Western Oil Sands Reports 2007 First Quarter Results



    /NOT FOR DISTRIBUTION TO U.S. NEWSWIRE SERVICES OR DISSEMINATION IN THE
    UNITED STATES/

    CALGARY, April 26 /CNW/ - Western Oil Sands Inc. ("Western") announced
today its financial and operating results for the first quarter of 2007.
Western generated net revenue of $179.2 million, EBITDAX of $81.1 million,
cash flow from operations of $63.0 million ($0.39 per share) and net earnings
of $31.6 million ($0.20 per share) in the first quarter of 2007. By
comparison, in the first quarter of 2006 Western generated net revenue of
$139.2 million, EBITDAX of $62.1 million, cash flow from operations of
$47.8 million ($0.30 per share) and a net loss of $24.8 million (restated)
($0.15 per share). In the first quarter of 2007, net earnings included
$12.8 million ($11.0 million net of tax) in net unrealized foreign exchange
and risk management (mark-to-market) losses compared to net unrealized foreign
exchange and risk management (mark-to-market) losses of $68.3 million
($45.2 million net of tax) for the first quarter of 2006.
    Production during the first quarter of 2007 averaged 32,325 barrels per
day compared to 25,945 barrels per day in the first quarter of 2006
representing a 25 per cent increase and the best first quarter winter
performance ever for the Athabasca Oil Sands Project ("AOSP"). Western's
financial performance during the first quarter of 2007 was positively impacted
by this increase together with a significant (29 per cent) narrowing of the
light to heavy crude oil differential and a weaker Canadian dollar relative to
the US dollar compared to the prior year period. These positive developments
were partially offset by an eight per cent decrease in West Texas Intermediate
("WTI") prices.

    
    Highlights

    -   Western announced future growth plans for the AOSP with proposed
        permit applications for Expansions 3 through 5 of the Project. These
        plans would facilitate mineable bitumen production to approximately
        770,000 barrels per day, or 154,000 barrels per day net to Western.
        These plans are consistent with Western's stated long term objective
        of growing its total oil sands production to in excess of
        200,000 barrels per day. Western now believes this production target
        is attainable through current operations, Expansion 1 through 5 and
        in-situ volumes. Western continues to see potential for mining
        expansions beyond Expansion 5 based on the resource potential of the
        unevaluated leases associated with the AOSP.

    -   WesternZagros Limited ("WesternZagros"), a wholly-owned subsidiary of
        Western confirmed that its Exploration and Production Sharing
        Agreement ("EPSA") was ratified by the Kurdistan Regional Government
        ("KRG") and confirmed by His Excellency Nerchivan Barzani, Prime
        Minister of Iraqi Kurdistan. As part of the ratification process,
        WesternZagros worked with the KRG to finalize its EPSA area boundary
        and other key terms in line with draft petroleum legislation. The
        final EPSA area encompasses 2,120 square acres (approximately
        524,000 acres) and holds a number of high potential exploratory
        prospects.

    -   Western completed its first winter drilling program on our operated
        in-situ properties. Results from the 13 core-holes drilled will be
        analyzed over the course of the summer by both Western internal
        professionals as well as contracted external laboratory agencies.
        Disclosure of the resource potential together with future anticipated
        drilling programs will be announced as details become known. Not one
        recordable injury event occurred during the drilling program,
        reflecting Western's emphasis on safe work conditions and commitment
        to corporate social responsibility.

    -   During the first quarter, Western announced the appointment of Ms.
        Joanne L. Alexander to the position of Vice President and General
        Counsel. Ms. Alexander also serves as Corporate Secretary and as an
        Officer of the Company.
    


    MANAGEMENT'S DISCUSSION & ANALYSIS

    The following discussion of financial condition and results of operations
was prepared as of April 25, 2007 and should be read in conjunction with the
Interim Unaudited Consolidated Financial Statements for the periods ended
March 31, 2007 and 2006 and the Audited Consolidated Financial Statements at
December 31, 2006 included in the Annual Report. It offers Management's
analysis of the financial and operating results of Western Oil Sands Inc.
("Western") and contains certain forward-looking statements relating, but not
limited, to our operations, anticipated financial performance, business
prospects and strategies. Forward-looking information typically contains
statements with words such as "anticipate", "estimate", "expect", "potential",
"could", or similar words suggesting future outcomes. We caution readers and
prospective investors of the Company's securities to not place undue reliance
on forward-looking information as by its nature, it is based on current
expectations regarding future events that involve a number of assumptions,
inherent risks and uncertainties, which could cause actual results to differ
materially from those anticipated by Western. These risks include, but are not
limited to, risks of commodity prices in the marketplace for crude oil and
natural gas; risks associated with the extraction, treatment and upgrading of
mineable oil sands deposits; size and scope of expansions; risks surrounding
the level and timing of capital expenditures required to fulfill the Project's
growth strategy; risks of financing these growth initiatives at commercially
attractive levels; risks of being unable to participate in expansion and
corresponding loss of voting rights in the Athabasca Oil Sands Project
("AOSP"); risks relating to the execution of the Project's optimization
strategy; risks involving the uncertainty of estimates involved in the reserve
and resource estimation process and ore body configuration/geometry,
uncertainty in the assessment of asset retirement obligations, uncertainty in
the estimation of future income taxes, uncertainty in the estimation of
stock-based compensation and employee future benefits and uncertainty in
treatment of capital for royalty purposes; risks surrounding health, safety
and environmental matters; risk of foreign exchange rate fluctuations; risks
and uncertainties associated with securing the necessary regulatory approvals
for expansion initiatives; risks surrounding major interruptions in
operational performance together with any associated insurance proceedings
thereto; and risks associated with identifying, negotiating and completing our
other business development activities, both those that relate to oil sands
activities and those that do not, either domestically or abroad. Risks
associated with our international initiatives include, but are not limited to,
political and economic conditions in the countries in which we intend to
operate, risks associated with acts of insurgency or terrorism, changes in
market conditions, political risks, including changes in law or government
policy, the risks associated with negotiating with foreign governments and
risks generally associated with international activity.
    For additional information relating to the risks and uncertainties facing
Western, refer to Western's Annual Information Form for the year ended
December 31, 2006 which is available on SEDAR at www.sedar.com.

    
    Highlights

    -------------------------------------------------------------------------
                                                        Three Months Ended
                                                             March 31
                                                    -------------------------
                                                         2007         2006
    -------------------------------------------------------------------------

    Operating Data
      Bitumen Production (bbls/d)                        32,325       25,945
      Synthetic Crude Sales (bbls/d)                     40,555       37,188
      Operating Expense per Processed Barrel ($/bbl)      24.07        26.12

    Financial Data ($ thousands, except as indicated)
      Net Revenue                                       179,240      139,248
      Realized Crude Oil Sales Price
       - Oil Sands ($/bbl)(1)(2)                          58.49        55.31
      EBITDAX(1)(3)                                      81,014       62,100
      Cash Flow from Operations(4)                       62,991       47,770
      Cash Flow per Share - Basic ($/Share)(1)(5)          0.39         0.30
      Risk Management Loss                              (19,037)     (67,724)
      Net Earnings (Loss)(6)                             31,634   (24,833)(9)
      Net Earnings (Loss) Per Share ($/Share)
        Basic                                              0.20     (0.15)(9)
        Diluted                                            0.19     (0.15)(9)
      Net Capital Expenditures(7)                       160,511       35,331
      Long-term Financial Liabilities(8)                748,242      661,765
      Long-term Debt                                    635,183      525,195
    -------------------------------------------------------------------------
      Weighted Average Shares Outstanding
       - Basic (Shares)                             161,493,276  160,568,322
    -------------------------------------------------------------------------

    (1) Please refer to the discussion of Non-GAAP financial measures in this
        release.
    (2) Realized Crude Oil Sales Price ($/bbl) is calculated as Oil Sands
        Revenue less any transportation costs, net of hedging activities,
        divided by total Synthetic Crude Sales for the period. Please refer
        to the table in this release for the calculation.
    (3) Earnings before interest, taxes, depreciation, depletion,
        amortization, stock based compensation, accretion on asset retirement
        obligation, risk management and foreign exchange as calculated in the
        table in this release.
    (4) Cash flow from operations is expressed before changes in non-cash
        working capital.
    (5) Cash flow per share is calculated as cash flow from operations
        divided by weighted average common shares outstanding, basic.
    (6) Western has not paid dividends in any of the above referenced
        periods.
    (7) Net Capital Expenditures are capital expenditures net of any
        insurance proceeds received during the period.
    (8) Long-term financial liabilities includes long-term debt, option
        premium liability and lease obligations.
    (9) Amounts restated to reflect changes in accounting treatment for stock
        based compensation under EIC-162.
    


    OPERATING RESULTS

    Production
    During the first quarter of 2007, Western's net bitumen production
averaged 32,325 barrels per day, a 25 per cent increase over the 25,945
barrels per day recorded in the first quarter of 2006. Production in the first
quarter of 2006 was impacted by the unplanned outage and subsequent
replacement of the conveyor belt at the Mine. Compared to the fourth quarter
of 2006, production in the first quarter of 2007 is lower due to seasonal
conditions which present additional operational challenges.

