Imperial Oil Annual Report 2008

FY2008 Annual Report · Imperial Oil

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Syncrude has reclaimed more than 4,500 hectares, including this wetland in an area
once part of an active oil sands mining operation.

Imperial oil limited
p.o. Box 2480, Station ‘M’
Calgary, Alberta t2p 3M9

AnnuAl report 2008

energy IS eSSentIAl

Economic growth and energy use are tightly linked, with energy essential for
economic progress. Oil and gas products make it possible for millions of Canadians
to light and heat their homes, fuel their vehicles, and power their businesses.

DIreCtorS, SenIor MAnAgeMent AnD offICerS

Over the long term, we expect that:

Oil and natural gas will
remain the world’s primary
energy sources
Even with an accelerated pace of
advancement in energy efficiency,
global demand for energy will reach
the equivalent of about 310 million
barrels of oil a day by 2030, or
about 35 percent more than in 2005.
This means that we must produce
more energy from all available and
commercially viable resources. There
will be an increase in the use of
alternative energy sources.

Due to their availability, affordability
and versatility, hydrocarbons – oil,
natural gas and coal – will continue
to supply about 80 percent of the
world’s energy needs. Oil and natural
gas alone will account for about 60
percent over the outlook period.

Resources will exist
to meet demand
While oil and natural gas resources
are abundant, supplying increasing
amounts of these energy sources
is a long-term proposition that will
require massive investment, access to
resources, environmental management
and efficient energy markets. Open
energy markets and expanding energy
trade will be essential as global energy
interdependence grows. Technological
advances will also be vital to the
world’s energy future – increasing
supply by tapping unconventional and
frontier energy sources, mitigating
demand growth by improving
energy efficiency, and reducing the
environmental impacts of increased
energy production and use.

Management’s discussion and analysis
Frequently used financial terms

Contents
2 Chairman’s letter
4 Year in review
8 Upstream
14 Downstream
18 Chemical
20
34
36 Management’s report
37 Auditors’ report
38
60
64
65 Quarterly financial and stock trading data
66

Information for investors

Financial statements, accounting policies and notes
Supplemental information on oil and gas exploration and production activities
Share ownership, trading and performance

60 %

of the world’s
energy needs will
continue to be
supplied by oil
and natural gas

Energy demand will increase
even with the current
economic downturn
Increasing population, long-term
economic growth and improving
living standards around the world will
generate greater demand for all forms
of energy. While growth in energy
use will continue in North America,
it will be strongest in developing
countries such as China and India.

World energy demand is projected to grow at 1.2 percent a year

by fuel type – millions of oil-equivalent barrels a day

350

300

250

200

150

100

Other*

Coal

Natural gas

60%

Oil

60%

1980

1990

2000

2010

2020

2030

*Other energy sources include nuclear, hydro, biomass, wind and solar.

Imperial oil limited Board of Directors from left to right,
Jack M. Mintz, Victor l. young, Krystyna t. Hoeg, Bruce H. March, Sheelagh D. Whittaker, roger phillips, paul A. Smith and robert C. olsen.

Board of Directors
Krystyna T. Hoeg
retired president and chief
executive officer
Corby Distilleries limited
toronto, ontario

Bruce H. March
Chairman, president and
chief executive officer
Imperial oil limited
Calgary, Alberta

Jack M. Mintz
palmer Chair in public
policy, university of Calgary
Calgary, Alberta

Robert C. Olsen
executive vice-president
exxonMobil production
Company
Houston, texas

Roger Phillips
retired president and chief
executive officer
IpSCo Inc.
regina, Saskatchewan

Paul A. Smith
Senior vice-president,
finance and administration,
and treasurer
Imperial oil limited
Calgary, Alberta

Sheelagh D. Whittaker
Corporate director
london, england

Victor L. Young
Corporate director of several
corporations
St. John’s, newfoundland
and labrador

Other Officers
randy l. Broiles
Senior vice-president,
resources division

Sean r. Carleton
Controller

Brian W. livingston
Vice-president,
general counsel and
corporate secretary

Audit committee
V.l. young, chair
S.D. Whittaker, vice-chair
K.t. Hoeg
J.M. Mintz
r. phillips

Executive resources
committee
r. phillips, chair
V.l. young, vice-chair
K.t. Hoeg
J.M. Mintz
r.C. olsen
S.D. Whittaker

Nominations and corporate
governance committee
S.D. Whittaker, chair
J.M. Mintz, vice-chair
K.t. Hoeg
r.C. olsen
r. phillips
V.l. young

Environment, health
and safety committee
J.M. Mintz, chair
K.t. Hoeg, vice-chair
r.C. olsen
r. phillips
S.D. Whittaker
V.l. young

Imperial Oil Foundation
K.t. Hoeg, chair
r. phillips, vice-chair
J.M. Mintz, director
p.A. Smith, director
S.D. Whittaker, director
V.l. young, director

Directors, senior management and officers

Forward-looking statements

This report contains forward-looking information on future production, project start-ups and future capital spending. Actual results could differ materially as a result of
market conditions or changes in law, government policy, operating conditions, costs, project schedules, operating performance, demand for oil and natural gas, commercial
negotiations or other technical and economic factors.

The Imperial Oil advantage

Annual report 2008 | Imperial Oil Limited

Imperial Oil is one of Canada’s largest corporations and a leading
member of the country’s petroleum industry. It is one of the country’s
largest producers of crude oil and natural gas, and is the largest
petroleum refiner and marketer with a coast-to-coast supply network
that includes about 1,900 retail service stations.

We adhere to a proven,
consistent strategy
focused on long-term
growth in shareholder
value based on four
corporate priorities:

• target flawless execution

in everything we do

• grow profitable sales volumes

• attain best-in-class cost

structures in each business

• improve the productivity

of our asset mix

We are developing one
of Canada’s leading
resource positions

We are developing new
technologies to improve
existing operations,
unlock energy resources,
reduce environmental
impacts and improve
our products

We continually improve
base operations to
enhance safety,
environmental
performance, reliability
and efficiency throughout
the company

We create shareholder
value – generating
superior long-term
investment returns

Sustained increase
in shareholder value

Proved reserves*

Significant resource base

Non-proved resources

value of $100 invested in
Imperial Oil on December 31, 1998

billions of oil-equivalent barrels
after royalties

billions of oil-equivalent barrels – 2008

800

600

400

200

Imperial Oil
S&P/TSX Equity Energy Index
S&P/TSX Composite

(1)

Source: Bloomberg

Caption copy

Net production
Proved reserves*
Non-proved resources**

Mineable oil sands
In-situ heavy oil
Conventional, including frontier

(1) From 2002 to 2004, the S&P/TSX Composite Energy Index was used. Prior to 2002, the S&P/TSX Energy

Index was used.

• Significant resource base of nearly 14 billion oil-equivalent barrels.

* Based upon prices the company uses to make investment decisions – this basis is used for reporting

reserves on pages 1-19 in this document unless otherwise noted. See page 62 for estimates based upon the
U.S. Securities and Exchange Commission’s requirement that applies December 31st prices and costs.

• Non-proved resources of more than 11 billion oil-equivalent barrels,

of which 10 billion barrels are heavy oil and oil sands.

** Pursuant to National Instrument 51-101 disclosure guidelines, and using Canadian Oil and Gas Evaluation
Handbook definitions, Imperial’s non-proved resources are classified as a “contingent resource.” Such
resources are a best estimate of the company’s net interest after royalties at year-end 2008, as determined
by Imperial’s internal qualified reserves evaluator. Contingent resources are considered to be potentially
recoverable from known accumulations using established technology or technology under development,
but are currently not considered to be commercially recoverable due to one or more contingencies. There is
no certainty that it will be economically viable or technically feasible to produce any portion of the resource.
See discussion on pages 8-13 in the Upstream section for additional information on components of the
contingent resource base, including undeveloped oil sands acreage and the Mackenzie natural gas project.

• Long-life reserves.

Imperial Oil Limited | Annual report 2008

CHAIRMAN’S LeTTeR

Imperial is well positioned to grow
in today’s challenging times.

It’s hard to imagine a more volatile year
than the one experienced in 2008 –
industries and economies the world over
were impacted by the year’s events. But
despite these challenging economic times,
Imperial Oil continued to position itself for
long-term growth while producing solid
results for shareholders in 2008:

• net income was $3.9 billion, the highest

in our history

• regular annual per-share dividends were
increased for the 14th consecutive year

• $2.5 billion was distributed to

shareholders through dividend payments
and share repurchases

The basis for our continued prosperity
comes from a long-standing focus on the
factors we can control in our business. Our
business model enables us to excel when
market conditions are favourable and to
prosper during difficult times through:

• prudent financial management and

business controls

• disciplined capital investment
• operational excellence

Going forward, financial strength is
essential. Our balance sheet is built on an
efficient and conservative approach, and
we have essentially no debt. The company’s
investment discipline includes developing
projects to ensure their returns will be
resilient over a wide range of economic
scenarios. This has laid the foundation for
a portfolio of projects that will continue
to move forward in the current economic
environment and will double our company’s
size in the years to come.

In the area of operational excellence, we
continue to focus on improving safety,
environmental performance, reliability and
efficiency across the business. In 2008, we
sustained industry-leading employee safety
performance. We are proud of the progress
made in 2008 to improve our operations
reliability, with more improvements to
come in making our assets more reliable
and more efficient.

We also continued to look for opportunities
to grow our business.

The Kearl oil sands project represents
a tremendous opportunity, and we are
committed to developing it responsibly.
Advanced technology, operational
excellence, and ongoing consultation
with stakeholders will contribute to
reducing impacts on the environment
while optimizing the social and
economic benefits.

At the Cold Lake heavy oil operation,
we outlined growth plans that will add
another 30,000 barrels a day of production.
In addition, our ongoing commitment
to research saw us advance the use of
a technology that enhances resource
recovery at Cold Lake by adding a small
amount of solvent into the steaming
process. At Syncrude, we are working to
increase production and reduce costs at the
world’s largest producer of synthetic crude
oil from oil sands.

Natural gas opportunities continued to be
advanced as well. In the Horn River Basin
of British Columbia, exploration drilling
and evaluation are underway and we
increased our land position in this
promising unconventional natural gas
area. In the Mackenzie Delta area of the
Northwest Territories, the regulatory
approvals process continues on a project
that would create the infrastructure to
bring an estimated six trillion cubic feet
of onshore natural gas resource to North
America. The Taglu field (100-percent
Imperial) contains three trillion cubic feet
of this resource.

Aside from oil sands and gas-related
projects, we continued to explore for
world-class discoveries in frontier areas.
In the Beaufort Sea, we completed a 3-D
seismic survey that will help us position
a future exploration well. And off the east
coast of Newfoundland, we’re working with
our partners to develop plans for a second
exploration well to test the oil and gas
potential of the Orphan Basin.

Complementing the Upstream’s growth
potential is the strength of integration with
our Downstream assets.

In the Downstream and Chemical
businesses, upgrades at our manufacturing
and retail sites further improved
productivity, efficiency and flexibility. Such
investments are increasing our capacity
to convert crude oil into higher-value
products, strengthening our position in
a highly competitive retail market and
enabling us to respond efficiently and
profitably to shifting customer demands.

All of these initiatives will position us for
success in 2009 and beyond.

Continued economic uncertainty will affect
market conditions and demand for our
products in the year ahead. Our disciplined,
prudent approach and unparalleled
financial strength will enable us to take
advantage of a period of decreasing costs
and improving labour productivity as
we invest in our future. In 2009, our capital
and exploration program will increase to
$2.2 billion.

Our dedicated workforce is following
proven strategies, and our strong
commitment to research and technology is
helping us unlock future energy resources
while reducing environmental impacts.

With these strengths and our proven record
of performance, I believe shareholders
can look forward to continued success at
Imperial – a company solidly positioned
to grow.

Bruce March

Chairman, president and chief executive officer

February 24, 2009

Beaufort Sea

mackenzie natural
gas project

norman wells

Horn river

4 3

Strathcona

Annual report 2008 | Imperial Oil Limited

Orphan Basin

Dartmouth

map LEgEnD

OIL SanDS pOrtFOLIO

Frontier exploration
Development
Major production
Refineries

Kearl
Syncrude
Athabasca
Cold Lake Nabiye expansion
Cold Lake

Sarnia

nanticoke

unLOckIng canaDa’S rESOurcE pOtEntIaL wItH a prOvEn, IntEgratED apprOacH

As an integrated energy company, we explore for, produce, refine and market
products that are essential to society. Each of our businesses is distinct,
but all are complementary and managed by the same principles.

ExpLOratIOn

DEvELOpmEnt anD prODuctIOn

Unlocking Canada’s resource potential in frontier areas with
ingenuity, major investment, Arctic capability and leading-
edge technology.

Developing discovered resources using world-class technology,
global project management techniques and financial strength.

Producing crude oil and natural gas in an economically and
environmentally responsible way, with a commitment to
world-class research and advanced technology.

markEtIng

rEFInIng anD pEtrOcHEmIcaLS

Delivering petroleum products across Canada through secure
and ratable outlets of more than 100 distribution terminals and
about 1,900 retail service stations.

Refining crude oil into petroleum products with a proven model
of continuous operations improvement and delivering cost
efficiencies. Chemical and lubricants manufacturing assets
are fully integrated with refineries, maximizing value through
optimized operations.

Imperial Oil Limited | Annual report 2008

2008 Year in review

OpeRATING HIGHLIGHTS

Safety and environment

• Sustained industry-leading

• More than 95 percent of

– Started construction

employee safety performance.
Initiatives to improve contractor
safety continued in all parts of
our operations, toward the
goal of “Nobody Gets Hurt.”

• Environmental management
and performance remained
a major focus. About 130
managers and supervisors
were trained in environmental
leadership to support our
focus: “protect Tomorrow.
Today.”

produced water is treated
and recycled for steam
production at Imperial’s Cold
Lake production facility. At
Syncrude, where Imperial is
a 25-percent owner, about
88 percent of all water used
comes from a continuous
recycle loop.

• Committed more than

$100 million to reduce sulphur
dioxide (SO2) emissions
at Sarnia and Dartmouth
refineries:

on a new unit at Sarnia,
that when coupled with
operational enhancements,
will enable the site to reduce
SO2 emissions by more than
50 percent.

– At Dartmouth, a project

was commenced that will
enable SO2 emissions to be
reduced by more than
25 percent.

• Completed the first full year
of operation of a sulphur
recovery unit that will reduce
SO2 emissions from Cold
Lake’s Mahihkan plant by
more than 70 percent, and
started up a new sulphur
recovery unit at the Mahkeses
plant that will reduce SO2
emissions by more than
70 percent.

Imperial has an extensive land position in the Horn River Basin, a promising unconventional shale
gas area in northern British Columbia. Exploration drilling commenced in 2008.

Chairman’s letter | Year in review | Upstream | Downstream | Chemical

Annual report 2008 | Imperial Oil Limited

About

$500
million

invested in
Kearl to date

Research and
development
• Total research expenditures in
Canada were $117 million in
2008. In addition, through its
relationship with exxonMobil,
Imperial had access to about
$900 million of industry-
leading research worldwide.

• In 2008, the Imperial Oil-
Alberta Ingenuity Centre
for Oil Sands Innovation
(COSI) research portfolio
comprised three key
program areas aimed at the
sustainable development
of Alberta’s oil sands and
improved environmental
performance. For example,
the five integrated projects in
the non-aqueous extraction
program are developing the
fundamental science base
that could lead to a bitumen
extraction process with up to
a 60-percent reduction in fresh
water use, the elimination of
tailings ponds and a reduction
in GHG intensity.

Advanced major projects
and new opportunities
• About 800 million barrels
were added to Imperial’s
proved reserves in connection
with phase one of the Kearl
oil sands project.

• Commenced exploration

drilling and evaluation in the
Horn River Basin of northeast
British Columbia.

• Completed an extensive
3-D seismic survey in the
Beaufort Sea.

• Progressed planning and

design work on the Nabiye
project, the next phase of
expansion at the Cold Lake
heavy oil operation.

• Piloted a technology involving
continuous steam flooding to
improve resource recovery in
mature portions of the field at
Cold Lake.

• Advanced the use of a

technology that improves
resource recovery at existing
Cold Lake wells by adding
solvent to the steaming
process.

• Commenced a pilot program
that adds solvent to Steam-
Assisted Gravity Drainage
(SAGD) wells. The technology
has potential to enhance
recovery for certain reservoirs
in the Cold Lake and
Athabasca areas.

Reserves growth and
volume performance
• Increased proved reserves

after royalties from
1.5 billion oil-equivalent
barrels at year-end 2007 to
about 2.4 billion oil-equivalent
barrels at year-end 2008.

• Daily production of crude

oil, natural gas and natural
gas liquids averaged 308,000
oil-equivalent barrels a day
before royalties.

• Net petroleum product sales
volumes averaged 438,000
barrels a day; Imperial is the
largest petroleum refiner in
Canada.

Corporate citizenship

• We continued our long

tradition of contributing to
the communities where we
operate by creating jobs,
providing products that
Canadians need and investing
in community initiatives.
Imperial’s funding totaled
$12.1 million in 2008.

• We hired more than 100 new

university graduates.

• See our corporate citizenship
report at www.imperialoil.ca.

Imperial Oil Limited | Annual report 2008

2008 Year in review

FINANCIAL HIGHLIGHTS

$3.9
billion

in net income,
return on capital
employed of 45%

• Achieved record earnings of

$3.9 billion or $4.36 per share.

• Achieved an industry-leading
return on capital employed of
45 percent.

• Annual per-share dividends

paid increased for the 14th year
in a row. Imperial has paid
a dividend to shareholders
every year since 1890.

• Shareholder distributions

totaled $2.5 billion through
dividend payments and
share repurchases.

• Sustained a strong balance
sheet with $2 billion in cash
and essentially no debt.
Debt as a percentage of total
capital was at two percent at
year-end, interest coverage
was 661 times on an earnings
basis, and 721 times on a cash
flow basis.

• Maintained a “AAA” rating

from Standard & poor’s, the
only Canadian industrial
company with this rating.

• Completed a $1.4 billion
capital and exploration
program.

• Planned capital and

exploration expenditures
in 2009 of $2.2 billion, to be
financed entirely through
internally generated funds.

Financial highlights

millions of dollars

2008

2007

2006

2005

2004

Operating revenues (a)
Net income
Cash flow from operating activities and asset sales (b)
Cash and cash equivalents at year-end
Total debt at year-end
Average capital employed (c)

31 240
3 878
4 535
1 974
143
8 684

25 069
3 188
3 905
1 208
146
8 509

24 505
3 044
3 799
2 158
1 437
8 515

27 797
2 600
3 891
1 661
1 439
7 976

22 408
2 052
3 414
1 279
1 443
7 425

(a)

Operating revenues include $4,894 million for 2005 and $3,584 million for 2004 for purchases/sales contracts with the same
counterparty. Associated costs were included in purchases of crude oil and products. Effective January 1, 2006, these purchases/
sales were recorded on a net basis.

(b) A definition of cash flow from operating activities and asset sales can be found on page 35.
(c) A definition of average capital employed can be found on page 34.

Key financial ratios

Net income per share – diluted (dollars) (a)
Return on average capital employed (percent) (b)
Return on average shareholders’ equity (percent) (c)
Annual shareholders’ return (percent) (d)
Debt to capital (percent) (e)

2008

2007

2006

2005

2004

4.36
44.7
45.7
(24.3)
2

3.41
37.7
41.6
28.0
2

3.11
35.9
43.5
12.5
17

2.53
32.6
40.2
64.0
18

1.91
27.7
34.6
25.3
19

(a) Calculated by reference to the average number of shares outstanding, weighted monthly (page 64).
(b) A definition of return on average capital employed can be found on page 35.
(c) Net income divided by average shareholders’ equity (page 39).
(d) Includes share appreciation and dividends.
(e) Current and long-term portions of debt (page 39) and the company’s share of equity company debt, divided by debt and

shareholders’ equity (page 39).

50%

Net income
millions of dollars

Return on capital
employed (ROCE)
percent

Imperial Oil ROCE (percent)
Canadian integrated oil
companies ROCE (percent)
Net income

Source: Bloomberg and
quarterly reports

Capital and exploration
expenditures

millions of dollars

09
plan

4 000

3 500

3 000

2 500

2 000

1 500

1 000

500

2 400

2 000

1 600

1 200

800

400

Annual report 2008 | Imperial Oil Limited

DeveLOpING CANADA’S OIL SANDS ReSpONSIBLy

Satisfying the world’s demand for energy will require both renewable and non-renewable sources. Because
of their size, the oil sands of northern Alberta – second only in size to Saudi Arabia for estimated recoverable oil
– will play an increasingly important role in the global supply picture. The development of the oil sands is creating
employment and economic benefits for Canadians, but with this opportunity comes the requirement to reduce the
impacts on the environment. Imperial’s own research organization made investments of $80 million in 2008
to advance opportunities to lessen impacts on the air, water and land affected by oil sands production.

