Lloydminster Oil Volumes Climbing

In east central Alberta and west central Saskatchewan, Canada, Devon holds more than two million net acres in the Lloydminster area. Production at Lloydminster is from shallow reservoirs between 1,300 and 2,000 feet deep. Lloydminster oil is heavy, but can be brought to the surface without the steam injection process required at Jackfish.

At Lloydminster, we are developing Devon's acreage in the Manatokan, Iron River and End Lake fields. We drilled 429 wells in the Lloydminster area in 2007 with excellent results. We increased 2007 average production to 33,500 equivalent barrels per day, 40% more than in 2006. We plan to drill another 475 wells at Lloydminster in 2008. Because the wells are shallow and relatively inexpensive to drill, finding and development costs are very attractive.

Exploring the Deep

Although development projects such as the Barnett Shale and Lloydminster are delivering impressive growth, we believe long-term, sustainable growth requires a significant commitment to high-impact, long-cycle-time exploration. In 2008, we will invest about $1 billion in exploration projects that will not deliver reserves or production for several years, but can provide the seeds for future growth.

Early this decade, we determined that the deepwater Gulf of Mexico would be a focus area for our exploration program. We had an experienced team of deepwater explorationists, many of whom had joined Devon through previous acquisitions. We also had an extensive seismic library and deepwater acreage inventory. We further increased our deepwater acreage position through federal lease sales and joint ventures with other operators. Today, Devon's deepwater lease inventory is among the largest in the Gulf of Mexico.

Our deepwater exploration commitment led to early and notable success with discoveries in both Miocene and Lower Tertiary reservoirs. In the Miocene trend we made discoveries at Sturgis (25% working interest) in 2003 and Mission Deep (50% working interest) in 2006. We are now drilling a Miocene exploratory well at Sturgis North (25% working interest) and plan to drill an appraisal well at Mission Deep later in 2008.

In 2002, we made our first discovery in the Lower Tertiary trend. Lower Tertiary geologic formations are older and deeper than the Miocene-aged rocks. Devon has to date participated in four significant Lower Tertiary discoveries with combined estimated net resources of up to 900 million oil-equivalent barrels. We have also built an inventory of about 20 untested exploratory prospects with combined unrisked resource potential of up to five billion oil-equivalent barrels. This is double Devon's current proved reserve base of about 2.5 billion equivalent barrels.

Of our four discoveries, Cascade is the first to be sanctioned for development. St. Malo (22.5% working interest) and Jack (25% working interest), discovered in 2003 and 2004 respectively, may be sanctioned in 2009 for development. A successful production test of the Jack No. 2 well in 2006 brought worldwide attention to the Lower Tertiary trend and to Devon's stake in the play. Additional appraisal drilling and facilities design engineering on both St. Malo and Jack are planned for 2008. Should St. Malo and Jack be sanctioned in 2009, first production could occur as early as 2013. Additional appraisal activity is also planned in 2008 for Kaskida (20% working interest), a 2006 discovery.

To provide greater flexibility in accomplishing our deepwater drilling plans, we have entered into long-term contracts for two fifth-generation offshore rigs. We took delivery of the Ocean Endeavor, the first of the two rigs, in 2007. We expect to take delivery of the second rig, the West Sirius, in mid-2008. These rigs are capable of drilling in 10,000 feet of water and to depths greater than 30,000 feet. We will use the rigs for exploratory, appraisal and development wells. The Ocean Endeavor is now drilling the Jack No. 3 appraisal well before moving to drill the initial producing wells at Cascade. We plan to drill a Devon-operated exploratory well with the West Sirius after it arrives in U.S. waters.

Cascade Sanctioned for Development

Cascade was the first of Devon's four significant discoveries in the Lower Tertiary trend of the Gulf of Mexico. We drilled the discovery well in 2002 and followed up with two successful appraisal wells in 2005. Devon and Petrobras, the Brazilian national oil company, are equal partners in the 23,000-acre Cascade unit. In 2007, the partners sanctioned the project for commercial development.

Cascade is located in the Walker Ridge lease area under about 8,000 feet of water. We plan to develop the project with a floating production, storage and offloading vessel, or FPSO. Although FPSOs are deployed in many oceans around the world, Cascade is expected to be the first project in the Gulf of Mexico to use this production system. In 2007, the Cascade partners awarded contracts for the FPSO and for two shuttle tankers that will transport oil to the coast.

We expect to begin drilling the first of two initial producing wells at Cascade later this year, with production planned to commence in 2010. Reservoir data gathered from these first two wells will help determine the optimum facilities size and number of producing wells required to fully develop Cascade's potential. This phased approach will allow us to develop the project in a prudent and cost-effective way.

International Exploration Looks to Brazil and China

Devon is predominately a North American company. About 95% of our proved reserves, excluding the properties in Africa that we are divesting, are in the United States and Canada. Although currently focused in North America, we are excited about our prospects in Brazil and China. These are countries with stable political, fiscal and regulatory environments and where we have alliances with experienced and capable partners.

Devon established a foothold in Brazil with our 2004 Polvo discovery in the offshore Campos Basin. We began producing oil at Polvo in the second half of 2007 and expect to drill a total of 10 producing wells and three water injection wells. The Polvo facilities, which include a fixed drilling and producing platform and an FPSO, are sized to produce up to 50,000 barrels of oil per day. Devon operates the project with a 60% working interest.

We also hold interests in nine offshore leases in Brazil, encompassing nearly 800,000 net acres. Seven of the lease blocks are in the prolific Campos Basin, and we are partners with Petrobras, Brazil's national oil company, in four of those blocks. In 2008, we plan to drill a high-potential exploratory well on Block BM-C-30. In early 2009, Devon will take delivery under a long-term contract of a deepwater drill ship in Brazil. We plan to drill seven exploratory wells with the drill ship over a two-year period.

China is another country where Devon has established offshore production. Our Panyu field is located in the Pearl River Mouth Basin in the South China Sea. Devon and its partners began producing oil at Panyu in 2003, and to date Devon's share of the production has been about 22 million barrels. We have a 24.5% working interest in the project, which is operated by the Chinese National Offshore Oil Company, known as CNOOC.

In the first quarter of 2008, Devon began drilling an exploratory well on Block 42/05, also in the South China Sea, but in deeper water than Panyu. The BY 6-1-1 well is in 3,200 feet of water and is on trend with a large natural gas discovery made by another operator in 2006. We have also identified other exploratory prospects on Block 42/05 that we plan to test in the future.

In addition to Block 42/05, Devon also holds Blocks 53/30 and 64/18 in the South China Sea and Block 11/34 in the Yellow Sea. During the exploration phase, we have 100% working interests in each exploratory block. CNOOC has the option to participate with a 51% working interest in any discoveries. We believe these lease blocks could hold more than one billion barrels of combined net resource potential for Devon.