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discussion with Dr. Jim Buckee

Financially, 2006 was a good year for Talisman with record cash flow and earnings. The Company continued to progress its major developments in the North Sea and Southeast Asia. We continue to act to increase long term shareholder value while maintaining a prudent balance sheet. We increased the dividend by 32% and split Talisman shares on a three-for-one basis to enhance liquidity. We’ve announced the sale of approximately 57,000 boe/d of non-core assets with the intent of using a large portion of the proceeds to repurchase Talisman shares

What is your assessment of Talisman’s performance in 2006?

JIM Operationally, 2006 was a difficult year not only for Talisman but for oil and gas producers in general, due in part to adverse weather and lengthy procurement lead times. Having said that, we did generate $4.75 billion in cash flow, our eighth consecutive record, despite lower natural gas prices and a stronger Canadian dollar. Net income was also a record $2 billion, up from $1.6 billion in 2005. Talisman’s production averaged 485,000 boe/d and we increased production per share by 4.4% year-over-year. We also made significant progress on our development projects in the North Sea and Southeast Asia.

I was disappointed with the Company’s share price performance in 2006. The share price fell 3.5% last year, although, including the 90% increase in 2005, Talisman’s share price performance has exceeded our peer group over the past two years.

What were some of the highlights from last year?

JIMIn North America, we drilled 496 successful natural gas wells, including significant discoveries in the Alberta Foothills, in Monkman and in Appalachia, which have extended existing play boundaries. We are also developing a major new natural gas play along the Outer Foothills, where we acquired over 260,000 gross acres in 2006 and believe the unrisked contingent and prospective resource potential could be 1 to 2 tcf. The Company set new production records in the Alberta Foothills and in Bigstone/Wild River. The Palliser and Lynx Pipelines were completed and Talisman Midstream Operations transported a record 600 mmcf/d of natural gas in February 2007. We acquired additional, highly prospective acreage in Alaska where we now hold interests in almost one million net acres.

In the North Sea, we drilled 32 successful oil and gas wells. The Company continues to progress nine developments in the UK and two in Norway, which we expect will increase our total North Sea production to between 230,000 to 240,000 boe/d in 2009. This includes 26,000 boe/d from the Yme field redevelopment in Norway, which was sanctioned at year-end. I was pleased with the integration of the Paladin assets and the acquisition of the Auk and Fulmar fields. Auk has over 800 mmbbls of original oil in place, a recovery factor to date of only 18% and a lot of development potential. We also installed the first five megawatt turbine as part of the Beatrice Wind Farm Project.

In Indonesia, the 400 mmcf/d gas plant expansion at Corridor has been tied in, in preparation for first sales to West Java. We participated in a phenomenal well in the Corridor Block which is on production at 150 mmcf/d. We also acquired a highly prospective deepwater exploration block, west of Sulawesi. In Malaysia/Vietnam, the Bunga Tulip development came onstream in the fourth quarter at approximately 4,000 boe/d. We have started work on the PM-3 CAA Northern Fields development, with first liquids production expected in the third quarter of 2008, ramping up to 40,000 bbls/d by year end. In Vietnam, we drilled a successful exploration well on Block 15-2/01 at year-end. The well tested at 14,863 bbls/d and appraisal work is underway. This could be a significant discovery.

In Algeria, we are continuing with the Phase 2 expansion of the Greater MLN gas reinjection project. In Tunisia, we acquired rights to the prospective El Hamra Block. We drilled two successful offshore exploration wells in Trinidad and Tobago and acquired a highly prospective exploration block in Colombia.

We replaced 116% of production through drilling and revisions in 2006, growing proved reserves by 2% to 1.67 billion boe. In North America, we added a record 471 bcf of proved natural gas reserves, replacing 142% of gas production. Internationally, we replaced 123% of liquids production.

Production in 2006 was below expectations. Is this a concern going forward?