Greenhouse gas emissions
Significantly reducing global CO2 emissions
growth is a challenging proposition that will
require global participation, step changes
in energy efficiency, significant technology
gains, and massive investment over decades.

The oil sands industry currently accounts
for about four percent of Canada’s total
greenhouse gas (GHG) emissions – or about
0.1 percent of global emissions.

GHG emissions can be reduced by improving
energy efficiency. For example, at Syncrude,
improvements have reduced energy intensity
per barrel by nearly 20 percent since 2006.
Longer term, breakthrough technologies will
be required to make a step change. To this
end, Imperial is a founding partner of the
Imperial Oil-Alberta Ingenuity Centre for Oil
Sands Innovation (COSI) at the University of
Alberta. This centre brings together some of
the best scientific and engineering minds to
seek new technologies associated with oil
sands development, including more energy-
efficient ways to extract and upgrade the
resource.

In addition, at Imperial’s own Calgary
research facility, we are working on solvent-
based heavy oil recovery processes that
can significantly reduce GHG emissions
compared to current thermal recovery
processes. Imperial is also an active member
of the Integrated CO2 Network, a consortium
of companies exploring the viability of
developing a large scale Canadian carbon
dioxide capture, transportation and storage
network. Carbon capture and storage has
been identified as a potential method of
reducing future GHG emissions from the
oil sands.

Water
Extracting bitumen from oil sands uses water,
and we are steadily reducing the quantity
required through extraction efficiency.
Through more than 40 years of technical
innovation, Imperial has pioneered state-of-
the-art water recycling technology at Cold
Lake. Today the operation recycles more than
95 percent of the water that is recovered with
the bitumen, helping to reduce requirements
for fresh water.

Looking ahead, promising research at COSI
is underway to develop a non-aqueous
extraction process for oil sands mining that
could significantly reduce fresh water use.

Another outcome of this research could also
lead to the production of dry or “stackable”
tailings, which would eliminate the need for
large tailings ponds.

Land
Surface mining of the oil sands has the most
visible impact on the land. Only about 20
percent of Alberta’s oil sands resource is
suitable for surface mining. To put this into
context, Canada’s boreal forest encompasses
3,200,000 square kilometres, of which
420 square kilometres is currently being
disturbed through surface mining. This
represents 0.01 percent of the Canadian
boreal forest.

While 20 percent of the oil sands can be
surface mined, the other 80 percent requires
in-situ technologies to bring the oil to the
surface. Our Cold Lake operation, the largest
thermal in-situ operation in the world, uses
this technology in centrally located well
clusters, resulting in a smaller surface
disturbance. And, of the total land area that
has been disturbed, about 19 percent has
been permanently reclaimed.

19%

of land reclaimed
at Cold Lake

We are working to further reduce our
temporary footprint through each phase of
operation. For example, at ongoing operations
like Syncrude, 22 percent of disturbed land
has been reclaimed – and Syncrude in 2008
received the industry’s first provincial land
reclamation certificate for a 104-hectare
parcel known as Gateway Hill.

Ultimately, all oil sands operations are
required to reclaim the land they disturb.
Imperial, together with other oil sands
operators, is funding leading-edge
reclamation research conducted by the
Canadian Oil Sands Network for Research
and Development.

Industry, governments and the research
community all have roles to play in ensuring
the responsible development of Canada’s oil
sands. It is a shared obligation that will call
for the development and integration of new
ideas and technologies – and action.

Ron Myers, manager of
Ron Myers, manager of
Imperial’s facilities and
Imperial’s facilities
environment research
and environment research
group, leads a multi-
group, is part of a
disciplinary research team
multi-disciplinary team
that is developing more
that is looking for ways
energy efficient oil sands
to reclaim the land faster
processes that have a
and more effectively.
reduced environmental
footprint.

Imperial Oil Limited | Annual report 2008

Upstream

Imperial completed a 3-D seismic survey in the Beaufort Sea, a promising
frontier exploration area. This work was conducted on the large acreage
position acquired in 2007. Imperial has a strong offshore position in the
Mackenzie Delta and Beaufort region.

Chairman’s letter | Year in review | Upstream | Downstream | Chemical

Annual report 2008 | Imperial Oil Limited

We are advancing a
high-quality portfolio
of major projects that
position the company
for significant long-
term volume growth.

Our Upstream business
continued its record of superior
operating performance in
2008, generating earnings
of $2,923 million, cash flow
from operating activities and
asset sales of $3,712 million
and return on average capital
employed of 65 percent.

We produced an average of
308,000 oil-equivalent barrels
a day before royalties of heavy
oil, synthetic crude oil, natural
gas, and conventional crude oil
and natural gas liquids.

Capital and exploration
spending totaled $1.1 billion
in 2008 with about $1.8 billion
planned in 2009, largely for
future reserve additions and
production growth.

The resource base
Our total proved and non-
proved resource base is about
14 billion oil-equivalent barrels
after royalties, representing
about 150 years of production
at current levels – a leading
position in terms of size and
quality. The resource base
comprises about 2.4 billion
oil-equivalent barrels of proved
reserves – a 56-percent
increase over last year –
and more than 11 billion
oil-equivalent barrels of
non-proved resources, which
consist primarily of heavy oil
and oil sands.

Phase one of
Kearl added about

800

million barrels
to proved reserves

Looking ahead, we are
advancing an inventory of
major projects to add reserves
and production. These include:

• future mining phases of

Syncrude and Kearl

• in-situ development at Cold
Lake and in the Athabasca
area

• unconventional gas in

northeast British Columbia

• natural gas and liquids from
the onshore Mackenzie Delta
region and Canada’s High
Arctic

• hydrocarbons from the

Beaufort Sea and the Orphan
Basin off Canada’s east Coast

AT A GLANCe

2008

2007

2006

2005

2004

Net income (millions of dollars)
Cash flow from operating activities
and asset sales (millions of dollars)
Gross crude oil and NGL production (thousands of barrels a day)
Gross natural gas production (millions of cubic feet a day)
Average capital employed (millions of dollars)
Return on average capital employed (percent)

2 923

2 369

2 376

2 008

1 517

3 712
256
310
4 526
64.6

2 661
275
458
4 258
55.6

3 151
272
556
3 993
59.5

2 805
261
580
3 928
51.1

2 395
262
569
3 877
39.1

Imperial Oil Limited | Annual report 2008

Heavy oil and oil sands
Canada’s oil sands are an
increasingly important energy
source in helping to meet
the world’s long-term energy
needs and sustaining Canadian
economic prosperity. The oil
sands represent a national
opportunity, but there are
challenges with respect to
bringing the resource to
market efficiently and in an
environmentally responsible
manner. As an oil sands
pioneer, we are using our
technological and operational
expertise to overcome
these challenges.

cold Lake
Cold Lake is the world’s largest
thermal in-situ heavy oil
operation, representing more
than four percent of Canada’s
total oil production. proved
reserves are about 672 million
barrels after royalties,
representing production for
another 15 years at current
rates. Cold Lake’s non-proved
resources are about 2 billion
barrels.

production in 2008 averaged
147,000 barrels a day before
royalties – down from the
record 154,000 barrels a day
in 2007. Lower production
volumes were due to the
cyclic nature of production.

Ongoing research and
application of technologies
to improve recovery have
been mainstays of Cold Lake’s
success. More than $250 million
was spent on such initiatives
prior to the project’s commercial
start-up in 1985. Since that time,
resource recovery rates have
nearly doubled, to about 30
percent today. This technology
evolution continued in 2008, as
we piloted a new technology
that uses continuous steam
flooding to enhance recovery
in mature portions of the
reservoir, and we progressed
the use of Liquid Addition to
Steam for enhanced Recovery
– a technology that enhances
recovery by adding solvent to
the steaming process.

300

200

100

600

500

400

300

200

100

Crude oil and NGL
production by source

thousands of barrels a day
before royalties

Syncrude
Cold Lake
Conventional and NGLs

Oil sands production from
Syncrude and Cold Lake
provides a strong production
base to replace declining
conventional volumes.

Natural gas production

millions of cubic feet a day
before royalties

Natural gas declines occurred
as expected in 2008, following
completion of the Wizard Lake
blowdown.

Production at the Cold Lake heavy oil operation averaged 147,000 barrels a day before royalties in 2008. The site has
more than 4,500 wells drilled from some 200 multi-well pads, four plants that generate steam and process bitumen, and a
cogeneration unit. Pictured here are employees Vince Burke and Donna Pinder.

Chairman’s letter | Year in review | Upstream | Downstream | Chemical

Annual report 2008 | Imperial Oil Limited

Resource base

billions of oil-equivalent barrels
after royalties

3.5

(1.2)

13.7

11.4

n
o
i
t
c
u
d
o
r
P

s
e
g
n
a
h
C

1998

2008

Proved reserves
Non-proved resources

Proved reserves replacement
of 150 percent and resource
replacement of 300 percent
over the last decade.

In addition to Imperial’s
sustained investments in
technology to enhance
recovery, the regulator-
approved Nabiye project
will add new producing well
pads, a processing plant and
about 30,000 barrels a day of
production.

This development builds on the
merits of continued technology
improvements made possible
by a phased development
approach. Three modifications
from the current approval are
being considered to further
improve environmental
performance: a modified field
development plan to reduce
surface footprint, addition of a
cogeneration facility to improve
energy efficiency, and addition
of sulphur-removal facilities
to reduce sulphur-dioxide
emissions.

Syncrude
Imperial holds a 25-percent
interest in Syncrude, an
integrated mining, extraction
and upgrading facility located
north of Fort McMurray,
Alberta. Syncrude has proved
reserves of 2.9 billion barrels
of synthetic crude oil after
royalties, translating into
about 32 years of production
at current rates. Syncrude’s
non-proved resources are
more than 9 billion barrels of
synthetic crude oil.

Imperial’s share of production
averaged 72,000 barrels a
day before royalties – down
from 76,000 barrels a day in
2007. Lower volumes were
primarily the result of increased
mining and plant maintenance
activities during the year.

production from Syncrude
represents about nine percent
of Canadian oil production, and
offers strong opportunity for
future growth.

A multi-year plan to improve
operating performance
continued in 2008, with a focus
on improved reliability. Such
improvements in 2008 included
greater energy efficiency,
higher synthetic crude oil
yield from bitumen, and
strong planned maintenance
turnaround performance.

On behalf of the Syncrude
owners and under the
provisions of the 2007
Management Services
Agreement, exxonMobil
and Imperial assumed
responsibility for operations
oversight and major project
development. progress to
date includes improved safety
performance and lower energy
intensity through reduced
flaring and enhanced energy
management. As well, there
have been improvements in
plant reliability and major
turnaround execution with the
implementation of exxonMobil
Global Best practices.

proved reserves of crude oil and natural gas (a)

crude oil and ngLs
millions
of barrels

natural gas
billions
of cubic feet

Synthetic
crude oil
(Syncrude)

mined
bitumen
(Kearl)

millions of barrels

year ended

2004 (b)
2005 (b)
2006 (b)
2007 (b)
2008 (b)

Conventional
gross net

Heavy Oil
(Cold Lake)
net

gross

Total
gross net

gross net

134 110
77
65
76
67

95
81
96
88

783
753
667
727
753

702
683
616
649
672

917 812
848 760
748 681
823 725
841 739

1 034 880
927 765
830 673
779 622
743 603

835 757
816 738
792 718
765 694
809 734

–
–
–
–

–
–
–
–
962 807

(a)

Gross reserves are the company’s share of reserves before deducting the shares of mineral owners or governments or both.
Net reserves exclude these shares.

(b) Based upon prices the company uses to make investment decisions; see page 62 for estimates based upon the U.S. Securities and

Exchange Commission’s requirement that applies December 31st prices and costs.

Imperial Oil Limited | Annual report 2008

Conventional production
Imperial remains a large
domestic producer of
conventional crude oil and
natural gas. production before
royalties averaged about
37,000 barrels a day of crude
oil and natural gas liquids,
and about 310 million cubic
feet a day of natural gas,
for a combined total of
approximately 89,000 oil-
equivalent barrels a day.

western canada
Conventional production
in Western Canada is at a
mature stage. To help ensure
profitability, Imperial focuses
on cost control, maximizing
production of existing assets,
and pursuing all projects with
the potential for attractive
returns. In 2008, these included
new drilling at Norman Wells
and the ongoing shallow
gas drilling program in
southeastern Alberta.

FUTURe GROWTH OppORTUNITIeS

undeveloped acreage
Adding to the high-quality oil
sands assets of Cold Lake,
Syncrude and Kearl, Imperial
holds extensive undeveloped
acreage with promising mining
and in-situ development
opportunities in the Athabasca
region of Alberta. The
Athabasca delineation program
will continue in 2009, targeting
further resource additions.

Horn River
Imperial (50-percent interest)
and exxonMobil Canada have
acquired more than 152,000
net acres in British Columbia’s
Horn River Basin, a frontier
exploration area where
natural gas is trapped in shale
rock. Although challenging
to produce, unconventional
resources such as shale gas can
be prolific – and preliminary
industry results in the area
have been promising. The
viability of shale gas as a large-
scale energy source has been
made possible by technologies
that better fracture rocks in
extended-reach horizontal
wells, enabling the resource
to be accessed in an economic
manner.

Our exploration drilling and
evaluation of the Horn River
acreage commenced in 2008
with a four-well program,
and with success as well
as additional exploration
activities, Horn River could be
another large, long-life natural
gas project that advances with
a disciplined development
approach.

Mackenzie natural
gas project
The Mackenzie Delta represents
an important potential source
of energy for North America.

Located in Canada’s north, the
proposed Mackenzie natural
gas project would create the
infrastructure to bring an
estimated six trillion cubic
feet of onshore natural gas
resource to North American
markets from three fields, with
the Taglu field (100-percent
Imperial) containing resources
of three trillion cubic feet
alone. The project would be
built with sufficient capacity
to accommodate future
discoveries along the
pipeline route.

After several years of work
on the project, the regulatory
approvals process has not yet
concluded. project spending
has been minimized, and
current activities are focused
on finalizing remaining benefits
and access agreements as well
as establishing an appropriate
fiscal framework with the
federal government.

Timing for a regulatory
decision is dependent on the
issuance of a report by the
Joint Review panel.

Offshore exploration
Our search for world-class oil
and gas discoveries takes us to
some of Canada’s most remote
and technically challenging
regions, where we use our
demonstrated expertise and
leading-edge technology to
unlock resource potential.

Beaufort Sea
The Beaufort Sea is a frontier
area of exploration in Canada’s
Arctic. A multi-year exploration
licence covering more than
500,000 acres was acquired by
Imperial (50-percent interest)
and exxonMobil Canada in
2007, adding to an already
strong offshore position in the
Mackenzie Delta and Beaufort
region. The exploration
area is located about 120 km
north of the Taglu field in
the Northwest Territories, in
varying water depths.

In 2008, a 3-D seismic program
was completed that utilized the
services of professional wildlife
biologists and traditional-
knowledge experts hired from
local Aboriginal communities.
Results from this program will
help us evaluate the resource
potential and future exploration
drilling in this promising area.

Orphan Basin
The Orphan Basin is located
in the Atlantic Ocean, about
400 km northeast of St. John’s,
Newfoundland. Imperial has a
15-percent interest in a position
that spans 4.2 million acres.
exploration in this remote area
is technically challenging and
high cost, but has potential for
containing large amounts of
hydrocarbons. The drilling of
the first exploration well, one
of the deepest in Canadian
history, was completed by
co-venturers in 2007. We have
integrated lessons from this
well into plans for the drilling
of the next exploration well.

Chairman’s letter | Year in review | Upstream | Downstream | Chemical

Annual report 2008 | Imperial Oil Limited

KeARL: A WORLD-CLASS ReSOURCe

Based on our proven success at Cold Lake,
the Kearl project will advance in phases,
enabling new technologies, improved
management processes, and advanced
operational know-how to be applied as they
emerge.

The first phase of Kearl has the potential to
initially produce 110,000 barrels of bitumen
a day before royalties, of which Imperial’s
share would be about 78,000 barrels a day.

The project has an estimated lifespan of
about 40 years, and when all three phases
are completed, it could produce more than
300,000 barrels of bitumen a day before
royalties.

In 2008, activities focused on engineering,
access road construction, site preparation
and earthworks. By year-end, about
$500 million had been invested in Kearl,
and there are currently nearly 1,200
employees and contractors working
on project development.

Detailed design engineering continues and
procurement of items that require long lead
times has started. Current activities also
include reducing the overall project cost by
capturing productivity improvements and
finalizing transportation system agreements.
Safety, disciplined execution of project plans,
and cost reduction remain strongly in focus
as the project advances.

Kearl is a long-life, high-quality oil sands
mining opportunity located north of Fort
McMurray, Alberta. The proposed three-
phase project has an estimated total
recoverable resource of 4.6 billion barrels of
bitumen before royalties – in which Imperial
holds about a 70-percent interest.

In connection with the first phase of
development, about 800 million barrels
of bitumen after royalties were added to
Imperial’s proved reserves in 2008, marking
a major project milestone.

Kearl represents one of the best undeveloped
resources in terms of the quantity of bitumen
that can be produced for a given volume of
mined material, providing the project with
an inherent cost advantage. Kearl will utilize
proven technologies such as truck-and-
shovel mining and hydrotransport, as well
as newer ones, such as high-temperature
paraffinic froth treatment – a technology
developed by the company that produces a
higher-quality, marketable bitumen product.

Stuart Nadeau is the environmental and regulatory manager for Kearl, an oil sands mining
project with the potential to produce more than 300,000 barrels a day. Imperial is committed
to developing Kearl responsibly – with advanced technology, operational excellence, and
ongoing consultation with stakeholders.

Imperial Oil Limited | Annual report 2008

Downstream

Our refinery in Sarnia, Ontario can process 121,000 barrels of crude oil a day into
a range of petroleum products for heat, light, transportation and lubrication.
The chemical plant produces the raw materials for a variety of industrial and
consumer products such as containers and recreational goods.

Proprietary and restricted distribution until Feb. 24, 2009

Chairman’s letter | Year in review | Upstream | Downstream | Chemical

Annual report 2008 | Imperial Oil Limited

With the capacity
to process 500,000
barrels of crude oil
a day, we are the
largest refiner and
marketer of petroleum
products in Canada.

Our Downstream operations
convert crude oil into more
than 700 petroleum products
that consumers and businesses
need and use every day.

We continue to have a leading
market share in petroleum
product sales, including retail
fuels and finished lubricants.
Our competitive advantage is
achieved by having refining
and marketing operations in
Western, Central and Atlantic
Canada.

Net earnings from the
Downstream totaled
$796 million, down from a
record $921 million in 2007.

earnings decreased primarily
due to lower overall
downstream margins, higher
planned maintenance costs and
lower sales volumes. These
factors were partially offset by
a gain of $187 million from the
sale of the company’s equity
investment in Rainbow pipe
Line Co. Ltd.

Return on average capital
employed was 23 percent,
and cash flow from operating
activities and asset sales
totaled $539 million.

Total refinery throughput
was 446,000 barrels a day,
up from 2007, and average
refinery utilization was 89
percent. production gains
from reliability improvements
through the year were partially
offset by the impact of
declining economic conditions
that did not support running the
refineries to full capacity.

Total net petroleum product
sales were 438,000 barrels a
day, down slightly from 2007.

Capital investment in the
Downstream totaled
$232 million in 2008, and
was focused on improving
air emissions, increasing
refinery capacity utilization and
upgrading the retail network.

AT A GLANCe

Net income (millions of dollars)
Cash flow from operating activities
and asset sales (millions of dollars)
Refinery throughput (thousands of barrels a day)
Refinery utilization (percent)
Net petroleum product sales (thousands of barrels a day)*
Average capital employed (millions of dollars)
Return on average capital employed (percent)

2008

2007

2006

2005

2004

796

921

624

694

556

539
446
89
438
3 460
23.0

1 180
442
88
448
3 257
28.3

562
442
88
453
3 161
19.7

874
466
93
465
2 906
23.9

946
467
93
462
2 831
19.6

*Net petroleum product sales do not include sales under purchases/sales contracts with the same counterparty.

Imperial Oil Limited | Annual report 2008

MARKeT ReSpONSIveNeSS IN THe DOWNSTReAM

Investing to meet customers’ changing needs
Petroleum refining is capital intensive, cyclical and competitive. Manufacturing
processes are complex, and long lead times can be required when making significant
changes to the mix of petroleum products produced. In such an environment, the speed
at which refineries respond to market conditions and customers’ evolving energy needs
leads to a competitive advantage and increased profitability.