    
    Revenue

    -------------------------------------------------------------------------
    NET REVENUE                                          Three Months Ended
                                                              March 31
                                                       ----------------------
    ($ thousands, except as indicated)                    2007         2006
    -------------------------------------------------------------------------

    Revenue
      Oil Sands(1)                                      213,558      185,355
      Marketing and Transportation                       90,731       22,405
                                                       ----------------------
      Total Revenue                                     304,289      207,760
                                                       ----------------------
                                                       ----------------------

    Purchased Feedstocks and Transportation
      Oil Sands                                          34,830       46,205
      Marketing and Transportation                       90,219       22,307
                                                       ----------------------
      Total Purchased Feedstocks and Transportation     125,049       68,512
                                                       ----------------------
                                                       ----------------------

    Net Revenue
      Oil Sands(1)                                      178,728      139,150
      Marketing and Transportation                          512           98
                                                       ----------------------
      Total Net Revenue                                 179,240      139,248
                                                       ----------------------
                                                       ----------------------

    Synthetic Crude Sales (bbls/d)                       40,555       37,188

                                                       ----------------------
                                                       ----------------------

    Realized Crude Oil Sales Price ($/bbl)(2)             58.49        55.31

                                                       ----------------------
                                                       ----------------------

    -------------------------------------------------------------------------

    (1) Oil Sands Revenue and Net Revenue are presented net of Western's
        hedging activities.
    (2) Realized Crude Oil Sales Price ($/bbl) is calculated as Oil Sands
        Revenue less any transportation costs divided by total Synthetic
        Crude Sales for the period. For the three months ended March 31,
        2007, $0.1 million (Q1-2006 -$0.2 million) has been incurred for
        transportation costs related to Oil Sands.
    

    Western recorded a 46 per cent increase in crude oil sales revenue of
$304.3 million in the first quarter of 2007, including $213.6 million from the
sale of proprietary production, compared to $207.8 million in the first
quarter of 2006, including $185.4 million from the sale of proprietary
production. This year-on-year increase is predominantly the result of
increased production in the quarter combined with a higher realized selling
price per barrel, the latter being a function of a narrowing in the heavy
crude oil differential and weakening of the Canadian dollar relative to the
US dollar partially offset by lower underlying crude oil prices.
    Western generated net revenue of $179.2 million in the first quarter of
2007, after considering the impact of purchased feedstocks and transportation
costs downstream of Edmonton. By comparison, net revenue of $139.2 million was
recorded in the first quarter of 2006. Feedstocks are crude oil products
introduced into the hydrocracking/hydrotreating process and blendstocks
introduced into synthetic crude oil products. The cost of these feedstocks
varies with world oil markets and the spread between heavy and light crude oil
prices.
    Oil sands sales volumes, which include bitumen and purchased feedstocks,
averaged 40,555 barrels per day in the first quarter of 2007 compared to
37,188 barrels per day in the first quarter of 2006. This represents a nine
per cent increase.
    During the first quarter of 2007 WTI crude oil averaged US$58.16 per
barrel for the quarter, a three per cent decrease over the fourth quarter of
2006 and an eight per cent decrease compared to the prior year period.
Edmonton PAR prices averaged four per cent higher in the first quarter of 2007
compared to the fourth quarter of 2006, primarily due to the weakening of the
US/Cdn dollar exchange rate. As Western measures its blended differential to
Edmonton PAR, the weakening of the US/Cdn exchange rate serves to improve
overall sale price realizations.
    Western's realized price increased to $58.49 per barrel in the first
quarter of 2007 compared to $55.31 per barrel the prior year period. Sales
price realizations increased by $3.41 per barrel from the fourth quarter of
2006. The narrowing of the heavy crude oil differential in the first quarter
of 2007 compared to both the prior year period and the fourth quarter of 2006
is largely responsible for the improvement in sales price realizations. This
narrowing of heavy differentials is thought to be due in part by the reversal
of crude oil pipelines into the US Midwest and Gulfcoast regions creating
incremental demand for US refineries to process heavy Canadian crude oil and
unlock the value inherent in the heavy crude oil differential. The heavy crude
oil differential averaged $19 per barrel (33 per cent of WTI) in the first
quarter of 2007 compared to approximately $23 per barrel (38 per cent of WTI)
in the fourth quarter of 2006 and over $29 per barrel (46 per cent of WTI) in
the first quarter of 2006. Other factors that contributed to improved sales
price realizations were a general weakening of the US/Cdn exchange rate over
both of these comparable periods as well as local Alberta synthetic supply
constraints that placed additional demand on light synthetic crude oil which
is used by heavy oil producers to transport product to various markets. During
the first quarter of 2007, the light to heavy crude oil sales mix and the
corresponding sales price realization increased due to improvements recently
introduced in the hydro-conversion process at the Upgrader.

    Operating Costs
    Western's unit cash operating costs were $24.07 per processed barrel for
the first quarter of 2007 compared to $26.12 per processed barrel for the
first quarter of 2006 and $20.12 per processed barrel for the fourth quarter
of 2006. Compared to the first quarter of 2006, this decrease is largely
attributable to the 25 per cent increase in production which provides greater
economies of scale over the cost structure which is primarily fixed in nature
together with lower natural gas costs in the first quarter of 2007. This was
partially offset by minor repair costs incurred during the quarter associated
with seasonal conditions.
    Compared to the fourth quarter of 2006, unit operating costs increased
$3.95 per processed barrel in the first quarter of 2007. This increase was
largely due to seasonal factors which results in additional repairs and
maintenance impeding performance of some of the units, particularly at the
Mine.

    
    -------------------------------------------------------------------------
                                                         Three Months Ended
                                                              March 31
                                                       ----------------------
    ($ thousands, except as indicated)                    2007         2006
    -------------------------------------------------------------------------

    Operating Expenses For Bitumen Sold
      Operating Expense - Income Statement               70,278       63,930
      Operating Expense - Inventoried                       239       (1,631)
                                                       ----------------------
      Total Operating Expenses For Bitumen Sold          70,517       62,296
                                                       ----------------------
                                                       ----------------------

    Sales (barrels per day)
      Total Synthetic Crude Sales                        40,555       37,188
      Purchased Upgrader Blend Stocks                     7,997       10,687
                                                       ----------------------
      Synthetic Crude Sales Excluding Blend Stocks       32,558       26,501
                                                       ----------------------
                                                       ----------------------

    Operating Expenses Per Processed Barrel ($/bbl)(1)    24.07        26.12
                                                       ----------------------
                                                       ----------------------

    -------------------------------------------------------------------------

    (1) Operating Expenses Per Processed Barrel ($/bbl) is calculated as
        Total Operating Expenses For Bitumen Sold divided by Synthetic Crude
        Sales Excluding Blend Stocks.
    

    The above table calculates operating expenses per processed barrel on the
basis of the operating costs that are associated with the synthetic crude
sales, excluding purchased blend stocks, for the relevant period. The
calculation recognizes that, intrinsic in the Project's operations, bitumen
production from the Mine receives an approximate three per cent uplift as a
result of the hydrotreating/hydroconversion process, which is included in
synthetic crude sales excluding blendstocks.

    Royalties
    Royalties of $1.2 million were recorded in the first quarter of 2007
compared to $0.6 million in the first quarter of 2006. Year-on-year amounts
have increased as a result of increased production and higher deemed bitumen
royalty prices. Compared to the fourth quarter of 2006, royalty expenditures
are consistent as lower production volumes were offset by higher deemed
bitumen prices.
    Royalties are calculated at one per cent of the gross revenue from the
bitumen produced (based on its deemed value prior to upgrading) until recovery
of all capital costs associated with the AOSP, together with a return on
capital equal to the Government of Canada's federal long-term bond rate. After
full capital cost recovery, the royalty is calculated as the greater of
one per cent of the gross revenue on the bitumen produced or 25 per cent of
the net revenue on the bitumen produced based on deemed bitumen prices.
    During the fourth quarter 2006, Western announced its participation in
the first 100,000 barrel per day expansion of the AOSP and we fully expect to
participate in subsequent mining expansions of the AOSP. As such, Western
assumes that additional capital incurred to construct future expansions will
be added to the capital base for royalty purposes, extending our royalty
horizon in the absence of any legislative amendments to the royalty regime. At
current commodity prices, Western does not anticipate conversion to the
25 per cent of net bitumen revenues for the next several years, however, a
temporary increase to the higher percentage may be incurred until applicable
government rulings can be completed with respect to AOSP Expansion 1.
Incremental amounts incurred during this interim period would be refundable.
The move to the higher royalty rate may be accelerated or postponed depending
on future crude oil prices, foreign exchange rates and the timing and
inclusion of capital expenditures and the Alberta government's treatment of
bitumen extraction expansion efforts.
    The Alberta government has announced a review of oil and gas royalties
including oil sands. A panel has been selected and public consultation will
occur over the coming months. It is anticipated that recommendations will be
made to the Minister in late summer. Western, combined with industry
representation through CAPP (Canadian Association of Petroleum Producers),
will actively participate in the review process in order to present the
opportunities, challenges, and economics associated with oil sands development
today and in the future.

