North America

nature of operations

Talisman has conventional and unconventional operations in North America. In 2008, Talisman outlined a new corporate strategy, which included significant development of the Company’s unconventional assets in North America. This change in business strategy has brought higher levels of activity to areas where the Company’s existing conventional plays remain.

The Company’s Western Canadian operations produced the majority of the Company’s North America production in 2008, from several core gas producing areas in British Columbia (BC) and Alberta, and oil producing areas in Alberta and Saskatchewan. Talisman also operates in Ontario. Talisman’s significant Canadian unconventional plays are located in BC, Alberta, Saskatchewan and Quebec. Unconventional exploration through pilot and development drilling began in 2008 and will continue into 2009.

In the United States (US), Talisman has operations and interests in New York, Pennsylvania, Utah, Wyoming, Arkansas, Texas and Alaska. Talisman began piloting its unconventional resource play in Pennsylvania during 2008. Significant activity is planned for 2009.

our people

To support its new unconventional gas strategy, Talisman reorganized its North American operations to manage increased levels of activity. Talisman changed its organizational model to an asset-oriented structure, which aligned multi-functional teams with common reporting priorities and goals. Talisman increased its emphasis on technical skills development and innovation, which enabled the Company to increase its focus on new plays. To achieve this, Talisman created centres of expertise to support technical innovation skills development through centralized services in core areas of the business.

Talisman also created a dedicated department within its North America operations to address increased stakeholder issues. Dedicated human resource, HSE/OI, supply management and information technology staff were also embedded into North America operations to gain a deeper understanding of regional needs and enhance the quality of services provided.

To support these significant organizational changes, the Company provided change leadership training to all managers as well as enhanced career development processes for all employees.

health, safety, environment and operational integrity

health and safety

Sadly, a contractor working for Talisman died from his injuries following a workplace incident in June 2008. The contractor fell under the wheel of a reversing truck he was helping to direct. Through a detailed and comprehensive investigation of this incident, Talisman identified opportunities to improve procedures and controls, particularly in the area of rig moves. Talisman engaged the rig moving companies and sponsored workshops to develop personal safety initiatives addressing critical behaviours in the ‘danger zones’ of equipment transport. Internal and external safety alerts on this fatality were distributed company-wide and to other stakeholders.

In 2008, Talisman’s lost time injury frequency was 1.32 in North America. The Company implemented several personal safety initiatives in 2008 in North America, including the development of new hire mentoring and training, behaviour-based training, safety fundamentals for supervisors and due diligence programs. The Company also implemented a recognition initiative that rewards outstanding safety performance. These initiatives were designed to establish consistency in competency and mentorship for front-line workers as well as align goals associated with performance measurement. Talisman’s Drug and Alcohol Policy was also implemented with all contractors in Canada. Approximately 2,500 contractors are now either adhering to Talisman’s policy or an equivalent policy within the contractor company.

As a result of Talisman’s focus on unconventional, multi-well developments, the Company is designing a safety plan focused on simultaneous drilling, completing and producing on a single pad wellsite. Top industry personnel are contributing their expertise to ensure Talisman utilizes and applies best practices to manage multi-well developments.

environment

As the pace and intensity of Talisman’s unconventional gas development increases, so will the challenge of minimizing the Company’s impact on the environment. During the piloting stages of development, Talisman is conducting project level environmental planning to minimize the cumulative impact of its operations. This initiative includes opportunities to reduce the operational footprint through the use of multi-well pads and common corridors for pipelines and access roads, site selection to minimize disturbance and conflict with sensitive areas, water conservation and integrated land management with other land users in a region.

Unconventional shale development success relies heavily on the ability to fracture rock to release gas up the wellbore. This process requires large volumes of water. During the piloting stages of development, Talisman is seeking to reduce operational demand for fresh water through ongoing research into economically viable, alternative non-potable sources of water, as well as the development and implementation of technologies to treat and recycle previously used fracture water.

Talisman has worked proactively with government authorities to comply with all applicable regulatory requirements for the withdrawal and disposal of water required for its operations. Withdrawal and disposal options are in place to execute the Company’s 2009 unconventional gas programs.

emissions

In March 2007, the Alberta Government introduced its Specified Gas Emitters Regulation as part of the province’s Climate Change and Emissions Management Amendment Act. Facilities that emitted more than 100,000 tonnes per year of CO₂ equivalent were required to measure and report their baseline emissions intensity based on the average emissions and production data from 2003 to 2005, then reduce their net emissions intensity by 12% by the end of 2007.

The only Talisman facility that exceeds the Alberta 100,000 tonne threshold is the Edson gas plant. Various energy efficiency initiatives and the addition of the cogeneration facility in 2005 contributed to the Edson gas plant reducing its 2007 half-year emissions intensity by more than the regulated 12%, thereby generating a carbon credit surplus for the Company equivalent to 23,000 tonnes of CO₂ emissions.

The BC carbon tax came into effect on July 1, 2008. Talisman’s BC operations are subject to the tax; however, the costs are not material to the Company.

Talisman will continue to engage in consultations with the federal and provincial governments and evaluate regulations as they evolve.

stakeholders

Talisman respects stakeholder concerns regarding its unconventional activity, including the use, sourcing, treatment and disposal of water as well as overall surface impacts, such as increased road use, dust and noise. Talisman’s environmental management plans define the environmental issues associated with its unconventional plays and outline how the Company plans to mitigate these concerns. Talisman’s community relations programs establish an internal code of conduct for Talisman employees and contractors, defining how the Company will manage impacts such as additional truck traffic, speed, routing and overall safety issues. Talisman’s local economic engagement plans define the economic opportunities associated with its unconventional plays and examine all linkages with local contractors and service providers, resulting in active community participation in projects.

regulatory issues

Regulation and regulatory bodies are, in many jurisdictions, in the early stages of understanding and responding to unconventional environmental issues. Talisman is working with regulators to establish high environmental standards through regulatory development. Talisman is also actively involved in several industry associations throughout North America to address common concerns related to oil and gas activities.

Late in 2007, the New York State Department of Environmental Conservation (DEC) initiated an effort to amend New York’s well spacing unit law to accommodate the anticipated increased natural gas production in New York’s Marcellus Shale formation. In 2008, Governor Paterson approved the new well spacing legislation and issued a directive calling for the DEC to immediately review and update the state’s Generic Environmental Impact Statement (GEIS). The review aims to determine if horizontal drilling within the Marcellus Shale formation is permitted under the current GEIS and recommend changes if needed. Without a site specific environmental impact statement for each drilling location, drilling permits will not be issued in New York until the GEIS is complete. Talisman continues to actively engage in this process. As a result, the Company has focused its Marcellus Shale drilling in Pennsylvania.

local and aboriginal consultation

Talisman encourages employees and contractors to increase local and Aboriginal participation in the Company’s exploration and development plans. In 2008, Talisman continued to work with regulators to enhance the Alberta First Nations Consultations Guidelines process by improving consistency across Alberta and developing program level consultation. This approach will provide a more comprehensive overview of the Company’s operational plans and offer an earlier opportunity for stakeholders and Talisman to work together to ind mutually agreeable solutions. Talisman was selected by the Alberta Government in May 2008 to present case studies showing how program consultation can help to mitigate infringements on First Nations rights and traditional uses within Talisman’s operations.