In 2008, in response to market conditions that favoured diesel production over gasoline,
Imperial made refinery investments in new hardware and modified operations to
optimize diesel production. As well, the crude slate was expanded to include crudes
that are difficult to process but offer a higher refining incentive. As a result of these
improvements, we increased our diesel production, enabling Imperial to capture the
highest value for its products.

We continue to expand the number of company-owned retail sites that offer diesel to
meet the growing demand for this profitable fuel.

There are about 1,900 Esso-branded service stations serving customers
across Canada. The network continued to be upgraded in 2008.

Offering customers high-quality choices
In the fuels marketing side of the business, our brands are evolving with the changing
needs and expectations of the marketplace. Investments are being made to upgrade
and modernize the retail chain. The chain serves customers through about 1,900
Esso-branded retail service stations, which include about 370 On the Run-branded
stores that consistently deliver convenience, quality and value. Products and services
continue to be added, and alliances with Tim Hortons, Royal Bank and Aeroplan further
enhance the convenience store offer. As well, we have the largest network of car
washes in the country.

Imperial is the Canadian distributor for Mobil 1 synthetic lubricants.
In 2008, we continued to expand the market presence with twelve
Mobil 1 Lube Express franchise locations across five provinces.

Offering customers innovative products and services
Selling under the Esso and Mobil brands, we are the
Canadian market-share leader for finished lubricants. This
success is due in large part to a long history of providing
innovative, high-quality products and services to customers.

Imperial is the Canadian distributor for Mobil 1 synthetic
lubricants – products that provide customers with
outstanding engine protection and improved gas mileage.
In 2008, the product line was expanded with the launch of
Mobil Super 1000 passenger vehicle engine oil, serving the
new vehicle market, and Mobil Super 2000, serving the high-
mileage vehicle market.

The entire product offering is complemented by a coast-to-
coast network of technical specialists – recognized experts
in their field who help customers select products best
matched to their needs and save money in their operations.

Imperial is positioned to excel in a highly competitive market
in the years ahead, introducing new and innovative products
through access to world-scale research.

Alliances with Tim Hortons,
Royal Bank and Aeroplan provide
competitive advantage.

Customers can pay in a variety of ways
at many locations, with pay-at-the-pump
options for debit card, credit card and
Speedpass transponder – the fastest and
easiest way to pay.

Trademarks: On the Run, Speedpass, Mobil, Mobil Super, Mobil 1 and the pegasus design are trademarks of Exxon Mobil Corporation or one of its subsidiaries. Imperial Oil licensee. RBC and Royal Bank are registered trademarks
of Royal Bank of Canada. Tim Hortons is a registered trademark of the TDL Marks Corporation. Aeroplan is a registered trademark of Aeroplan Limited Partnership.

Chairman’s letter | Year in review | Upstream | Downstream | Chemical

Annual report 2008 | Imperial Oil Limited

Leading refiner and
marketer of petroleum
products in Canada

In 2009, capital expenditures of
about $400 million are planned.
Refinery projects will focus on
increasing sulphur recovery to
further reduce sulphur dioxide
emissions, upgrading water
management systems, as
well as enhancing feedstock
flexibility and energy efficiency.
Retail projects will continue to
focus on network upgrades in
major urban markets.

About $330 million has
been invested to improve
the company-owned retail
chain over the past five
years, making the business a
pacesetter in site productivity,
with the best locations and
leading-edge site offers. The
business maintained best-
in-class unit cash costs, with

site productivity reaching an
average of 6.7 million litres –
an increase of 20 percent since
2004 – and continued growth in
convenience store sales.

In addition to serving retail
customers, the fuels marketing
and lubricants businesses
supplied petroleum products
to the mining, manufacturing,
forestry, construction and
transportation industries across
Canada in 2008. petroleum
products are provided through
a national network of 24
primary distribution terminals
and 92 secondary bulk
terminals. Imperial is the only
company to operate lube oil
manufacturing, blending and
marketing facilities in both the
east and west.

Productivity and
competitiveness of the
retail chain increased.

Annual throughput –
company-owned or leased
retail service stations

millions of litres per site

2 000

1 500

1 000

500

Site productivity has increased
20 percent since 2004.

Esso retail service stations

at year end

Company-owned or leased
Dealer-owned or leased

The retail chain upgrading
program continued in 2008,
with significant investment
to enhance site offers and
divestment of non-strategic
sites. This program further
increased the competitiveness
of the chain.

Janet Matsushita is the manager of our refinery in Dartmouth, Nova Scotia – one of four Imperial
refineries. Dartmouth has a rated capacity of about 82,000 barrels of crude oil a day and produces a wide
range of petroleum products including gasoline, diesel fuel, home heating fuel, asphalt and aviation fuel.

Imperial Oil Limited | Annual report 2008

Chemical

John Stover of the Sarnia Polymers Technology Centre performs one of many
tests that assist customers in designing new products that contain our resin.

Chairman’s letter | Year in review | Upstream | Downstream | Chemical

Annual report 2008 | Imperial Oil Limited

Imperial is one of
Canada’s leading
producers of chemical
products, with the
largest market share
in North America for
polyethylene used in
rotational molding and
the second-largest
market share in
injection molding.

Like the Downstream segment,
the Chemical business operates
in a competitive, cyclical and
global marketplace. Margins in
2008 were above the historical
average, but down from peaks
seen in 2006.

To help ensure profitable
operations throughout
the entire business cycle,
we continue to integrate
petrochemical manufacturing
with refinery operations.
Integration enables feedstocks
and production to be adjusted
to current market conditions –
and to reduce costs by sharing
management, leveraging
common site infrastructure and
efficiently managing energy
needs across the site.

A sustained emphasis on such
initiatives helped keep the
Chemical business a leader in
cost and productivity in 2008.

Chemical net earnings in 2008
were $100 million, up from
$97 million in 2007. Higher
margins for polyethylene
products were essentially
offset by lower margins for
intermediate products and
lower sales volumes for
both polyethylene and
intermediate products.

Return on average capital
employed was 50 percent,
and cash flow from operating
activities and asset sales
totaled $183 million.

Leader in cost
and productivity

Total sales of petrochemical
products were about
2,800 tonnes a day, down
from 2007, primarily due to
decreased sales of polymers
and intermediate products.

Capital expenditures of
$13 million in 2008 were primarily
focused on investments to
upgrade water management
systems, improve safety and
increase feedstock flexibility.

planned capital expenditures
in 2009 are about $35 million,
and will include continued
investments to increase
feedstock flexibility and further
upgrade water management
and safety systems.

AT A GLANCe

Net income (millions of dollars)
Cash flow from operating activities
and asset sales (millions of dollars)
Chemical sales volumes (thousands of tonnes a day)
Average capital employed (millions of dollars)
Return on average capital employed (percent)

2008

2007

2006

2005

2004

100

143

121

109

183
2.8
199
50.4

109
3.1
230
42.2

162
3.0
261
54.8

94
3.0
272
44.6

126
3.3
261
41.8

Imperial Oil Limited | Annual report 2008

financial suMMary (u.s. gaap)

millions of dollars
operating revenues (a)

net income by segment:
upstream
downstream
chemical
corporate and other
net income

cash and cash equivalents at year end
total assets at year end

long-term debt at year end
total debt at year end
other long-term obligations at year end

average capital employed (b)
return on average capital employed (percent) (b)

cash flow from operating
activities and asset sales (b)

2008
31 240

2 923
796
100
59
3 878

1 974
17 035

34
143
2 298

8 684
44.7

2007
25 069

2006
24 505

2005
27 797

2004
22 408

2 369
921
97
(199)
3 188

1 208
16 287

38
146
1 914

8 509
37.7

2 376
624
143
(99)
3 044

2 158
16 141

359
1 437
1 683

8 515
35.9

2 008
694
121
(223)
2 600

1 661
15 582

863
1 439
1 728

7 976
32.6

1 517
556
109
(130)
2 052

1 279
14 027

367
1 443
1 525

7 425
27.7

4 535

3 905

3 799

3 891

3 414

per-share information (dollars)
net income per share – basic
net income per share – diluted
dividends
(a) operating revenues include $4,894 million for 2005 and $3,584 million for 2004 for purchases/sales contracts with the same counterparty.
associated costs were included in “purchases of crude oil and products”. effective January 1, 2006, these purchases/sales were recorded
on a net basis.

3.43
3.41
0.35

2.54
2.53
0.31

3.12
3.11
0.32

4.39
4.36
0.38

1.92
1.91
0.29

(b) see frequently used financial terms on pages 34 to 35.

ManageMent’s discussion and analysis of financial condition and results of operations

overview

the following discussion and analysis of imperial’s financial results, as well as the accompanying financial statements and
related notes to consolidated financial statements to which they refer, are the responsibility of the management of imperial
oil limited.

the company’s accounting and financial reporting fairly reflect its straightforward business model involving the extracting,
refining and marketing of hydrocarbons and hydrocarbon-based products. the company’s business involves the production
(or purchase), manufacture and sale of physical products, and all commercial activities are directly in support of the
underlying physical movement of goods.

imperial, with its resource base, financial strength, disciplined investment approach and technology portfolio, is well-
positioned to participate in substantial investments to develop new canadian energy supplies. While commodity prices
remain volatile on a short-term basis depending upon supply and demand, imperial’s investment decisions are based on
its long-term business outlook, using a disciplined approach in selecting and pursuing the most attractive investment
opportunities. the corporate plan is a fundamental annual management process that is the basis for setting near-term
operating and capital objectives, in addition to providing the longer-term economic assumptions used for investment
evaluation purposes. potential investment opportunities are tested over a wide range of economic scenarios to establish
the resiliency of each opportunity. once investments are made, a reappraisal process is completed to ensure relevant
lessons are learned and improvements are incorporated into future projects.

Annual report 2008 | Imperial Oil Limited

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

Business environment and risk assessment

long-term business outlook
economic and population growth are expected to remain the primary drivers of energy demand, globally and in north
america. the company expects the global economy to grow at an average rate of about three percent per year through
2030. the combination of population and economic growth should lead to an increase in demand for primary energy at an
average rate of 1.2 percent annually. the vast majority of this increase is expected to occur in developing countries.

oil, gas and coal are expected to remain the predominant energy sources with approximately an 80 percent share of total
energy. oil and gas alone are expected to maintain close to a 60 percent share.

over the same period, the canadian economy is expected to grow at an average rate of about two percent per year, and
canadian demand for energy at about half of one percent per year. oil and gas are expected to continue to supply about
two-thirds of canadian energy demand. it is expected that canada will also be a growing supplier of energy to u.s. markets
through this period.

oil products are the transportation fuel of choice for the world’s fleet of cars, trucks, trains, ships and airplanes. primarily
because of increased demand in developing countries, oil consumption is expected to increase by about 25 percent or over
20 million barrels a day by 2030. canada’s oil resources, second only to saudi arabia, represent an important potential
additional source of supply.

natural gas is expected to be a major primary energy source globally, capturing about 35 percent of all incremental energy
growth and approaching one-quarter of global energy supplies. natural gas production from conventional sources in
mature established regions in the united states and canada is not expected to meet increasing demand, strengthening the
market opportunities for new gas supply from canada’s frontier areas and unconventional resources.

upstream
imperial produces crude oil and natural gas for sale into large north american markets. crude oil and natural gas prices are
determined by global and north american markets and are subject to changing supply and demand conditions. these can
be influenced by a wide range of factors, including economic conditions, international political developments and weather.
in the past, crude oil and natural gas prices have been volatile, and the company expects that volatility to continue.

imperial’s fundamental upstream business strategies guide our exploration, development, production and gas marketing
activities. these strategies include identifying and pursuing all attractive exploration opportunities, investing in projects
that deliver superior returns and maximizing profitability of existing oil and gas production. these strategies are
underpinned by a relentless focus on operational excellence, commitment to innovative technologies, development of our
employees and investment in the communities in which we operate.

imperial has a large portfolio of oil and gas resources in canada, both developed and undeveloped, which helps reduce
the risks of dependence on potentially limited supply sources in the upstream. With the relative maturity of conventional
production in the established producing areas of Western canada, imperial’s production is expected to come increasingly
from frontier and unconventional sources, particularly heavy oil(a), oil sands(b) and unconventional natural gas and from
canada’s north, where imperial has large undeveloped resource opportunities.

downstream
the downstream industry environment remains very competitive. refining margins are the difference between what a
refinery pays for its raw materials (primarily crude oil) and the wholesale market prices for the range of products produced
(primarily gasoline, diesel fuel, heating oil, jet fuel and heavy fuel oil). While volatile from year to year, refining margins
have declined at a rate of about one percent per year, on average, over the past 20 years in inflation adjusted terms.
intense competition in the retail fuels market similarly has tended to drive down real margins over time. crude oil and
many products are widely traded with published international prices. prices for those commodities are determined by the
marketplace, often an international marketplace, and are affected by many factors, including global and regional supply/
demand balances, inventory levels, refinery operations, import/export balances, transportation logistics, seasonality and
weather. canadian wholesale prices in particular are largely determined by wholesale prices in adjacent u.s. regions.
these prices and factors are continually monitored and provide input to operating decisions about which raw materials
to buy, facilities to operate and products to make. However, there are no reliable indicators of future market factors that
accurately predict changes in margins from period to period.

imperial’s downstream strategies are to provide customers with quality service and products at the lowest total cost offer,
have the lowest unit costs among our competitors, ensure efficient and effective use of capital and capitalize on integration
with the company’s other businesses. imperial owns and operates four refineries in canada, with distillation capacity of
502,000 barrels a day and lubricant manufacturing capacity of 8,000 barrels a day.

(a) Heavy oil typically is represented by crude oils with a viscosity of greater than 10,000 cp and is recovered through enhanced thermal operations.
(b) oil sands are a semi-solid material composed of bitumen, sand, water and clays and are recovered through surface mining methods.

Imperial Oil Limited | Annual report 2008

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

imperial’s fuels marketing business includes retail operations across canada serving customers through about 1,900 esso-
branded retail service stations, of which about 570 are company-owned or leased, and wholesale and industrial operations
through a network of 24 primary distribution terminals, as well as a secondary distribution network.

chemical
the north american petrochemical industry is cyclical. the company’s strategy for its chemical business is to reduce
costs and maximize value by continuing to increase the integration of its chemical plants at sarnia and dartmouth with
the refineries. the company also benefits from its integration within exxonMobil’s north american chemical businesses,
enabling imperial to maintain a leadership position in its key market segments.

results of operations

net income in 2008 of $3,878 million or $4.36 a share on a diluted basis was the best on record, exceeding the previous
record achieved in 2007 of $3,188 million or $3.41 a share. earnings increased primarily due to higher crude oil and natural
gas commodity prices. improved upstream realizations were partially offset by the negative impacts of lower upstream
volumes, higher royalties, higher energy and maintenance costs and lower overall downstream margins.

Factors affecting Imperial’s 2008 net income

millions of dollars

2 100

(420)

Lower expected
conventional
crude oil and
natural gas
volumes

(240)

Lower Syncrude
and Cold Lake
cyclical heavy oil
volumes

(310)

Higher
royalties

3 188

3 044

Higher crude
oil and
natural gas
commodity
prices

(230)

Lower overall
downstream
margins and
unfavourable
inventory
effects

(100)

Higher energy,
maintenance
and other
expenses

(110)

3 878

Absence of
favourable tax
rate change
effects and other

2007

2008

the return on average capital employed was 45 percent, compared with 38 percent in 2007 (2006 – 36 percent).

upstream
net income was $2,923 million versus $2,369 million in 2007. earnings benefited from higher overall crude oil and natural
gas commodity prices totaling about $2,100 million. their positive impact on earnings was partially offset by lower
conventional volumes from expected reservoir decline of about $420 million, lower syncrude volumes of about $135
million and lower cyclical cold lake heavy oil production of about $105 million. earnings were also negatively impacted
by higher royalties of about $310 million, higher energy, syncrude maintenance, and other production costs totaling
about $290 million, the absence of favourable effects of tax rate changes of about $170 million and lower gains from asset
divestments of about $140 million.

Annual report 2008 | Imperial Oil Limited

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

return on average capital employed was 65 percent, compared with 56 percent in 2007 (2006 – 60 percent).

Financial statistics
millions of dollars
net income
operating revenues
cash flow from operating activities and asset sales
average capital employed
return on average capital employed (percent)

2008
2 923
11 222
3 712
4 526
64.6

2007
2 369
8 685
2 661
4 258
55.6

2006
2 376
8 456
3 151
3 993
59.5

2005
2 008
8 189
2 805
3 928
51.1

2004
1 517
6 580
2 395
3 877
39.1

World crude oil prices ended in 2008 much lower than the record levels reached earlier in the year. the price of Brent crude
oil, a common benchmark of world oil markets, declined from a high of $144.22 (u.s.) a barrel in July to a low of $33.65 (u.s.)
in december. for the year, the average price of Brent crude oil was $96.99 (u.s.) a barrel, up about 34 percent from 2007.
the company’s realizations on sales of canadian conventional crude oil mirrored the same trends as world prices, ending
2008 at a level much lower than the average of the year.

prices for canadian heavy oil, including the company’s heavy oil at cold lake, moved generally in line with that of the
lighter crude oil. the price of Bow river, a benchmark canadian heavy oil, increased by about 56 percent in 2008 from 2007
and fell much below the year’s average by the end of the year.

prices for canadian natural gas in 2008 were higher than in the previous year. the average of 30-day spot prices for natural
gas in alberta was about $8.61 a thousand cubic feet in 2008, compared with $7.01 in 2007 (2006 – $7.41). the company’s
average realizations on natural gas sales were $8.69 a thousand cubic feet, compared with $6.95 in 2007 (2006 – $7.24).

Average realizations and prices
canadian dollars
conventional crude oil realizations (a barrel)
natural gas liquids realizations (a barrel)
natural gas realizations (a thousand cubic feet)
par crude oil price at edmonton (a barrel)
Heavy oil price at Hardisty (Bow river, a barrel)

2008
95.76
59.35
8.69
103.60
83.91

2007
71.70
47.92
6.95
77.67
53.87

2006
68.58
40.75
7.24
73.75
51.90

2005
64.48
40.00
9.00
69.86
45.62

2004
48.96
33.78
6.78
53.26
37.98

gross production of heavy oil at the company’s wholly owned facilities at cold lake was 147,000 barrels a day, compared
with 154,000 barrels in 2007 (2006 – 152,000). lower production was due to the cyclic nature of production at cold lake.

gross production of synthetic crude oil from the syncrude oil sands operation, in which the company has a 25 percent
interest, was 289,000 barrels a day versus 305,000 barrels in 2007 (2006 – 258,000). lower volumes were primarily the
result of planned and unplanned maintenance activities during the year, including work to improve reliability performance.
imperial’s share of average gross production decreased to 72,000 barrels a day from 76,000 barrels in 2007 (2006 – 65,000).

Crude oil prices

U.S. dollars a barrel –
quarterly average

Natural gas average prices

Canadian dollars a thousand
cubic feet – Alberta 30-day spot*

120

100

Brent Crude
Canadian Heavy Oil
(Bow River)

* Natural Gas Exchange –
Alberta Nova Inventory
Transfer (NGX AB-NIT)
Month Ahead Index Price

Imperial Oil Limited | Annual report 2008

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

gross production of conventional oil decreased to 27,000 barrels a day from 29,000 barrels in 2007 (2006 – 31,000) as a
result of natural decline in Western canadian reservoirs.

gross production of natural gas decreased to 310 million cubic feet a day from 458 million in 2007 (2006 – 556 million). the
most significant reason for the lower production volumes was the completion of production, as expected, from the Wizard
lake gas cap blowdown.

gross production of natural gas liquids (ngls) available for sale averaged 10,000 barrels a day in 2008, down from
16,000 barrels in 2007 (2006 – 24,000), mainly due to the completion of production from Wizard lake.

Crude oil and NGLs – production and sales (a)
thousands of barrels a day

2008

2007

2006

2005

2004

cold lake
syncrude
conventional crude oil
total crude oil production
ngls available for sale
total crude oil and ngl production
cold lake sales, include diluent (b)
ngl sales

Natural gas – production and sales (a)
millions of cubic feet a day

147
72
27

gross net
124
62
19
246 205
8
213

10
256
191
11

net
130
65
21
216
12
228

gross
154
76
29
259
16
275
200
20

net
127
58
23
208
19
227

gross
152
65
31
248
24
272
198
29

gross
139
53
38
230
31
261
183
39

net
124
53
29
206
25
231

net
112
59
33
204
26
230

gross
126
60
43
229
33
262
167
42

2008

2007

2006

2005

2004

gross
569
production (c)
520
sales
(a) daily volumes are calculated by dividing total volumes for the year by the number of days in the year. gross production is the company’s

gross net
310 249
288

gross
556
513

gross
458
407

gross
580
536

net
404

net
496

net
514

net
518

share of production (excluding purchases) before deducting the share of mineral owners or governments or both. net production excludes
those shares.

