorities from time to time by the Corporation which are availableon the Corporation's profile on SEDAR at www.sedar.com and on theCorporation's website at www.cdnoilsands.com.

You are cautioned that the foregoing list of important factors is notexhaustive. Furthermore, the forward-looking statements contained inthis MD&A and the related press release are made as of July 27, 2012,and unless required by law, the Corporation does not undertake anyobligation to update publicly or to revise any of the includedforward-looking statements, whether as a result of new information,future events or otherwise. The forward-looking statements containedin this MD&A and the related press release are expressly qualified bythis cautionary statement.

Non-GAAP Financial Measures

In this MD&A and the related press release, we refer to financialmeasures that do not have any standardized meaning as prescribed byCanadian GAAP. These non-GAAP financial measures include cash flowfrom operations, cash flow from operations on a per Share basis, netdebt, total net capitalization, total capitalization, net debt tototal net capitalization, and total debt to total capitalization. Inaddition, the Corporation refers to various per barrel figures, suchas net realized selling prices, operating expenses and Crownroyalties, which also are considered non-GAAP measures. We derive perbarrel figures by dividing the relevant sales or cost figure by oursales volumes, which are net of purchased crude oil volumes in aperiod. Non-GAAP financial measures provide additional informationthat we believe is meaningful regarding the Corporation's operationalperformance, its liquidity and its capacity to fund dividends,capital expenditures and other investing activities. Users arecautioned that non-GAAP financial measures presented by theCorporation may not be comparable with measures provided by otherentities.

Cash flow from operations is calculated as cash from operatingactivities, as reported on the Consolidated Statement of Cash Flows,before changes in non-cash working capital. Cash flow from operationsper Share is calculated as cash flow from operations divided by theweighted-average number of Shares outstanding in the period. Webelieve cash flow from operations, which is not impacted byfluctuations in non-cash working capital balances, is more indicativeof operational performance. The majority of our non-cash workingcapital is liquid and typically settles within 30 days.

Cash flow from operations is reconciled to cash from operatingactivities as follows:

Three Months EndedSix Months Ended
June 30June 30
( millions)2012201120122011
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Cash flow from operations245 544699 1,022
Change in non-cash working
capital(1)117(17)229(36)
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Cash from operating
activities(1)362 527928 986
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(1) As reported in the Consolidated Statements of Cash Flows.

Review of Syncrude Operations

Synthetic Crude Oil ("SCO") production from the Syncrude JointVenture ("Syncrude") during the second quarter of 2012 totalled 21.7million barrels, or 239,000 barrels per day, compared with 25.6million barrels, or 281,000 barrels per day, in the comparative 2011period. Production in the 2012 second quarter reflects the plannedturnarounds of Coker 8-3 and the Vacuum Distillation Unit while therewas no major maintenance activity during the 2011 second quarter.Both Coker 8-3 and the Vacuum Distillation Unit returned to servicein early July 2012. Net to the Corporation, production totalled 8.0million barrels in the second quarter of 2012 compared with 9.4million barrels in the second quarter of 2011, based on Canadian OilSands' 36.74 per cent working interest in Syncrude.

Year-to-date, Syncrude produced 48.5 million barrels in 2012, or267,000 barrels per day, compared with 2011 when production totalled54.5 million barrels, or 301,000 barrels per day. Production volumesfor the first half of 2012 reflect maintenance on Coker 8-1 in thefirst quarter and the planned Coker 8-3 and Vacuum Distillation Unitturnarounds in the second quarter. Comparatively, production in thefirst half of 2011 was not affected by interruptions for majormaintenance. Net to the Corporation, production totalled 17.8 millionbarrels in the first half of 2012 compared with 20.0 million barrelsin the comparative 2011 period, based on Canadian Oil Sands' 36.74per cent working interest in Syncrude.

Canadian Oil Sands' operating expenses in the second quarter of 2012increased 13.59 per barrel to 50.66 per barrel from 37.07 perbarrel in the second quarter of 2011. The increase reflects lowerproduction volumes and higher turnaround expenses due to the plannedmajor maintenance, increased expense for Syncrude's long-termincentive plans, and more routine maintenance activity, partiallyoffset by decreased purchased energy costs in 2012. Year-to-date,operating expenses in 2012 increased 4.59 per barrel to 40.83 perbarrel from 36.24 per barrel in the comparative 2011 period,reflecting lower production volumes in 2012; while turnaroundexpenses were higher in the 2012 period than in 2011, these expenseswere offset by decreased purchased energy costs. Additionalinformation is provided in the "Operating Expenses" section of thisMD&A.

Canadian Oil Sands' 2012 capital expenditures were 292 million inthe second quarter and 433 million on a year-to-date basis, up from140 million and 249 million in the comparative 2011 periods, asspending increased on multi-year capital projects to replace orrelocate Syncrude mining trains and to support tailings managementplans. Additional information is provided in the "CapitalExpenditures" section of this MD&A.

Review of Financial Results

Highlights

Three Months EndedSix Months Ended
June 30June 30
( millions, except per Share
and volume amounts)2012201120122011
----------------------------------------------------------------------------
Cash flow from operations(1)245 544 699 1,022
Per Share(1)0.51 1.12 1.44 2.11
Net income101 346 422 670
Per Share, Basic and Diluted0.21 0.71 0.87 1.38
Sales volumes(2)
Total (mmbbls)8.29.318.020.2
Daily average (bbls)89,597102,93898,853111,867
Realized SCO selling price
(/bbl)90.45 111.00 94.06 101.34
West Texas Intermediate (average
US/bbl)93.35 102.34 98.15 98.50
Operating expenses (/bbl)50.66 37.07 40.83 36.24
Capital expenditures292 140 433 249
Dividends170 145 315 242
Per Share0.35 0.30 0.65 0.50
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(1) Cash flow from operations and cash flow from operations per Shareare non-GAAP measures and are defined on page 5 of this report.

(2) The Corporation's sales volumes differ from its productionvolumes due to changes in inventory, which are primarily in-transitpipeline volumes. Sales volumes are net of purchases.

Net Income per Barrel

Three Months EndedSix Months Ended
June 30June 30
( per barrel)(1)2012201120122011
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Sales after crude oil purchases
and transportation expense90.73111.6194.31101.80
Operating expenses(50.66)(37.07)(40.83)(36.24)
Crown royalties(2.05)(10.48)(6.24)(8.33)
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38.0264.0647.2457.23
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Non-production expenses(3.10)(2.67)(2.79)(2.85)
Administration and insurance(1.14)(0.58)(0.97)(0.83)
Depreciation and depletion(11.34)(10.39)(10.42)(9.52)
Net finance expense(2.05)(1.70)(1.30)(1.47)
Foreign exchange (loss) gain(3.22)0.89(0.55)1.49
Tax expense(4.68)(12.77)(7.72)(10.97)
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(25.53)(27.22)(23.75)(24.15)
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Net income per barrel12.4936.8423.4933.08
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Sales volumes (mmbbls)(2)8.29.318.020.2
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(1) Unless otherwise specified, the per barrel measures in this MD&Ahave been derived by dividing the relevant item by sales volumes inthe period.

(2) Sales volumes, net of purchased crude oil volumes.

Cash flow from operations decreased 55 per cent to 245 million, or0.51 per Share, in the second quarter of 2012 from 544 million, or1.12 per Share, in the second quarter of 2011. The decrease was duemainly to lower sales (net of crude oil purchases and transportationexpense) and higher operating expenses, partially offset by lowerCrown royalties. Year-to-date cash flow from operations decreased 32per cent to 699 million, or 1.44 per Share, in 2012 from 1,022million, or 2.11 per Share, in 2011 due mainly to lower net salespartially offset by lower Crown royalties.

Sales net of crude oil purchases and transportation expense decreased305 million to 740 million in the second quarter of 2012 from1,045 million in the comparative 2011 quarter, and year-to-date netsales decreased 365 million to 1,696 million in 2012 from 2,061million in 2011, reflecting both lower sales volumes and a loweraverage realized selling price in 2012. Additional information isprovided in the "Sales Net of Crude Oil Purchases and TransportationExpense" section of this MD&A.

Crown royalties decreased 82 million to 16 million, or 2.05 perbarrel, in the second quarter of 2012 from 98 million, or 10.48 perbarrel, in the 2011 second quarter due to lower deemed bitumen pricesand volumes combined with higher bitumen-related capital costs in2012. On a year-to-date basis, Crown royalties decreased 57 millionto 112 million, or 6.24 per barrel, in 2012 from 169 million, or8.33 per barrel, in 2011 due primarily to lower bitumen volumes andhigher bitumen-related capital costs in 2012. Additional informationis provided in the "Crown Royalties" section of this MD&A.