    CORPORATE RESULTS

    Research, Business Development and Other Expense
    Western incurred $18.3 million in research, business development and
other expenses in the first quarter of 2007, $5.9 million of which relates
specifically to AOSP-related research and development projects. Also included
is Western's share of a judgment issued against the Joint Venture Owners and
Albian Sands Energy in respect of a contractual matter at the Mine. The final
amount of the judgment estimated at approximately $5.8 million net to Western,
has not yet been settled or paid. Western and its other Joint Venture Owners
are considering whether to appeal this decision. Net of this judgment,
research, business development and other expenses totaled $12.5 million
compared to $6.0 million recorded for the prior year period. The increase is
the result of additional efforts in research and business development
involving Western's Kurdistan and in-situ opportunities.

    General and Administrative Expense
    General and administrative expenses ("G&A") were $6.5 million for the
first quarter of 2007 compared to $8.9 million (restated for EIC-162 treatment
for stock based compensation) for the first quarter of 2006. This decrease is
largely due to the retroactive treatment for stock based compensation which
increased first quarter 2006 reported G&A by $5.0 million. Net of this
adjustment, G&A was slightly higher due to the increased number of employees
within Western, together with additional consulting costs for various
corporate initiatives.

    Insurance Expense
    Insurance expenses were $4.0 million for the first quarter of 2007
compared to $2.7 million in the first quarter of 2006. Insurance expenses were
higher compared to the prior year period due to additional premiums associated
with increased levels of coverage combined with a weakening of the US/Cdn
exchange rate as the premiums are paid in US dollars but reported for
financial statement purposes in Canadian dollars.

    Interest Expense
    During the first quarter of 2007, financing charges totaled $14.6 million
of which $5.6 million was capitalized relating to AOSP Expansion 1.
Capitalized interest will increase in the future as we expect to employ a
combination of cash flow and debt financing to fund our share of the capital
costs of AOSP Expansion 1. This represents a moderate increase from the
$13.0 million incurred for financing charges in the first quarter of 2006.
Interest expense for the three months ended March 31, 2007 is comprised of
$12.6 (Q1-2006 - $11.3 million) million related to interest charges on debt
obligations, $0.6 million (Q1-2006 - $0.7 million) on capital lease
obligations, $0.7 million (Q1-2006 - $1.0 million) on the option premium
liability and $0.7 million (Q1-2006 - nil) for amortization of debt financing
costs. The option premium liability relates to Western's strategic crude oil
risk management program implemented in the third quarter of 2005, and the
decision to defer the premiums associated with the put and call options
purchased and sold, respectively. Imbedded in the prices of the deferred
options is a financing charge which is reported as interest expense.
    The 12 per cent increase in total interest expense compared to the first
quarter of 2006 is a function of two items: Western carrying larger balances
in its Revolving Credit Facility associated with funding our share of the AOSP
Expansion 1 capital costs and the weakening of the US/Cdn exchange rate
thereby increasing interest charges on our US denominated Notes which are
reported in Canadian dollars. Interest expense increased by $0.9 million in
the first quarter of 2007 compared to the fourth quarter of 2006 as well due
to higher levels of debt and a weakening of the US/Cdn exchange rate.
Western's total interest charges will increase over the balance of 2007, and
over the next several years, as we continue to fund our share of the
anticipated capital costs through a combination of cash flow from operations
and incremental borrowings. Western will continue to assess funding
requirements as part of our normal course business model.

    Depreciation, Depletion and Amortization
    Depreciation, depletion and amortization ("DD&A") totaled $13.1 million
for the first quarter of 2007 compared to $10.5 million in the first quarter
of 2006. Higher amounts are recorded over the prior year period due to
increased levels of production. Incremental reserves associated with AOSP
Expansion 1 will not be included in the depreciation rate until the assets
associated with AOSP Expansion 1 commence operations anticipated to be in
2010.

    Foreign Exchange
    During the first quarter of 2007, Western reported a foreign exchange
gain of $5.8 million compared to a loss of $0.4 million in the first quarter
of 2006. This gain is the result of a stronger month-end Canadian dollar
relative to the US dollar compared to the previous quarter's month-end rate
which results in a lower Canadian equivalent amount on Western's
US$450 million long-term debt and deferred option premium liability. As
reference points, the noon-day foreign exchange rate on March 31, 2007 was
$0.8674 US/Cdn compared to $0.8581 US/Cdn on December 31, 2006 and
$0.8568 US/Cdn on March 31, 2006. The average rate for the first quarter of
2007 was $0.8537 US/Cdn compared to $0. 8659 US/Cdn for the prior year period
and $0.8784 US/Cdn for the fourth quarter of 2006.

    Risk Management Activities
    Western began to realize the benefits and associated costs of the
strategic crude oil hedging program executed in the third quarter of 2005 in
its financial statements. Premiums associated with the program were funded out
of cash flow from operations due to Western's decision to defer the premiums.
In January 2007, a number of Western's US$55 per barrel put options settled
in-the-money for Western as WTI averaged US$54.35 per barrel for the month.
The $0.1 million settlement was recorded as a realized risk management gain on
our income statement. WTI continues to trade within the band established by
the collar which is a weighted average floor price of US$52.42 on 20,000
barrels per day and a ceiling price of US$92.41 on an average 13,333 barrels
per day for the period January 2007 through to December 2009.
    Western is not utilizing hedge accounting treatment under Canadian GAAP
for this program and, as a result, certain mark-to-market adjustments will
flow through our financial statements. These adjustments are created from the
changes in the fair market value of the financial instruments employed over
the time period in question. For the period ended March 31, 2007, Western's
risk management assets decreased significantly in value from the amount
recorded as at December 31, 2006 resulting in a mark-to-market loss of
$19.0 million ($15.1 million net of tax) primarily due to the moderate
weakening in WTI prices during the quarter together with less time value
associated with the options as they approach maturity. This loss does not
impact stated cash flow from operations.

    
                                                         Three Months Ended
                                                              March 31
    -------------------------------------------------------------------------
    (Unaudited) ($ thousands)                             2007         2006
    -------------------------------------------------------------------------

    Risk Management Asset - Beginning of Period          26,308       98,426
    Decrease in Fair Value                               19,157       67,697
    -------------------------------------------------------------------------
    Risk Management Asset - End of Period                 7,151       30,702
    Less: Current Portion(1)                              2,986        1,933
    -------------------------------------------------------------------------
    Risk Management Asset - Long-term Portion             4,165       28,769
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    (1) Current portion represents the fair value of the risk management
        program that expires within the next 12 months.
    

    Income Taxes
    For the first quarter of 2007, Western had an income tax expense of
$11.8 million compared to an income tax recovery of $9.9 million for the same
period last year. The recovery in the first quarter of 2006 largely resulted
from a risk management loss whereas the expense for the first quarter of 2007
is largely the result of increased profitability due to increased production
levels and higher sales price realizations.
    During the first quarter of 2007, the Federal Government announced its
intention to phase out the Accelerated Capital Cost Allowance ("ACCA") that
permitted oil sands companies to claim a higher amount against taxable income
than normally permitted for assets of this nature. As it relates to the AOSP
and Western specifically, it is currently envisioned that capital associated
with Expansion 2 and beyond will not be eligible for ACCA, however, base
operations and AOSP Expansion 1 capital will be included in the ACCA pool with
the ability to claim in excess of 25 per cent subject to the extent of taxable
income from that operation. Such a change in corporate tax rules will not have
a material impact on Western's reported earnings and cash flow from
operations.

    Net Earnings
    During the first quarter of 2007, Western reported net income of
$31.6 million ($0.20 per share) compared to a net loss of $24.8 million
(restated) ($0.15 per share) in the first quarter of 2006. Net earnings in the
first quarter of 2007 includes the impact of $19.0 million ($15.1 million net
of tax) in risk management losses, in addition to $5.8 million ($3.9 million
net of tax) in foreign exchange gains on our US dollar denominated debt and
option premium liability and $5.8 million related to Western's share of the
judgment against the AOSP Owners and Albian Sands Energy.