(b) diluent is natural gas condensate or other light hydrocarbons added to cold lake heavy oil to facilitate transportation to market by pipeline.
(c) production of natural gas includes amounts used for internal consumption with the exception of the amounts reinjected.

production costs increased mainly due to higher energy prices and syncrude maintenance costs.

downstream
net income was $796 million, compared with $921 million in 2007. earnings decreased primarily due to lower overall
downstream margins and unfavourable inventory effects totaling about $230 million. earnings were also lower due to
higher planned maintenance costs of about $40 million and lower sales volumes of about $40 million. these factors were
partially offset by a gain of $187 million from the sale of the company’s equity investment in rainbow pipe line co. ltd.

return on average capital employed was 23 percent, compared with 28 percent in 2007 (2006 – 20 percent).

Annual report 2008 | Imperial Oil Limited

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

Financial statistics
millions of dollars
net income
operating revenues (a)
cash flow from operating activities and asset sales
average capital employed
return on average capital employed (percent)

Sale of petroleum products
thousands of barrels a day (b)
gasolines
Heating, diesel and jet fuels
Heavy fuel oils
lube oils and other products
net petroleum product sales
total domestic sales of petroleum products (percent)

2008
796
26 941
539
3 460
23.0

2008
204
157
30
47
438
93.0

2007
921
21 535
1 180
3 257
28.3

2007
208
164
33
43
448
94.8

2006
624
20 783
562
3 161
19.7

2006
206
166
32
49
453
95.1

2005
694
24 017
874
2 906
23.9

2005
210
169
38
48
465
95.3

2004
556
19 169
946
2 831
19.6

2004
209
172
37
44
462
93.0

Refinery utilization
2004
thousands of barrels a day (b)
total refinery throughput (c)
467
refinery capacity at december 31
502
93
utilization of total refinery capacity (percent)
(a) operating revenues in 2005 and prior years included amounts for purchases/sales with the same counterparty. associated costs were included

2006
442
502
88

2005
466
502
93

2007
442
502
88

2008
446
502
89

in “purchases of crude oil and products”. effective January 1, 2006, these purchases/sales were recorded on a net basis.

(b) Volumes a day are calculated by dividing total volumes for the year by the number of days in the year.
(c) crude oil and feedstocks sent directly to atmospheric distillation units.

industry refining margins were lower in 2008, compared with those in 2007, reflecting weakening demand and higher
inventory levels. Marketing margins in 2008 were higher than those in 2007.

refinery throughput was 89 percent of capacity in 2008, one percent higher than the previous year (2006 – 88 percent).
reliability improvements through the year were partially offset by the impact of declining economic conditions that did not
support running the refineries to full capacity.

downstream’s total sales volumes, excluding those resulting from purchases/sales contracts with the same counterparty,
were 438,000 barrels a day, down from 448,000 barrels in 2007 (2006 – 453,000). lower industry demand was the main
reason for the decline.

Manufacturing costs in 2008 were higher than the previous year primarily reflecting higher energy prices and planned
maintenance costs.

Average refining margins

Canadian dollars a barrel

New York Harbor product prices
minus Brent crude, reflects
Imperial’s product sales mix.

Imperial Oil Limited | Annual report 2008

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

chemical
net income was $100 million, compared with $97 million in 2007. Higher margins for polyethylene products were
essentially offset by lower margins for intermediate products and lower sales volumes for both polyethylene and
intermediate products.

return on average capital employed was 50 percent, compared with 42 percent in 2007 (2006 – 55 percent).

Financial statistics
millions of dollars
net income
operating revenues
cash flow from operating activities and asset sales
average capital employed
return on average capital employed (percent)

2008
100
1 832
183
199
50.4

2007
97
1 635
109
230
42.2

Sales
thousands of tonnes a day (a)
polymers and basic chemicals
intermediate and others
total petrochemicals
(a) calculated by dividing total volumes for the year by the number of days in the year.

2008
2.1
0.7
2.8

2007
2.2
0.9
3.1

2006
143
1 704
162
261
54.8

2006
2.2
0.8
3.0

2005
121
1 665
94
272
44.6

2005
2.1
0.9
3.0

2004
109
1 509
126
261
41.8

2004
2.4
0.9
3.3

the average industry price of polyethylene was $1,960 a tonne in 2008, up 18 percent from $1,666 a tonne in 2007
(2006 – $1,703), contributing to higher margins for polyethylene products.

sales of chemical products were 2,800 tonnes a day, down from 3,100 tonnes in 2007 (2006 – 3,000 tonnes), primarily due to
lower industry demand for both polyethylene and intermediate chemical products.

Manufacturing costs for 2008 were higher than 2007, reflecting higher energy prices.

corporate and other
net income effects from corporate and other was $59 million, versus negative $199 million last year. favourable earnings
effects were primarily due to lower share-based compensation charges and the absence of unfavourable effects of tax rate
changes reported in 2007.

liquidity and capital resources

sources and uses of cash

millions of dollars
cash provided by/(used in)
operating activities
investing activities
financing activities
increase/(decrease) in cash and cash equivalents

2008

2007

2006

4 263
(961)
(2 536)
766

3 626
(620)
(3 956)
(950)

3 587
(965)
(2 125)
497

cash and cash equivalents at end of year

1 974

1 208

2 158

although the company issues long-term debt from time to time and maintains a revolving commercial paper program,
internally generated funds normally cover the majority of its financial requirements. the management of cash that may be
temporarily available as surplus to the company’s immediate needs is carefully controlled to ensure that it is secure and
readily available to meet the company’s cash requirements and to optimize returns on cash balances.

cash flows from operating activities are highly dependent on crude oil and natural gas prices and product margins. in
addition, to support cash flows in future periods, the company will need to continually find and develop new fields, and
continue to develop and apply new technologies to existing fields, in order to maintain or increase production. projects are
in place or underway to increase production capacity. However, these volume increases are subject to a variety of risks,
including project execution, operational outages, reservoir performance and regulatory changes.

Annual report 2008 | Imperial Oil Limited

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

the company’s financial strength enables it to make large, long-term capital expenditures. imperial’s portfolio of
development opportunities and the complementary nature of its business segments help mitigate the overall risks of the
company and associated cash flow. further, due to its financial strength, debt capacity and portfolio of opportunities, the
risk associated with failure or delay of any single project would not have a significant impact on the company’s liquidity or
ability to generate sufficient cash flows for its operations and fixed commitments.

the company’s registered pension plan is subject to an independent actuarial valuation that is required at least once
every three years. the next such valuation will take place in 2010. given the recent downturn in financial markets, the
next valuation could require that imperial increase its contributions to the plan over the next five years. the size of any
required contribution will not be known until the valuation is completed. the company expects that it will meet any funding
requirements without affecting current or future investment plans.

cash flow from operating activities
cash provided by operating activities was $4,263 million, versus $3,626 million in 2007 (2006 – $3,587 million). Higher cash
flow in 2008 was primarily due to higher net income.

cash flow from investing activities
cash used in investing activities totaled $961 million in 2008, compared with $620 million in 2007 (2006 – $965 million).
Higher spending on property, plant and equipment contributed to the increase.

capital and exploration expenditures
total capital and exploration expenditures were $1,363 million in 2008, compared with $978 million in 2007 (2006 –
$1,209 million).

the funds were used mainly to advance the Kearl oil sands project, maintain cold lake production capacity, invest in
environmental initiatives and upgrade the network of esso retail outlets. about $250 million was spent on projects related
to reducing the environmental impact of the company’s operations and improving safety.

the following table shows the company’s capital and exploration expenditures for upstream during the five years ending
december 31, 2008:

millions of dollars
Heavy oil and oil sands
production
exploration
total capital and exploration expenditures

2008
740
238
132
1 110

2007
489
150
105
744

2006
518
237
32
787

2005
662
232
43
937

2004
819
234
60
1 113

for the upstream segment, over 85 percent of the capital and exploration expenditures in 2008 were focused on growth
opportunities. significant expenditures during the year were for advancing the Kearl oil sands project and ongoing
development drilling at cold lake. other 2008 investments included facilities improvements at syncrude, drilling at Horn
river and conventional fields in Western canada and a 3-d seismic program in the Beaufort sea.

Kearl is an oil sands mining project located northeast of fort McMurray, alberta. regulatory approvals were received and
the project is planned to advance in phases. production from the first phase of Kearl is expected to average approximately
110,000 barrels of bitumen a day before royalties, of which imperial’s share would be about 78,000 barrels. imperial’s share
of proven reserves developed by the first phase is 807 million barrels and was added to the company’s proven mined
bitumen reserves in 2008.

about $500 million had been invested in Kearl by the end of 2008. activities in 2008 focused on engineering work to define
the project design and execution plan. other activities in 2008 also included access road construction, site preparation and
earthworks. significant progress has also been made in transportation system agreements.

imperial has acquired exploration licenses to about 76,000 net acres in British columbia’s natural gas prone Horn river
area. exploration drilling and evaluation commenced in 2008.

planned capital and exploration expenditures in the upstream segment are expected to be about $1.8 billion in 2009, with
over 80 percent of the total focused on growth opportunities. investments are mainly planned for the Kearl oil sands project
and development drilling at cold lake. other investments will include facilities improvements at syncrude, development
drilling at conventional oil and gas operations in Western canada and exploration at Horn river.

Imperial Oil Limited | Annual report 2008

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

the following table shows the company’s capital expenditures in the downstream segment during the five years ending
december 31, 2008:

millions of dollars
refining and supply
Marketing
other (a)
total capital expenditures
(a) consists primarily of real estate purchases.

2008
160
61
11
232

2007
120
63
4
187

2006
248
97
16
361

2005
368
91
19
478

2004
178
85
20
283

for the downstream segment, capital expenditures were $232 million in 2008, compared with $187 million in 2007 (2006
– $361 million). in 2008, downstream capital expenditures focused mainly on improving air emissions, increasing refinery
capacity utilization and upgrading the retail network.

capital expenditures for the downstream segment in 2009 are expected to be about $400 million, and will be mainly
directed to increasing sulphur recovery to further reduce sulphur dioxide emissions, upgrading water management
systems as well as enhancing feedstock flexibility and energy efficiency. retail projects will continue to focus on network
upgrades in major urban markets.

the following table shows the company’s capital expenditures for its chemical operations during the five years ending
december 31, 2008:

millions of dollars
capital expenditures

2008
13

2007
11

2006
13

2005
19

2004
15

of the capital expenditures for the chemical segment in 2008, the major investment was directed to upgrading water
management systems, improving safety and increasing feedstock flexibility.

planned capital expenditures for chemical in 2009 is about $35 million and will include continued investments to increase
feedstock flexibility and further upgrade water management and safety systems.

total capital and exploration expenditures for the company in 2009, which will focus mainly on growth and productivity
improvements, are expected to total about $2.2 billion and to be financed from internally generated funds.

cash flow from financing activities
cash used in financing activities was $2,536 million in 2008, compared with $3,956 million in 2007 (2006 – $2,125 million).

in June, another 12-month share repurchase program was implemented. during 2008, the company purchased 44.3 million
shares for $2,210 million (2007 – 50.5 million shares for $2,358 million), including shares purchased from exxonMobil.
since imperial initiated its first share repurchase program in 1995, the company has purchased 890.4 million shares
– representing about 51 percent of the total outstanding at the start of the program – with resulting distributions to
shareholders of over $15 billion.

the company declared dividends totaling 38 cents a share in 2008, up from 35 cents in 2007 (2006 – 32 cents). regular
annual per-share dividends paid have increased in each of the past 14 years and, since 1986, payments per share have
grown by 102 percent.

total debt outstanding at the end of 2008, excluding the company’s share of equity company debt, was $143 million,
compared with $146 million at the end of 2007 (2006 – $1,437 million). debt represented two percent of the company’s
capital structure at the end of 2008, unchanged from the end of 2007 (2006 – 17 percent).

debt-related interest incurred in 2008, before capitalization of interest, was $8 million, compared with $62 million in 2007
(2006 – $63 million). the average effective interest rate on the company’s debt was 5.5 percent in 2008, compared with 4.9
percent in 2007 (2006 – 4.4 percent).

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

financial percentages, ratios and credit rating

Annual report 2008 | Imperial Oil Limited

2008
2

2007
2

2006
17

2005
18

2004
19

total debt as a percentage of capital (a)
interest coverage ratios
earnings basis (b)
cash-flow basis (c)
long-term unsecured debt rating
local currency (dBrs/s&p) (d)
(a) current and long-term portions of debt (page 39) and the company’s share of equity company debt, divided by debt and shareholders’ equity

aa+/aaa

AA+/AAA

aa/aaa

88
101

661
721

66
77

72
82

aa/aaa

83
108

(page 39).

(b) net income (page 38), debt-related interest before capitalization (page 58, note 13) and income taxes (page 38), divided by debt-related interest

before capitalization.

(c) cash flow from net income adjusted for other non-cash items (page 41), current income tax expense (page 48, note 4) and debt-related interest

before capitalization (page 58, note 13) divided by debt-related interest before capitalization.

(d) dominion Bond rating service (dBrs) and standard & poor’s corporation (s&p) are debt-rating agencies.

the company’s financial strength, as evidenced by the above financial ratios, represents a competitive advantage of
strategic importance. the company’s sound financial position gives it the opportunity to access capital markets in the full
range of market conditions and enables the company to take on large, long-term capital commitments in the pursuit of
maximizing shareholder value.

commitments
the following table shows the company’s commitments outstanding at december 31, 2008. it combines data from the
consolidated balance sheet and from individual notes to the consolidated financial statements.

financial
statement
note reference
note 14
note 14
note 10

millions of dollars
capitalized lease obligations (a)
operating leases (b)
unconditional purchase obligations (c)
firm capital commitments (d)
pension and other post-retirement
obligations (e)
asset retirement obligations (f)
other long-term purchase agreements (g)
(a) capital lease obligations primarily relate to the capital lease for marine services.
(b) Minimum commitments for operating leases, shown on an undiscounted basis, primarily cover office buildings, rail cars and service stations.
(c) unconditional purchase obligations are those long-term commitments that are non-cancelable and that third parties have used to secure financing

2009
4
64
127
251

1 196
711
974

note 5
note 6

203
309
506

740
360
166

253
42
302

payment due by period
2010 to
2013
15
210
262
80

2014 and
beyond
19
158
31
–

total
amount
38
432
420
331

for the facilities that will provide the contracted goods and services. they mainly pertain to pipeline throughput agreements.

(d) firm capital commitments related to capital projects, shown on an undiscounted basis. the largest commitments outstanding at year-end 2008

were $98 million associated with the company’s share of exploration projects.

(e) the amount by which the benefit obligations exceeded the fair value of fund assets for pension and other post-retirement plans at year-end.

the payments by period include expected contributions to funded pension plans in 2009 and estimated benefit payments for unfunded plans in
all years.
asset retirement obligations represent the fair value of legal obligations associated with site restoration on the retirement of assets with
determinable useful lives.

(f)

(g) other long-term purchase agreements are non-cancelable, long-term commitments other than unconditional purchase obligations. they

include primarily raw material supply and transportation services agreements.

Imperial Oil Limited | Annual report 2008

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

unrecognized tax benefits totaling $150 million have not been included in the company’s commitments table because
the company does not expect there will be any cash impact from the final settlements as sufficient funds have been
deposited with the canada revenue agency. further details on the unrecognized tax benefits can be found in note 4 to the
consolidated financial statements on page 48.

the company was contingently liable at december 31, 2008 for a maximum of $79 million relating to guarantees for
purchasing operating equipment and other assets from its rural marketing associates upon expiry of the associate
agreement or the resignation of the associate. the company expects that the fair value of the operating equipment and
other assets so purchased would cover the maximum potential amount of future payments under the guarantees.

litigation and other contingencies
as discussed in note 10 to the consolidated financial statements on page 56, a variety of claims have been made against
imperial oil limited and its subsidiaries. Based on a consideration of all relevant facts and circumstances, the company
does not believe the ultimate outcome of any currently pending lawsuits against the company will have a material adverse
effect on the company’s operations or financial condition.

the alberta government enacted changes to the oil and gas and generic oil sands royalty regime effective 2009. the
impacts of the changes have been incorporated in the company’s 2008 oil and gas reserves and mined bitumen reserves
calculation, where appropriate. in november 2008, imperial, along with the other syncrude joint-venture owners, signed
an agreement with the government of alberta to amend the existing syncrude crown agreement. under the amended
agreement, beginning January 1, 2010, syncrude will begin transitioning to the new oil sands royalty regime by paying
additional royalties, the exact amount of which will depend on production levels from 2010 to 2015. also, beginning
January 1, 2009, syncrude’s royalty will be based on bitumen value with upgrading costs and revenues excluded from
the calculation. the impacts of the amended agreement have been incorporated in the 2008 synthetic crude oil reserves
calculation.

critical accounting policies

the company’s financial statements have been prepared in accordance with united states generally accepted accounting
principles (gaap) and include estimates that reflect management’s best judgment. the company’s accounting and
financial reporting fairly reflect its straightforward business model. imperial does not use financing structures for the
purpose of altering accounting outcomes or removing debt from the balance sheet. the following summary provides
further information about the critical accounting policies and the estimates that are made by the company to apply those
policies. it should be read in conjunction with note 1 to the consolidated financial statements on page 42.

Hydrocarbon reserves
proved oil, gas, synthetic crude oil and mined bitumen reserve quantities are used as the basis for calculating unit-of-
production depreciation rates and for evaluating impairment. proved oil and gas reserves are the estimated quantities of
crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty
to be recoverable in future years from known reservoirs and deposits under existing economic and operating conditions.
estimates of synthetic crude oil reserves are based on detailed geological and engineering assessments of in-place crude
bitumen volumes, the mining plan, historical extraction recovery and upgrading yield factors, installed plant operating
capacity and operating approval limits. estimates of mined bitumen reserves are based on detailed geological and
engineering assessments of in-place crude bitumen volumes, the mining plan, demonstrated extraction recovery factors,
planned operating capacity and operating approval limits.

the estimation of proved reserves is controlled by the company through long-standing approval guidelines. reserve
changes are made within a well-established, disciplined process driven by senior-level geoscience and engineering
professionals (assisted by a central reserves group with significant technical experience), culminating in reviews with
and approval by senior management and the company’s board of directors. notably, the company does not use reserve
targets to determine compensation. Key features of the estimation include rigorous peer-reviewed technical evaluations
and analysis of well and field performance information and a requirement that management make significant funding
commitments toward the development of the reserves prior to reporting as proved.

although the company is reasonably certain that proved reserves will be produced, the timing and amount recovered
can be affected by a number of factors, including completion of development projects, reservoir performance, regulatory
approvals and significant changes in long-term oil and gas price levels.

Annual report 2008 | Imperial Oil Limited

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

the year-end oil and gas reserves volumes as well as the reserves change categories shown in the proved reserves
tables are calculated using december 31 prices and costs. these reserves quantities are also used in calculating unit-of-
production depreciation rates and in calculating the standardized measure of discounted net cash flow. We understand
that the use of december 31 prices and costs is intended to provide a point in time measure to calculate reserves and
to enhance comparability between companies. However, the use of year-end prices for reserves estimation introduces
short-term price volatility into the process, which is inconsistent with the long-term nature of the upstream business, since
annual adjustments are required based on prices occurring on a single day. as a result, the use of prices from a single date
is not relevant to the investment decisions made by the company.

revisions can include upward or downward changes in previously estimated volumes of proved reserves for existing
fields due to the evaluation or revaluation of already available geologic, reservoir or production data; new geologic,
reservoir or production data; or changes in year-end prices and costs that are used in the determination of reserves.
this category can also include significant changes in either development strategy or production equipment/facility
capacity. the quantities shown in the revisions category under heavy oil proved reserves in 2006 on page 62 were due
mainly to the changes in year-end prices and costs that were used in the determination of reserves. 807 million barrels of
mined bitumen reserves were added in 2008 in the revisions category, reflecting the company’s share of reserves being
developed in the first phase of the Kearl oil sands project.

the company uses the successful-efforts method to account for its exploration and production activities. under this
method, costs are accumulated on a field-by-field basis with certain exploratory expenditures and exploratory dry holes
being expensed as incurred. costs of productive wells and development dry holes are capitalized and amortized on the
unit-of-production method. the company uses this accounting policy instead of the full-cost method because it provides a
more timely accounting of the success or failure of the company’s exploration and production activities.

Impact of reserves on depreciation
the calculation of unit-of-production depreciation is a critical accounting estimate that measures the depreciation of
upstream assets. it is the ratio of actual volumes produced to total proved developed reserves (those reserves recoverable
through existing wells with existing equipment and operating methods) applied to the asset cost. the volumes produced
and asset cost are known and, while proved developed reserves have a high probability of recoverability, they are based
on estimates that are subject to some variability. While the revisions the company has made in the past are an indicator of
variability, they have had little impact on the unit-of-production rates of depreciation.