Operating expenses in the second quarter of 2012 increased 13.59 perbarrel to 50.66 per barrel from 37.07 per barrel in the secondquarter of 2011. The increase reflects lower production volumes andhigher turnaround expenses due to the planned major maintenance,increased expense for Syncrude's long-term incentive plans, and moreroutine maintenance activity, partially offset by decreased purchasedenergy costs in 2012. Year-to-date, operating expenses in 2012increased 4.59 per barrel to 40.83 per barrel from 36.24 perbarrel in the comparative 2011 period, reflecting lower productionvolumes in 2012; while turnaround expenses were higher in the 2012period than in 2011, these expenses were offset by decreasedpurchased energy costs. Additional information is provided in the"Operating Expenses" section of this MD&A.

Net income decreased to 101 million, or 0.21 per Share, in thesecond quarter of 2012 from 346 million, or 0.71 per Share, in thesecond quarter of 2011. Year-to-date net income decreased to 422million, or 0.87 per Share, in 2012 from 670 million, or 1.38 perShare, in 2011. In addition to the variances in net sales, Crownroyalties, and operating expenses described earlier, net income wasimpacted by variances in deferred taxes and foreign exchange gainsand losses.

The Corporation recorded deferred tax expense of 19 million and 119million in the second quarter and first half of 2012, respectively,down from 119 million and 222 million in the comparative 2011periods. The decrease in quarter-over-quarter and year-over-year taxexpense was primarily due to lower before-tax earnings in 2012.

The Corporation recognizes foreign exchange gains and lossesprimarily as a result of revaluations of its U.S. dollar denominatedlong-term debt caused by fluctuations in U.S. / Cdn dollar exchangerates. The Corporation recorded foreign exchange losses of 26million and 10 million for the second quarter and first half of2012, respectively, reflecting a weakening Canadian dollar during theperiod and higher U.S. dollar-denominated long-term debt levels as aresult of the U.S. 700 million Senior Notes issued in March. Foreignexchange gains of 8 million and 30 million were recorded in thesecond quarter and first half of 2011, respectively, reflecting astrengthening in the value of the Canadian dollar relative to theU.S. dollar.

Capital expenditures in 2012 were 292 million in the second quarterand 433 million on a year-to-date basis, up from 140 million and249 million in the comparative 2011 periods, as spending increasedon multi-year capital projects to replace or relocate Syncrude miningtrains and to support tailings management plans. Additionalinformation is provided in the "Capital Expenditures" section of thisMD&A.

Net debt, comprised of long-term debt less cash and cash equivalents,decreased to 0.2 billion at June 30, 2012 from 0.4 billion atDecember 31, 2011. While 699 million of cash flow from operations inthe first half of 2012 fell short of capital expenditures anddividend payments of 433 million and 315 million, respectively, areduction in non-cash working capital balances increased cash andcash equivalents by 265 million.

Sales Net of Crude Oil Purchases and Transportation Expense

Three Months EndedSix Months Ended
June 30June 30
( millions,
except where
otherwise
noted)20122011 Change20122011 Change
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Sales(1)882 1,092 (210) 2,019 2,175 (156)
Crude oil
purchases(134)(41)(93)(306)(100)(206)
Transportation
expense(8)(6)(2)(17)(14)(3)
----------------------------------------------------------------------------
740 1,045 (305) 1,696 2,061 (365)
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Sales volumes
(mmbbls)(2)8.29.3(1.1)18.020.2(2.2)
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Realized SCO
selling
price(3)90.45 111.00 (20.55) 94.06 101.34 (7.28)
(average
Cdn/bbl)
West Texas
Intermediate
("WTI")93.35102.34(8.99)98.1598.50(0.35)
(average
US/bbl)
SCO premium
(discount) to
WTI(5.45)11.72(17.17)(5.70)5.61(11.31)
(weighted
average
Cdn/bbl)
Average foreign
exchange rate0.991.03(0.04)0.991.02(0.03)
(US/Cdn)
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(1) Sales include sales of purchased crude oil and sulphur.

(2) Sales volumes, net of purchased crude oil volumes.

(3) SCO sales net of crude oil purchases and transportation expensedivided by sales volumes, net of purchased crude oil volumes.

The 305 million, or 29 per cent, decrease in sales net of crude oilpurchases and transportation expense in the second quarter of 2012relative to the 2011 second quarter reflects lower sales volumes anda lower average realized SCO selling price in 2012.

Sales volumes averaged about 90,000 barrels per day in the secondquarter of 2012 compared with 103,000 barrels per day in the 2011second quarter, reflecting the planned Coker 8-3 and VacuumDistillation Unit turnarounds in 2012.

The second quarter 2012 realized selling price averaged 90.45 perbarrel, a 20.55 per barrel decrease from 111.00 per barrel in the2011 second quarter, reflecting a SCO discount relative to WTI and alower WTI crude oil price, partially offset by a weaker Canadiandollar in 2012. The Corporation realized a 5.45 per barrelweighted-average SCO discount to WTI in the second quarter of 2012versus an 11.72 per barrel premium in the second quarter of 2011.WTI averaged U.S. 93 per barrel compared with U.S. 102 per barrelin the comparative 2011 period and the Canadian dollar averaged 0.99U.S./Cdn, down from 1.03 U.S./Cdn in 2011.

On a year-to-date basis, the 365 million, or 18 per cent, decreasein sales net of crude oil purchases and transportation expense in2012 reflects lower sales volumes and a lower average realized SCOselling price.

Sales volumes averaged about 99,000 barrels per day in the first sixmonths of 2012 compared with 112,000 barrels per day in thecomparative 2011 period, reflecting maintenance on Coker 8-1 and theplanned Coker 8-3 and Vacuum Distillation Unit turnarounds in 2012.

The realized selling price in the first six months of 2012 averaged94.06 per barrel compared with 101.34 per barrel in the 2011comparative period, reflecting a SCO discount relative to WTI, alower WTI benchmark oil price and a weaker Canadian dollar. TheCorporation realized a weighted-average SCO to WTI discount of 5.70per barrel in the first half of 2012, an 11.31 per barrel decreasefrom the 5.61 per barrel premium in the comparative 2011 period. WTIaveraged U.S. 98 per barrel compared with U.S. 99 per barrel in thecomparative 2011 period and the Canadian dollar averaged 0.99U.S./Cdn compared with 1.02 U.S./Cdn in 2011.

The SCO discount to WTI reflects recent supply/demand fundamentalsfor light crude oil. Increasing North American production of both SCOand light crude oil from tight oil formations and refinerymodifications enabling processing of heavier crude oils have resultedin sales to more distant refineries, thereby decreasing the netrealized price by higher transportation costs. More recently, thissituation has been exacerbated by pipeline apportionment, which hasrestricted the ability of SCO and other crude oils to reach theirpreferred markets, reducing the price received. Additionalinformation on the SCO to WTI differential is provided in the"Outlook" section of this MD&A.

The Corporation purchases crude oil from third parties to fulfillsales commitments with customers when there are shortfalls inSyncrude's production and to facilitate certain transportation andtankage arrangements and operations. Sales include the sale ofpurchased crude oil while the cost of these purchases is included incrude oil purchases and transportation expense. Crude oil purchaseswere higher in the three and six months ended June 30, 2012 relativeto the comparative 2011 periods, reflecting additional purchasedvolumes in 2012 to support transportation and storage arrangementsand unanticipated production shortfalls, partially offset by lowercrude oil prices.

Crown Royalties

Crown royalties decreased 82 million to 16 million, or 2.05 perbarrel, in the second quarter of 2012 from 98 million, or 10.48 perbarrel, in the 2011 second quarter due to lower deemed bitumen pricesand volumes combined with higher bitumen-related capital costs in2012. On a year-to-date basis, Crown royalties decreased 57 millionto 112 million, or 6.24 per barrel, in 2012 from 169 million, or8.33 per barrel, in 2011 due primarily to lower bitumen volumes andhigher bitumen-related capital costs in 2012.

The Syncrude Royalty Amending Agreement requires that bitumen bevalued by a formula that references the value of bitumen based onNorth American heavy oil reference prices adjusted for reasonablequality, transportation and handling deductions (including diluentcosts) to reflect the quality and location differences betweenSyncrude's bitumen and the reference price of bitumen. Canadian OilSands' share of the royalties recognized for the period from January1, 2009 to June 30, 2012 are estimated to be approximately 45million lower than the amount calculated using theAlberta-government-provided bitumen value for Syncrude. The Syncrudeowners and the Alberta government continue to discuss the basis forreasonable quality, transportation, and other adjustments but if suchdiscussions do not result in an agreed upon solution, either partymay seek judicial determination of the matter. The cumulative impact,if any, of such discussions or judicial determination, as applicable,will be recognized immediately and will impact both net income andcash flow from operations accordingly.

Operating Expenses

The following table breaks down operating expenses into their majorcomponents and shows operating expenses per barrel of bitumen andSCO. The information allocates costs to bitumen production andupgrading on the basis used to determine Crown royalties.