    
    -------------------------------------------------------------------------
                                                         Three Months Ended
                                                              March 31
                                                       ----------------------
    ($ thousands)                                         2007         2006
    -------------------------------------------------------------------------

    Net Earnings (Loss)                                  31,634      (24,833)
    After Tax Impact of:
    Add (Deduct):
      Unrealized Risk Management (Gain)/Loss             19,157       67,724
      Unrealized Foreign Exchange (Gain)/Loss            (6,315)         636
    -------------------------------------------------------------------------
    Net Earnings Excluding Unrealized Gain (Loss)        44,476       43,527
    -------------------------------------------------------------------------

    Net Earnings Excluding Unrealized Gain (Loss)
     Per Share ($)
      Basic                                                0.28         0.27
      Diluted                                              0.27         0.27
    -------------------------------------------------------------------------

    The following table provides the reconciliation between Net Earnings
(Loss), Cash Flow from Operations (before changes in non-cash working capital)
and EBITDAX:

    RECONCILIATION: NET EARNINGS (LOSS) TO EBITDAX

    -------------------------------------------------------------------------
                                                         Three Months Ended
                                                              March 31
                                                       ----------------------
    ($ thousands)                                         2007         2006
    -------------------------------------------------------------------------

    Net Earnings (Loss)                                 31,634       (24,833)

    Add (Deduct):
      Depreciation, Depletion and Amortization          13,050        10,546
      Accretion on Asset Retirement Obligation             338           155
      Amortization of Financing Charges                    736             -
      Stock-based Compensation                           2,088         5,049
      Unrealized Foreign Exchange Loss (Gain)           (6,315)          636
      Unrealized Risk Management Loss                   19,157        67,724
      Future Income Tax Expense (Recovery)              11,751       (10,383)
      Interest Expense on Option Premium Liability         650           952
      Cash Settlement on Performance Share Units        (3,806)       (2,076)
      Cash Settlement on Option Premium Liability       (6,292)            -
    -------------------------------------------------------------------------
    Cash Flow From Operations, Before Changes
     in Non-Cash Working Capital                        62,991        47,770
    Add (Deduct):
      Interest (excluding interest on Option
       Premium Liability and capitalized interest)       7,561        12,077
      Realized Foreign Exchange Loss (Gain)                537          (266)
      Realized Risk Management Gain                       (120)            -
      Current Taxes                                         17           443
      Cash Settlement on Performance Share Units         3,806         2,076
      Cash Settlement on Option Premium Liability        6,292             -
    -------------------------------------------------------------------------
    EBITDAX                                             81,084        62,100
    -------------------------------------------------------------------------
    

    EBITDAX (Earnings before Interest, Taxes, Depreciation, Depletion,
Amortization, Stock-based Compensation, Accretion on Asset Retirement
Obligation, Foreign Exchange and Risk Management) was $81.1 million for the
first quarter of 2007, reflecting a 31 per cent increase over the
$62.1 million recorded for the first quarter of 2006 due in large part to
increased production and higher sales price realizations. First quarter 2007
EBITDAX decreased $18.5 million compared to the fourth quarter of 2006. This
decrease in EBITDAX is the result of lower production stemming from seasonal
issues partially offset by higher sale price realizations.
    Cash flow from operations before changes in non-cash working capital
("cash flow from operations") was $63.0 million for the first quarter of 2007
compared to $47.8 million in the first quarter of 2006. First quarter 2007
cash flow from operations decreased $28.1 million over the fourth quarter of
2006. This decrease is primarily the result of lower bitumen production
partially offset by an increase in the average synthetic crude oil sales
price.

    FINANCIAL POSITION

    Bank Debt
    During the first quarter of 2007, Western drew an additional $52 million
under its $340 million Revolving Credit Facility ("Revolving Credit Facility")
bringing the amount outstanding to $129 million as at March 31, 2007.
Additional amounts drawn were used to partially fund Western's share of
capital expenditures for Expansion 1 during the quarter. As at March 31, 2007,
the undrawn capacity of the Revolving Credit Facility equated to $194 million,
net of amounts allocated to letters of credit.
    Western's debt to total capitalization as at March 31, 2007 remained
relatively unchanged at 49 per cent compared to the prior year period and as
at December 31, 2006. Western anticipates the extent of leverage will increase
as Western continues to fund its share of capital expenditures for AOSP
Expansion 1, together with Western-led initiatives through a combination of
cash flow from operations and incremental borrowings.

    Capital Expenditures
    Western's capital expenditures totaled $160.5 million in the first
quarter of 2007 compared to $35.3 million for the comparable period in 2006.
Capital expenditures in the first quarter of 2007 included $10.5 million for
base operations, $4.6 million for sustaining capital, $114.4 million for
expansion related capital including capitalized interest, $8.3 million related
to Western's Kurdistan initiative and $22.7 million for business development
and corporate expenditures largely consisting of in-situ winter core-hole
drilling programs for both Western operated lands and Western's 20 per cent
interest in Chevron's Ells River In-situ Project.

    Analysis of Cash Resources
    Cash balances totaled $5.5 million at March 31, 2007 compared to
$15.7 million at March 31, 2006. Cash inflows included: $63.0 million in cash
flow from operations, $52.0 million from Revolving Credit Facility drawdowns,
$1.3 million from the exercise of employee stock options and a $46.9 million
decrease in non-cash working capital. Cash outflows included: capital
expenditures of $160.5 million and $0.3 million repayment of obligations under
capital lease.
    During the first quarter of 2007, the decrease in non-cash working
capital was the result of a $5.6 million decrease in accounts receivable, a
$45.3 million increase in accounts payable and a $3.2 million decrease in
prepaid expenses, offset by a $7.2 million increase in inventory. The decrease
in accounts receivable is the result of decreased sales volumes stemming from
the lower production in the quarter. The increase in accounts payable reflects
an additional three months of accrued interest on the US denominated debt and
increased accruals related to the construction of AOSP Expansion 1. Inventory
was higher as a result of additional barrels of finished product in inventory,
together with higher production costs associated with these barrels.

    Insurance Claims
    There were no new developments during the first quarter of 2007 with
respect to Western's ongoing arbitration proceedings concerning the Cost
Overrun and Project Delay insurance policy, known as Section IV. Western
anticipates that formal arbitration hearings will commence this year. Amounts
owing under all Western's insurance claims total $244 million as of March 31,
2007.

    Flow-Through Shares
    As communicated during 2006, the Canada Revenue Agency ("CRA") proposed
to challenge the characterization of certain expenditures capitalized as
Canadian Exploration Expense ("CEE") which were incurred in 2001 and 2002 and
renounced to subscribers of the flow-through share offerings equaling
$29.2 million in 2001 and $19.5 million in 2002. Western has yet to be
formally reassessed and continues to work with the other Joint Venture Owners
to seek resolution of this potential challenge. If the CRA is successful in
assessing a change in the characterization of these expenditures, the
resulting reduction would impact Western's obligations under the indemnity
provisions in the subscription agreements for the flow-through shares and, in
turn, would impact Western's reported results.

    Outlook for the Remainder of 2007
    Western continues to focus on the four key initiatives which drive the
Company's growth strategy - the AOSP, in-situ development, downstream
integration, and the Kurdistan oil opportunity through our wholly-owned
subsidiary WesternZagros Limited. Western is working diligently on the
execution of these initiatives and believes that significant long-term growth
potential lies ahead of us as we continue on our path of adding significant
value for all our stakeholders. Western anticipates its share of production
from the AOSP to average approximately 33,000 to 35,000 barrels per day in
2007, unchanged from prior guidance.
    Through both mining and in-situ development, Western's production profile
could exceed 200,000 barrels per day in the next 15 to 20 years. Given this
profile, Western continues to pursue downstream integration opportunities to
maximize value from our oil sands resources and undeveloped acreage position.
Related to these initiatives, Western announced that it intends to explore and
pursue opportunities that will realize the full value of its assets and future
growth potential. This may result in an acquisition or sale of assets, merger
or other corporate transaction. Western's advisors, Goldman, Sachs & Co. and
TD Securities Inc., are assisting in these activities under the oversight of
an ad hoc committee of independent directors of the Board. This committee's
role is to direct the scope of work activities, advise the Board of Directors
on a timely and regular basis and to make recommendations to the Board of
Directors. While we are encouraged with the number and quality of attractive
opportunities, as a matter of policy, Western does not discuss any specific
business opportunity until such time as it has been fully considered, it is
material and it becomes a disclosable event. In addition, there can be no
assurances that any of these activities will result in the consummation of an
agreement or transaction or result in any change to Western's current ongoing
business strategy.

    AOSP Expansion 1 Update
    Construction and engineering activity is progressing rapidly at both the
mine site and the upgrader with a combined work force of over 3,000 personnel.
Field construction progress includes the completion of the primary separation
cell piling work, continued progress with respect to the deep underground
facilities and building foundations in extraction and tailings, continued
advancement on the Albian Village in support of first phase occupancy, headway
on the potable water and sewage treatment plants. Detailed modules fabrication
and field construction schedules continue to be refined for the mine site,
with module fabrication scheduled to begin in mid-2007. At the upgrader,
activity has focused on the construction of the dilbit tank, the winter piling
program and installation of deep underground piping. Approximately
four million man-hours have been recorded thus far without a lost-time
incident. Overall progress is on plan with respect to both cost and schedule.
    With respect to Expansion 1, capital expenditures are expected to
continue to grow over the next couple of years as development efforts
accelerate. Western plans to implement a comprehensive financing plan,
comprised of cash flow from operations and incremental borrowings, to provide
the platform by which we will meet our financials commitments for this first
100,000 barrel per day expansion.

    Business and Financial Risks
    Western is subject to a number of business and financial risks that are
typical given the nature of Western's operations. These risks are described in
Western's previous public disclosures, including the 2006 Annual Report and
Annual Information Form, which are available on the Company's website and
SEDAR.

