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ARC Energy Trust (“ARC” or the “Trust”) has a very handson approach to production sustainability with a focus on organic reserve replacement. Record capital expenditures of $194 million on our internal development opportunities dwarfed the $16 million spent on acquisitions net of divestments. This focus on development of our exceptional asset base will continue in 2005 with a capital budget of $240 million directed at providing growth through the drill bit. ARC and the oil and gas industry as a whole enjoyed an unprecedented year in 2004. The significant increase in the price of West Texas Intermediate (“WTI”) crude oil spurred heated activity in the oil and gas industry that created both opportunities and challenges typical to any business sector working at or near full capacity. As a result of its high-quality asset base and large inventory of value-adding development opportunities, ARC once again enjoyed a record breaking year for revenues, above forecast drilling results and maintained a balance sheet that was among the strongest in the sector.
ECONOMIC ENVIRONMENT The strong global economy and politics were the dominant drivers for the upsurge in the price of oil in 2004. Oil prices fluctuated widely during the year with WTI achieving a high of US$55.17, a low of US$32.52 and closing the year at US$43.45. The fluctuating prices were primarily due to political uncertainty in key oil producing countries, very tight, just-in-time global supply and robust economies in many regions of the world, specifically in Asia. There is consensus among analysts that economic growth in Asia will remain strong in 2005 and political instability will continue in the Middle East, therefore oil prices are anticipated to stay high. OPEC’s spare capacity, or more correctly lack thereof, appears to be a key factor in determining oil prices. The less spare capacity – the higher the oil price. Analysts forecast that spare capacity for OPEC in 2005 will average between 1.5 mmb per day and 2 mmb per day. With worldwide demand expected to grow by 1 to 2 mmb per day as a result of continued strong economic growth in 2005, with limited new supplies expected to be brought on stream, markets are expected to remain tight, which would support a continued strong oil price environment. North American natural gas prices also experienced a high degree of volatility in 2004 with a peak price of $8.29 per GJ at AECO, a low price of $4.10 per GJ and a year-end price of $5.90 per GJ. The weather and its impact on storage levels is typically the main driver for natural gas prices, however in 2004, the gas prices were being “pulled up” by the record oil price during the year. As a
result, gas prices were higher than would normally have been the case for the actual storage levels experienced during the year. Demand for natural gas in North America throughout 2004 was at the lower end of the range for the past five years and is expected to remain relatively flat in 2005. At the same time, production has been gradually increasing resulting in storage levels at the high end of the five year range. While this outlook does create some cause for concern with respect to gas prices in 2005, anticipated strong oil prices are expected to once again lift gas prices to higher levels than would otherwise be the case.
REGULATORY CHANGES Various legislative and regulatory changes took place in 2004 affecting our industry directly. At the end of 2003, new reserves reporting guidelines came into effect for all publicly traded oil and gas producers. National Instrument 51-101 (“NI 51-101”) standardized how oil and gas producers report their reserves information resulting in many oil and gas producers writing down a portion of their reserves. ARC was pleased to announce that it suffered no negative effects with the implementation of NI 51-101. For 2004, we are pleased to record our eighth consecutive year of positive reserve revisions, clearly demonstrating the high quality nature of our assets. In March 2004, the Federal Government proposed changes to current legislation governing mutual fund trusts to ensure that the foreign ownership of income and royalty trusts does not exceed 50 per cent. It also proposed that the 15 per cent withholding tax be applied to all distributions paid to non-residents rather than just the taxable portion of distributions. The proposed changes were of serious concern to the royalty trust sector as a number of trusts had foreign ownership levels that exceeded 50 per cent. Although ARC’s foreign ownership level is approximately 25 per cent, we were very concerned about the proposed changes since the oil and gas industry has always relied on foreign investment to support its activities. Any move by the government to impose restrictions on our access to capital could have negative implications in the future. In response to input from the trust sector, the government deferred implementation of the foreign ownership restrictions pending further discussions with the industry with the exception of the 15 per cent witholding tax. The proposed changes to the withholding tax were implemented effective year-end 2004. We will continue to work with federal finance officials on the foreign ownership issue to ensure that our sector’s concerns will be heard.
2004 ANNUAL REPORT