Three Months Ended
June 30
20122011(4)
----------------------------------------------------------------------------
( per barrel)BitumenSCOBitumenSCO
----------------------------------------------------------------------------
Bitumen production38.48 42.3723.31 29.12
Internal fuel allocation(2)2.322.562.703.38
----------------------------------------------------------------------------
Total produced bitumen costs40.8044.9326.0132.50
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Upgrading costs(1)15.859.46
Less: internal fuel allocation
to bitumen(2)(2.56)(3.38)
----------------------------------------------------------------------------
Total Syncrude operating
expenses58.2238.58
Canadian Oil Sands
adjustments(3)(7.56)(1.51)
----------------------------------------------------------------------------
Total operating expenses50.6637.07
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(thousands of barrels per day)
----------------------------------------------------------------------------
Syncrude production volumes263239352281
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six Months Ended
June 30
20122011(4)
----------------------------------------------------------------------------
( per barrel)BitumenSCOBitumenSCO
----------------------------------------------------------------------------
Bitumen production29.87 34.7124.03 28.61
Internal fuel allocation(2)2.252.622.643.14
----------------------------------------------------------------------------
Total produced bitumen costs32.1237.3326.6731.75
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Upgrading costs(1)12.119.73
Less: internal fuel allocation
to bitumen(2)(2.62)(3.14)
----------------------------------------------------------------------------
Total Syncrude operating
expenses46.8238.34
Canadian Oil Sands
adjustments(3)(5.99)(2.10)
----------------------------------------------------------------------------
Total operating expenses40.8336.24
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(thousands of barrels per day)
----------------------------------------------------------------------------
Syncrude production volumes310267359301
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Upgrading costs include the production and ongoing maintenancecosts associated with processing and upgrading of bitumen to SCO.

(2) Reflects energy generated by the upgrader that is used in thebitumen production process and is valued by reference to natural gasand diesel prices. Natural gas prices averaged 1.79 per GJ and 2.04per GJ in the three and six months ended June 30, 2012, respectively,and 3.62 per GJ and 3.60 per GJ in the three and six months endedJune 30, 2011, respectively. Diesel prices averaged 0.83 per litreand 0.89 per litre in the three and six months ended June 30, 2012,respectively, and 0.92 per litre and 0.90 per litre in the threeand six months ended June 30, 2011, respectively.

(3) Canadian Oil Sands' adjustments mainly pertain to actualreclamation costs and major turnaround costs, which Syncrude includesin operating expenses. Canadian Oil Sands capitalizes majorturnaround costs and recognizes actual reclamation costs through itsasset retirement obligation. Major turnaround costs are expensedthrough depreciation and reclamation costs are expensed through bothdepletion and accretion (within net finance expense). Costs ofnon-major turnarounds are expensed through operating expenses.

(4) Certain comparative period amounts have been restated to conformto the current period presentation.

Three Months EndedSix Months Ended
June 30June 30
( per barrel of
SCO)20122011 Change20122011 Change
----------------------------------------------------------------------------
Production costs 47.59 31.69 15.9037.42 31.09 6.33
Purchased energy3.075.38(2.31)3.415.15(1.74)
----------------------------------------------------------------------------
Total operating
expenses50.66 37.07 (13.59) 40.83 36.24 4.59
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(GJs per barrel
of SCO)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Purchased energy
consumption1.721.49 0.231.671.430.24
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Operating expenses in the second quarter of 2012 increased 13.59 perbarrel to 50.66 per barrel from 37.07 per barrel in the secondquarter of 2011 primarily due to:

--lower production volumes and higher turnaround expenses due to the
planned major maintenance activity in 2012;
--an increase in the value of Syncrude's long-term incentive plans in the
2012 second quarter as opposed to a decrease in the comparative 2011
quarter. A portion of Syncrude's long-term incentive plans is based on
the market return performance of several Syncrude owners' shares,
including those of the Corporation, which was stronger in 2012 than in
2011; and
--more routine maintenance activity;

The increase in operating expenses was partially offset by:

--decreased purchased energy costs due to lower natural gas prices and
diesel volumes in the 2012 second quarter.

Year-to-date, operating expenses in 2012 increased 4.59 per barrel to40.83 per barrel from 36.24 per barrel in the comparative 2011period, reflecting lower production volumes; while turnaroundexpenses were higher in the 2012 period than in 2011, these expenseswere offset by decreased purchased energy costs.

On a total dollar basis, operating expenses increased about 19 percent quarter-over-quarter from 347 million in 2011 to 413 millionin 2012, and year-to-date, were unchanged from 2011 to 2012.

Purchased energy consumption rates were higher in 2012, primarilybecause downtime of Cokers 8-1 and 8-3 resulted in less fuel beinggenerated, which required higher natural gas purchases in 2012 tomeet energy needs than in the comparative 2011 periods.

Non-Production Expenses

Non-production expenses totalled 26 million and 50 million in thesecond quarter and first half of 2012, respectively, compared with25 million and 58 million in the comparative 2011 periods.Non-production expenses consist primarily of development expendituresrelating to capital programs, which are expensed, such aspre-feasibility engineering, technical and support services, researchand development, evaluation drilling and regulatory and stakeholderconsultation expenditures. Non-production expenses can vary fromperiod to period depending on the number of projects underway and thedevelopment stage of the projects.

Net Finance Expense

Three Months EndedSix Months Ended
June 30June 30
( millions)2012201120122011
----------------------------------------------------------------------------
Interest costs30 24 51 45
Less capitalized interest(21)(13)(41)(24)
----------------------------------------------------------------------------
Interest expense9111021
Accretion of asset retirement
obligation74138
----------------------------------------------------------------------------
Net finance expense16 15 23 29
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Interest costs in 2012 were higher than the comparative 2011 periods asa result of the U.S. 700 million debt issued on March 29, 2012;however, interest expense in 2012 was lower than the comparative 2011periods because a higher portion of interest costs were capitalizedin 2012, as cumulative capital expenditures on qualifying assetsrose. The period-over-period increases in accretion of the assetretirement obligation from 2011 to 2012 reflect the increase in theestimated asset retirement obligation recognized in the fourthquarter of 2011.

Depreciation and Depletion Expense

Depreciation and depletion expense totalled 93 million and 188million in the three and six months ended June 30, 2012 and 97million and 192 million in the three and six months ended June 30,2011, as Canadian Oil Sands' depreciable property, plant andequipment, and the estimated useful lives over which most of theseassets are depreciated, were similar in both periods.

Foreign Exchange (Gain) Loss

Three Months EndedSix Months Ended
June 30June 30
( millions)2012201120122011
----------------------------------------------------------------------------
Foreign exchange (gain) loss -
long-term debt36 (9) 16 (34)
Foreign exchange (gain) loss -
other(10)1(6)4
----------------------------------------------------------------------------
Total foreign exchange (gain) loss 26 (8) 10 (30)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Foreign exchange gains/losses are primarily the result of revaluationsof our U.S. dollar denominated long-term debt caused by fluctuationsin U.S. / Cdn dollar exchange rates.

The foreign exchange losses on long-term debt for the second quarterof 2012 were the result of a weakening in the value of the Canadiandollar relative to the U.S. dollar to 0.98 U.S./Cdn at June 30, 2012from 1.00 U.S./Cdn at March 31, 2012. The 2012 year-to-date foreignexchange loss is mainly the result of a weakening in the value of theCanadian dollar from March 29, 2012, when the U.S. 700 million ofSenior Notes were issued, to June 30, 2012. The foreign exchangegains in the comparative 2011 periods were the result of astrengthening in the value of the Canadian dollar relative to theU.S. dollar to 1.04 U.S./Cdn at June 30, 2011 from 1.03 U.S./Cdn atMarch 31, 2011 and 1.01 U.S./Cdn at December 31, 2010.

Tax Expense

Three Months EndedSix Months Ended
June 30June 30
( millions)2012201120122011
----------------------------------------------------------------------------
Current tax expense20 - 20 -
Deferred tax expense19119119222
----------------------------------------------------------------------------
Total tax expense39 119 139 222
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The decrease in total tax expense from 2011 to 2012 reflects lowerbefore-tax earnings in 2012.

Asset Retirement Obligation

Canadian Oil Sands increased its estimated asset retirementobligation from 1,037 million at December 31, 2011 to 1,077 millionat June 30, 2012. The increase reflects a decrease in the interestrate used to discount future reclamation payments, partially offsetby 42 million of reclamation spending during the first half of 2012.The 29 million current portion of the asset retirement obligation isincluded in accounts payable and accrued liabilities, while the1,048 million non-current portion is presented separately as anasset retirement obligation on the June 30, 2012 Consolidated BalanceSheet.

Pension and Other Post-Employment Benefit Plans

The Corporation's share of the estimated unfunded portion of SyncrudeCanada's pension and other post-employment benefit plans increased to476 million at June 30, 2012 from 465 million at December 31, 2011,reflecting a lower discount rate partially offset by contributions.For the six months ended June 30, 2012, a 30 million actuarial loss,net of 10 million in deferred taxes, has been recognized in othercomprehensive income to reflect the change in the discount rate.