    Non-GAAP Financial Measures
    Western includes cash flow from operations per share, cash flow from
operations excluding hedging activities, earnings before interest, taxes,
depreciation, depletion and amortization, stock-based compensation, accretion
on asset retirement obligation, foreign exchange gains and gains or losses on
risk management activities ("EBITDAX"), EBITDAX excluding hedging activities
and net earnings excluding hedging activities as investors may use this
information to better analyze our operating performance. We also include
certain per barrel information, such as realized crude oil sales price, to
provide per unit numbers that can be compared against industry benchmarks,
such as the Edmonton PAR benchmark. The additional information should not be
considered in isolation or as a substitute for measures of operating
performance prepared in accordance with Canadian Generally Accepted Accounting
Principles ("GAAP"). Non-GAAP financial measures do not have any standardized
meaning prescribed by Canadian GAAP and are therefore unlikely to be
comparable to similar measures presented by other issuers. Management believes
that, in addition to Net Earnings per Share and Net Earnings Attributable to
Common Shareholders (both Canadian GAAP measures), cash flow from operations
per share and EBITDAX provide a better basis for evaluating our operating
performance, as they both exclude fluctuations on the US dollar denominated
Senior Secured Notes and certain other non-cash items, such as depreciation,
depletion and amortization, and future income tax recoveries. In addition,
EBITDAX provides a useful indicator of our ability to fund our financing costs
and any future capital requirements.


    
    Consolidated Balance Sheets
                                                          As at        As at
                                                       March 31  December 31
    (Unaudited) ($ thousands)                              2007         2006
    -------------------------------------------------------------------------

    Assets

    Current Assets
      Cash                                                5,493        3,139
      Accounts Receivable                               104,447      110,039
      Inventory                                          28,950       21,761
      Prepaid Expense                                     9,252       12,443
      Current Portion of Risk Management (note 12)        2,986        7,601
                                                     ------------------------
                                                        151,128      154,983
                                                     ------------------------

    Property, Plant and Equipment (note 2)            1,755,136    1,606,966
    Risk Management (note 12)                             4,165       18,707
    Deferred Charges (note 1)                                 -       13,503
                                                     ------------------------
                                                      1,759,301    1,639,176
                                                     ------------------------
                                                      1,910,429    1,794,159
                                                     ------------------------
    Liabilities

    Current Liabilities
      Accounts Payable and Accrued Liabilities          203,852      158,501
      Current Portion of Lease Obligations (note 4)       1,958        1,958
      Current Portion of Option Premium Liability
       (note 5)                                          27,548       24,966
                                                     ------------------------
                                                        233,358      185,425
                                                     ------------------------
    Long-term Liabilities
      Long-term Debt (note 3)                           635,183      601,385
      Lease Obligations (note 4)                         57,854       57,480
      Option Premium Liability (note 5)                  55,205       64,309
      Asset Retirement Obligation (note 6)               21,111       20,773
      Future Income Tax (note 11)                        84,512       73,113
                                                     ------------------------
                                                        853,865      817,060
                                                     ------------------------
                                                      1,087,223    1,002,485
                                                     ------------------------
    Shareholders' Equity

    Share Capital (note 8)                              555,757      554,233
    Contributed Surplus (note 10)                        12,009       12,890
    Retained Earnings                                   255,440      224,551
                                                     ------------------------
                                                        823,206      791,674
                                                     ------------------------
                                                      1,910,429    1,794,159
                                                     ------------------------
    Commitments and Contingencies (note 14)

    See Accompanying Notes to the Consolidated Financial Statements



    Consolidated Statements of Operations, Comprehensive and Retained
    Earnings

    Three Months Ended March 31
    (Unaudited) ($ thousands, except amounts per share)    2007         2006
    -------------------------------------------------------------------------

    Revenues                                            304,289      207,760
    Less Purchased Feedstocks and Transportation        125,049       68,512
                                                     ------------------------
                                                        179,240      139,248
                                                     ------------------------
    Expenses
      Royalties                                           1,192          640
      Operating                                          70,278       63,930
      Research, Business Development and Other
       (note 14)                                         18,318        6,022
      General and Administrative                          6,466        8,941
      Insurance                                           3,990        2,664
      Interest (note 7)                                   8,947       13,029
      Accretion on Asset Retirement Obligation
       (note 6)                                             338          155
      Depreciation, Depletion and Amortization           13,050       10,546
                                                     ------------------------
                                                        122,579      105,927
                                                     ------------------------
    Earnings Before Other Income (Expense) and
     Income Taxes                                        56,661       33,321
    Other Income (Expense)
      Foreign Exchange Gain (Loss)                        5,778         (370)
      Risk Management Loss (note 12)                    (19,037)     (67,724)
                                                     ------------------------
    Earnings (Loss) Before Income Taxes                  43,402      (34,773)
    Income Tax Expense (Recovery) (note 11)              11,768       (9,940)
                                                     ------------------------
    Net Earnings (Loss)                                  31,634      (24,833)
    Retained Earnings at Beginning of Period            224,551      161,181
    Settlement of Performance Share Unit Plan
     (note 10)                                             (745)           -
                                                     ------------------------
    Retained Earnings at End of Period                  255,440      136,348
                                                     ------------------------
    Net Earnings (Loss) Per Share (note 9)
      Basic                                                0.20        (0.15)
      Diluted                                              0.19        (0.15)
                                                     ------------------------

    See Accompanying Notes to the Consolidated Financial Statements



    Consolidated Statements of Cash Flows

    Three Months Ended March 31
    (Unaudited) ($ thousands)                              2007         2006
    -------------------------------------------------------------------------
    Cash Provided By (Used In)
    Cash From Operating Activities
      Net Earnings (Loss)                                31,634      (24,833)
    Non-cash Items:
      Stock-based Compensation (note 10)                  2,088        5,049
      Accretion on Asset Retirement Obligation
       (note 6)                                             338          155
      Depreciation, Depletion and Amortization           13,050       10,546
      Amortization of Financing Charges (note 3)            736            -
      Interest Expense on Option Premium Liability
       (note 5)                                             650          952
      Unrealized Loss on Risk Management (note 12)       19,157       67,724
      Unrealized Foreign Exchange (Gain) Loss
       (note 3 and 5)                                    (6,315)         636
      Future Income Tax Expense (Recovery) (note 11)     11,751      (10,383)
    Cash Items:
      Cash Settlement of Option Premium Liability
       (note 5)                                          (6,292)           -
      Cash Settlement of Performance Share
       Unit Plan (note 10)                               (3,806)      (2,076)
                                                     ------------------------
                                                         62,991       47,770
    Decrease in Non-cash Working Capital (note 13)       15,427       13,368
                                                     ------------------------
                                                         78,418       61,138
                                                     ------------------------
    Cash From (Used In) Financing Activities
      Issue of Share Capital (note 8)                     1,264        2,581
      Issue (Repayment) of Long-term Debt, Net           52,000      (41,000)
      Repayment of Obligations Under Capital Lease         (335)        (336)
                                                     ------------------------
                                                         52,929      (38,755)
                                                     ------------------------
    Cash Invested
      Capital Expenditures                             (160,511)     (35,331)
      Decrease in Non-cash Working Capital
       (note 13)                                         31,518       23,104
                                                     ------------------------
                                                       (128,993)     (12,227)
                                                     ------------------------
    Increase in Cash                                      2,354       10,156
    Cash at Beginning of Period                           3,139        5,590
                                                     ------------------------
    Cash at End of Period                                 5,493       15,746
                                                     ------------------------

    See Accompanying Notes to the Consolidated Financial Statements



    Notes to the Consolidated Financial Statements

    (Unaudited) (Tabular amounts in $ thousands, except for share amounts)

    The interim consolidated financial statements include the accounts of
    Western Oil Sands Inc. and its subsidiaries (the "Corporation"), and are
    presented in accordance with Canadian Generally Accepted Accounting
    Principles. The interim consolidated financial statements have been
    prepared using the same accounting policies and methods of computation as
    the audited consolidated financial statements for the year ended
    December 31, 2006, except as described in Note 1(b). The disclosures
    provided below are incremental to those included in the annual
    consolidated financial statements. The interim consolidated financial
    statements should be read in conjunction with the consolidated financial
    statements and the notes thereto in the Corporation's annual report for
    the year ended December 31, 2006.

    1.  Changes in Accounting Policies

        a)    Stock-based Compensation for Employees Eligible to Retire
              Before the Vesting Date

        For the year ended December 31, 2006, the Corporation retroactively
        adopted Emerging Issues Committee Abstract 162 ("EIC-162"). EIC-162
        required the Corporation to recognize stock-based compensation
        expense for awards granted to employees eligible for retirement under
        stock-based compensation plans that contain provisions that allow an
        employee to continue vesting in an award in accordance with the
        stated vesting terms after the employee has retired. Accordingly,
        stock-based compensation expense for the three month period ended
        March 31, 2006 was increased by $3.2 million, included in general and
        administrative expense, representing the additional compensation
        expense recognized for employees eligible for retirement during the
        vesting period.

        b) Financial Instruments

        On January 1, 2007, the Corporation adopted the CICA Handbook
        sections 3855 "Financial Instruments - Recognition and Measurement,"
        3862 "Financial Instruments - Disclosures," 3863 "Financial
        Instruments - Presentation," 3865 "Hedges," 1530 "Comprehensive
        Income," and 3251 "Equity." Other than the effect on Deferred Charges
        as described under Financial Instruments below, the adoption of the
        financial instruments standards has not affected the current or
        comparative period balances on the consolidated financial statements
        as all financial instruments identified have been fair valued.

