President's Message

The year will long be remembered for the Macondo tragedy, which affected all of us with its loss of human life, and devastating impact on the environment. It will have ongoing ramifications, and we as an industry must take steps, collectively and individually, to minimize the risks of such an incident happening again.

Although Talisman makes concerted efforts to keep all workers safe at all times, tragically, we experienced a fatality in 2010 when a contractor, Evaristo Chimpa, lost his life on the Pastaza River in northern Peru. All of us at Talisman extend our sincere condolences to Mr. Chimpa’s family and friends. The company’s river operations were immediately ceased to undergo a detailed and comprehensive investigation. We have since used the findings to improve river operations in all areas where we rely on barges to supply our activities.

A Dynamic Environment

Globally, the economic recovery has been remarkably robust, with surprising strength in demand for oil products. Uncertainties remain, however, and the strength and durability of the recovery remains at least a little uncertain.

In North America, we have seen a dislocation between natural gas and oil prices, as a result of the success of shale drilling. Longer term, this abundant source of clean energy will surely play a major role in the US power sector. However, to secure such a future, our industry must do a better job of communicating the environmental benefits, the security and longevity of shale gas to consumers and regulators.

For now, gas in North America remains oversupplied, and it may take another 18-24 months to normalize. However, we believe oil prices to be underpinned due to the robust demand, and tightening spare capacity balances.

We are confident that Talisman is well positioned in such dynamic conditions, with a diverse portfolio, and flexibility in our capital programs.

Safe Operations – Our First Priority

Our first priority is safe operations and, during 2010, we continued to improve our safety performance. We achieved a further 18% reduction in our lost-time injury frequency in 2010, on top of a 40% improvement in 2009. We have set a goal for a further 20% reduction in 2011.

We were already in the process of conducting a review of our drilling operations when we learned of the Macondo incident in the Gulf of Mexico and immediately broadened and intensified this work. Although we were satisfied with our readiness, our learnings have helped strengthen Talisman’s drilling preparedness.

Successfully Transitioning the Portfolio

In terms of the portfolio, we completed the sale of $2 billion of non-core, predominantly North American natural gas assets during 2010, bringing the total to $5 billion over the past two years.

In general, the intent was to sell higher-cost, high-decline conventional gas assets and reposition the portfolio towards lower-cost, long-life assets, focusing on liquids. We also sought to strategically partner with companies that bring regional or technical expertise to the table, and whose objectives are closely aligned with ours.

In our Montney shale play in British Columbia, we sold a 50% working interest in our Farrell Creek properties to Sasol. Together with our new partner, we will study the feasibility of a gas-to-liquids facility for the Farrell Creek gas, using Sasol’s proprietary technology.

Elsewhere, we established a material position, totaling 78,000 net acres, in the heart of the liquids-rich window in the Eagle Ford shale play in Texas. Here we are partnering with Statoil, who also see North American shale as a strategic growth area.

We also took a significant step to deepen our presence in Colombia. We acquired a 49% interest in BP’s Colombian assets, jointly with Ecopetrol. This adds immediate production, with significant exploration and development upside, and complements our existing, extensive exploration acreage in the country.

In addition, we continue to build our international exploration portfolio of high-impact plays, particularly in Southeast Asia and Latin America. Early drilling results in both regions are encouraging. In total, we’ve added over 16 million net exploration acres during the past two years in support of renewing the portfolio for long-term growth. We also added a number of exploration blocks in Norway to help sustain our North Sea operations for at least the next decade. We will drill a number of significant exploration wells this year in Colombia, Peru, Indonesia, the North Sea, Papua New Guinea, and the Kurdistan region of northern Iraq.

Strong Operating Performance

Production for the year came in ahead of expectations, with strong underlying growth from the second half onwards, fuelled by growing shale volumes and new production records in Southeast Asia.

With the portfolio now set for ongoing production growth and continuing improvement in the cost base, we are now positioned for sustainable, profitable growth.

Looking forward, our portfolio now supports ongoing growth from North American shale (natural gas and liquids) and Southeast Asia. This is underpinned by a decade of sustainable (mostly liquids) production from our North Sea assets and conventional properties in North America.

Talisman replaced 164% of production with proved reserves in 2010, excluding the impact of price revisions. We continue to reduce our replacement costs, which were down 35% over 2009, with a two-year reduction of 63%. The cost to replace proved developed producing reserves was 54% lower than in 2009. This underpins improving profitability into the future.

Net income was up in 2010, reflecting improved operating performance, higher commodity prices and gains on financial instruments. Cash flow was lower due to lower cash proceeds from derivatives and higher cash taxes. However, the key take away is that the underlying performance and cost base of the company continues to improve.

A Commitment to Corporate Responsibility

I would encourage you to read our 2010 Corporate Responsibility report. We recognize that wherever we are active, Talisman must operate safely, responsibly and transparently. We are proud of our track record, both in working with communities and the steps we take to protect the environment.

We are very aware of the concerns raised by stakeholders around the globe regarding oil and gas development. Whether the issue is free, prior, informed consent in Peru; drilling safety, or water use and groundwater protection in hydraulic fracturing operations, Talisman is committed to taking the necessary steps to minimize the risks, and to do it right.

Well Positioned for a Great Future

Our priority this year is around safe execution. We have repositioned the portfolio to deliver growth at increasing profitability, and we have very exciting plans to deliver that growth. We are also making excellent progress in repositioning our exploration portfolio, and will drill some important wells this year.

We are continuing to strengthen our internal capability, and we have set an objective to significantly improve our development processes for Talisman employees during this year. Without their hard work and application, we would not have achieved our transition in such a short time, and I am deeply grateful to them for their dedication.

I am also grateful for the continuing guidance of our Board of Directors and in particular our Chairman, Chuck Williamson, who have supported us as well as challenged us to think harder about our business through the year.

Looking forward, we can now project a growing company, with many high quality options, and an exciting future. I am optimistic that for Talisman, tomorrow will be even better than today.

John A. Manzoni – President and Chief Executive Officer, Talisman Energy Inc.