Summary of Quarterly Results

20122011
Q2Q1Q4Q3Q2Q1
----------------------------------------------------------------------------
Sales(1)( millions)740 956 884 989 1,045 1,016
Net income (
millions)101 321 232 242 346 324
Per Share, Basic &
Diluted0.21 0.66 0.48 0.50 0.71 0.67
Cash flow from
operations(2)(
millions)245 454 363 512 544 478
Per Share(2)0.51 0.94 0.75 1.06 1.12 0.99
Dividends (
millions)170 145 146 145 145 97
Per Share0.35 0.30 0.30 0.30 0.30 0.20
Daily average sales
volumes(3) (bbls)89,597108,10891,259109,260102,938120,894
Realized SCO selling
price (/bbl)90.45 97.07 104.78 97.89 111.00 93.04
Operating expenses(4)
(/bbl)50.66 32.68 46.88 37.19 37.07 35.53
Purchased natural gas
price (/GJ)1.79 2.23 3.19 3.51 3.62 3.59
WTI(5) (average
US/bbl)93.35 103.03 94.06 89.54 102.34 94.60
Foreign exchange
rates (US/Cdn)
Average0.99 1.00 0.98 1.02 1.03 1.02
Quarter-end0.98 1.00 0.98 0.96 1.04 1.03
----------------------------------------------------------------------------
----------------------------------------------------------------------------
2010
Q4Q3
----------------------------------------------------------------------------
Sales(1)( millions)912 692
Net income (
millions)575 193
Per Share, Basic &
Diluted1.19 0.40
Cash flow from
operations(2)(
millions)398 230
Per Share(2)0.82 0.48
Dividends (
millions)242 242
Per Share0.50 0.50
Daily average sales
volumes(3) (bbls)114,73996,477
Realized SCO selling
price (/bbl)83.97 77.94
Operating expenses(4)
(/bbl)35.81 37.97
Purchased natural gas
price (/GJ)3.45 3.44
WTI(5) (average
US/bbl)85.24 76.21
Foreign exchange
rates (US/Cdn)
Average0.99 0.96
Quarter-end1.01 0.97
----------------------------------------------------------------------------
----------------------------------------------------------------------------

(1) Sales after crude oil purchases and transportation expense.

(2) Cash flow from operations and cash flow from operations per Shareare non-GAAP measures and are defined on page 5 of this report.

(3) Daily average sales volumes net of crude oil purchases.

(4) Derived from operating expenses, as reported on the ConsolidatedStatements of Income and Comprehensive Income, divided by salesvolumes during the period.

(5) Pricing obtained from Bloomberg.

During the last eight quarters, the following items have had asignificant impact on the Corporation's financial results:

--fluctuations in oil prices have affected the Corporation's sales, Crown
royalties, net income and cash flow from operations. WTI oil prices have
ranged from U.S. 72 per barrel to U.S. 114 per barrel over the past
two years;
--fluctuations in the monthly average differential between SCO and
Canadian dollar WTI oil prices, which has ranged from a 15 per barrel
premium to a 15 per barrel discount over the past two years, have
affected the Corporation's sales, net income and cash flow from
operations;
--U.S. to Canadian dollar exchange rate fluctuations have resulted in
foreign exchange gains and losses on the revaluation of U.S. dollar-
denominated debt and have impacted commodity pricing;
--planned and unplanned maintenance activities have negatively impacted
quarterly production volumes, revenues and operating expenses; and,
--beginning in the first quarter of 2011, net income reflects an increase
in taxes following the December 31, 2010 conversion from an income trust
to a corporation. Net income was higher in the fourth quarter of 2010
due to a 269 million deferred tax recovery resulting from re-measuring
the deferred tax liability at a lower tax rate upon corporate
conversion.

Quarterly variances in net income and cash flow from operations arecaused mainly by fluctuations in crude oil prices, production andsales volumes, operating expenses and natural gas prices. Net incomeis also impacted by unrealized foreign exchange gains and losses,depreciation and depletion, and deferred tax amounts. The dividendspaid to Shareholders are likewise dependent on the factors impactingcash flow from operations as well as the amount and timing of capitalexpenditures.

While the supply/demand balance for crude oil affects selling prices,the impact of this relationship has not displayed significantseasonality. Natural gas prices are typically higher in winter monthsas heating demand rises, but this seasonality is influenced byweather conditions and North American natural gas inventory levels.

Recent technological developments in North American natural gasproduction have significantly increased production levels and reducednatural gas prices. These conditions may persist for the next severalyears.

Syncrude production levels may not display seasonal patterns ortrends. While maintenance and turnaround activities

are typically scheduled to avoid the winter months, the exact timingof unit outages cannot be precisely scheduled, and unplanned outagesmay occur. The costs of major turnarounds are capitalized asproperty, plant and equipment and depreciated over the period untilthe next scheduled turnaround. The costs of all other turnarounds andmaintenance activities are expensed in the period incurred, which canresult in volatility in quarterly operating expenses. All turnaroundsand maintenance activities impact per barrel operating expensesbecause sales volumes are lower in the periods when

this work is occurring.

Capital Expenditures

Three MonthsSix Months
EstimatedEndedEnded
%June 30June 30
( millions, except % amounts)Complete(1)2012201120122011
----------------------------------------------------------------------------
Major Projects
Mildred Lake Mine Train Replacement258820 13138
Reconstruct crushers, surge
facilities, and slurry prep
facilities to support tailings
storage requirements
Aurora North Mine Train Relocation35234318
Relocate crushers, surge facilities,
and slurry prep facilities to
support tailings storage
requirements
Aurora North Tailings Management352063913
Construct a composite tails (CT)
plant at the Aurora North mine to
process tailings
Centrifuge Tailings Management512-19-
Construct a centrifuge plant at the
Mildred Lake mine to process
tailings
Syncrude Emissions Reduction (SER)99(2)4361166
Retrofit technology into Syncrude's
original two cokers to reduce total
sulphur dioxide and other emissions
----------------------------------------------------------------------------
Capital expenditures on major
projects14766231125
----------------------------------------------------------------------------
Regular maintenance
Capitalized turnaround costs616676
Other capital(3)63559494
----------------------------------------------------------------------------
Capital expenditures on regular
maintenance12461161100
----------------------------------------------------------------------------
Capitalized interest21134124
----------------------------------------------------------------------------
Total capital expenditures 292 140 433 249
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) The estimated % complete is based on hours spent as a % of total
forecasted hours to project completion.
(2) Construction of the SER project is essentially complete and is expected
to be in-service in the second half of 2012.
(3) Other regular maintenance capital includes expenditures on relocation of
tailings facilities and other infrastructure projects.

Year-to-date capital expenditures increased to 433 million in 2012from 249 million in 2011, and to 292 million in the second quarterof 2012 from 140 million in the second quarter of 2011. The increasereflects spending on the major capital projects at Syncrude. Moreinformation on the major projects is provided in the "Outlook"section of this MD&A.

The increase in capitalized turnaround costs from 2011 to 2012reflects the planned turnarounds of Coker 8-3 and the VacuumDistillation Unit during the second quarter of 2012. The increase incapitalized interest costs from 2011 to 2012 reflects highercumulative capital expenditures on qualifying assets in 2012.

Contractual Obligations and Commitments

During the first six months of 2012, Canadian Oil Sands entered intonew contractual obligations totalling approximately 1.2 billion forthe transportation and storage of crude oil in support of theCorporation's strategy to secure access to preferred markets andenhance marketing flexibility. The Corporation also assumed 130million in new funding commitments primarily related to the majorcapital projects discussed in the Outlook section of this MD&A,increased its funding commitment by 120 million in respect ofSyncrude Canada's registered pension plan, and assumed 84 million innew commitments related to Syncrude Canada's employee retentionprogram.

Dividends

On July 27, 2012, the Corporation declared a quarterly dividend of0.35 per Share for a total dividend of approximately 170 million.The dividend will be paid on August 31, 2012 to Shareholders ofrecord on August 27, 2012.

Dividend payments continue to be set quarterly by the Board ofDirectors in the context of current and expected crude oil prices,economic conditions, Syncrude's operating performance, and theCorporation's capacity to finance operating and investingobligations. Dividend levels are established with the intent ofabsorbing short-term market volatility over several quarters.Dividend levels also recognize our intention to fund the currentmajor projects primarily with cash flow from operations and existingcash balances, while maintaining a strong balance sheet to reduceexposure to potential oil price declines, capital cost increases ormajor operational upsets.