Impact of reserves and prices on testing for impairment
proved oil and gas properties held and used by the company are reviewed for impairment whenever events or
circumstances indicate that the carrying amounts may not be recoverable. assets are grouped at the lowest level for which
there are identifiable cash flows that are largely independent of the cash flows of other groups of assets.

the company estimates the future undiscounted cash flows of the affected properties to judge the recoverability of
carrying amounts. in general, impairment analyses are based on proved reserves. Where probable reserves exist, an
appropriately risk-adjusted amount of these reserves may be included in the impairment evaluation. an asset would be
impaired if the undiscounted cash flows were less than its carrying value. impairments are measured by the amount by
which the asset’s carrying value exceeds its fair value.

Imperial Oil Limited | Annual report 2008

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

the company performs asset valuation analyses on an ongoing basis as a part of its asset management program. these
analyses monitor the performance of assets against corporate objectives. they also assist the company in assessing
whether the carrying amounts of any of its assets may not be recoverable. in addition to estimating oil and gas reserve
volumes in conducting these analyses, it is also necessary to estimate future oil and gas prices. trigger events for
impairment evaluations include a significant decrease in current and projected prices or reserve volumes, an accumulation
of project costs significantly in excess of the amount originally expected and historical and current operating losses.

in general, the company does not view temporarily low oil prices as a triggering event for conducting impairment tests.
the markets for crude oil and natural gas have a history of significant price volatility. although prices will occasionally
drop significantly, the relative growth/decline in supply versus demand will determine industry prices over the long term,
and these cannot be accurately predicted. accordingly, any impairment tests that the company performs make use of
the company’s price assumptions developed in the annual planning and budgeting process for crude oil and natural gas
markets, petroleum products and chemicals. these are the same price assumptions that are used for capital investment
decisions. Volumes are based on individual field production profiles, which are also updated annually.

the standardized measure of discounted future cash flows on page 61 is based on the year-end price applied for all future
years, as required under statement of financial accounting standards no. 69 (sfas 69). future prices used for any
impairment tests will vary from the one used in the sfas 69 disclosure and could be lower or higher for any given year.

pension benefits
the company’s pension plan is managed in compliance with the requirements of governmental authorities and meets
funding levels as determined by independent third-party actuaries. pension accounting requires explicit assumptions
regarding, among others, the discount rate for the benefit obligations, the expected rate of return on plan assets and the
long-term rate of future compensation increases. all pension assumptions are reviewed annually by senior management.
these assumptions are adjusted only as appropriate to reflect long-term changes in market rates and outlook. the long-
term expected rate of return on plan assets of 8.00 percent used in 2008 compares to actual returns of 5.00 percent and
8.31 percent achieved over the last 10- and 20-year periods ending december 31, 2008. if different assumptions are
used, the expense and obligations could increase or decrease as a result. the company’s potential exposure to changes
in assumptions is summarized in note 5 to the consolidated financial statements on page 49. at imperial, differences
between actual returns on plan assets and the long-term expected returns are not recorded in pension expense in the
year the differences occur. such differences are deferred, along with other actuarial gains and losses, and are amortized
into pension expense over the expected remaining service life of employees. pension expense represented less than one
percent of total expenses in 2008.

asset retirement obligations and other environmental liabilities
legal obligations associated with site restoration on the retirement of assets with determinable useful lives are recognized
when they are incurred, which is typically at the time the assets are installed. the obligations are initially measured at fair
value and discounted to present value. over time, the discounted asset retirement obligation amount will be accreted for
the change in its present value, with this effect included in operating expense. as payments to settle the obligations occur
on an ongoing basis and will continue over the lives of the operating assets, which can exceed 25 years, the discount rate
will be adjusted only as appropriate to reflect long-term changes in market rates and outlook. for 2008, the obligations
were discounted at six percent and the accretion expense was $29 million, before tax, which was significantly less than one
percent of total expenses in the year. there would be no material impact on the company’s reported financial results if a
different discount rate had been used.

asset retirement obligations are not recognized for assets with an indeterminate useful life. asset retirement obligations
for these facilities generally become firm at the time the facilities are permanently shut down and dismantled. these
obligations may include the costs of asset disposal and additional soil remediation. However, these sites have
indeterminate lives based on plans for continued operations, and as such, the fair value of the conditional legal obligations
cannot be measured, since it is impossible to estimate the future settlement dates of such obligations. for these and non-
operating assets, the company accrues provisions for environmental liabilities when it is probable that obligations have
been incurred and the amount can be reasonably estimated.

asset retirement obligations and other environmental liabilities are based on engineering estimated costs, taking into
account the anticipated method and extent of remediation consistent with legal requirements, current technology and
the possible use of the location. since these estimates are specific to the locations involved, there are many individual
assumptions underlying the company’s total asset retirement obligations and provision for other environmental liabilities.
While these individual assumptions can be subject to change, none of them is individually significant to the company’s
reported financial results.

Annual report 2008 | Imperial Oil Limited

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

tax contingencies
the operations of the company are complex, and related tax interpretations, regulations and legislation are continually
changing. significant management judgment is required in the accounting for income tax contingencies and tax disputes
because the outcomes are often difficult to predict.

gaap requires recognition and measurement of uncertain tax positions that the company has taken or expects to take
in its income tax returns. the benefit of an uncertain tax position can only be recognized in the financial statements if
management concludes that it is more likely than not that the position will be sustained with the tax authorities. for a
position that is likely to be sustained, the benefit recognized in the financial statements is measured at the largest amount
that is greater than 50 percent likely of being realized. a reserve is established for the difference between a position taken
in an income tax return and the amount recognized in the financial statements. the company’s unrecognized tax benefits
and a description of open tax years are summarized in note 4 to the consolidated financial statements on page 48.

Market risks and other uncertainties

the company is exposed to a variety of financial, operating and market risks in the course of its business. some of
these risks are within the company’s control, while others are not. for those risks that can be controlled, specific risk-
management strategies are employed to reduce the likelihood of loss.

during 2008, credit markets tightened, and the global economy slowed. in 2009, the company does not expect to be
dependent on credit markets to fund normal operations or investment plans.

in april 2007, the government of canada announced its intent to introduce a set of regulations to limit emissions of
greenhouse gas and air pollutants from major industrial facilities in canada, although the details of the regulations have
not been finalized. consequently, attempts to assess the impact on the company are premature. the company will continue
to monitor the development of legal requirements in this area.

in the province of alberta, regulations governing greenhouse gas emissions from large industrial facilities came into effect
July 1, 2007. compliance costs were not material in 2007 and 2008, and the company does not expect ongoing compliance
costs to have a material adverse effect on the company’s operations or financial condition.

the u.s. energy independence and security act of 2007 precludes agencies of the u.s. federal government from procuring
motive fuels from non-conventional petroleum sources that have lifecycle greenhouse gas emissions greater than
equivalent conventional fuel. this may have implications for the company’s marketing in the united states of some heavy
oil and oil sands production, but the impact cannot be determined at this time.

other risks, such as changes in international commodity prices and currency-exchange rates, are beyond the company’s
control. the company does not use derivative markets to speculate on the future direction of currency or commodity
prices. the company’s size, strong financial position and the complementary nature of its upstream, downstream and
chemical segments help mitigate the company’s exposure to changes in these other risks. the company’s potential
exposure to these types of risk is summarized in the earnings sensitivities table below, which shows the estimated annual
effect, under current conditions, of certain sensitivities of the company’s after-tax net income.

Earnings sensitivities (a)
millions of dollars after tax
$ 150
three dollars (u.s.) a barrel change in crude oil prices
$
6
seventy cents a thousand cubic feet change in natural gas prices
$ 140
one dollar (u.s.) a barrel change in sales margins for total petroleum products
7
$
one cent (u.s.) a pound change in sales margins for polyethylene
$ 300
eight cents decrease (increase) in the value of the canadian dollar versus the u.s. dollar
(a) the amount quoted to illustrate the impact of each sensitivity represents a change of about 10 percent in the value of the commodity or rate in
question at the end of 2008. each sensitivity calculation shows the impact on net income that results from a change in one factor, after tax and
royalties and holding all other factors constant. While these sensitivities are applicable under current conditions, they may not apply proportionately
to larger fluctuations.

+ (-)
+ (-)
+ (-)
+ (-)
+ (-)

Imperial Oil Limited | Annual report 2008

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

the sensitivity of net income to changes in crude oil prices increased from 2007 year-end by about $13 million (after-tax)
for each one u.s.-dollar a barrel difference. a decrease in the value of the canadian dollar has increased the impact of
u.s. dollar denominated crude oil prices on the company’s revenues and earnings.

the presentation of the sensitivity of net income to changes in sales margins for total petroleum products has changed
from a one cent (u.s.) a litre basis to a one dollar (u.s.) a barrel basis to conform to industry benchmarks’ unit of measure.
the sensitivity of net income to changes in sales margins for total petroleum products was about $140 million (after-tax) for
each one dollar (u.s.) a barrel difference at 2008 year-end, an increase of about $25 million from 2007 year-end. a decrease
in the value of the canadian dollar has increased the impact of u.s. dollar denominated crude oil and petroleum products
prices on the company’s revenues and earnings.

frequently used financial terms

listed below are definitions of three of imperial’s frequently used financial performance measures. the definitions are
provided to facilitate understanding of the terms and how they are calculated.

capital employed
capital employed is a measure of net investment. When viewed from the perspective of how capital is used by the
business, it includes the company’s property, plant and equipment and other assets, less liabilities, excluding both short-
term and long-term debt. When viewed from the perspective of the sources of capital employed for the whole company,
it includes total debt and shareholders’ equity. Both of these views include the company’s share of amounts applicable to
equity companies.

millions of dollars
Business uses: asset and liability perspective
total assets
less: total current liabilities excluding short-term debt and
current portion of long-term debt
less: total long-term liabilities excluding long-term debt
add: imperial’s share of equity company debt
total capital employed

millions of dollars
total company sources: debt and equity perspective
short-term debt and current portion of long-term debt
long-term debt
shareholders’ equity
add: imperial’s share of equity company debt
total capital employed

2008

2007

2006

17 035

16 287

16 141

(4 040)
(3 787)
40
9 248

2008

109
34
9 065
40
9 248

(4 833)
(3 385)
50
8 119

2007

108
38
7 923
50
8 119

(4 270)
(3 028)
55
8 898

2006

1 078
359
7 406
55
8 898

Annual report 2008 | Imperial Oil Limited

ManageMent’s discussion and analysis of financial condition and results of operations (cont’d)

return on average capital employed (roce)
roce is a financial performance ratio. for each of the company’s business segments, roce is annual business-segment
net income divided by average business-segment capital employed (an average of the beginning- and end-of-year
amounts). segment net income includes imperial’s share of segment net income of equity companies, consistent with the
definition used for capital employed, and excludes the cost of financing. the company’s total roce is net income excluding
the after-tax cost of financing divided by total average capital employed. the company has consistently applied its roce
definition for many years and views it as the best measure of historical capital productivity in a capital-intensive, long-term
industry to both evaluate management’s performance and demonstrate to shareholders that capital has been used wisely
over the long term. additional measures, which tend to be more cash flow based, are used to make investment decisions.

millions of dollars
net income
financing costs (after tax), including imperial’s share of equity companies
net income excluding financing costs

average capital employed
return on average capital employed (percent)

2008
3 878
2
3 880

8 684
44.7

2007
3 188
18
3 206

8 509
37.7

2006
3 044
10
3 054

8 515
35.9

cash flow from operating activities and asset sales
cash flow from operating activities and asset sales is the sum of the net cash provided by operating activities and proceeds
from asset sales reported in the consolidated statement of cash flows. this cash flow is the total source of cash both from
operating the company’s assets and from the divesting of assets. the company employs a long-standing, disciplined
regular review process to ensure that all assets are contributing to the company’s strategic and financial objectives.
assets are divested when they no longer meet these objectives or are worth considerably more to others. Because of the
regular nature of this activity, management believes it is useful for investors to consider sales proceeds together with cash
provided by operating activities when evaluating cash available for investment in the business and financing activities,
including shareholder distributions.

millions of dollars
cash from operating activities
proceeds from asset sales
total cash flow from operating activities and asset sales

2008
4 263
272
4 535

2007
3 626
279
3 905

2006
3 587
212
3 799

Imperial Oil Limited | Annual report 2008

MAnAgeMenT’S rePOrT On InTernAL COnTrOL Over FInAnCIAL rePOrTIng

Management, including the company’s chief executive officer and principal accounting officer and principal financial
officer, is responsible for establishing and maintaining adequate internal control over the company’s financial reporting.
Management conducted an evaluation of the effectiveness of internal control over financial reporting based on the Internal
Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on this evaluation, management concluded that Imperial Oil Limited’s internal control over financial reporting was effective
as of December 31, 2008.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, audited the effectiveness of the company’s
internal control over financial reporting as of December 31, 2008, as stated in their report which is included herein.

B.H. March

Chairman, president and chief executive officer

P.A. Smith

Senior vice-president, finance and administration, and treasurer
(Principal accounting officer and principal financial officer)

February 24, 2009

Annual report 2008 | Imperial Oil Limited

AUDITOrS’ rePOrT

To the Shareholders of Imperial Oil Limited
We have completed integrated audits of Imperial Oil Limited’s 2008, 2007 and 2006 consolidated financial statements and
of its internal control over financial reporting as of December 31, 2008. Our opinions, based on our audits, are presented
below.

Consolidated financial statements
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial
position of Imperial Oil Limited and its subsidiaries at December 31, 2008 and December 31, 2007, and the results of their
operations and their cash flows for each of the years in the three year period ended December 31, 2008 in conformity with
accounting principles generally accepted in the United States of America. These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting
Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s report on internal control over financial reporting.
Our responsibility is to express an opinion on the effectiveness of the Company’s internal control over financial reporting
based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design
and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we
consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Chartered Accountants
Calgary, Alberta, Canada
February 24, 2009

Imperial Oil Limited | Annual report 2008

COnSOLIDATeD STATeMenT OF InCOMe (U.S. gAAP)

millions of Canadian dollars
For the years ended December 31

Revenues and other income
Operating revenues (a) (b)
Investment and other income (note 9)
Total revenues and other income

Expenses
exploration
Purchases of crude oil and products (c)
Production and manufacturing (d)
Selling and general
Federal excise tax (a)
Depreciation and depletion
Financing costs (note 13)
Total expenses

Income before income taxes

Income taxes (note 4)

Net income

Per-share information (Canadian dollars)
net income per common share – basic (note 11)
net income per common share – diluted (note 11)
Dividends

2008

2007

2006

31 240
339
31 579

132
18 865
4 228
1 038
1 312
728
–
26 303

5 276

1 398

3 878

4.39
4.36
0.38

25 069
374
25 443

106
14 026
3 474
1 335
1 307
780
36
21 064

4 379

1 191

3 188

3.43
3.41
0.35

24 505
283
24 788

32
13 793
3 446
1 284
1 274
831
28
20 688

4 100

1 056

3 044

3.12
3.11
0.32

(a) Operating revenues include federal excise tax of $1,312 million (2007 – $1,307 million, 2006 – $1,274 million).
(b) Operating revenues include amounts from related parties of $2,150 million (2007 – $1,772 million, 2006 – $1,955 million), (note 15).
(c) Purchases of crude oil and products include amounts from related parties of $4,729 million (2007 – $3,331 million, 2006 – $3,937 million),

(note 15).

(d) Production and manufacturing expenses include amounts to related parties of $161 million (2007 – $194 million, 2006 – $156 million),

(note 15).

The information on pages 42 through 59 is an integral part of these consolidated financial statements.

COnSOLIDATeD BALAnCe SHeeT (U.S. gAAP)

millions of Canadian dollars
At December 31

Assets
Current assets
Cash
Accounts receivable, less estimated doubtful amounts

Inventories of crude oil and products (note 12)

Materials, supplies and prepaid expenses
Deferred income tax assets (note 4)
Total current assets
Long-term receivables, investments and other long-term assets
Property, plant and equipment,

less accumulated depreciation and depletion (note 3)

goodwill (note 3)
Other intangible assets, net
Total assets (note 3)

Liabilities
Current liabilities
notes and loans payable (note 13)
Accounts payable and accrued liabilities (a)

Income taxes payable

Total current liabilities
Capitalized lease obligations (note 14)
Other long-term obligations (note 6)
Deferred income tax liabilities (note 4)
Total liabilities

Commitments and contingent liabilities (note 10)

Shareholders’ equity
Common shares at stated value (note 11)(b)
earnings reinvested
Accumulated other comprehensive income
Total shareholders’ equity

Total liabilities and shareholders’ equity

Annual report 2008 | Imperial Oil Limited

2008

2007

1 974
1 455
673
180
361
4 643
881

11 248
204
59
17 035

109
2 542
1 498
4 149
34
2 298
1 489
7 970

1 208
2 132
566
128
660
4 694
766

10 561
204
62
16 287

108
3 335
1 498
4 941
38
1 914
1 471
8 364

1 528
8 484
(947)
9 065

1 600
7 071
(748)
7 923

17 035

16 287

(a) Accounts payable and accrued liabilities include amounts to related parties of $96 million (2007 – $260 million), (note 15).
(b) number of common shares outstanding was 859 million (2007 – 903 million), (note 11).

The information on pages 42 through 59 is an integral part of these consolidated financial statements.

Approved by the directors

B.H. March
Chairman, president and
chief executive officer

P.A. Smith
Senior vice-president,
finance and administration, and treasurer

Imperial Oil Limited | Annual report 2008

COnSOLIDATeD STATeMenT OF SHAreHOLDerS’ eqUITy (U.S. gAAP)

millions of Canadian dollars
At December 31

Common shares at stated value (note 11)
At beginning of year

Issued under the stock option plan

Share purchases at stated value
At end of year

Earnings reinvested
At beginning of year
Cumulative effect of accounting change (note 4)
net income for the year
Share purchases in excess of stated value
Dividends
At end of year

Accumulated other comprehensive income
At beginning of year
Post-retirement benefits liability adjustment (note 5)
Amortization of post-retirement benefits liability adjustment

included in net periodic benefit cost

Minimum pension liability adjustment (note 5)
At end of year

2008

2007

2006

1 600
7
(79)
1 528

7 071
–
3 878
(2 131)
(334)
8 484

(748)
(283)

84
–
(947)

1 677
12
(89)
1 600

6 462
14
3 188
(2 269)
(324)
7 071

(733)
(87)

72
–
(748)

1 747
10
(80)
1 677

5 466
–
3 044
(1 737)
(311)
6 462

(580)
(733)

–
580
(733)

Shareholders’ equity at end of year

9 065

7 923

7 406

Comprehensive income for the year
net income for the year
Other comprehensive income

Post-retirement benefits liability adjustment
Minimum pension liability adjustment

Total comprehensive income for the year

3 878

(199)
–
3 679

3 188

(15)
–
3 173

3 044

–
334
3 378

The information on pages 42 through 59 is an integral part of these consolidated financial statements.

COnSOLIDATeD STATeMenT OF CASH FLOWS (U.S. gAAP)

millions of Canadian dollars
Inflow/(outflow)
For the years ended December 31

Operating activities
net income
Adjustments for non-cash items:
Depreciation and depletion
(gain)/loss on asset sales

Deferred income taxes and other
Changes in operating assets and liabilities:
Accounts receivable

Inventories and prepaids
Income taxes payable

Accounts payable
All other items – net (a)
Cash from operating activities

Investing activities
Additions to property, plant and equipment and intangibles
Proceeds from asset sales
Loans to equity company
Cash from (used in) investing activities

Financing activities
Short-term debt – net
repayment of long-term debt
Long-term debt issued
reduction in capitalized lease obligations
Issuance of common shares under stock option plan
Common shares purchased (note 11)
Dividends paid
Cash from (used in) financing activities

Increase (decrease) in cash
Cash at beginning of year
Cash at end of year (b)

Annual report 2008 | Imperial Oil Limited

2008

2007

2006

3 878

3 188

3 044

728
(241)
387

679
(159)
–
(798)
(211)
4 263

(1 231)
272
(2)
(961)

–
–
–
(3)
7
(2 210)
(330)
(2 536)

766
1 208
1 974

780
(215)
75

(261)
13
(77)
250
(127)
3 626

(899)
279
–
(620)

(65)
(1 722)
500
(4)
12
(2 358)
(319)
(3 956)

(950)
2 158
1 208

831
(134)
292

203
(97)
(225)
(86)
(241)
3 587

(1 177)
212
–
(965)

72
(70)
–
(4)
10
(1 818)
(315)
(2 125)

497
1 661
2 158

(a) Includes contribution to registered pension plans of $165 million (2007 – $163 million, 2006 – $395 million).
(b) Cash is composed of cash in bank and cash equivalents at cost. Cash equivalents are all highly liquid securities with maturity of three months or

less when purchased.