           Financial Instruments

           Section 3855 requires that all financial assets be classified as
           held-for-trading, available-for-sale, held-to-maturity, or loans
           and receivables and that all financial liabilities must be
           classified as held-for-trading or other. Financial assets and
           financial liabilities classified as held-for-trading are measured
           at fair value with changes in those fair values recognized in
           earnings. Financial assets held-to-maturity, loans and
           receivables, and other financial liabilities are measured at
           amortized cost using the effective interest method of
           amortization. Available-for-sale financial assets are measured at
           fair value with unrealized gains and losses, including changes in
           foreign exchange rates, being recognized in other comprehensive
           income. Investments in equity instruments classified as available-
           for-sale that do not have a quoted market price in an active
           market are measured at cost.

           Derivative instruments are always carried at fair value and
           reported as assets where they have a positive fair value and as
           liabilities where they have a negative fair value. Derivatives may
           be embedded in other financial instruments. Under the new
           Financial Instrument standards, derivatives embedded in other
           financial instruments are valued as separate derivatives when
           their economic characteristics and risks are not clearly and
           closely related to those of the host contract; the terms of the
           embedded derivative are the same as those of a free standing
           derivative; and the combined contract is not held for trading.
           When an entity is unable to measure the fair value of the embedded
           derivative separately, the combined contract is treated as a
           financial asset or liability that is held-for-trading and measured
           at fair value with changes therein recognized in the earnings.

           The fair value of a financial instrument on initial recognition is
           normally the transaction price, i.e. the fair value of the
           consideration given or received. Subsequent to initial
           recognition, fair values are based on quoted market prices where
           available from active markets, otherwise fair values are estimated
           based upon market prices at reporting date for other similar
           assets or liabilities with similar terms and conditions, or by
           discounting future payments of interest and principal at estimated
           interest rates that would be available to the Corporation at the
           reporting date.

           Transaction costs are expensed as incurred for financial
           instruments classified or designated as held-for-trading.
           Transaction costs related to other financial instruments are
           generally capitalized and are then amortized over the expected
           life of the instrument using the effective interest method.
           Accordingly, the Deferred Charges balance of $13.5 million,
           consisting of transaction costs relating to the Senior Secured
           Notes, was reclassified against Long-term Debt effective
           January 1, 2007 under prospective application. For the three month
           period ended March 31, 2007, $0.7 million of these costs were
           included in interest expense under the effective interest method.

           Hedges

           Section 3865 replaces the guidance formerly in Section 1650,
           "Foreign Currency Translation" and Accounting Guideline 13,
           "Hedging Relationships" by specifying how hedge accounting is
           applied and what disclosures are necessary when it is applied. The
           Corporation does not have any derivative instruments that have
           been designated as hedges.

           Comprehensive Income

           Section 1530 establishes new standards for reporting the display
           of comprehensive income, consisting of Net Income and Other
           Comprehensive Income ("OCI"). OCI is the change in equity (net
           assets) of an enterprise during a reporting period from
           transactions and other events from non-owner sources and excludes
           those resulting from investments by owners and distributions to
           owners. The Corporation has no such transactions and events which
           would require the disclosure of OCI for the three month period
           ended March 31, 2007. Any changes in these items would be
           presented in a consolidated statement of comprehensive income.

           Equity

           Section 3251 replaces Section 3250, "Surplus" and establishes
           standards for the presentation of equity and changes in equity
           during a reporting period, including changes in Accumulated Other
           Comprehensive Income ("Accumulated OCI"). Any cumulative changes
           in OCI would be included in Accumulated OCI and be presented as a
           new category of Shareholder's Equity on the consolidated balance
           sheets.

        c) Accounting Changes

        On January 1, 2007, the Corporation adopted CICA Handbook Section
        1506, "Accounting Changes", which revises and replaces former Section
        1506, "Accounting Changes". The Section establishes criteria for
        changing accounting policies, together with the accounting treatment
        and disclosure of changes in accounting policies and estimates, and
        correction of errors.

        d) Determining the Variability to be Considered in Applying AcG-15

        On January 1, 2007, the Corporation prospectively adopted the
        Emerging Issues Committee issued Abstract 163, "Determining the
        Variability to be Considered in Applying AcG-15", which addresses how
        an enterprise should determine the variability to be considered in
        applying AcG-15, "Consolidation of Variable Interest Entities". The
        adoption of this standard has not affected the current or comparative
        period balances on the consolidated financial statements.

    2.  PROPERTY, PLANT AND EQUIPMENT
                                                        Accum.
        March 31, 2007                        Cost       DD&A(*)         Net
        ---------------------------------------------------------------------

        Athabasca Oil Sands Project
          Producing Assets               1,431,238     (167,334)   1,263,904
          Capital Leases                    52,705       (6,372)      46,333
          Asset Retirement Obligation       18,246       (1,309)      16,937
          Expansion                        339,957            -      339,957
        ---------------------------------------------------------------------
                                         1,842,146     (175,015)   1,667,131

        In-Situ Projects                    47,535            -       47,535
        Kurdistan Exploration Project       32,246            -       32,246
        Corporate                           15,925       (7,701)       8,224
        ---------------------------------------------------------------------

                                         1,937,852     (182,716)   1,755,136
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

                                                          Accum.
        December 31, 2006                     Cost       DD&A(*)         Net
        ---------------------------------------------------------------------

        Athabasca Oil Sands Project
          Producing Assets               1,414,560     (155,226)   1,259,334
          Capital Leases                    52,705       (5,914)      46,791
          Asset Retirement Obligation       18,246       (1,145)      17,101
          Expansion                        225,599            -      225,599
        ---------------------------------------------------------------------
                                         1,711,110     (162,285)   1,548,825

        In-Situ Projects                    25,842            -       25,842
        Kurdistan Exploration Project       23,954            -       23,954
        Corporate                           15,726       (7,381)       8,345
        ---------------------------------------------------------------------

                                         1,776,632     (169,666)   1,606,966
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

           (*) Accumulated Depreciation, Depletion and Amortization

        At March 31, 2007, costs not currently subject to depreciation,
        depletion and amortization included $340.0 million relating to the
        Athabasca Oil Sands Project ("AOSP") Expansion as it has not been
        substantially completed and commercial production has not yet
        commenced. During the three month period ended March 31, 2007, the
        Corporation capitalized $5.6 million in interest costs relating to
        this Expansion. As at March 31, 2007, a total of $8.4 million of
        interest costs has been capitalized relating to this Expansion.

        All costs included in the Kurdistan Exploration Project and the In-
        Situ Projects are excluded from depletion as they represent costs
        related to properties incurred in cost centres that are considered to
        be in the pre-production stage. Currently, there are no proved
        reserves in these cost centres. All costs, net of any associated
        revenues, in these cost centres have been capitalized.

    3.  LONG-TERM DEBT
                                                       March 31, December 31,
                                                           2007         2006
        ---------------------------------------------------------------------
        Senior Secured Notes
          US$450 Million - 8.375%, Due May 1, 2012      506,183      524,385
        Revolving Credit Facility                       129,000       77,000
        ---------------------------------------------------------------------

                                                        635,183      601,385
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Corporation's US dollar denominated Senior Secured Notes (the
        "Notes") are translated into Canadian dollars at the period end
        exchange rate. As at March 31, 2007, US$11.6 million of unamortized
        transactions costs are netted against the Notes. During the three
        month period ended March 31, 2007, transaction costs of $0.7 million
        have been recognized as interest expense under the effective interest
        method.

        For the three month period ended March 31, 2007, the unrealized
        foreign exchange gain arising on the Notes was $5.4 million
        (March 31, 2006 - $0.5 million). As at March 31, 2007, a total of
        $189.9 million of unrealized foreign exchange gains had been
        recognized from the inception of the Notes, approximately $92 million
        of which has been capitalized as the unrealized gains were recognized
        prior to commercial operations.

    4.  LEASE OBLIGATIONS
                                                       March 31, December 31,
                                                           2007         2006
        ---------------------------------------------------------------------

        Obligations Under Capital Lease                  48,594       48,928
        Operating Lease Guarantee Obligation             11,218       10,510
        ---------------------------------------------------------------------

                                                         59,812       59,438
        Less: Current Portion                             1,958        1,958
        ---------------------------------------------------------------------

                                                         57,854       57,480
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Obligations Under Capital Lease relates to the Corporation's
        share of capital costs for the hydrogen-manufacturing unit within the
        AOSP. Repayments of the principal obligation are $1.3 million per
        year and are scheduled to remain at that level until fully repaid.