Liquidity and Capital Resources

June 30December 31
( millions, except % amounts)20122011
----------------------------------------------------------------------------
Long-term debt1,8371,132
Cash and cash equivalents(1,618)(718)
----------------------------------------------------------------------------
Net debt(1,2)219414
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholders' equity4,2864,210
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total net capitalization(1,3)4,5054,624
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total capitalization(1,4)6,1235,342
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net debt to total net capitalization(1,5) (%)59
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total debt to total capitalization(1,6) (%)3021
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Net debt, total net capitalization, total capitalization, net debt to
total net capitalization, and total debt to total capitalization are non-
GAAP measures.
(2)Long-term debt less cash and cash equivalents.
(3)Net debt plus Shareholders' equity.
(4)Long-term debt plus Shareholders' equity.
(5)Net debt divided by total net capitalization.
(6)Long-term debt divided by total capitalization.

Net debt, comprised of long-term debt less cash and cash equivalents,decreased to 0.2 billion at June 30, 2012 from 0.4 billion atDecember 31, 2011. While cash flow from operations of 699 million inthe first half of 2012 fell short of capital expenditures anddividend payments of 433 million and 315 million, respectively, areduction in non-cash working capital balances increased cash andcash equivalents by 265 million. Shareholders' equity increased to4.3 billion at June 30, 2012 from 4.2 billion at December 31, 2011,as net income exceeded dividends in the first half of 2012.

During the second quarter of 2012, the Corporation extended the termsof its credit facilities by one year. The term of the 1,500 millionoperating credit facility was extended to June 1, 2016 and the 40million extendible revolving term credit facility to June 30, 2014.No amounts were drawn against these facilities at June 30, 2012.

In March 2012, Canadian Oil Sands issued U.S. 400 million of 4.5%senior unsecured notes due April 1, 2022 and U.S. 300 million of6.0% senior unsecured notes due April 1, 2042 (collectively, the"Notes"). Interest on the Notes is payable semi-annually on April 1and October 1. Proceeds from the issues will be used to repay U.S.300 million of senior notes, which mature on August 15, 2013, tofund major capital projects over the next three years and for generalcorporate purposes.

COS' senior notes' indentures and credit facility agreements containcertain covenants which restrict Canadian Oil Sands' ability to sellall or substantially all of its assets or change the nature of itsbusiness, and limit total debt to total capitalization to 55 percent. Canadian Oil Sands was in compliance with its debt covenantsthrough the first half of 2012 and a significant increase in debt ordecrease in Shareholders' equity would be required before thecovenants restrict the Corporation's financial flexibility.

The Corporation's liquidity position has improved in the first sixmonths of 2012 as a result of our growing cash position and theissuance of the Notes. We expect cash levels to decreasesignificantly over the next several years as we fund the majorcapital projects and repay the 2013 debt maturity. As a result, netdebt levels should rise to a more normalized level of 1 billion to2 billion by the end of 2014, coincident with reduced capital riskfrom the completion of our major capital projects.

Shareholders' Capital and Trading Activity

The Corporation's shares trade on the Toronto Stock Exchange underthe symbol COS. The Corporation had a market capitalization ofapproximately 9.6 billion with 484.5 million shares outstanding anda closing price of 19.72 per Share on June 30, 2012. The followingtable summarizes the trading activity for the second quarter of 2012.

Canadian Oil Sands Limited - Trading Activity

Second
QuarterAprilMayJune
2012201220122012
----------------------------------------------------------------------------
Share price
High23.3221.8623.3220.05
Low18.2119.8820.0118.21
Close19.7221.8320.0919.72
Volume of Shares traded (millions)100.624.133.443.1
Weighted average Shares outstanding
(millions)484.5484.5484.5484.5
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Financial Instruments and Financial Risks

The Corporation's financial instruments include cash and cashequivalents, accounts receivable, reclamation trust investments,accounts payable, accrued liabilities and long-term debt. The nature,the Corporation's use of, and the risks associated with theseinstruments are unchanged from December 31, 2011. The Corporation didnot have any financial derivatives outstanding in 2012.

Changes in Accounting Policies

There were no new accounting policies adopted, nor any changes toaccounting policies, in the second quarter or first half of 2012.

2012 Outlook

As ofAs of
July 27April 30
(millions of Canadian dollars, except volume and per
barrel amounts)20122012
----------------------------------------------------------------------------
Operating assumptions
Syncrude production (mmbbls)110110
Canadian Oil Sands sales (mmbbls)40.440.4
Sales, net of crude oil purchases and transportation3,3933,637
Operating expenses1,5141,529
Operating expenses per barrel37.4637.83
Crown royalties139239
Cash flow from operations1,4611,641
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Capital expenditure assumptions
Major projects714780
Regular maintenance335364
Capitalized interest7575
Total capital expenditures1,1241,219
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Business environment assumptions
West Texas Intermediate (U.S./bbl)90.00 100.00
Premium (Discount) to average Cdn WTI prices
(Cdn/bbl)(7.00) (10.00)
Foreign exchange rate (U.S./Cdn)0.991.00
AECO natural gas (Cdn/GJ)2.503.00
----------------------------------------------------------------------------
----------------------------------------------------------------------------

In our July 27, 2012 outlook, Canadian Oil Sands continues to estimate2012 annual Syncrude production of 110 million barrels (301,000barrels per day) with a range of 106 to 112 million barrels. Net toCanadian Oil Sands, this is equivalent to 40.4 million barrels(110,000 barrels per day). The 110 million barrel outlook assumesrobust production with no major interruptions for the remainder ofthe year. There is no major maintenance planned for the second halfof 2012.

Sales, net of crude oil purchases and transportation expense, are nowestimated to be approximately 3.4 billion, reflecting our 40.4million barrel production estimate and an 84 per barrel plant-gaterealized selling price. The selling price assumes a U.S. 90 perbarrel WTI oil price, a SCO discount to Cdn dollar WTI of 7 perbarrel and a foreign exchange rate of 0.99 U.S./Cdn.

The forecast SCO discount to WTI reflects actual year-to-date resultsand recent supply/demand fundamentals for inland North American lightcrude oil. Increasing North American production of both SCO and lightcrude oil from tight oil formations, and refinery modificationsenabling processing of heavier crude oils, have pushed light crudesales to more distant refineries, thereby increasing transportationcosts included in the net realized price. Recently, this situationhas been exacerbated by pipeline apportionment which has restrictedthe ability of SCO and other crude oils to reach their preferredmarkets, reducing the price received. These supply and demanddynamics lead to price volatility which is likely to persist forseveral years until sufficient pipeline capacity is available todeliver crude oil from western Canada to Cushing, Oklahoma or theUnited States gulf coast.

We estimate 2012 operating expenses of 1,514 million, or 37.46 perbarrel, reflecting actual costs incurred to date and a reducednatural gas price assumption of 2.50 per gigajoule.

The estimate for 2012 capital expenditures has decreased by 95million to 1,124 million due to adjustments to the expected timingof major project spending. The expected completion dates andestimated costs for the major projects are not affected.

Current taxes of approximately 40 million in 2012 and approximately350 million in 2013 are based on the assumptions in our 2012 outlookand the estimated timing of tax deductions for capital expenditures.The increase in estimated 2012 current taxes reflects revisions tothe estimated timing of tax deductions for capital expenditures.

Canadian Oil Sands is estimating 2012 cash flow from operations of1,461 million, or 3.02 per Share. After deducting forecast 2012capital expenditures, we estimate 337 million in remaining cash flowfrom operations for the year, or 0.69 per Share.

We expect cash levels to decrease significantly over the next severalyears as we fund the major capital projects and repay the 2013 debtmaturity. As a result, net debt levels should rise to a morenormalized level of 1 billion to 2 billion by the end of 2014,coincident with reduced capital risk from the completion of our majorcapital projects.

Changes in certain factors and market conditions could potentiallyimpact Canadian Oil Sands' Outlook. The following table provides asensitivity analysis of the key factors affecting the Corporation'sperformance.

Outlook Sensitivity Analysis (July 27, 2012)

Cash Flow from
Operations
Increase
Annual
Variable(1)Sensitivity millions / Share
----------------------------------------------------------------------------
Syncrude operating expenses decreaseCdn1.00/bbl330.07
Syncrude operating expenses decreaseCdn50 million150.03
WTI crude oil price increaseU.S.1.00/bbl350.07
Syncrude production increase2 million bbls520.11
Canadian dollar weakeningU.S.0.01/Cdn310.06
AECO natural gas price decreaseCdn0.50/GJ250.05
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)2012 cash flow from operations sensitivities are not expected to be
significantly impacted by income taxes; however, in 2013, Canadian Oil
Sands expects to record current taxes of approximately (400) million.

The 2012 Outlook contains forward-looking information and users arecautioned that the actual amounts may vary from the estimatesdisclosed. Please refer to the "Forward-Looking Information Advisory"section of this MD&A for the risks and assumptions underlying thisforward-looking information.