JIMOur original forecast for 2006 was between 515,000 and 545,000 boe/d and, accounting for asset sales, we missed the midpoint of the range by 7.5%. However, the shortfall was mainly due to poor weather, longer procurement lead times and unexpected operating challenges. Given extremely tight industry conditions, many companies missed production guidance last year.

In North America, inclement weather delayed well tie-ins and infrastructure completions, while numerous third-party outages resulted in shut-in production. In the North Sea, production shutdowns for maintenance took longer than expected and there was an extended outage at Ross/Blake due to compressor problems. We also experienced extended compressor outages in North America and Algeria. Natural gas nominations in Malaysia were lower than expected and both oil and gas production was affected by an extended maintenance turnaround due to adverse weather conditions.

I believe we are steadily overcoming our production issues. We have taken a more conservative approach to forecasting our 2007 volumes, factoring in additional downtime for maintenance, turnarounds and unplanned shutdowns.

For 2007, we expect production to average 485,000 boe/d, plus or minus 5%. This includes the impact of non-core asset sales, which will total approximately 57,000 boe/d when completed. With new projects coming onstream in the North Sea, additional oil and gas volumes in Southeast Asia and continued successful drilling in North America, we expect production in 2009 to be 20 to 30% above projected 2007 levels.

What are Talisman’s plans in 2007?

JIMBased on the midpoint of our production guidance, cash flow is expected to be approximately $5 billion in 2007. This assumes a US$65/bbl WTI oil price, a US$7.50/mmbtu NYMEX natural gas price and a 90 cent Canadian dollar. As of early March, oil prices were lower than our forecast but were partially offset by the weaker Canadian dollar, so I am still comfortable with this cash flow estimate.

We prudently set our 2007 spending to focus on high quality projects while operating in a volatile commodity price environment. Exploration and development spending is budgeted at $4.8 billion in 2007, compared to $4.6 billion in 2006. North America and the North Sea account for approximately 80% of the capital program.

The strategy for Talisman’s North American operations is disciplined organic growth through drilling, focusing on material, scalable, conventional gas plays. We continue to be the leading deep gas driller in Western Canada. More than 90% of our spending in Canada and the US Lower 48 is being directed toward natural gas projects. Half of this is focused on four core gas areas: the Alberta Foothills, Edson, Bigstone/Wild River and Monkman. The sale of non-core, mature properties, combined with significant land purchases, has rejuvenated our Western Canadian land base and we are better positioned for long term growth.

Talisman’s successful North Sea strategy has been to develop commercial hubs around core operated properties and infrastructure; 2007 should see the completion of several development projects and integration of the Fulmar/Auk assets. Key projects include Tweedsmuir, Duart, Enoch, Wood, Blane and Affleck, as well as the tieback of the Galley field to Tartan. In Norway, work is proceeding on the Rev and Yme field developments.

In Southeast Asia, Talisman will continue to focus on low cost oil and natural gas developments. In Indonesia, we are commissioning the Phase 2 expansion of our gas processing facilities at Corridor in preparation for new gas sales to West Java. In Malaysia and Vietnam, we will progress the Song Doc and the PM-3 CAA Northern Fields developments, with first production expected in 2008. In addition, we are delineating our oil discovery in Vietnam and plan to drill up to three additional exploration wells on this highly prospective block this year.

Talisman plans to spend $53 million in Algeria, most of which is related to Phase 2 expansion of the Greater MLN gas reinjection facilities. The Company also plans to spend approximately $65 million in Trinidad and Tobago for development drilling at Angostura and both onshore and offshore exploration drilling.

Elsewhere, we have built a highly prospective acreage position in Alaska. The 2007 program includes up to three high impact exploration wells. In Qatar, up to two exploration wells are planned for 2007. In Peru and Colombia, activities will be focused on seismic acquisition. We have built a very exciting international exploration portfolio, including Alaska and the Northwest Territories, which contains approximately 350 prospects and leads with upside exposure to over five billion boe of prospective resources (P50, net unrisked).