The information on pages 42 through 59 is an integral part of these consolidated financial statements.

Imperial Oil Limited | Annual report 2008

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS

The accompanying consolidated financial statements and the supporting and supplemental material are the responsibility of the
management of Imperial Oil Limited.

The company’s principal business is energy, involving the exploration, production, transportation and sale of crude oil and
natural gas and the manufacture, transportation and sale of petroleum products. The company is also a major manufacturer and
marketer of petrochemicals.

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the
United States of America. The financial statements include certain estimates that reflect management’s best judgment. Certain
reclassifications to prior years have been made to conform to the 2008 presentation. All amounts are in Canadian dollars unless
otherwise indicated.

1. Summary of significant accounting policies

Principles of consolidation
The consolidated financial statements include the accounts of Imperial Oil Limited and its subsidiaries. Intercompany accounts
and transactions are eliminated. Subsidiaries include those companies in which Imperial has both an equity interest and the
continuing ability to unilaterally determine strategic, operating, investing and financing policies. Significant subsidiaries included
in the consolidated financial statements include Imperial Oil resources Limited, Imperial Oil resources n.W.T. Limited, Imperial
Oil resources ventures Limited and McColl-Frontenac Petroleum Inc. All of the above companies are wholly owned. A significant
portion of the company’s Upstream activities is conducted jointly with other companies. The accounts reflect the company’s
share of undivided interest in such activities, including its 25 percent interest in the Syncrude joint venture and its nine percent
interest in the Sable offshore energy project.

Inventories
Inventories are recorded at the lower of cost or current market value. The cost of crude oil and products is determined primarily
using the last-in, first-out (LIFO) method. LIFO was selected over the alternative first-in, first-out and average cost methods
because it provides a better matching of current costs with the revenues generated in the period.

Inventory costs include expenditures and other charges, including depreciation, directly or indirectly incurred in bringing the
inventory to its existing condition and final storage prior to delivery to a customer. Selling and general expenses are reported as
period costs and excluded from inventory costs.

Investments
The principal investments in companies other than subsidiaries are accounted for using the equity method. They are recorded
at the original cost of the investment plus Imperial’s share of earnings since the investment was made, less dividends received.
Imperial’s share of the after-tax earnings of these companies is included in “investment and other income” in the consolidated
statement of income. Other investments are recorded at cost. Dividends from these other investments are included in
“investment and other income.”

These investments represent interests in non-publicly traded pipeline companies that facilitate the sale and purchase of crude oil
and natural gas in the conduct of company operations. Other parties who also have an equity interest in these companies share
in the risks and rewards according to their percentage of ownership. Imperial does not invest in these companies in order to
remove liabilities from its balance sheet.

Property, plant and equipment
Property, plant and equipment are recorded at cost. Investment tax credits and other similar grants are treated as a reduction of
the capitalized cost of the asset to which they apply.

The company uses the successful-efforts method to account for its exploration and development activities. Under this method,
costs are accumulated on a field-by-field basis with certain exploratory expenditures and exploratory dry holes being expensed
as incurred. The company carries as an asset exploratory well costs if (a) the well found a sufficient quantity of reserves to justify
its completion as a producing well and (b) the company is making sufficient progress assessing the reserves and the economic
and operating viability of the project. exploratory well costs not meeting these criteria are charged to expense. Costs of
productive wells and development dry holes are capitalized and amortized on the unit-of-production method for each field. The
company uses this accounting policy instead of the full-cost method because it provides a more timely accounting of the success
or failure of the company’s exploration and production activities.

Maintenance and repair costs, including planned major maintenance, are expensed as incurred. Improvements that increase or
prolong the service life or capacity of an asset are capitalized.

Annual report 2008 | Imperial Oil Limited

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

Production costs are expensed as incurred. Production involves lifting the oil and gas to the surface and gathering, treating,
field processing and field storage of the oil and gas. The production function normally terminates at the outlet valve on the lease
or field production storage tank. Production costs are those incurred to operate and maintain the company’s wells and related
equipment and facilities. They become part of the cost of oil and gas produced. These costs, sometimes referred to as lifting
costs, include such items as labour cost to operate the wells and related equipment; repair and maintenance costs on the wells
and equipment; materials, supplies and energy costs required to operate the wells and related equipment; and administrative
expenses related to the production activity.

Depreciation and depletion for assets associated with producing properties begin at the time when production commences
on a regular basis. Depreciation for other assets begins when the asset is in place and ready for its intended use. Assets under
construction are not depreciated or depleted. Acquisition costs of proved properties are amortized using a unit-of-production
method, computed on the basis of total proved oil and gas reserves. Unit-of-production depreciation is applied to those wells,
plant and equipment assets associated with productive depletable properties and the unit-of-production rates are based on the
amount of proved developed reserves of oil and gas. Depreciation of other plant and equipment is calculated using the straight-
line method, based on the estimated service life of the asset. In general, refineries are depreciated over 25 years; other major
assets, including chemical plants and service stations, are depreciated over 20 years.

Proved oil and gas properties held and used by the company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amounts may not be recoverable. Assets are grouped at the lowest level for which there
are identifiable cash flows that are largely independent of the cash flows of other groups of assets.

The company estimates the future undiscounted cash flows of the affected properties to judge the recoverability of carrying
amounts. Cash flows used in impairment evaluations are developed using annually updated corporate plan investment
evaluation assumptions for crude oil and natural gas commodity prices and foreign-currency exchange rates. Annual volumes
are based on individual field production profiles, which are also updated annually.

In general, impairment analyses are based on proved reserves. Where probable reserves exist, an appropriately risk-adjusted
amount of these reserves may be included in the impairment evaluation. An asset would be impaired if the undiscounted cash
flows were less than its carrying value. Impairments are measured by the amount by which the carrying value exceeds its fair
value.

Acquisition costs for the company’s oil sands(a) operation are capitalized as incurred. Oil sands exploration costs are expensed
as incurred. The capitalization of project development costs begins when there are no major uncertainties that exist which would
preclude management from making a significant funding commitment within a reasonable time period. The company expenses
stripping costs during the production phase as incurred.

Depreciation of oil sands mining and extraction assets begins when bitumen ore is produced on a sustained basis, and
depreciation of bitumen upgrading assets begins when feed is introduced to the upgrading unit and maintained on a continuous
basis. Assets under construction are not depreciated. Investments in extraction facilities, which separate the crude from sand,
as well as the upgrading facilities, are depreciated on a unit-of-production method based on proven reserves. Investments in
mining and transportation systems are generally depreciated on a straight-line basis over a 15-year life. Other mining related
infrastructure costs that are of a long-term nature intended for continued use in or to provide long-term benefit to the operation,
such as pre-production stripping, certain roads, etc., are depreciated on a unit-of-production basis based on proven reserves.

Oil sands assets held and used by the company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amounts are not recoverable. The impairment evaluation for oil sands assets is based on a comparison
of undiscounted cash flows to book carrying value.

gains or losses on assets sold are included in “investment and other income” in the consolidated statement of income.

Interest capitalization
Interest costs relating to major capital projects under construction are capitalized as part of property, plant and equipment. The
project construction phase commences with the development of the detailed engineering design and ends when the constructed
assets are ready for their intended use.

(a) Oil sands are a semi-solid material composed of bitumen, sand, water and clays and are recovered through surface mining methods. Currently, the

company’s oil sands production volumes are the company’s share of production volumes in the Syncrude joint venture, and the company’s reserves
from oil sands operations are the company’s share of synthetic crude oil reserves in the Syncrude joint venture and the company’s share of mined
bitumen reserves in the Kearl oil sands project.

Imperial Oil Limited | Annual report 2008

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

Goodwill and other intangible assets
goodwill is not subject to amortization. goodwill is tested for impairment annually or more frequently if events or circumstances
indicate it might be impaired. Impairment losses are recognized in current period earnings. The evaluation for impairment of
goodwill is based on a comparison of the carrying values of goodwill and associated operating assets with the estimated present
value of net cash flows from those operating assets.

Intangible assets with determinable useful lives are amortized over the estimated service lives of the assets. Computer software
development costs are amortized over a maximum of 15 years and customer lists are amortized over a maximum of 10 years.
The amortization is included in “depreciation and depletion” in the consolidated statement of income.

Asset retirement obligations and other environmental liabilities
Legal obligations associated with site restoration on the retirement of assets with determinable useful lives are recognized when
they are incurred, which is typically at the time the assets are installed. These obligations primarily relate to soil remediation and
decommissioning and removal costs of oil and gas wells and related facilities. The obligations are initially measured at fair value
and discounted to present value. A corresponding amount equal to that of the initial obligation is added to the capitalized costs
of the related asset. Over time, the discounted asset retirement obligation amount will be accreted for the change in its present
value, and the initial capitalized costs will be depreciated over the useful lives of the related assets.

no asset retirement obligations are set up for those manufacturing, distribution and marketing facilities with an indeterminate
useful life. Asset retirement obligations for these facilities generally become firm at the time the facilities are permanently shut
down and dismantled. These obligations may include the costs of asset disposal and additional soil remediation. However,
these sites have indeterminate lives based on plans for continued operations, and as such, the fair value of the conditional legal
obligations cannot be measured, since it is impossible to estimate the future settlement dates of such obligations. Provision for
environmental liabilities of these assets is made when it is probable that obligations have been incurred and the amount can be
reasonably estimated. These liabilities are not discounted. Asset retirement obligations and other provisions for environmental
liabilities are determined based on engineering estimated costs, taking into account the anticipated method and extent of
remediation consistent with legal requirements, current technology and the possible use of the location.

Foreign-currency translation
Monetary assets and liabilities in foreign currencies have been translated at the rates of exchange prevailing on December 31.
Any exchange gains or losses are recognized in income.

Financial instruments
The fair values of cash, accounts receivable and current liabilities approximate recorded amounts because of the short period to
receipt or payment of cash. The fair values of the company’s other financial instruments, which are mainly long-term receivables,
are estimated primarily by discounting future cash flows, using current rates for similar financial instruments under similar credit
risk and maturity conditions.

The company does not use financing structures for the purpose of altering accounting outcomes or removing debt from the
balance sheet. The company does not use derivative instruments to speculate on the future direction of currency or commodity
prices.

Revenues
revenues associated with sales of crude oil, natural gas, petroleum and chemical products and other items are recorded
when the products are delivered. Delivery occurs when the customer has taken title and has assumed the risks and rewards of
ownership, prices are fixed or determinable and collectibility is reasonably assured. The company does not enter into ongoing
arrangements whereby it is required to repurchase its products, nor does the company provide the customer with a right of
return.

revenues include amounts billed to customers for shipping and handling. Shipping and handling costs incurred up to the
point of final storage prior to delivery to a customer are included in “purchases of crude oil and products” in the consolidated
statement of income. Delivery costs from final storage to customer are recorded as a marketing expense in “selling and general”
expenses.

Purchases and sales of inventory with the same counterparty that are entered into in contemplation of one another are combined
and recorded as exchanges measured at the book value of the item sold.

Share-based compensation
The company awards share-based compensation to employees in the form of restricted stock units. Compensation expense is
measured each reporting period based on the company’s current stock price and is recorded as “selling and general” expenses
in the consolidated statement of income over the requisite service period of each award. See note 8 to the consolidated financial
statements for further details.

Annual report 2008 | Imperial Oil Limited

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

Consumer taxes
Taxes levied on the consumer and collected by the company are excluded from the consolidated statement of income. These are
primarily provincial taxes on motor fuels and the federal goods and services tax.

2. Accounting change for fair value measurement

effective January 1, 2008, the company adopted the Financial Accounting Standards Board’s (FASB) Statement no. 157 (SFAS
157), “Fair value Measurements” for financial assets and liabilities that are measured at fair value and nonfinancial assets
and liabilities that are remeasured at fair value on a recurring basis. SFAS 157 defines fair value, establishes a framework for
measuring fair value when an entity is required to use a fair value measure for recognition or disclosure purposes and expands
the disclosures about fair value measurements. The initial application of SFAS 157 had no material impact on the company’s
financial statements. effective January 1, 2009, SFAS 157 is applicable to all nonfinancial assets and liabilities that are measured
at fair value.

3. Business segments

The company operates its business in Canada. The Upstream, Downstream and Chemical functions best define the operating
segments of the business that are reported separately. The factors used to identify these reportable segments are based on
the nature of the operations that are undertaken by each segment and the structure of the company’s internal organization. The
Upstream segment is organized and operates to explore for and ultimately produce crude oil and its equivalent, and natural
gas. The Downstream segment is organized and operates to refine crude oil into petroleum products and the distribution and
marketing of these products. The Chemical segment is organized and operates to manufacture and market hydrocarbon-based
chemicals and chemical products. The above segmentation has been the long-standing practice of the company and is broadly
understood across the petroleum and petrochemical industries.

These functions have been defined as the operating segments of the company because they are the segments (a) that engage
in business activities from which revenues are earned and expenses are incurred; (b) whose operating results are regularly
reviewed by the company’s chief operating decision maker to make decisions about resources to be allocated to each segment
and assess its performance; and (c) for which discrete financial information is available.

Corporate and other includes assets and liabilities that do not specifically relate to business segments – primarily cash, long-
term debt and liabilities associated with incentive compensation and post-retirement benefits liability adjustment. net income in
this segment primarily includes financing costs, interest income and share-based incentive compensation expenses.

Segment accounting policies are the same as those described in the summary of significant accounting policies. Upstream,
Downstream and Chemical expenses include amounts allocated from the “corporate and other” segment. The allocation is
based on a combination of fee for service, proportional segment expenses and a three-year average of capital expenditures.
Transfers of assets between segments are recorded at book amounts. Intersegment sales are made essentially at prevailing
market prices. Assets and liabilities that are not identifiable by segment are allocated.

Imperial Oil Limited | Annual report 2008

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

millions of dollars
Revenues and other income
external sales (b)
Intersegment sales
Investment and other income

Expenses
exploration
Purchases of crude oil and products
Production and manufacturing
Selling and general (c)
Federal excise tax
Depreciation and depletion
Financing costs (note 13)
Total expenses
Income before income taxes
Income taxes (note 4)
Current
Deferred
Total income tax expense
Net income
Cash flow from (used in) operating activities
Capital and exploration expenditures
Property, plant and equipment
Cost
Accumulated depreciation and depletion
Net property, plant and equipment (d) (e)
Total assets

millions of dollars
Revenues and other income
external sales (b)
Intersegment sales
Investment and other income

Upstream (a)
2007

2008

2006

Downstream
2007

2008

2006

2008

Chemical
2007

5 819
5 403
18
11 240

4 539
4 146
233
8 918

4 619
3 837
111
8 567

24 049 19 230 18 527
2 256
2 305
105
52
27 212 21 587 20 888

2 892
271

132
3 995
2 569
6
–
474
2
7 178
4 062

1 051
88
1 139
2 923
3 699
1 110

106
3 113
2 057
8
–
519
4
5 807
3 111

682
60
742
2 369
2 411
744

32
2 841
1 994
13
–
584
2
5 466
3 101

602
123
725
2 376
3 024
787

–

–
22 223 16 469 16 178
1 266
1 232
1 018
987
1 274
1 307
233
244
6
1
26 214 20 240 19 975
913
1 347

1 452
998
1 312
234
(5)

998

(56)
258
202
796
280
232

491
(65)
426
921
1 151
187

174
115
289
624
507
361

16 344
(8 832)
7 512
8 758

15 285 14 926
(8 474) (8 255)
6 671
6 811
7 513
8 171

6 776
(3 452)
3 324
6 038

6 655
(3 320)
3 335
6 727

6 581
(3 178)
3 403
6 450

1 372
460
1
1 833

–
1 401
208
72
–
12
–
1 693
140

37
3
40
100
183
13

732
(514)
218
431

1 300
335
–
1 635

–
1 230
185
71
–
12
–
1 498
137

42
(2)
40
97
109
11

718
(496)
222
476

2006

1 359
345
–
1 704

–
1 209
189
76
–
11
–
1 485
219

60
16
76
143
161
13

702
(484)
218
504

Corporate and other
2006
2007

2008

Eliminations
2007

2008

2006

Consolidated
2007

2008

2006

–
–
49
49

–
–
–
(38)
–
8
3
(27)
76

(27)
44
17
59
101
8

–
–
89
89

–
–
–
269
–
5
31
305
(216)

(52)
35
(17)
(199)
(45)
36

–
–
67
67

–
–
–
177
–
3
20
200
(133)

(60)
26
(34)
(99)
(105)
48

–
(8 755)
–
(8 755)

–
(6 786)
–
(6 786)

–
(6 438)
–
(6 438)

–
(8 754)
(1)
–
–
–
–
(8 755)
–

–
(6 786)
–
–
–
–
–
(6 786)
–

–
(6 435)
(3)
–
–
–
–
(6 438)
–

31 240 25 069 24 505
–
283
31 579 25 443 24 788

–
374

–
339

132

106

32
18 865 14 026 13 793
3 446
3 474
1 284
1 335
1 274
1 307
831
780
28
36
26 303 21 064 20 688
4 100
4 379

4 228
1 038
1 312
728
–

5 276

–
–
–
–
–
–

1 005
393
1 398
3 878
4 263
1 363

1 163
28
1 191
3 188
3 626
978

776
280
1 056
3 044
3 587
1 209

313
(119)
194
1 982

304
(111)
193
1 251

269
(104)
165
2 145

–
–
–
(174)

–
–
–
(338)

–
–
–
(471)

24 165 22 962 22 478
(12 917) (12 401) (12 021)
11 248 10 561 10 457
17 035 16 287 16 141

Annual report 2008 | Imperial Oil Limited

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

(a) A significant portion of activities in the Upstream segment is conducted jointly with other companies. The segment

includes the company’s share of undivided interest in such activities as follows:

millions of dollars

otal external and intersegment sales

Total expenses
net income, after income tax

Total current assets
Long-term assets
Total current liabilities
Other long-term obligations

Cash flow from operating activities
Cash (used in) investing activities

(b) Includes export sales to the United States, as follows:

millions of dollars

Upstream
Downstream
Chemical

Total export sales

2008

4 766
3 002
1 302

758
5 380
659
619

1 891
(685)

2008
3 095
1 685
844

5 624

2007

3 923
2 394
1 224

1 043
4 868
705
460

865
(131)

2007
2 013
922
768

3 703

2006

3 303
1 966
1 148

516
4 833
810
344

1 229
(403)

2006
1 936
869
793

3 598

(c) Consolidated selling and general expenses include delivery costs from final storage areas to customers of $314 million in 2008

(2007 – $318 million, 2006 – $316 million).

(d) Includes property, plant and equipment under construction of $1,523 million (2007 – $951 million).
(e) All goodwill has been assigned to the Downstream segment. There have been no goodwill acquisitions, impairment losses or

write-offs due to sales in the past three years.

Imperial Oil Limited | Annual report 2008

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

Income taxes

millions of dollars
Current income tax expense
Deferred income tax expense (a)
Total income tax expense (b)
Statutory corporate tax rate (percent)
Increase/(decrease) resulting from:
enacted tax rate change
Other
effective income tax rate

2008
1 005
393
1 398
29.5

–
(3.0)
26.5

2007
1 163
28
1 191
30.1

(2.2)
(0.7)
27.2

2006
776
280
1 056
32.8

(2.7)
(4.3)
25.8

(a) The provisions for deferred income taxes in 2008 include net (charges)/credits for the effect of changes in tax laws and rates of $1 million

(2007 – $90 million, 2006 – $81 million).

(b) Cash outflow from income taxes, plus investment credits earned, was $1,101 million in 2008 (2007 – $1,395 million, 2006 – $1,000 million).

Income taxes (charged)/credited directly to shareholders’ equity were:

millions of dollars
Post-retirement benefits liability adjustment:
net actuarial loss/(gain)
Amortization of net actuarial (loss)/gain
Prior service cost
Amortization of prior service cost
Total post-retirement benefits liability adjustment
Minimum pension liability adjustment

2008

2007

2006

102
(26)
–
(5)
71
–

21
(24)
13
(6)
4
–

212
(146)

Deferred income taxes are based on differences between the accounting and tax values of assets and liabilities. These
differences in value are remeasured at each year-end using the tax rates and tax laws expected to apply when those differences
are realized or settled in the future. Components of deferred income tax liabilities and assets as at December 31 were:

millions of dollars
Depreciation and amortization
Successful drilling and land acquisitions
Pension and benefits
Site restoration
net tax loss carryforwards (a)
Capitalized interest
Other
Deferred income tax liabilities

LIFO inventory valuation
Other
Deferred income tax assets
valuation allowance
Net deferred income tax liabilities

(a) Tax losses can be carried forward indefinitely.