        The Operating Lease Guarantee Obligation relates to the Mobile
        Equipment Leases. The Corporation is committed to pay its 20 per cent
        share of an amount equal to 85 per cent of the original cost of the
        equipment to the lessor at the end of the terms of the leases.
        Accordingly, the Corporation recognized, as a liability, a portion of
        this future payment as it relates to the service life of the
        equipment that has passed. During the three month period ended
        March 31, 2007, no payments were made in regard to this obligation
        (March 31, 2006 - $0.2 million).

    5.  OPTION PREMIUM LIABILITY

        The Corporation deferred payment and receipt of the premiums
        associated with the options described in Note 12(a) until the
        settlement of the option contracts between 2007 and 2009. During the
        three month period ended March 31, 2007, $6.3 million was paid in
        respect to the settlement of the option contracts maturing during the
        period (March 31, 2006 - nil). The remaining total net premiums
        payable by the Corporation are US$16.5 million for the remainder of
        2007, US$32.4 million for 2008 and US$27.8 million for 2009.

        On the dates that the option contracts were entered into, a net
        liability was recognized on the consolidated balance sheet at the
        estimated present value of the net premiums payable. Subsequent to
        the inception dates of the option contracts, interest expense is
        recognized, with a corresponding increase to the liability, at annual
        rates ranging from 4.25% to 4.50%. Interest expense recognized for
        the three month period ended March 31, 2007 was $0.7 million
        (March 31, 2006 - $1.0 million). The option premium liability is
        denominated in US dollars and is translated into Canadian dollars at
        the period end exchange rate. The unrealized foreign exchange gain
        arising on the option premium liability for the three month period
        ended March 31, 2007 was $0.9 million (March 31, 2007 - $0.1 million
        unrealized foreign exchange loss).

        The following table presents the reconciliation of the net Option
        Premium Liability:

        Three Months Ended March 31                        2007         2006
        ---------------------------------------------------------------------

        Option Premium Liability at Beginning
         of Period                                       89,275       85,416
        Interest Expense                                    650          952
        Unrealized Foreign Exchange (Gain) Loss            (880)          96
        Settlement of Option Premium Liability           (6,292)           -
        ---------------------------------------------------------------------

        Option Premium Liability at End of Period        82,753       86,464
        Less: Current Portion                            27,548        6,065
        ---------------------------------------------------------------------

                                                         55,205       80,399
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    6.  ASSET RETIREMENT OBLIGATION

        The Corporation, in association with its 20 per cent working interest
        in the AOSP, is responsible for its share of future dismantlement and
        site restoration costs in the mining, extracting and upgrading
        activities. The following table presents the reconciliation of the
        Asset Retirement Obligation:

        Three Months Ended March 31                        2007         2006
        ---------------------------------------------------------------------

        Asset Retirement Obligation at Beginning
         of Period                                       20,773        9,094
        Accretion on Asset Retirement Obligation            338          155
        ---------------------------------------------------------------------

        Asset Retirement Obligation at End of Period     21,111        9,249
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The AOSP's Upgrader has retirement obligations for which fair value
        cannot be reasonably determined because the asset currently has an
        indeterminate life. The asset retirement obligation for these assets
        will be recorded in the first period in which the lives of the assets
        are determinable. The Corporation currently does not have asset
        retirement obligations associated with In-Situ Projects or the
        Kurdistan Exploration Project as these projects are in the early
        stages of development.

    7.  INTEREST EXPENSE

        Three Months Ended March 31                        2007         2006
        ---------------------------------------------------------------------

        Interest on Long-term Debt (1)                   13,302       11,331
        Interest on Obligations Under Capital Lease         616          746
        Interest on Option Premium Liability                650          952
        ---------------------------------------------------------------------

        Total Financing Charges                          14,568       13,029
        Less: Capitalized Interest for AOSP
         Expansion                                        5,621            -
        ---------------------------------------------------------------------

        Interest Expense                                  8,947       13,029
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        (1) Interest on Long-term Debt includes amortization of transaction
        costs of $0.7 million (March 31, 2006 - nil).

        Cash interest paid for the three month period ended March 31, 2007
        was $2.3 million (March 31, 2006 - $1.3 million). Cash interest
        received for the three month period ended March 31, 2007 was
        $0.1 million (March 31, 2006 - $0.1 million).

    8.  SHARE CAPITAL
        Issued and Outstanding
                                                      Number of
                                                         Shares       Amount
        ---------------------------------------------------------------------

        Common Shares
        Balance at December 31, 2006                161,378,399      554,233
        Issued on Exercise of Employee Stock
         Options                                        190,556        1,264
        Exercise of Stock Options Previously
         Recognized                                           -          260
        ---------------------------------------------------------------------
        Total Share Capital at March 31, 2007       161,568,955      555,757
        ---------------------------------------------------------------------

        Outstanding
        Stock Options                                 3,495,868
        --------------------------------------------------------
        Diluted Shares at March 31, 2007            165,064,823
        --------------------------------------------------------
        --------------------------------------------------------

    9.  NET EARNINGS PER SHARE

        Basic weighted average number of common shares for the three month
        period ended March 31, 2007 was 161,493,276 (March 31, 2006 -
        160,568,322). Diluted weighted average number of shares for the three
        month period ended March 31, 2007 is 163,155,850. Due to a loss for
        the three month period ended March 31, 2006, no incremental shares
        were included in the diluted earnings per weighted average number
        because the effect would have been anti-dilutive.

    10. STOCK-BASED COMPENSATION

        (a) Stock Option Plan

        Under the Corporation's Stock Option Plan, 83,860 options were
        granted during the three month period ended March 31, 2007 at an
        average exercise price of $33.72 per share (March 31, 2006 - 787,540
        options at an average exercise price of $33.62 per share). The fair
        values of all options granted during the period are estimated as at
        the grant date using the Black-Scholes option-pricing model. The
        weighted-average fair values of the options and the assumptions used
        in their determination are as follows:

        Three Months Ended March 31                        2007         2006
        ---------------------------------------------------------------------

        Granted                                          83,860      787,540
        Weighted-average Fair Value                      $11.66       $16.00
        Risk Free Interest Rate                     4.00 - 4.06%        4.11%
        Expected Life (In Years)                          4 - 6            6
        Expected Volatility                             34 - 35%          43%
        Dividend Per Share                                    -            -
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        (b) Performance Share Unit Plan

        Under the Performance Share Unit Plan ("PSUP"), 116,700 PSUs were
        granted during the three month period ending March 31, 2007
        (March 31, 2006 - 122,645 PSUs). The weighted average grant-date fair
        value was $33.69 using the Monte-Carlo Simulation pricing model
        (March 31, 2006 - $33.41). During the three month period ended
        March 31, 2007, 109,557 units vested (March 31, 2006 - 63,111) and
        the required common shares were acquired and distributed to the PSUP
        unit holders. The common shares were acquired from the secondary
        market for $3.8 million, at an average price of $34.74 per share. The
        Corporation had previously recognized compensation of $2.7 million,
        with the excess of the amount paid of $1.1 million ($0.7 million net
        of tax) charged to retained earnings. During 2006, common shares were
        acquired from the secondary market for $2.1 million, at an average
        price of $32.89 per share. The following table presents the
        reconciliation of the number of Performance Share Units:

        Three Months Ended March 31                        2007         2006
        ---------------------------------------------------------------------
        Outstanding at Beginning of Period              237,670      160,128
        Granted                                         116,700      122,645
        Exercised                                      (109,557)     (63,111)
        Forfeited                                        (1,380)        (160)
        ---------------------------------------------------------------------
        Outstanding at End of Period                    243,433      219,502
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        (c) Deferred Share Unit Plan

        Under the Deferred Share Unit Plan ("DSUP"), for the three month
        period ended March 31, 2007, $0.3 million (March 31, 2006 -
        $0.1 million) in compensation expense was recorded in General and
        Administrative Expenses. No Deferred Share Units ("DSU") were
        redeemed for cash or shares of the Corporation for the three month
        period ended March 31, 2007 (March 31, 2006 - nil). The Corporation
        had 27,207 DSUs outstanding at March 31, 2007 (March 31, 2006 -
        5,462). As at March 31, 2007, the Corporation had $0.9 million
        recorded in Accounts Payable and Accrued Liabilities associated with
        the DSUP.

        (d) Stock-based Compensation

        For the three month period ended March 31, 2007, the Corporation
        recognized $2.1 million (March 31, 2006 - $5.0 million) in
        compensation expense related to stock-based compensation. For the
        three month period ended March 31, 2007, the compensation expense was
        comprised of $1.3 million (March 31, 2006 - $4.0 million) in respect
        to the Corporation's stock option plan and $0.8 million (March 31,
        2006 - $1.0 million) in respect to the Corporation's Performance
        Share Unit Plan.