Major Projects

Centrifuge Tailings Management project

Syncrude is planning to construct a centrifuge plant as part of itsmulti-pronged approach to manage tailings and comply with governmentregulations, as specified in the Energy Resources and ConservationBoard ("ERCB") Directive 074. The plant is estimated to cost 1.9billion (0.7 billion net to Canadian Oil Sands), reflecting afully-engineered cost estimate with an estimated accuracy range ofplus or minus 15 per cent. Construction of the plant is expected tobe completed in the first half of 2015. Syncrude has pilotedcentrifuge technology, compared it to alternative methods forprocessing tailings and believes centrifuge technology is aneffective solution for meeting the requirements of its plan submittedunder Directive 074. Centrifuge technology produces a soft, clay-richsoil that can be used in Syncrude's reclamation efforts. Syncrudecontinues to work with other oil sands operators as part of theCanadian Oil Sands Innovation Alliance ("COSIA") to research anddevelop tailings management technologies.

The following tables provide cost and schedule estimates forSyncrude's major projects. Costs for the Centrifuge TailingsManagement project are now included in 2012, 2013 and 2014 spendingestimates. Regular maintenance capital costs post 2012 will beprovided on an annual basis with the budget for the following year,and are currently estimated to average approximately 10 per barrelover the next few years.

Major Projects - Total Project Cost and Schedule Estimates(1)

Spent toTotal CostEstimatedTarget
Dec 31, 2011Estimate% In-Service
( billions)( billions)AccuracyDate
----------------------------------------------------------------------------
Mildred Lake
Mine Train
ReplacementSyncrude0.54.215%/-15%Q4 2014
Reconstruct
crushers, surge
facilities, and
slurry prep
facilities to
support tailings
storage
requirementsCOS share0.21.6
Aurora North Mine
Train RelocationSyncrude0.21.015%/-15%Q1 2014
Relocate crushers,
surge facilities,
and slurry prep
facilities to
support tailings
storage
requirementsCOS share0.10.4
Aurora North
Tailings Management Syncrude0.20.815%/-15%Q4 2013
Construct a
composite tails
(CT) plant at the
Aurora North mine
to process
tailingsCOS share0.10.3
Centrifuge Tailings
ManagementSyncrude-1.915%/-15%H1 2015
Construct a
centrifuge plant
at the Mildred
Lake mine to
process tailingsCOS share-0.7
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Major Projects - Annual Spending Profile(1)

Spent to
( billions)Dec 31, 20112012201320142015
----------------------------------------------------------------------------
Syncrude0.91.92.62.20.3
Canadian Oil Sands share0.40.70.90.80.2
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Major projects costs include capital expenditures, excluding capitalized
interest, and certain non-production expenses.

The forecast of the spending profile for Syncrude's major projects hasbeen refined based on the completion of detailed execution plans andthe awarding of major contracts and subcontracts. The expectedcompletion dates and estimated total costs for the major projects arenot affected.

Construction on the SER project was essentially complete at the endof 2011 at a cost of approximately 1.5 billion (gross to Syncrude).The project is expected to be in service in the second half of 2012.

Canadian Oil Sands plans to finance these major projects primarilywith cash flow from operations and existing cash balances.

The major projects tables contain forward-looking information andusers of this information are cautioned that the actual yearly andtotal major project costs and the actual in-service dates for themajor projects may vary from the plans disclosed. The major projectcost estimates and major project target in-service dates are based oncurrent spending plans. Please refer to the "Forward-LookingInformation Advisory" section of this MD&A for the risks andassumptions underlying this forward-looking information. For a listof additional risk factors that could cause the actual amount of themajor project costs and the major project target in-service dates todiffer materially, please

refer to the Corporation's Annual Information Form dated February23, 2012 which is available on the Corporation's profile on SEDAR atwww.sedar.com and on the Corporation's website atwww.cdnoilsands.com.

Consolidated Statements of Income and Comprehensive Income

(unaudited)

Three Months EndedSix Months Ended
June 30June 30
(millions of Canadian dollars,
except per Share and Share volume
amounts)2012201120122011
----------------------------------------------------------------------------
Sales882 1,0922,019 2,175
Crown royalties (Note 13)(16)(98)(112)(169)
----------------------------------------------------------------------------
Revenues8669941,9072,006
----------------------------------------------------------------------------
Expenses
Operating413347734734
Non-production26255058
Crude oil purchases and
transportation14247323114
Administration841413
Insurance2244
Depreciation and depletion9397188192
----------------------------------------------------------------------------
6845221,3131,115
----------------------------------------------------------------------------
Earnings from operating activities182472594891
Foreign exchange loss (gain)
(Note 8)26(8)10(30)
Net finance expense (Note 9)16152329
----------------------------------------------------------------------------
Earnings before taxes140465561892
Tax expense (Note 10)39119139222
----------------------------------------------------------------------------
Net income101346422670
Other comprehensive loss, net of
income taxes
Actuarial loss on employee future
benefit plans (Note 8)(30)(4)(30)(4)
Reclassification of derivative
gains to net income(1)-(2)(1)
----------------------------------------------------------------------------
Comprehensive income70342390665
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted average Shares (millions)485485485485
Shares, end of period (millions)485485485485
Net income per Share
Basic and diluted0.210.710.871.38
----------------------------------------------------------------------------
See Notes to Unaudited Consolidated Financial Statements

Consolidated Statements of Shareholders' Equity

(unaudited)

Three Months EndedSix Months Ended
June 30June 30
(millions of Canadian dollars)2012201120122011
----------------------------------------------------------------------------
Retained earnings
Balance, beginning of period1,6931,2611,5171,034
Net income101346422670
Actuarial loss on employee
future benefit plans(30)(4)(30)(4)
Dividends(170)(145)(315)(242)
----------------------------------------------------------------------------
Balance, end of period1,5941,4581,5941,458
----------------------------------------------------------------------------
Accumulated other comprehensive
income
Balance, beginning of period11141215
Reclassification of derivative
gains to net income(1)-(2)(1)
----------------------------------------------------------------------------
Balance, end of period10141014
----------------------------------------------------------------------------
Shareholders' capital
Balance, beginning of period2,6732,6722,6732,671
Issuance of shares---1
----------------------------------------------------------------------------
Balance, end of period2,6732,6722,6732,672
----------------------------------------------------------------------------
Contributed surplus
Balance, beginning of period9887
Share-based compensation--11
----------------------------------------------------------------------------
Balance, end of period9898
----------------------------------------------------------------------------
Total Shareholders' equity4,2864,1524,2864,152
----------------------------------------------------------------------------
----------------------------------------------------------------------------
See Notes to Unaudited Consolidated Financial Statements

Consolidated Balance Sheets

(unaudited)

As at
June 30December 31
(millions of Canadian dollars)20122011
----------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents1,618718
Accounts receivable219376
Inventories135142
Prepaid expenses110
----------------------------------------------------------------------------
1,9731,246
Property, plant and equipment, net (Note 4)7,5417,227
Exploration and evaluation8989
Reclamation trust6358
----------------------------------------------------------------------------
9,6668,620
----------------------------------------------------------------------------
----------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities554479
Current taxes20-
Current portion of employee future benefits7647
----------------------------------------------------------------------------
650526
Employee future benefits and other liabilities472480
Long-term debt (Note 5)1,8371,132
Asset retirement obligation (Note 6)1,0481,008
Deferred taxes1,3731,264
----------------------------------------------------------------------------
5,3804,410
Shareholders' equity4,2864,210
----------------------------------------------------------------------------
9,6668,620
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Commitments and Contingency (Notes 13 and 14, respectively)
See Notes to Unaudited Consolidated Financial Statements

Consolidated Statements of Cash Flows

(unaudited)

Three Months EndedSix Months Ended
June 30June 30
(millions of Canadian dollars)2012201120122011
----------------------------------------------------------------------------
Cash from (used in) operating
activities
Net income101346422670
Items not requiring an outlay of
cash
Depreciation and depletion9397188192
Accretion of asset retirement
obligation (Note 10)74138
Foreign exchange (gain) loss on
long-term debt (Note 9)36(9)16(34)
Deferred tax expense (Note 11)19119119222
Share-based compensation3(4)32
Actual reclamation expenditures
(Note 7)1(2)(42)(31)
Change in employee future benefits
and other liabilities(15)(7)(20)(7)
----------------------------------------------------------------------------
2455446991,022
Change in non-cash working capital
(Note 15(a))117(17)229(36)
----------------------------------------------------------------------------
Cash from operating activities362527928986
----------------------------------------------------------------------------
Cash from (used in) financing
activities
Issuance of senior notes (Note 6)--689-
Repayment of bank credit facilities---(145)
Issuance of shares---1
Dividends(170)(145)(315)(242)
----------------------------------------------------------------------------
Cash from (used in) financing
activities(170)(145)374(386)
----------------------------------------------------------------------------
Cash from (used in) investing
activities
Capital expenditures(292)(140)(433)(249)
Reclamation trust funding(2)(1)(5)(3)
Change in non-cash working capital
(Note 15(a))186368
----------------------------------------------------------------------------
Cash used in investing activities(276)(135)(402)(244)
----------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents(84)247900356
Cash and cash equivalents, beginning
of period1,70218971880
----------------------------------------------------------------------------
Cash and cash equivalents, end of
period 1,618436 1,618436
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Cash and cash equivalents consist of:
Cash1051210512
Short-term investments1,5134241,513424
----------------------------------------------------------------------------
1,618436 1,618436
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Supplementary Information (Note 15)
See Notes to Unaudited Consolidated Financial Statements

Notes to Unaudited Consolidated Financial Statements

For the Three and Six Months Ended June 30, 2012

(Tabular amounts expressed in millions of Canadian dollars, exceptwhere otherwise noted)

1) Nature of Operations

Canadian Oil Sands Limited ("Canadian Oil Sands" or the"Corporation") was incorporated under the laws of the Province ofAlberta, Canada in 2010 pursuant to a plan of arrangement effectingthe reorganization from an income trust into a corporate structureeffective December 31, 2010.