2008
1 685
258
(312)
(202)

(2) (37)
53 4
9
1 489

(301)
(60)
(361)
–
1 128

2007
1 624
276
(249)
(156)

(42)

9
(36)
1 471

(547)
(113)
(660)
–
811

2006
1 588
263
(311)
(161)

50
(42)
1 345

(448)
(125)
(573)
–
772

Unrecognized tax benefits
As of January 1, 2007, the company adopted the Financial Accounting Standards Board (FASB) Interpretation no. 48 (FIn 48),
“Accounting for Uncertainty in Income Taxes”. The cumulative adjustment for the accounting change reported in 2007 was an
after-tax gain of $14 million. The gain reflected the recognition of several refund claims with associated interest, partly offset by
increased income tax reserves.

Unrecognized tax benefits reflect the difference between positions taken on tax returns and the amounts recognized in the
financial statements. resolution of the related tax positions will take many years to complete. It is difficult to predict the timing
of resolution for individual tax positions, since such timing is not entirely within the control of the company. The company’s
effective tax rate will be reduced if any of these tax benefits are subsequently recognized.

Annual report 2008 | Imperial Oil Limited

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

The following table summarizes the movement in unrecognized tax benefits:

millions of dollars
January 1 balance
Additions for prior years’ tax positions
reductions for prior years’ tax positions
December 31 balance

2008
170
9
(29)
150

2007
142
28
–
170

The 2008 and 2007 changes in unrecognized tax benefits did not have a material effect on the company’s net income or cash
flow. The company’s tax filings from 2004 to 2007 are subject to examination by the tax authorities. The Canada revenue Agency
has proposed certain adjustments to the company’s filings for several years in the period 1994 to 2003. Management is currently
evaluating those proposed adjustments. Management believes that a number of outstanding matters before 2004 are expected
to be resolved in 2009. The impact on unrecognized tax benefits and the company’s effective income tax rate from these matters
is not expected to be material.

The company classifies interest on income tax related balances as interest expense or interest income and classifies tax related
penalties as operating expense.

5. employee retirement benefits

retirement benefits, which cover almost all retired employees and their surviving spouses, include pension income and
certain health care and life insurance benefits. They are met through funded registered retirement plans and through unfunded
supplementary benefits that are paid directly to recipients. Funding of registered retirement plans complies with federal and
provincial pension regulations, and the company makes contributions to the plans based on an independent actuarial valuation.

Pension income benefits consist mainly of company-paid defined benefit plans that are based on years of service and final
average earnings. The company shares in the cost of health care and life insurance benefits. The company’s benefit obligations
are based on the projected benefit method of valuation that includes employee service to date and present compensation levels
as well as a projection of salaries to retirement.

The expense and obligations for both funded and unfunded benefits are determined in accordance with United States generally
accepted accounting principles and actuarial procedures. The process for determining retirement-income expense and related
obligations includes making certain long-term assumptions regarding the discount rate, rate of return on plan assets and rate
of compensation increases. The obligation and pension expense can vary significantly with changes in the assumptions used to
estimate the obligation and the expected return on plan assets.

The benefit obligations and plan assets associated with the company’s defined benefit plans are measured on December 31.

Imperial Oil Limited | Annual report 2008

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

Pension benefits
2007

2008

Other post-retirement
benefits

(1)

–

(a) The company amortizes the net balance of actuarial loss/(gain) over the average remaining service period of active plan participants.
(b) The company amortizes prior service cost on a straight-line basis as permitted under SFAS 87 and SFAS 106.

Annual report 2008 | Imperial Oil Limited

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

Cash flows
Benefit payments expected in:

millions of dollars
2009
2010
2011
2012
2013
2014 – 2018

Pension benefits
274
277
282
288
296
1 623

Other post-retirement
benefits
25
25
25
25
25
128

In 2009, the company expects to make cash contributions of about $200 million to its pension plans.

Sensitivities
A one percent change in the assumptions at which retirement liabilities could be effectively settled is as follows:

Increase/(decrease)
millions of dollars
rate of return on plan assets:
effect on net benefit cost, before tax

Discount rate:
effect on net benefit cost, before tax
effect on benefit obligation

rate of pay increases:
effect on net benefit cost, before tax
effect on benefit obligation

One percent
increase

One percent
decrease

(40)

(55)
(440)

35
115

65
530

(30)
(105)

A one percent change in the assumed health-care cost trend rate would have the following effects:

Increase/(decrease)
millions of dollars
effect on service and interest cost components
effect on benefit obligation

One percent
increase
4
31

One percent
decrease
(3)
(26)

6. Other long-term obligations

millions of dollars
employee retirement benefits (note 5) (a)
Asset retirement obligations and other environmental liabilities (b)
Share-based incentive compensation liabilities (note 8)
Other obligations
Total other long-term obligations

2008
1 151
728
203
216
2 298

2007
954
522
210
228
1 914

(a) Total recorded employee retirement benefit obligations also include $45 million in current liabilities (2007 – $59 million).
(b) Total asset retirement obligations and other environmental liabilities also include $83 million in current liabilities (2007 – $74 million).

The following table summarizes the activity in the liability for asset retirement obligations:

millions of dollars
January 1 balance
Additions
Accretion
Settlement
December 31 balance

2008
488
232
29
(38)
711

2007
422
71
25
(30)
488

Imperial Oil Limited | Annual report 2008

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

7. Derivatives and financial instruments

The company did not enter into any energy derivatives, foreign-exchange forward contracts or currency and interest-rate swaps
in the past three years. The company maintains a system of controls that includes a policy covering the authorization, reporting
and monitoring of derivative activity.

The fair value of the company’s financial instruments is determined by reference to various market data and other appropriate
valuation techniques. There are no material differences between the fair values of the company’s financial instruments and the
recorded book value.

8. Share-based incentive compensation programs

Share-based incentive compensation programs are designed to retain selected employees, reward them for high performance
and promote individual contribution to sustained improvement in the company’s future business performance and shareholder
value.

Incentive share units, deferred share units and restricted stock units
Incentive share units have value if the market price of the company’s common shares when the unit is exercised exceeds the
market value when the unit was issued, as adjusted for any share splits. The issue price of incentive share units is the closing
price of the company’s shares on the Toronto Stock exchange on the grant date. Up to 50 percent of the units may be exercised
after one year from issuance; an additional 25 percent may be exercised after two years; and the remaining 25 percent may be
exercised after three years. Incentive share units are eligible for exercise up to ten years from issuance. The units may expire
earlier if employment is terminated other than by retirement, death or disability.

The deferred share unit plan is made available to selected executives and nonemployee directors. The selected executives can
elect to receive all or part of their performance bonus compensation in units, and the nonemployee directors can elect to receive
all or part of their directors’ fees in units. The number of units granted to executives is determined by dividing the amount of the
bonus elected to be received as deferred share units by the average of the closing prices of the company’s shares on the Toronto
Stock exchange for the five consecutive trading days immediately prior to the date that the bonus would have been paid. The
number of units granted to a nonemployee director is determined at the end of each calendar quarter by dividing the amount of
director’s fees for the calendar quarter that the nonemployee director elected to receive as deferred share units by the average
closing price of the company’s shares for the five consecutive trading days immediately prior to the last day of the calendar
quarter. Additional units are granted based on the cash dividend payable on the company’s shares divided by the average
closing price immediately prior to the payment date for that dividend and multiplying the resulting number by the number of
deferred share units held by the recipient, as adjusted for any share splits.

Deferred share units cannot be exercised until after termination of employment with the company or resignation as a director
and must be exercised no later than December 31 of the year following termination or resignation. On the exercise date, the
cash value to be received for the units is determined based on the average closing price of the company’s shares for the five
consecutive trading days immediately prior to the date of exercise, as adjusted for any share splits.

Under the restricted stock unit plan, each unit entitles the recipient to the conditional right to receive from the company, upon
exercise, an amount equal to the five-day average of the closing price of the company’s common shares on the Toronto Stock
exchange on and immediately prior to the exercise dates. Fifty percent of the units are exercised three years following the grant
date, and the remainder are exercised seven years following the grant date. The company may also issue units where fifty
percent of the units are exercisable five years following the grant date and the remainder are exercisable on the later of ten years
following the grant date or the retirement date of the recipient. For units granted in 2002 to 2005, the exercise date has been
changed from December 31 to December 4 for units exercised in 2006 and subsequent years. For units granted in 2002, 2003,
2004 and 2005 to be exercised subsequent to the company’s May 2006 three-for-one share split, the company has indicated that
it will increase the cash payment or number of shares issued per unit, as the case may be, by a factor of three.

All units require settlement by cash payments with the following exceptions. The restricted stock unit program was amended
for units granted in 2002 and subsequent years by providing that the recipient may receive one common share of the company
per unit or elect to receive the cash payment for the units to be exercised in the seventh year following the grant date. For units
where fifty percent are exercisable five years following the grant date and the remainder exercisable on the later of ten years
following the grant date or the retirement date of the recipient, the recipient may receive one common share of the company per
unit or elect to receive cash payment for all units to be exercised.

The company accounts for these units by using the fair-value-based method. The fair value of awards in the form of incentive
share, deferred share and restricted stock units is the market price of the company’s stock. Under this method, compensation
expense related to the units of these programs is measured each reporting period based on the company’s current stock price
and is recorded in the consolidated statement of income over the requisite service period of each award.

Proprietary and restricted distribution until Feb. 24, 2009

Annual report 2008 | Imperial Oil Limited

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

The following table summarizes information about these units for the year ended December 31, 2008:

Outstanding at January 1, 2008
granted
exercised
Cancelled or adjusted
Outstanding at December 31, 2008

Incentive
share
units
6 758 850
–
(1 249 335)
1 500
5 511 015

Deferred
share
units
90 526
10 937
(15 092)
–
86 371

restricted
stock
units
10 219 851
1 760 795
(1 328 233)
(55 850)
10 596 563

There was a $33 million favourable adjustment to previously recorded compensation expenses for these programs in the
year ended December 31, 2008. The compensation expense charged against income for these programs was $202 million
and $133 million for the years ended December 31, 2007 and 2006, respectively. Income tax expense associated with the
favourable adjustment to compensation expense for the year ended December 31, 2008 was $5 million, and the income tax
benefit recognized in income related to compensation expense for these programs was $67 million and $45 million for the
years ended December 31, 2007 and 2006, respectively. Cash payments of $115 million, $159 million and $162 million for these
programs were made in 2008, 2007 and 2006, respectively.

As of December 31, 2008, there was $201 million of total before-tax unrecognized compensation expense related to nonvested
restricted stock units based on the company’s share price at the end of the current reporting period. The weighted average
vesting period of nonvested restricted stock units is 3.9 years. All units under the incentive share and deferred share programs
have vested as of December 31, 2008.

Incentive stock options
In April 2002, incentive stock options were granted for the purchase of the company’s common shares. For units exercised
subsequent to the company’s May 2006 three-for-one split, the company has indicated that it will give the option holders
the right to purchase three shares for each original stock option granted. The exercise price is $15.50 per share (adjusted to
reflect the three-for-one share split). All options have vested as of December 31, 2008. Any unexercised options expire after
April 29, 2012. The company has not issued incentive stock options since 2002 and has no plans to issue incentive stock
options in the future.

As permitted by SFAS 123, the company continues to apply the intrinsic-value-based method of accounting for the incentive
stock options granted in April 2002. Under this method, compensation expense is not recognized on the issuance of stock
options as the exercise price is equal to the market value at the date of grant.

no compensation expense and no income tax benefit related to stock options were recognized for stock options in the years
ended December 31, 2008, 2007 and 2006. The aggregate intrinsic value of stock options exercised was $17 million, $25 million
and $18 million in the years ended December 31, 2008, 2007 and 2006, respectively, and for the balance of outstanding stock
options is $109 million as at December 31, 2008.

The average fair value of each option granted during 2002 was $4.23 (adjusted to reflect the three-for-one share split). The fair
value was estimated at the grant date using an option-pricing model with the following weighted average assumptions: risk-free
interest rate of 5.7 percent, expected life of five years, volatility of 25 percent and a dividend yield of 1.9 percent.

The company has purchased shares on the market to fully offset the dilutive effects from the exercise of stock options. Purchase
may be discontinued at any time without prior notice.

The following table summarizes information about stock options for the year ended December 31, 2008:

Incentive stock options
Outstanding at January 1
granted
exercised
Cancelled or adjusted
Outstanding at December 31

2008

exercise remaining
price contractual
term (years)

(dollars)

Units

4 728 780

15.50

–

(434 145)

–
4 294 635

15.50

3.3

Imperial Oil Limited | Annual report 2008

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

Investment and other income

Investment and other income includes gains and losses on asset sales as follows:

millions of dollars
Proceeds from asset sales
Book value of assets sold
Gain/(loss) on asset sales, before tax (a) (b)
Gain/(loss) on asset sales, after tax (a) (b)

2008
272
31
241
209

2007
279
64
215
156

2006
212
78
134
96

(a) 2007 included a gain of $200 million ($142 million, after tax) from the sale of the company’s interests in a natural gas producing property in

British Columbia and in the Willesden green producing property.

(b) 2008 included a gain of $219 million ($187 million, after tax) from the sale of the company’s equity investment in rainbow Pipe Line Co. Ltd.

10. Litigation and other contingencies

A variety of claims have been made against Imperial Oil Limited and its subsidiaries in a number of lawsuits. Management has
regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition
or disclosure of these contingencies. The company accrues an undiscounted liability for those contingencies where the
incurrence of a loss is probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated
and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The
company does not record liabilities when the likelihood that the liability has been incurred is probable but the amount cannot
be reasonably estimated or when the liability is believed to be only reasonably possible or remote. For contingencies where an
unfavourable outcome is reasonably possible and which are significant, the company discloses the nature of the contingency
and, where feasible, an estimate of the possible loss. Based on a consideration of all relevant facts and circumstances, the
company does not believe the ultimate outcome of any currently pending lawsuits against the company will have a material
adverse effect on the company’s operations or financial condition.

The Alberta government enacted changes to the oil and gas and generic oil sands royalty regime effective 2009. The impacts
of the changes have been incorporated in the company’s 2008 oil and gas reserves and mined bitumen reserves calculation,
where appropriate. In november 2008, Imperial, along with the other Syncrude joint-venture owners, signed an agreement
with the government of Alberta to amend the existing Syncrude Crown Agreement. Under the amended agreement, beginning
January 1, 2010, Syncrude will begin transitioning to the new oil sands royalty regime by paying additional royalties, the exact
amount of which will depend on production levels from 2010 to 2015. Also, beginning January 1, 2009, Syncrude’s royalty will
be based on bitumen value with upgrading costs and revenues excluded from the calculation. The impacts of the amended
agreement have been incorporated in the 2008 synthetic crude oil reserves calculation.

The company was contingently liable at December 31, 2008 for a maximum of $79 million relating to guarantees for purchasing
operating equipment and other assets from its rural marketing associates upon expiry of the associate agreement or the
resignation of the associate. The company expects that the fair value of the operating equipment and other assets so purchased
would cover the maximum potential amount of future payment under the guarantees.

Additionally, the company has other commitments arising in the normal course of business for operating and capital needs, all
of which are expected to be fulfilled with no adverse consequences material to the company’s operations or financial condition.
Unconditional purchase obligations, as defined by accounting standards, are those long-term commitments that are non-
cancelable or cancelable only under certain conditions and that third parties have used to secure financing for the facilities that
will provide the contracted goods and services.

millions of dollars
Unconditional purchase obligations (a)

2009
127

2010
63

2011
74

2012
43

2013
82

After
2013
31

Total
420

(a) Undiscounted obligations of $420 million mainly pertain to pipeline throughput agreements. Total payments under unconditional purchase

obligations were $117 million (2007 – $94 million, 2006 – $100 million). The present value of these commitments, excluding imputed interest of
$66 million, totaled $354 million.

Payments due by period

Annual report 2008 | Imperial Oil Limited

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

11. Common shares

thousands of shares
Authorized

As at
Dec. 31
2008
1 100 000

As at
Dec. 31
2007
1 100 000

From 1995 to 2007, the company purchased shares under twelve 12-month normal course share purchase programs, as well as
an auction tender. On June 25, 2008, a 12-month share repurchase program was implemented with an allowable purchase of
about 44 million shares (five percent of the total at June 16, 2008), less shares purchased from exxon Mobil Corporation and
shares purchased by the employee savings plan and company pension fund. The results of these activities are shown below.

year
1995 to 2006
2007
2008
Cumulative purchases to date

Purchased

shares Millions of
dollars
10 453
2 358
2 210
15 021

(thousands)
795 623
50 516
44 295
890 434

exxon Mobil Corporation’s participation in the above maintained its ownership interest in Imperial at 69.6 percent.

The excess of the purchase cost over the stated value of shares purchased has been recorded as a distribution of earnings
reinvested.

The company’s common share activities are summarized below:

Balance as at January 1, 2006
Issued for cash under the stock option plan
Purchases at stated value
Balance as at December 31, 2006
Issued for cash under the stock option plan
Purchases at stated value
Balance as at December 31, 2007
Issued for cash under the stock option plan
Purchases at stated value
Balance as at December 31, 2008

Thousands of Millions of
dollars
1 747
10
(80)
1 677
12
(89)
1 600
7
(79)
1 528

shares
997 875
627
(45 514)
952 988
791
(50 516)
903 263
434
(44 295)
859 402

Imperial Oil Limited | Annual report 2008

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

The following table provides the calculation of basic and diluted earnings per share:

Net income per common share – basic
net income (millions of dollars)

2008

2007

2006

3 878

3 188

3 044

Weighted average number of common shares outstanding

(thousands of shares)

882 604

928 527

975 128

net income per common share (dollars)

4.39

3.43

3.12

Net income per common share – diluted
net income (millions of dollars)

3 878

3 188

3 044

Weighted average number of common shares outstanding

(thousands of shares)

effect of employee share-based awards (thousands of shares)
Weighted average number of common shares outstanding,
assuming dilution (thousands of shares)

882 604
6 418

928 527
5 811

975 128
4 460

889 022

934 338

979 588

net income per common share (dollars)

4.36

3.41

3.11

12. Miscellaneous financial information

In 2008, net income included an after-tax gain of $27 million (2007 – $25 million gain, 2006 – $14 million gain) attributable to the
effect of changes in last-in, first-out (LIFO) inventories. The replacement cost of inventories was estimated to exceed their LIFO
carrying values at December 31, 2008 by $994 million (2007 – $1,953 million). Inventories of crude oil and products at year-end
consisted of the following:

millions of dollars
Crude oil
Petroleum products
Chemical products
natural gas and other
Total inventories of crude oil and products

2008
328
268
65
12
673

2007
211
298
43
14
566

research and development costs in 2008 were $83 million (2007 – $89 million, 2006 – $73 million) before investment tax credits
earned on these expenditures of $9 million (2007 – $9 million, 2006 – $7 million). research and development costs are included
in expenses due to the uncertainty of future benefits.

Cash flow from operating activities included dividends of $11 million received from equity investments in 2008 (2007 –
$22 million, 2006 – $18 million).

13. Financing costs

millions of dollars
Debt-related interest
Capitalized interest
net interest expense
Other interest
Total financing costs (a)

2008
8
(8)
–
–
–

2007
62
(36)
26
10
36

2006
63
(48)
15
13
28

(a) Cash interest payments in 2008 were $6 million (2007 – $80 million, 2006 – $71 million). The weighted average interest rate on short-term borrowings

in 2008 was 3.5 percent (2007 – 5.1 percent).

Annual report 2008 | Imperial Oil Limited

nOTeS TO COnSOLIDATeD FInAnCIAL STATeMenTS (cont’d)

14. Leased facilities and capitalized lease obligations

At December 31, 2008, the company held non-cancelable operating leases covering office buildings, rail cars, service stations and
other properties with minimum undiscounted lease commitments totaling $432 million as indicated in the following table:

millions of dollars
Lease payments under
minimum commitments (a)

2009

2010

2011

2012

2013

After
2013

Payments due by period

158

Total

432

(a) Total rental expense incurred for operating leases in 2008 was $149 million (2007 – $98 million, 2006 – $101 million) which included minimum rental

expenditures of $140 million (2007 – $86 million, 2006 – $88 million). related rental income was not material.

Capitalized lease obligations primarily relate to the capital lease for marine services, which are provided by the lessor
commencing in 2004 for a period of 10 years, extendable for an additional five years. The average imputed rate was 11.0 percent
in 2008 (2007 – 10.9 percent). Total capitalized lease obligations also include $4 million in current liabilities (2007 – $4 million).

Principal payments on capital leases of approximately $4 million a year are due in each of the next five years.