What is the rationale behind selling assets and buying back shares? Are you contemplating any other large sales or acquisitions?

JIMMy objective, and that of management and the Board, is to create value for shareholders. Because we have no control over prices, one of the most important metrics is production per share, which represents measurable value. Talisman’s goal is to grow production per share at a rate of at least 5 to 10% annually.

The non-core assets we are selling represent about 10% of the Company’s production and we do not see meaningful production growth from them. These sales also simplify the asset base and free our people to focus on higher value projects.

Using some of these proceeds to increase our per share metrics at an attractive price is highly accretive to shareholder value. We continually review new opportunities, including tuck-in acquisitions, although right now I am happy with our core assets and with the organic production growth we expect in 2008 and 2009.

There has been some discussion among the analyst community of splitting up the Company. What are your views?

JIMThe opinion that the sum of the parts is greater than the whole is really a statement that our true value is not recognized by the market. With our current course of action, I believe we will rectify this by delivering strong operating and financial results, which, over time, should attract the right valuation.

Some investors say we are hard to value. This is likely true, but it is the result of diversity, which we view as a strength. Talisman provides comprehensive segmented information as well as detailed guidance to assist analysts and investors with their financial and operational estimates. There are no obvious operating efficiencies from two or three separate companies; in fact, the opposite is true. The time, effort, cost and potential tax inefficiencies from a breakup could see significant leakage of shareholder value. Additionally, we would not want to do anything that would have an adverse impact on our credit ratings or debt holders.

If this Company had different segments in unrelated businesses, a breakup might make more sense. But the oil and gas business is virtually the same wherever you go. We maintain a core of technical, commercial, financial and legal expertise at head office and have very strong regional centres. With video conferencing and high speed data communication, it is not difficult to manage our five major international operations offices.

We have examined this option carefully in the past and recognize the potential market arbitrage. However, I believe there is also value in having geographic and product diversity, particularly in a business where drilling results can be lumpy and commodity prices volatile. For example, when North American natural gas prices were falling last year, our international gas netbacks increased. Our exploration and development projects around the world compete for capital, which allows Talisman to continually high grade its investments. As evidence that this works, Talisman has one of the highest returns on capital employed and best recycle ratios among the peer group.

Some of your peers point to non-conventional oil and gas projects with 10 or more years of resource potential. Are you looking at non-conventional plays and how would you characterize Talisman’s long-term growth potential?

JIMWe continue to look at what we are doing versus the non-conventional business and we like our economics better. Talisman has a lot of shale and coal bed methane acreage but, when we run the economics, they are currently less attractive than our conventional plays. Similarly, the oil sands business is very capital and energy intensive with a lot of variability in the underlying resource quality. I believe that execution and operation of many of the projects will prove more difficult than expected.

By focusing on conventional oil and natural gas plays, we have the flexibility to quickly scale programs up or down. Talisman’s business model is repeatable, we still see a lot of opportunities in domestic deep gas and internationally with projects that generate high returns and pay out quickly. The deeper parts of the Canadian Basin are relatively underexplored. We have built a strong land position, we have experienced people and we continue to drill prolific wells; all supported by a midstream business operated by Talisman. Our operations people in North America believe we have 10 or more years of growth opportunities in and around our deep gas plays.

In the North Sea, we operate eight fields with almost five billion barrels of original hydrocarbons in place and 70% of this is remaining. The combination of Talisman owned infrastructure, new technology, current prices, extended-reach drilling, longer subsea tiebacks and the relative immaturity of the Norwegian sector means there is a lot of running room for a company our size in the North Sea.