        (e) Contributed Surplus
        The following table presents the reconciliation of Contributed
        Surplus:

        Three Months Ended March 31                        2007         2006
        ---------------------------------------------------------------------

        Contributed Surplus at Beginning of Period       12,890        3,474
        Stock-based Compensation Expense                  2,088        5,049
        Settlement of Performance Share Unit Plan        (2,709)      (2,076)
        Exercise of Stock Options Previously
         Recognized                                        (260)        (414)
        ---------------------------------------------------------------------

        Contributed Surplus at End of Period             12,009        6,033
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        11. INCOME TAX

        Three Months Ended March 31                        2007         2006
        ---------------------------------------------------------------------
        Current Income Tax Expense                           17          443
        Future Income Tax Expense (Recovery)             11,751      (10,383)
        ---------------------------------------------------------------------

        Income Tax Expense (Recovery)                    11,768       (9,940)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The future income tax liability consists of:

                                                       March 31, December 31,
                                                           2007         2006
        ---------------------------------------------------------------------

        Future Income Tax Assets
          Unrealized Loss on Risk Management             23,282       19,375
          Net Losses Carried Forward                      2,908        2,908
          Impairment of Long-lived Assets                   686          686
          Share Issue Costs                                 407          510

        Future Income Tax Liabilities
          Capital Assets in Excess of Tax Values        (94,463)     (79,824)
          Unrealized Foreign Exchange Gain and
           Debt Issue Cost                              (17,332)     (16,768)
        ---------------------------------------------------------------------

        Net Future Income Tax Liability                 (84,512)     (73,113)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        The following table reconciles income taxes calculated at the
        Canadian statutory rate of 32.12% (March 31, 2006 - 35.62%) with
        actual income taxes:

        Three Months Ended March 31                        2007         2006
        ---------------------------------------------------------------------

        Net Earnings Before Income Taxes                 43,402      (34,773)

        Income Tax Expense at Statutory Rate             13,941      (12,386)
        Effect of Tax Rate Changes and Timing
         of Use                                          (1,026)         665
        Non-taxable Portion of Foreign Exchange
         (Gain) Loss                                     (1,018)         101
        Non-deductible Expenses                              76          196
        Resource Allowance                                    -          (23)
        Stock-based Compensation                           (200)       1,064
        Provision to Actual                                 (22)           -
        Large Corporations Tax Expense                        -          443
        ---------------------------------------------------------------------

        Income Tax Expense (Recovery)                    11,751       (9,940)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

        The Corporation's financial instruments that are included in the
        Consolidated Balance Sheet are comprised of cash and cash
        equivalents, accounts receivable, risk management activities,
        accounts payables and accrued liabilities, option premium liability
        and long-term borrowings.

        a) Commodity-pricing Agreements

        The Corporation has entered into various commodity-pricing agreements
        designed to mitigate the exposure to the volatility of crude oil
        prices in US dollars, thereby providing greater certainty of future
        cash flow from the sale of the Corporation's synthetic crude oil
        products. This risk management strategy is intended to protect the
        Corporation's base and future capital programs and ensure the funding
        of debt obligations. These commodity-pricing agreements are accounted
        for under fair value accounting as they did not qualify or have not
        been designated as hedges for accounting purposes.

        The Corporation has put options at strike prices ranging from US
        $50.00 to US$55.00 per barrel, averaging US$52.42 per barrel for the
        three year period beginning January 1, 2007. The premiums for the
        purchased put options were partially offset through the sale of call
        options at strike prices ranging from US$90.00 to US$95.00 per
        barrel, averaging US$92.41 per barrel for the three year period
        beginning January 1, 2007, resulting in a net premium liability.
        Payment of the net premium liability is deferred until the settlement
        of the option contracts between 2007 and 2009.

        As at March 31, 2007, the Corporation had the following put and call
        options outstanding:

                                              2007         2008         2009
        ---------------------------------------------------------------------
        Barrels Per Day
          Put Options Purchased             20,000       20,000       20,000
          Call Options Sold                 10,000       15,000       15,000

        US$ Per Barrel
          Average Put Strike Price        US$52.50     US$54.25     US$50.50
          Average Call Strike Price       US$92.50     US$94.25     US$90.50
        ---------------------------------------------------------------------

        The fair value of the option contracts was recognized on the
        consolidated balance sheet on the dates they were entered into. The
        counterparties to these put and call options have investment grade
        credit ratings, thereby partially mitigating the credit risk
        associated with these financial instruments. The following table
        presents the reconciliation of the Risk Management Asset:

        Three Months Ended March 31                        2007         2006
        ---------------------------------------------------------------------

        Risk Management Asset at Beginning
         of Period                                       26,308       98,426
        Unrealized Loss on Risk Management              (19,157)     (67,724)
        ---------------------------------------------------------------------

        Risk Management Asset at End of Period            7,151       30,702
        Less: Current Portion                             2,986        1,933
        ---------------------------------------------------------------------

                                                          4,165       28,769
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The following table presents the net losses from risk management
        activities:

        Three Months Ended March 31                        2007         2006
        ---------------------------------------------------------------------

        Realized Gain on Risk Management                    120            -
        Unrealized Loss on Risk Management              (19,157)     (67,724)
        ---------------------------------------------------------------------

        Risk Management Loss                            (19,037)     (67,724)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        b) Fair Values of Financial Assets and Liabilities

        The fair values of financial instruments that are included in the
        Consolidated Balance Sheets, other than long-term borrowings,
        approximate their carrying amount due to the relatively short period
        to maturity of these instruments or have interest rates that
        approximate their fair value.

                                      March 31, 2007      December 31, 2006
        ---------------------------------------------------------------------
                                    Balance               Balance
                                      Sheet       Fair      Sheet       Fair
                                     Amount      Value     Amount      Value
        ---------------------------------------------------------------------
        Floating Rate Debt
          Revolving Credit          129,000    129,000     77,000     77,000
          Lease Obligation           57,854     57,854     57,480     57,480
        Fixed Rate Debt
          US Senior Secured Notes   506,183    564,981    524,385    584,034
        ---------------------------------------------------------------------

        Long-term Borrowings        693,037    751,835    658,865    718,514
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    13. CHANGES IN NON-CASH WORKING CAPITAL

        Three Months Ended March 31                          2007       2006
        ---------------------------------------------------------------------
        Source/(Use)
        Operating Activities
          Accounts Receivable                               5,592     25,685
          Inventory                                        (7,189)   (10,899)
          Prepaid Expense                                   3,191        669
          Accounts Payable and Accrued Liabilities         13,833     (2,087)
        ---------------------------------------------------------------------

                                                           15,427     13,368
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Investing Activities
          Accounts Payable and Accrued Liabilities         31,518     23,104
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    14. COMMITMENTS AND CONTINGENCIES

        a) Commitments

        The Corporation, through WesternZagros Limited ("WesternZagros"), a
        wholly-owned subsidiary of the Corporation, received confirmation on
        March 2, 2007 that its Exploration and Production Sharing Agreement
        ("EPSA") had been ratified by the Kurdistan Regional Government
        ("KRG") and confirmed by His Excellency Nerchivan Barzani, Prime
        Minister of Iraqi Kurdistan. As part of the ratification process,
        WesternZagros worked with the KRG to finalize its EPSA area boundary
        and other key terms in line with draft petroleum legislation. The
        final EPSA area encompasses 2,120 square kilometers (approximately
        524,000 acres) and holds a number of high potential prospects. The
        EPSA provides for the exploration of conventional oil and gas in the
        Federal Region of Kurdistan in northern Iraq and a work program.

        b) Contingencies

        During the three month period ended March 31, 2007, a judgment was
        issued against the Joint Venture Owners and Albian Sands Energy in
        respect of a contractual matter. While the final amount under the
        judgment has not yet been settled or paid, the Corporation has
        recognized $5.8 million as its 20% share in "Research, Business
        Development and Other" of the Consolidated Statement of Operations.
        The Corporation is considering whether it will appeal this decision.
        Other than this judgment, the Corporation believes that any
        liabilities that might arise pertaining to similar matters would not
        have a material effect on its consolidated financial position.
    

    Conference Call Notice
    A conference call will be hosted by management today at 11 a.m. Eastern
Time (9:00 a.m. Mountain Time) to discuss results. To participate in the
conference call, it is advised to call ten minutes prior to start time. Dial
(416) 644-3414 in the Toronto area or (800) 732-6179 toll-free. A replay of
the conference call will be available approximately two hours after the event
until May 3, 2007. To listen to the audio replay, call (416) 640-1917 or
toll-free at (877) 289-8525 and enter the passcode 21225944 followed by the
pound (No.) sign.
    The simultaneous audio webcast will be available on Western's web site at
www.westernoilsands.com under the Investors section and will be archived for
approximately 90 days.

    About Western Oil Sands
    Western Oil Sands Inc. is a Canadian corporation listed on the Toronto
Stock Exchange under the symbol WTO. Our vision is to create shareholder value
through the opportunity capture and development of large, world-class
hydrocarbon resources. Our primary asset is our 20 per cent undivided interest
in the Athabasca Oil Sands Project. Western is also pursuing initiatives
related to in-situ and technology development as well as downstream
opportunities. WesternZagros Limited, a wholly-owned subsidiary of Western, is
pursuing conventional oil and gas exploration opportunities in the Federal
Region of Kurdistan in Northern Iraq. For additional information, visit
www.westernoilsands.com.





For further information:

For further information: Dorreen Miller, Manager, Investor Relations and
Communications, (403) 233-1757

Organization Profile

MARATHON OIL CANADA CORPORATION

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