15. Transactions with related parties

revenues and expenses of the company also include the results of transactions with exxon Mobil Corporation and affiliated
companies (exxonMobil) in the normal course of operations. These were conducted on terms as favourable as they would have
been with unrelated parties and primarily consisted of the purchase and sale of crude oil, natural gas, petroleum and chemical
products, as well as transportation, technical and engineering services. Transactions with exxonMobil also included amounts
paid and received in connection with the company’s participation in a number of upstream activities conducted jointly in Canada.

The company has existing agreements with exxonMobil to:

(a) provide computer and customer support services to the company and to share common business and operational support

services that allow the companies to consolidate duplicate work and systems;

(b) operate the Western Canada production properties owned by exxonMobil. This contractual agreement is designed to

provide organizational efficiencies and to reduce costs. no separate legal entities were created from this arrangement.
Separate books of account continue to be maintained for the company and exxonMobil. The company and exxonMobil retain
ownership of their respective assets, and there is no impact on operations or reserves;

(d) share new upstream opportunities on an up to equal basis.

Certain charges from exxonMobil have been capitalized; they are not material in the aggregate.

As at December 31, 2008, the company had outstanding loans of $35 million (2007 – $33 million) to Montreal Pipe Line Limited,
in which the company has an equity interest, for financing of the equity company’s capital expenditure programs and working
capital requirements.

Imperial Oil Limited | Annual report 2008

SUPPLeMenTAL InFOrMATIOn On OIL AnD gAS eXPLOrATIOn AnD PrODUCTIOn ACTIvITIeS (unaudited)

Pages 60 to 63 provide information about the Upstream segment in accordance with Statement of Financial Accounting
Standards no. 69 (SFAS 69), “Disclosures about oil and gas production activities”. As such, the information on pages 60 and 61
excludes items not related to oil and natural gas extraction such as administrative and general expenses, pipeline operations,
gas plant processing fees and gains or losses on asset sales.

In addition to proved oil and gas reserves, the company has a 25 percent interest in proven synthetic crude oil reserves in the
Syncrude project and a 70.96 percent interest in proven mined bitumen reserves in the Kearl project. For internal management
purposes, the company views these reserves and their development as an integral part of its total Upstream operations.
However, for financial reporting purposes, these reserves are required to be reported separately from the oil and gas reserves
as shown on page 62.

The synthetic crude oil and mined bitumen reserves are not considered in the standardized measure of discounted future
cash flows for oil and gas reserves on page 61. The company’s share of Syncrude and Kearl results of operations, capital and
exploration expenditures and property, plant and equipment are also excluded from the following tables on this page.

Results of operations

millions of dollars
Sales to customers (a)
Intersegment sales (a) (b)

Production expenses
exploration expenses
Depreciation and depletion
Income taxes
Results of operations

Capital and exploration expenditures
Property costs (c)
Proved
Unproved
exploration costs
Development costs
Total capital and exploration expenditures

Property, plant and equipment
Property costs (c)
Proved
Unproved
Producing assets
Support facilities
Incomplete construction
Total cost
Accumulated depreciation and depletion
Net property, plant and equipment

2006
2 601
1 251
3 852
1 016
32
467
564
1 773

–
–
32
496
528

2008
3 343
1 297
4 640
1 335
122
337
814
2 032

–
–
122
525
647

3 168
271
7 212
181
691
11 523
7 840
3 683

Oil and gas

2007
2 383
1 131
3 514
1 074
100
371
526
1 443

–
1
100
437
538

3 167
148
6 706
180
579
10 780
7 505
3 275

(a) Sales to customers or intersegment sales do not include the sale of natural gas and natural gas liquids purchased for resale, as well as royalty
payments. These items are reported gross in note 3 in “external sales”, “intersegment sales” and in “purchases of crude oil and products”.

(b) Sales of crude oil to consolidated affiliates are at market value, using posted field prices. Sales of natural gas liquids to consolidated affiliates are at

prices estimated to be obtainable in a competitive, arm’s-length transaction.

(c) “Property costs” are payments for rights to explore for petroleum and natural gas and for purchased reserves (acquired tangible and intangible assets

such as gas plants, production facilities and producing-well costs are included under “producing assets”). “Proved” represents areas where
successful drilling has delineated a field capable of production. “Unproved” represents all other areas.

Annual report 2008 | Imperial Oil Limited

SUPPLeMenTAL InFOrMATIOn On OIL AnD gAS eXPLOrATIOn AnD PrODUCTIOn ACTIvITIeS (unaudited) (cont’d)

Standardized measure of discounted future cash flows
As required by SFAS 69, the standardized measure of discounted future net cash flows is computed by applying year-end prices,
costs and legislated tax rates and a discount factor of 10 percent to net proved reserves. The standardized measure includes
costs for future dismantlement, abandonment and remediation obligations. The company believes the standardized measure
does not provide a reliable estimate of the company’s expected future cash flows to be obtained from the development and
production of its oil and gas properties or of the value of its proved oil and gas reserves. The standardized measure is prepared
on the basis of certain prescribed assumptions, including year-end prices, which represent a single point in time and therefore
may cause significant variability in cash flows from year to year as prices change. The table below excludes the company’s
interest in Syncrude and Kearl.

Standardized measure of discounted future net cash flows related to proved oil and gas reserves

millions of dollars
Future cash flows
Future production costs
Future development costs
Future income taxes
Future net cash flows
Annual discount of 10 percent for estimated timing of cash flows
Discounted future cash flows

2008
18 956
(13 558)
(4 642)
(111)
645
613
1 258

Oil and gas

2007
32 415
(14 475)
(3 548)
(3 655)
10 737
(4 487)
6 250

2006
36 751
(16 290)
(2 633)
(5 039)
12 789
(6 374)
6 415

Changes in standardized measure of discounted future net cash flows related to proved oil and gas reserves

Balance at beginning of year
Changes resulting from:
Sales and transfers of oil and gas produced,

net of production costs

net changes in prices, development

costs and production costs

extensions, discoveries, additions and improved

recovery, less related costs

Development costs incurred during the year
revisions of previous quantity estimates
Accretion of discount
net change in income taxes
net change
Balance at end of year

6 250

6 415

4 314

(3 422)

(2 430)

(2 839)

(6 016)

(625)

4 221

25
438
1 460
689
1 834
(4 992)
1 258

164
412
1 285
710
319
(165)
6 250

(4)
411
87
568
(343)
2 101
6 415

Imperial Oil Limited | Annual report 2008

SUPPLeMenTAL InFOrMATIOn On OIL AnD gAS eXPLOrATIOn AnD PrODUCTIOn ACTIvITIeS (unaudited) (cont’d)

Net proved developed and undeveloped reserves (a)

Beginning of year 2006

revisions
Improved recovery
(Sale)/purchase of reserves in place
Discoveries and extensions
Production
end of year 2006

revisions
Improved recovery
(Sale)/purchase of reserves in place
Discoveries and extensions
Production
end of year 2007

Revisions
Improved recovery
(Sale)/purchase of reserves in place
Discoveries and extensions
Production
End of year 2008

Crude oil and ngLs
millions of barrels

Conventional Heavy oil (b)
551

Total
634

4
–
(1)
–
(15)
71

24
–
(1)
–
(12)
82

(8)
–
–
–
(10)
64

236
–
–
–
(46)
741

(27)
6
–
44
(47)
717

(66)
(1)
–
25
(45)
630

240
–
(1)
–
(61)
812

(3)
6
(1)
44
(59)
799

(74)
(1)
–
25
(55)
694

natural gas
billions of
cubic feet

Synthetic

Mined
crude oil(c) bitumen(d)
millions of barrels

747

140
–
(6)
10
(181)
710

75
1
(12)
8
(147)
635

45
–
–
4
(91)
593

738

1
–
–
–
(21)
718

–
–
–
–
(24)
694

63
–
–
–
(23)
734

–

–
–
–
–
–
–

807
–
–
–
–
807

(a) net reserves are the company’s share of reserves after deducting the shares of mineral owners or governments or both. All reported reserves are

located in Canada. reserves of natural gas are calculated at a pressure of 14.73 pounds per square inch at 60°F.

(b) Heavy oil reserves typically are represented by crude oils with a viscosity of greater than 10,000 cP and recovered through enhanced thermal

operations. Currently, the company’s heavy oil reserves include reserves attributable to the commercial phases of Cold Lake production operations.

(c) The company’s synthetic crude oil reserves include reserves attributable to the company’s share of the Syncrude joint venture.
(d) The company’s mined bitumen reserves include reserves attributable to the company’s share of the Kearl oil sands project.

The information above describes changes during the years and balances of proved oil and gas and proven synthetic crude oil
and mined bitumen reserves at year-end 2006, 2007 and 2008. The definitions used for oil and gas reserves are in accordance
with the U.S. Securities and exchange Commission’s (SeC) rule 4-10 (a) of regulation S-X, paragraphs (2), (3) and (4).

Crude oil and natural gas reserve estimates are based on geological and engineering data, which have demonstrated with
reasonable certainty that these reserves are recoverable in future years from known reservoirs under existing economic and
operating conditions, i.e., prices and costs as of the date the estimate is made.

Annual report 2008 | Imperial Oil Limited

SUPPLeMenTAL InFOrMATIOn On OIL AnD gAS eXPLOrATIOn AnD PrODUCTIOn ACTIvITIeS (unaudited) (cont’d)

estimates of synthetic crude oil reserves are based on detailed geological and engineering assessments of in-place crude
bitumen volumes, the mining plan, historical extraction recovery and upgrading yield factors, installed plant operating
capacity and operating approval limits. estimates of mined bitumen reserves are based on detailed geological and engineering
assessments of in-place crude bitumen volumes, the mining plan, demonstrated extraction recovery factors, planned operating
capacity and operating approval limits.

The year-end oil and gas reserves volumes as well as the reserves change categories shown in the proved reserves tables
are calculated using December 31 prices and costs. These reserves quantities are also used in calculating unit-of-production
depreciation rates and in calculating the standardized measure of discounted net cash flow. We understand that the use of
December 31 prices and costs is intended to provide a point in time measure to calculate reserves and to enhance comparability
between companies. However, the use of year-end prices for reserves estimation introduces short-term price volatility into the
process, which is inconsistent with the long-term nature of the upstream business, since annual adjustments are required based
on prices occurring on a single day. As a result, the use of prices from a single date is not relevant to the investment decisions
made by the company.

revisions can include upward or downward changes in previously estimated volumes of proved reserves for existing fields
due to the evaluation or revaluation of already available geologic, reservoir or production data; new geologic, reservoir or
production data; or changes in year-end prices and costs that are used in the determination of reserves. This category can also
include significant changes in either development strategy or production equipment/facility capacity. The quantities shown in
the revisions category under heavy oil proved reserves in 2006 were due mainly to changes in year-end prices and costs that
were used in the determination of reserves. 807 million barrels of mined bitumen reserves were added in 2008 in the revisions
category, reflecting the company’s share of reserves being developed in the first phase of the Kearl oil sands project.

net proved reserves are determined by deducting the estimated future share of mineral owners or governments or both.
For conventional crude oil and natural gas, net proved reserves are based on estimated future royalty rates as of the date the
estimate is made incorporating the Alberta government’s new oil and gas royalty regime. For Cold Lake and Kearl, net proved
reserves are based on the company’s best estimate of average royalty rates over the life of each project and incorporate the
Alberta government’s new oil sands royalty regime. For Syncrude, net proven reserves are based on the company’s best
estimate of average royalty rates over the life of the project and incorporate amendments to the Syncrude Crown Agreement.
In all cases, actual future royalty rates may vary with production, price and costs.

reserves data do not include crude oil and natural gas, such as those discovered in the Beaufort Sea-Mackenzie Delta and the
Arctic islands, or the heavy oil and oil sands, other than reserves attributable to commercial phases of Cold Lake production
operations, Syncrude and Kearl.

Oil-equivalent barrels (OeB) may be misleading, particularly if used in isolation. An OeB conversion ratio of 6,000 cubic feet to
one barrel on an energy-equivalent conversion method is primarily applicable at the burner tip and does not represent a value
equivalency at the well head.

no independent qualified reserves evaluator or auditor was involved in the preparation of the reserves data.

Imperial Oil Limited | Annual report 2008

SHAre OWnerSHIP, TrADIng AnD PerFOrMAnCe

Share ownership
Average number outstanding,

weighted monthly (thousands)
number of shares outstanding at

December 31 (thousands)

Shares held in Canada at December 31 (percent)
number of registered shareholders

at December 31 (a)

number of shareholders registered in Canada

2008

2007

2006

2005

2004

882 604

928 527

975 128

1 024 119

1 070 502

859 402
11.1

903 263
12.1

952 988
13.0

997 875
13.8

1 047 960
14.6

13 206
11 620

13 108
11 450

13 561
11 844

14 096
12 331

14 953
13 088

Shares traded (thousands)

477 574

292 888

321 245

357 633

281 334

Share prices (dollars) (b)
Toronto Stock exchange

High
Low
Close at December 31

nySe Alternext (U.S. dollars)

High
Low

Close at December 31

Net income per share (dollars)
– basic
– diluted

Price ratios at December 31
Share price to net earnings (c)

Dividends declared (d)
Total (millions of dollars)
Per share (dollars)

62.54
28.79
40.99

63.08
23.84
33.72

4.39
4.36

56.26
37.40
54.62

61.48
31.87
54.78

3.43
3.41

45.20
34.31
42.93

40.38
29.99
36.83

45.79
22.50
38.47

39.14
18.27
33.20

24.55
18.81
23.72

20.82
14.11
19.79

3.12
3.11

2.54
2.53

1.92
1.91

9.4

16.0

13.8

15.2

12.4

334
0.38

324
0.35

311
0.32

320
0.31

314
0.29

(a) exxon Mobil Corporation owns 69.6 percent of Imperial’s shares.
(b) Share prices were obtained from stock exchange records, adjusted for the three-for-one share split in 2006. U.S. dollar share price presented is

based on consolidated U.S. market data. The company’s shares trade in the United States of America on the nySe Alternext, formerly known as the
American Stock exchange.

(c) Closing share price at December 31 on the Toronto Stock exchange, divided by net income per share – diluted.
(d) The fourth-quarter dividend is paid on January 1 of the succeeding year.

Information for security holders outside Canada
Cash dividends paid to shareholders resident in countries with which Canada has an income tax convention are usually subject
to a Canadian nonresident withholding tax of 15 percent.

The withholding tax is reduced to five percent on dividends paid to a corporation resident in the United States that owns at least
10 percent of the voting shares of the company.

Imperial Oil Limited is a qualified foreign corporation for purposes of the reduced U.S. capital gains tax rates (15 percent and
five percent for certain individuals) which are applicable to dividends paid by U.S. domestic corporations and qualified foreign
corporations.

There is no Canadian tax on gains from selling shares or debt instruments owned by nonresidents not carrying on business in
Canada.

Valuation day price
For capital gains purposes, Imperial’s common shares were quoted at $3.50 a share on December 22, 1971, and $5.10 on
February 22, 1994. Both amounts are restated for the 1998 and 2006 three-for-one share splits.

Employees

number of employees at December 31

2008
4 843

2007
4 785

2006
4 869

2005
5 096

2004
6 083

Annual report 2008 | Imperial Oil Limited

qUArTerLy FInAnCIAL AnD STOCK TrADIng DATA (a)

Financial data (millions of dollars)
Total revenues and other income
Total expenses

Income before income taxes

Income taxes
Net income

Segmented net income (millions of dollars)
Upstream
Downstream
Chemical
Corporate and other
Net income

Per-share information (dollars)
net earnings – basic
net earnings – diluted
Dividends (declared quarterly)

Share prices (dollars) (b)
Toronto Stock exchange

High
Low
Close

nySe Alternext (U.S. dollars)

High
Low
Close

Mar. 31

7 263
6 298
965
284
681

650
30
24
(23)
681

0.76
0.75
0.09

58.09
45.80
53.80

58.91
44.30
52.26

2008
three months ended
June 30 Sept. 30

Dec. 31 Mar. 31

2007
three months ended
June 30 Sept. 30

8 859
7 276
1 583
435
1 148

938
239
10
(39)
1 148

1.29
1.28
0.09

62.54
52.41
56.16

63.08
51.24
55.07

9 515
7 558
1 957
568
1 389

999
270
38
82
1 389

1.57
1.57
0.10

57.80
41.60
45.58

56.89
40.00
42.60

5 942
5 171
771
111
660

5 934
4 819
1 115
(341)
774

6 339
5 319
1 020
(308)
712

6 430
5 240
1 190
(374)
816

336
257
28
39
660

0.77
0.76
0.10

46.43
28.79
40.99

43.66
23.84
33.72

563
198
28
(15)
774

0.82
0.81
0.08

43.75
37.40
42.80

38.29
31.87
37.12

460
314
22
(84)
712

0.76
0.76
0.09

54.70
41.77
49.59

50.35
36.90
46.34

607
191
24
(6)
816

0.88
0.88
0.09

51.90
40.86
49.29

50.95
37.99
49.56

Dec. 31

6 740
5 686
1 054
(168)
886

739
218
23
(94)
886

0.97
0.96
0.09

56.26
45.57
54.62

61.48
46.43
54.78

Shares traded (thousands) (c)

98 531

101 826

129 650

147 567

72 127

67 374

68 882

84 505

(a) quarterly data has not been audited by the company’s independent auditors.
(b) Imperial’s shares are listed on the Toronto Stock exchange. The company’s shares also trade in the United States of America on the nySe Alternext,
formerly known as the American Stock exchange. The symbol on these exchanges for Imperial’s common shares is IMO. Share prices were obtained
from stock exchange records. U.S. dollar share price presented is based on consolidated U.S. market data.

Imperial Oil Limited | Annual report 2008

InFOrMATIOn FOr InveSTOrS

Head office
Imperial Oil Limited
P.O. Box 2480, Station ’M’
Calgary, Alberta
Canada T2P 3M9

Annual meeting
The annual meeting of shareholders
will be held on Thursday, April 30,
2009, at 9:30 a.m. local time at the
TeLUS Convention Centre,
South Building, Macleod Hall,
120 ninth Avenue S.e., Calgary,
Alberta, Canada.

Shareholder account matters
To change your address, transfer
shares, eliminate multiple mailings,
elect to receive dividends in U.S.
funds, have dividends deposited
directly into accounts at financial
institutions in Canada that provide
electronic fund-transfer services,
enrol in the dividend reinvestment
and share purchase plan, or enrol for
electronic delivery of shareholder
reports, please contact Imperial’s
transfer agent, CIBC Mellon Trust
Company.

CIBC Mellon Trust Company
P.O. Box 7010
Adelaide Street Postal Station
Toronto, Ontario, Canada M5C 2W9
Telephone: 1-800-387-0825 (from
Canada or U.S.A.) or 416-643-5500

Fax: 416-643-5501

e-mail: inquiries@cibcmellon.com

Website: www.cibcmellon.com

United States resident shareholders
may transfer their shares through
Bny Mellon Shareowner Service.

Bny Mellon Shareowner Service
480 Washington Boulevard
Jersey City, new Jersey
U.S.A. 07310-1900
Telephone: 1-800-526-0801

Dividend reinvestment and
share-purchase plan
This plan provides shareholders
with two ways to add to their
shareholdings at a reduced cost.
The plan enables shareholders to
reinvest their cash dividends in
additional shares at an average
market price. Shareholders can also
invest between $50 and $5,000 each
calendar quarter in additional shares
at an average market price.

Funds directed to the dividend
reinvestment and share-purchase
plan are used to buy existing shares
on a stock exchange rather than
newly issued shares.

Imperial online
Imperial’s website contains a
variety of corporate and investor
information, including:
· current stock prices
· annual and interim reports
· Form 10-K
· investor presentations
· earnings and other news releases
· historical dividend information
· corporate citizenship practices

www.imperialoil.ca

Investor information
Information is also available by
writing to the investor relations
manager at Imperial’s head office
or by:

Telephone: 403-237-4538
Fax: 403-237-2075

Other contact numbers
Customer and other inquiries:
Telephone: 1-800-567-3776
Fax: 1-800-367-0585

Brian W. Livingston
vice-president, general counsel
and corporate secretary
Telephone: 403-237-2915
Fax: 403-237-2490

Version française du rapport
Pour obtenir la version française du
rapport de la Compagnie Pétrolière
Impériale Ltée, veuillez écrire à
la division des relations avec les
investisseurs, Compagnie Pétrolière
Impériale Ltée, P.O. Box 2480
Station ’M’, Calgary, Alberta
Canada T2P 3M9.

Design: Designwerke Inc.

Photography: Brodylo + Morrow, Kate Kunz
Photography, rich La Salle Photography,
Images Studio Photographic Arts, Leonard Segall,
Metcalfe Photography, Photography By Windjack,
Dave Callis, Syncrude archives, Westerngeco

Printing: J.F. Moore Communications