The Corporation indirectly owns a 36.74 per cent interest ("WorkingInterest") in the Syncrude Joint Venture ("Syncrude"). Syncrude isinvolved in the mining and upgrading of bitumen from oil sands inNorthern Alberta. The Syncrude Project is comprised of open-pit oilsands mines, utilities plants, bitumen extraction plants, and anupgrading complex that processes bitumen into Synthetic Crude Oil.Each joint-venture owner, including the Corporation, takes itsproportionate share of production in kind, and funds itsproportionate share of Syncrude's operating and capital costs on adaily basis. Syncrude Canada Ltd. ("Syncrude Canada") operatesSyncrude on behalf of the joint-venture owners and is responsible forselecting, compensating, directing and controlling Syncrude'semployees, and for administering all related employment benefits andobligations. The Corporation's investment in Syncrude and SyncrudeCanada represents its only producing asset.

The Corporation's office is located at the following address: 2500First Canadian Centre, 350 - 7th Avenue S.W., Calgary, Alberta,Canada T2P 3N9.

2) Basis of Presentation

These unaudited interim consolidated financial statements areprepared and reported in Canadian dollars in accordance with Canadiangenerally accepted accounting principles as set out in the Handbookof the Canadian Institute of Chartered Accountants ("CICA Handbook").The CICA Handbook incorporates International Financial ReportingStandards ("IFRS") and publicly accountable enterprises, like theCorporation, are required to apply such standards. These unauditedinterim financial statements have been prepared in accordance withIFRS applicable to the preparation of interim finanacial statementsand International Accounting Standard ("IAS") 34, Interim FinancialReporting, and the accounting policies applied in these interimunaudited consolidated financial statements are based on IFRS asissued, outstanding and effective on July 27, 2012.

Certain disclosures that are normally required to be included in thenotes to the annual audited consolidated financial statements havebeen condensed or omitted. These unaudited interim consolidatedfinancial statements should be read in conjunction with theCorporation's audited consolidated financial statements and notesthereto for the year ended December 31, 2011.

3) Accounting Policies

The same accounting policies and methods of computation are followedin these unaudited interim consolidated financial statements ascompared with the most recent audited annual consolidated financialstatements for the year ended December 31, 2011 except for currentincome taxes which, in interim periods, are accrued based on anestimate of the annualized effective tax rate applied to year-to-dateearnings.

4) Property, Plant and Equipment, Net

Six Months Ended June 30, 2012
UpgradingVehicles
andMiningand
( millions)extractingequipmentequipmentBuildings
----------------------------------------------------------------------------
Cost
Balance at January
1, 20124,6881,417690310
Additions----
Change in asset
retirement costs----
Retirements(3)(1)(16)(1)
Reclassifications(1)--2111
----------------------------------------------------------------------------
Balance at June 30,
20124,6851,416695320
----------------------------------------------------------------------------
Accumulated
depreciation
Balance at January
1, 20121,284480294100
Depreciation8232284
Retirements(3)(1)(16)(1)
Reclassifications----
----------------------------------------------------------------------------
Balance at June 30,
20121,363511306103
----------------------------------------------------------------------------
Net book value at
June 30, 20123,322905389217
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Six Months Ended June 30, 2012
AssetMajor
Retirement Turnaround ConstructionMine
( millions)costscostsin progress developmentTotal
----------------------------------------------------------------------------
Cost
Balance at January
1, 20129311141,144393 9,687
Additions-67366-433
Change in asset
retirement costs69---69
Retirements---(1)(22)
Reclassifications(1)--(32)--
----------------------------------------------------------------------------
Balance at June 30,
20121,0001811,47839210,167
----------------------------------------------------------------------------
Accumulated
depreciation
Balance at January
1, 201213853-111 2,460
Depreciation2017-5188
Retirements---(1)(22)
Reclassifications-----
----------------------------------------------------------------------------
Balance at June 30,
201215870-115 2,626
----------------------------------------------------------------------------
Net book value at
June 30, 20128421111,478277 7,541
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Year Ended December 31, 2011
UpgradingVehicles
andMiningand
( millions)extractingequipmentequipmentBuildings
----------------------------------------------------------------------------
Cost
Balance at January
1, 20114,6691,381688304
Additions----
Change in asset
retirement costs----
Retirements(6)(9)(22)(1)
Reclassifications(1)2545247
----------------------------------------------------------------------------
Balance at December
31, 20114,6881,417690310
----------------------------------------------------------------------------
Accumulated
depreciation
Balance at January
1, 20111,092449264100
Depreciation16992547
Retirements(6)(9)(22)(1)
Reclassifications29(52)(2)(6)
----------------------------------------------------------------------------
Balance at December
31, 20111,284480294100
----------------------------------------------------------------------------
Net book value at
December 31, 20113,404937396210
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Reclassifications are primarily transfers from Construction in progress
to other categories of property, plant and equipment when construction is
completed and assets are available for use.
Year Ended December 31, 2011
AssetMajor
Retirement Turnaround ConstructionMine
( millions)costscostsin progress developmentTotal
----------------------------------------------------------------------------
Cost
Balance at January
1, 20113621036943458,546
Additions-43600-643
Change in asset
retirement costs569---569
Retirements-(32)-(1)(71)
Reclassifications(1)--(150)49-
----------------------------------------------------------------------------
Balance at December
31, 20119311141,1443939,687
----------------------------------------------------------------------------
Accumulated
depreciation
Balance at January
1, 201110350-922,150
Depreciation1435-10381
Retirements-(32)-(1)(71)
Reclassifications21--10-
----------------------------------------------------------------------------
Balance at December
31, 201113853-1112,460
----------------------------------------------------------------------------
Net book value at
December 31, 2011793611,1442827,227
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1)Reclassifications are primarily transfers from Construction in progress
to other categories of property, plant and equipment when construction is
completed and assets are available for use.

For the three and six months ended June 30, 2012, interest costs of 21million and 41 million, respectively, were capitalized and includedin property, plant and equipment (three and six months ended June 30,2011 - 13 million and 24 million, respectively) based on 6.5 percent and 6.9 per cent interest capitalization rates for the three andsix months ended June 30, 2012, respectively (7.3 per cent for thethree and six months ended June 30, 2011).

5) Bank Credit Facilities

During the three months ended June 30, 2012, the Corporation extendedthe terms of its credit facilities by one year. The term of the1,500 million operating credit facility was extended to June 1, 2016and the 40 million extendible revolving term credit facility to June30, 2014. No amounts were drawn against these facilities at June 30,2012 (December 31, 2011 - nil).

6) Long-Term Debt

On March 29, 2012, the Corporation issued U.S. 400 million of 4.50%unsecured Senior Notes maturing April 1, 2022 and U.S. 300 millionof 6.00% unsecured Senior Notes maturing April 1, 2042. Interest onthe new Senior Notes is payable semi-annually on April 1 and October1. The Senior Notes are unsecured, rank pari passu with other seniorunsecured debt of the Corporation, and contain certain covenants thatplace limitations on the sale of assets and the granting of liens orother security interests.

7) Asset Retirement Obligation

The Corporation and each of the other Syncrude owners are liable fortheir share of ongoing environmental obligations related to theultimate reclamation of the Syncrude properties on abandonment. TheCorporation estimates reclamation expenditures will be madeprogressively over the next 70 years and has applied a risk-freeinterest rate of 2.25 per cent at June 30, 2012 (December 31, 2011 -2.50 per cent) in deriving the asset retirement obligation. Therisk-free rate is based on the yield for benchmark Government ofCanada long-term bonds.

The following table presents the reconciliation of the beginning andending aggregate carrying amount of the Corporation's share of theobligation associated with the retirement of the Syncrude properties:

Six MonthsYear
EndedEnded
June 30December 31
( millions)20122011
----------------------------------------------------------------------------
Asset retirement obligation, beginning of period1,037501
Change in estimated liability-471
Liabilities settled(42)(49)
Accretion expense1316
Change in risk-free interest rate6998
----------------------------------------------------------------------------
Asset retirement obligation, end of period1,0771,037
Less current portion(29)(29)
----------------------------------------------------------------------------
Non-current portion1,0481,008
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The increase in the asset retirement obligation from 1,037 million atDecember 31, 2011 to 1,077 million at June 30, 2012 reflects adecrease in the risk-free interest rate used to discount futurereclamation payments and accretion of the discounted liability,partially offset by reclamation spending.

