Energy Efficiency and Emissions

WHAT HAS TALISMAN DONE RECENTLY TO IMPROVE ITS UNDERSTANDING OF THE COMPANY'S GLOBAL EMISSIONS?

In 2005, Talisman established systems to record and report carbon dioxide and methane emissions from its offshore drilling and production operations in Malaysia, consistent with new regulatory requirements that apply to all Production Sharing Contracts in the Malaysian offshore. It is expected that we will commence reporting this data in next year's CR Report. In addition, we have taken steps to improve the accuracy of CO₂ emissions data for our operations in North America and the UK.

EN3-EN4, EN8, EN17

Moving Forward on Climate Change

On April 13, 2005, the Government of Canada released "Moving Forward on Climate Change: A Plan for Honouring our Kyoto Commitment". While lacking important implementation detail, this latest federal plan does confirm several important high-level policy matters relating to Large Final Emitters (LFE). The plan addresses targets in terms of emission intensity, honours the maximum 15% reduction in emission intensity, at a cost of not more than $15/tonne limits promised by the Government of Canada, and confirms investment in eligible research and development as a legitimate compliance option. The government expects to produce draft LFE regulations in 2006. Talisman will continue to work with the CAPP Climate Change Working Group to influence the design of emission reduction targets, implementation details and to refine corporate understanding of the associated financial and administrative impacts.

Canadian Industry Program for Energy Conservation

Talisman participated in the "Energy Innovators" program established under the Canadian Industry Program for Energy Conservation (CIPEC), a voluntary partnership between the Government of Canada and the oil and gas industry to improve Canada's industrial energy efficiency. CIPEC brings together industry associations and companies that represent more than 95% of all industrial energy use in Canada. As part of Talisman's involvement in CIPEC, energy efficiency audits targeting how Talisman equipment and processes affect energy consumption were conducted at several facilities in the Chauvin, Alberta area. Energy efficiency audits will be completed at other Talisman facilities in 2006.

CO₂ Emissions in Malaysia and Vietnam

Typically, petroleum reservoirs throughout Asia have high CO₂ content and venting or flaring is a common practice throughout Thailand, Malaysia, Indonesia, Vietnam and China. However, the fiscal and regulatory regimes throughout the region make no provision for CO₂ reinjection. Talisman (Malaysia) and Talisman (Vietnam) hold a 41% working interest in the PM-3 CAA project offshore Malaysia and Vietnam, which is currently emitting approximately 1,300 tonnes per day of formation CO₂. Malaysia and Vietnam are signatories to the Kyoto Protocol, but as Non-Annex I countries under the UN Framework Convention on Climate Change, Malaysia and Vietnam are not subject to any specific emission reduction targets, unlike Canada and the UK.

Although Talisman's competitors in the region routinely flare and vent CO₂, the Company is evaluating the potential for reinjecting CO₂ at PM-3 CAA. Talisman has commissioned an independent study to determine whether CO₂ reinjection at PM-3 CAA could qualify as a Kyoto Clean Development Mechanism (CDM) project, as well as to better understand the applicable CDM mechanisms and process. The results of this study will be available in 2006. Such a CDM project would require the agreement of the governments of Malaysia and Vietnam. CDM projects generate internationally recognized "certified emission reductions" that could be used by Talisman to retire future emission reduction obligations in the UK and Canada.

Talisman has not proceeded with this idea to date because there is significant regulatory uncertainty in Canada and the UK. The Company still has no clear idea of the size and cost of emission reductions that could be required during the first Kyoto compliance period (2008-2012). Requirements will become clearer as details of Phase Two of the EU Emission Trading System and the Canadian government's proposed Large Final Emitter regulations are more fully developed.

Benchmarking Emissions and Energy Consumption Against Production in the UK

Production Carbon Intensity (PCI) and Production Energy Intensity (PEI) are indicators that benchmark emissions and energy consumption against oil and gas production. PCI and PEI are useful indicators of greenhouse gas emissions and energy efficiency and have been adopted as reporting standards by many companies, including Talisman.

PCI and PEI do not, however, give full consideration to energy needs and emissions associated with handling increasing amounts of water that are typically produced with a maturing reservoir, as found in Talisman's (UK) operations. By the very nature that a mature reservoir will produce more water per unit of production, the intensity-based PCI and PEI will constantly increase (degrade) over time in conjunction with increasing water-cut and decreasing hydrocarbon production, no matter how energy efficient the facility is at the equipment level. In the chart below, we have plotted PEI as well as energy use against total production. This chart demonstrates that PEI is increasing in conjunction with an increasing percentage of water in the total production, while total energy consumption is decreasing. Similar results can be seen when charting PCI, emissions and total production. Energy and emissions data are reported in the Health, Safety and Environmental Performance data table on page 40 of the Report.

EU Emission Trading Scheme

Talisman (UK) is an active participant in Phase One of the EU Emission Trading Scheme, which commenced January 1, 2005. Combustion-related CO₂ emitted from Talisman (UK)'s platforms and terminals has been quantified and external verification is underway according to established rules. Talisman (UK) expects to have sufficient allowances to cover its obligations and will not have to purchase additional allowances in the market. Talisman (UK) also continues to participate in the voluntary flare transfer scheme initiated in 2001 as part of an industry-wide effort to reduce flaring-related emissions in the North Sea.

Talisman UK's Wind Farm demonstrator project has received funding from the Scottish Executive, the UK Department of Trade and Industry, the European Commission and Talisman (UK)'s co-venturer. More information, including the full EIA, can be seen at: www.beatricewind.co.uk

Beatrice Wind Farm Demonstrator Project Significant progress was made in support of Talisman (UK)'s proposed $58-million deepwater wind farm demonstrator project adjacent to its Beatrice platform, 25 kilometres off the east coast of Scotland. Fabrication of the two 5 megawatts (MW) RePower turbines was initiated and Talisman (UK) expects to install two demonstrator units in the third quarter of 2006. This project recently won the Green Energy Award from industry trade body Scottish Renewables. Talisman (UK) believes that the existing infrastructure at Beatrice offers a unique opportunity to test the feasibility of deepwater wind farms while optimizing the value of our existing facilities. Talisman (UK) hopes to show that it is possible to transfer complementary oil and gas skills into the offshore renewable energy business, providing additional opportunities for investment and employment in the North Sea. Initially, the two demonstrator units will provide electric power via subsea cable to the Beatrice platform. If approved, the project will run for a period of five years and provide a better understanding of the overall impact of deepwater wind farms and explore the cost effectiveness of deepwater sites. During the five-year trial, Talisman (UK) will collect performance data, look for ways to reduce costs and develop operating procedures.

If the project is successful, Talisman (UK) will consider the construction of a full-scale offshore wind farm including, the buildup of up to 200 turbines linked to the Beatrice platform. A commercial venture could generate almost 20% of Scotland's current electricity demand (enough energy to power a million average UK homes) while extending the life of the Beatrice facility.

The Beatrice demonstrator project combines wind generation technology with offshore oilfield development and project management skills which are clearly transferable to the renewables sector." Scottish Enterprise