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ARC ANNUAL 07

Message to Unitholders

Message to Unitholders

ARC ANNUAL 07

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ARC had another very successful year, both operationally and financially. We executed a $397 million capital program, drilling 278 operated wells without a single lost time accident for any of our employees or our contractors - an achievement that we are especially proud of.

In 2007, ARC had another very successful year both operationally and financially. We executed a $397 million capital program, drilling 278 operated wells without a single lost time accident for any of our employees or our contractors – an achievement that we are especially proud of. Our production averaged 62,723 boe per day and we exited the year at approximately 65,000 boe per day. Our diversified portfolio of oil and gas production allowed us to benefit from record oil prices while being able to endure relatively low natural gas prices and still deliver consistent distributions of $0.20 per month throughout the year. ARC has consistently met its production targets and has been able to do so through a disciplined approach to the execution of its capital program and its history of acquiring assets that have material upside potential not accounted for in the original purchase price. Our operational success in 2007 is highlighted by the fact that we replaced 101 per cent of production on a proved plus probable basis, 93 per cent of which was achieved organically with the balance through several minor acquisitions. All in, 2007 finding, development and acquisition costs (“FD&A”) excluding future development capital were $19.00 per boe (15 per cent lower than 2006) which included $87 million (20 per cent of total 2007 capital expenditures) of undeveloped land acquisitions primarily in the Montney resource play in northeast British Columbia. Excluding these extraordinary land purchases for which no reserves have been booked, our FD&A costs would have been $15.24 per boe on a proved plus probable basis (23 per cent lower than 2006). With an average netback in 2007 of $35.44 per boe, ARC’s 2007 recycle ratio was 1.8 including undeveloped land purchases and 2.3 excluding undeveloped land purchases. ARC has always been a disciplined, resource play focused oil and gas company that consistently creates value for its investors. In 2003, we established a significant operational presence in the Montney formation in northwest Alberta and northeast British Columbia. The Montney is a relatively tight marine siltstone

composed of quartz, dolomite and feldspar grains. The zone has long been known to be gas-charged; however, it is only in the last few years that drilling, fracturing, and completion technology have evolved to a level where this gas can be economically produced. In 2005, ARC pioneered the use of an innovative completion technology for horizontal wells that has proven to be the key to unlocking value from this resource. The use of this completion technology has been embraced by other operators and turned a seemingly marginal resource into the hottest natural gas play in western Canada at this time. The technology continues to improve and the costs to drill and complete the horizontal wells are coming down. ARC’s first horizontal well in Dawson cost $7.5 million to drill and complete – our most recent well came in at approximately $5 million. This first horizontal well has outperformed our expectations – to the end of 2007 this well has already produced 2.4 bcf and is still producing at 1,500 mcf per day. Including this first well, we now have 10 horizontal wells on production and have increased production at Dawson from 24 mmcf per day at the start of 2007 to almost 50 mmcf per day in early 2008. Given our existing presence in the area and our operational expertise, we have moved aggressively to expand our exposure to the Montney formation in northeast British Columbia. Since August 2006, ARC has spent in excess of $100 million to acquire 44,000 net acres (68 net sections) of land in the Dawson area bringing our total holdings to approximately 90,000 net acres (138 net sections). Included in this number are 57,000 net acres (87 net sections) of undeveloped acreage that we believe is highly prospective for Montney gas. In addition we have another 10,000 net acres (16 net sections) of land just across the border in Alberta that may also be prospective. With successful exploratory wells drilled in 2007 at West Dawson and Sunrise, we believe we have identified over one trillion cubic feet of Discovered Gas Resource (1) on just two of our three undeveloped land blocks in the area. As at

(1) Discovered Resources are defined as the quantity of hydrocarbons that are estimated to be contained within a known accumulation. Discovered Resources are divided into economic and uneconomic portions, with the estimated future recoverable portion classified as reserves and contingent resources. There is no certainty that it will be economically viable or technically feasible to produce any portion of this Discovered Resource. However, analogous developments in the ARC Dawson field and the EnCana Swan Lake field have proved to be economic. The resource is not currently classified as reserves or contingent resources as further drilling is required to define the aerial extent of the play and further testing is required to confirm formation deliverability potential. ARC believes its current estimate of this resource, if proven to be correct, will be sufficient to justify full economic development and production assuming the current commodity price and regulatory environments prevail.

2007  

Annual Report

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