The total undiscounted estimated cash flows required to settle theCorporation's share of the asset retirement obligation were 2,168million at June 30, 2012 (December 31, 2011 - 2,210 million).

8) Employee Future Benefits

The Corporation's share of Syncrude Canada's defined benefit andcontribution plans' costs for the three and six months ended June 30,2012 and 2011 is based on its 36.74 per cent working interest. Thecosts have been recorded in operating expenses and othercomprehensive income as follows:

Three Months Ended Six Months Ended
June 30June 30
( millions)2012201120122011
----------------------------------------------------------------------------
Operating expenses
Defined benefit plans
Pension plan1482115
Other post employment benefits plan1122
----------------------------------------------------------------------------
1592317
Defined contribution plans1122
----------------------------------------------------------------------------
16102519
Other comprehensive income
Defined benefit plans
Actuarial loss on pension plan305305
----------------------------------------------------------------------------
Total benefit cost46155524
----------------------------------------------------------------------------
----------------------------------------------------------------------------

The Corporation's share of the estimated unfunded portion of SyncrudeCanada's pension and other post-employment benefit plans increased to476 million at June 30, 2012 from 465 million at December 31, 2011reflecting a 0.25 per cent decrease in the interest rate used todiscount estimated future pension costs to 4.0 per cent, partiallyoffset by Syncrude Canada's contributions to the plans during the sixmonths ended June 30, 2012. For the three and six months ended June30, 2012, a 30 million actuarial loss, net of 10 million indeferred taxes, has been recognized in other comprehensive income toreflect the change in the discount rate. A liability for the 476million unfunded balance is recognized on the June 30, 2012Consolidated Balance Sheet.

9) Foreign Exchange

Three Months EndedSix Months Ended
June 30June 30
( millions)2012201120122011
----------------------------------------------------------------------------
Foreign exchange (gain) loss - long-
term debt36(9)16 (34)
Foreign exchange (gain) loss - other(10)1(6)4
----------------------------------------------------------------------------
Total foreign exchange (gain) loss26(8)10 (30)
----------------------------------------------------------------------------
----------------------------------------------------------------------------

10) Net Finance Expense

Three Months EndedSix Months Ended
June 30June 30
( millions)2012201120122011
----------------------------------------------------------------------------
Interest costs30245145
Less capitalized interest(21)(13)(41)(24)
----------------------------------------------------------------------------
Interest expense9111021
Accretion of asset retirement
obligation74138
----------------------------------------------------------------------------
Net finance expense16152329
----------------------------------------------------------------------------
----------------------------------------------------------------------------

11) Tax Expense

Three Months EndedSix Months Ended
June 30June 30
( millions)2012201120122011
----------------------------------------------------------------------------
Current tax expense20-20-
Deferred tax expense19119119222
----------------------------------------------------------------------------
Total tax expense39 119 139 222
----------------------------------------------------------------------------
----------------------------------------------------------------------------

12) Capital Management

The Corporation's capital consists of cash and cash equivalents, debtand Shareholders' equity. The balance of each of these items at June30, 2012 and December 31, 2011 was as follows:

June 30December 31
( millions, except % amounts)20122011
----------------------------------------------------------------------------
Long-term debt1,8371,132
Cash and cash equivalents(1,618)(718)
----------------------------------------------------------------------------
Net debt(1,2)219414
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Shareholders' equity4,2864,210
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total net capitalization(1,3)4,5054,624
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total capitalization(1,4)6,1235,342
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Net debt to total net capitalization(1,5) (%)59
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Total debt to total capitalization(1,6) (%)3021
----------------------------------------------------------------------------
----------------------------------------------------------------------------
(1) Net debt, total net capitalization, total capitalization, net debt to
total net capitalization, and total debt to total capitalization are non-
GAAP measures.
(2) Long-term debt less cash and cash equivalents.
(3) Net debt plus Shareholders' equity.
(4) Long-term debt plus Shareholders' equity.
(5) Net debt divided by total net capitalization.
(6) Long-term debt divided by total capitalization.

Net debt, comprised of long-term debt less cash and cash equivalents,decreased to 0.2 billion at June 30, 2012 from 0.4 billion atDecember 31, 2011 as Canadian Oil Sands generated cash from operatingactivities of 928 million in the six months ended June 30, 2012,exceeding capital expenditures and dividend payments of 433 millionand 315 million, respectively. In addition, a reduction in investingnon-cash working capital balances increased cash and cash equivalentsby 36 million.

Shareholders' equity increased to 4.3 billion at June 30, 2012 from4.2 billion at December 31, 2011, as net income exceeded dividendsin the six months ended June 30, 2012.

As disclosed in Notes 9 and 10 to the 2011 annual consolidatedfinancial statements, the Corporation is bound by certain debtcovenants; however, these covenants do not specifically limit theCorporation's ability to pay dividends. The Corporation monitors itstotal debt-to-total capitalization, as it must be less than 55 percent according to certain financial covenants. With a netdebt-to-total capitalization of five per cent at June 30, 2012, theCorporation is well within its limits and a significant increase indebt or decrease in equity would be required to negatively impact theCorporation's financial flexibility.

13) Commitments

Commitments are summarized in Canadian Oil Sands' 2011 annualconsolidated financial statements and include future cash paymentsthat the Corporation is required to make under existing contractualarrangements entered into directly or as a 36.74 per cent owner inSyncrude. During the six months ended June 30, 2012, Canadian OilSands entered into new contractual obligations totallingapproximately 1.2 billion for the transportation and storage ofcrude oil in support of the Corporation's strategy to secure accessto preferred markets and enhance marketing flexibility. TheCorporation also assumed 130 million in new funding commitmentsrelating to major capital projects, increased its funding commitmentby 120 million in respect of Syncrude Canada's registered pensionplan, and assumed 84 million in new commitments related to SyncrudeCanada's employee retention program.

14) Contingency

Crown royalties include amounts due under the Syncrude RoyaltyAmending Agreement with the Alberta government. The Syncrude RoyaltyAmending Agreement requires that bitumen be valued by a formula thatreferences the value of bitumen based on North American heavy oilreference prices adjusted for reasonable quality, transportation andhandling deductions (including diluent costs) to reflect the qualityand location differences between Syncrude's bitumen and the referenceprice of bitumen. Canadian Oil Sands' share of the royaltiesrecognized for the period from January 1, 2009 to June 30, 2012 areestimated to be approximately 45 million lower than the amountcalculated using the Alberta-government-provided bitumen value forSyncrude. The Syncrude owners and the Alberta government continue todiscuss the basis for reasonable quality, transportation, and otheradjustments but if such discussions do not result in an agreed uponsolution, either party may seek judicial determination of the matter.The cumulative impact, if any, of such discussions or judicialdetermination, as applicable, will be recognized immediately and willimpact both net income and cash from operating activitiesaccordingly.

15) Supplementary Information

a) Change in Non-Cash Working Capital

Three Months EndedSix Months Ended
June 30June 30
( millions)2012201120122011
----------------------------------------------------------------------------
Operating activities:
Accounts receivable 10642 1573
Inventories14(9)72
Prepaid expenses4295
Accounts payable and accrued
liabilities15(50)95(37)
Less: A/P and A/R changes
reclassified to investing and
other(22)(2)(39)(9)
----------------------------------------------------------------------------
Change in operating non-cash working
capital 117 (17) 229 (36)
----------------------------------------------------------------------------
Investing activities:
Accounts payable and accrued
liabilities186368
----------------------------------------------------------------------------
Change in investing non-cash working
capital186368
----------------------------------------------------------------------------
----------------------------------------------------------------------------

b) Income Taxes and Interest Paid

Three Months EndedSix Months Ended
June 30June 30
( millions)2012201120122011
----------------------------------------------------------------------------
Income taxes paid----
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Interest paid 22 27 45 46
----------------------------------------------------------------------------
----------------------------------------------------------------------------

Income taxes and interest payments are included within cash fromoperating activities on the Consolidated Statements of Cash Flows.

Canadian Oil Sands Limited

Marcel Coutu

President & Chief Executive Officer

Shares Listed - Symbol: COS

Toronto Stock Exchange

Contacts:
Canadian Oil Sands Limited
Siren Fisekci
Vice President, Investor & Corporate Relations
(403) 218-6228

Canadian Oil Sands Limited
Alison Trollope
Manager, Investor Relations
(403) 218-6231
invest@cdnoilsands.com
www.cdnoilsands.com

SOURCE: Canadian Oil Sands Limited

mailto:invest@cdnoilsands.com
http://www.cdnoilsands.com

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