In Southeast Asia, there is more than two trillion cubic feet of uncontracted gas in the Corridor field alone (Talisman share 36%), which is waiting to be booked upon completion of new gas sales contracts. We have over 60 mmboe of reserves in the Northern Fields under development in PM-3 CAA. In Vietnam, the potential on Block 15-2/01 looks very promising. There are a number of leads and prospects on the block and the risk has gone down considerably with our recent exploration success. This could become a new core producing area for Talisman.

We have significant exploration opportunities in each of our core producing areas, together with the upside we see in Alaska, Colombia and Peru. I believe this is the best exploration opportunity set we have had in Talisman’s history. Over the 15 years Talisman has been in business, we have consistently replaced reserves and grown production through the drill bit and we have achieved 10% annual average production per share growth. With the addition of new exploration acreage last year and ongoing development projects, Talisman is extremely well positioned for future growth.

Did the drop in oil and gas prices surprise you? Have your long-term views changed?

JIMNo, I think that prices will fluctuate due to short term imbalances around a secular increasing trend. If you look at underlying industry supply/demand data, not much has changed from the highs to the lows.

At US$50 a barrel, I believe prices were too low. If oil demand grows at more than 1 to 2% annually, it will be increasingly difficult to continue to add enough new productive capacity. Underpinning the long-term price of oil is the fact that the world is consuming over 30 billion barrels a year and replacing only a fraction of this with new discoveries. In the long term, I see the need for significantly higher prices to moderate demand and bring new supplies onstream.

My view is that the marginal cost of new natural gas supplies in North America, including a lot of tight or shale gas, but excluding LNG, is likely above US$7 to $8/mcf. However, we have also seen industrial demand collapse at prices above US$10/mcf, so supply and demand should balance somewhere in between.

Any other comments?

JIMI’d like to thank Talisman staff for their efforts this year. We have an exceptionally talented and dedicated group of people working for this Company. I’d also like to thank Mike McDonald, our former Executive Vice-President and Chief Financial Officer, and Joe Horler, our former Executive Vice-President, Marketing, both of whom retired in 2006, as well as the Talisman Board for their support and guidance over the past year.

jim buckkee

James W. Buckee
President and Chief Executive Officer
March 13, 2007

Jim Buckee image

Dr. Jim Buckee
President and Chief Executive Officer

We did generate $4.75 billion in cash flow, our eighth consecutive record.
I was disappointed with the Company’s share price performance in 2006.
In North America, we added a record 471 bcf of proved natural gas reserves, replacing 142% of gas production.
The Company continues to progress nine developments in the UK and two in Norway, which we expect will increase our total North Sea production to between 230,000 to 240,000 boe/d in 2009.
We have started work on the PM-3 CAA Northern Fields development, with first liquids production expected in the third quarter of 2008, ramping up to 40,000 bbls/d by year-end.
In Vietnam, we drilled a successful exploration well on Block 15-2/01 at year-end. This could be a significant discovery.
I believe we are steadily overcoming our production issues.
For 2007, we expect production to average 485,000 boe/d, +/– 5%.
Based on the midpoint of our production guidance, cash flow is expected to be approximately $5 billion in 2007.
We prudently set our 2007 spending to focus on high quality projects while operating in a volatile commodity price environment.
We have built a very exciting international exploration portfolio, including Alaska and the Northwest Territories, which contains approximately 350 prospects and leads with upside exposure to over five billion boe of unrisked prospective resources.
Using some of these proceeds to increase our per share metrics at an attractive price is highly accretive to shareholder value.
Talisman has one of the highest returns on capital employed and best recycle ratios among the peer group.
Our operations people in North America believe we have 10 or more years of growth opportunities in and around our deep gas plays.
In the North Sea, we operate eight fields with almost five billion barrels of original hydrocarbons in place, and 70% of this is remaining.
We have large exploration opportunities in each of our core producing areas.
I think that prices will fluctuate due to short term imbalances around a secular increasing trend.
In the long term I see the need for significantly higher prices to moderate demand and bring new supplies onstream.
WTI Crude Oil and NYMEX Gas Price