2. Business segments

The company operates its business in Canada. The Upstream, Downstream and Chemical functions best define the operating segments of the business that are reported separately. The factors used to identify these reportable segments are based on the nature of the operations that are undertaken by each segment and the structure of the company’s internal organization. The Upstream segment is organized and operates to explore for and ultimately produce crude oil and its equivalent, and natural gas. The Downstream segment is organized and operates to refine crude oil into petroleum products and the distribution and marketing of these products. The Chemical segment is organized and operates to manufacture and market hydrocarbon-based chemicals and chemical products. The above segmentation has been the long-standing practice of the company and is broadly understood across the petroleum and petrochemical industries.

These functions have been defined as the operating segments of the company because they are the segments (a) that engage in business activities from which revenues are earned and expenses are incurred; (b) whose operating results are regularly reviewed by the company’s chief operating decision maker to make decisions about resources to be allocated to each segment and assess its performance; and (c) for which discrete financial information is available.

Corporate and Other includes assets and liabilities that do not specifically relate to business segments – primarily cash, capitalized interest costs, short-term borrowings, long-term debt and liabilities associated with incentive compensation and post-retirement benefits liability adjustment. Net income in this segment primarily includes debt-related financing costs, interest income and share-based incentive compensation expenses.

Segment accounting policies are the same as those described in the summary of significant accounting policies. Upstream, Downstream and Chemical expenses include amounts allocated from the Corporate and Other segment. The allocation is based on a combination of fee for service, proportional segment expenses and a three-year average of capital expenditures. Transfers of assets between segments are recorded at book amounts. Intersegment sales are made essentially at prevailing market prices. Assets and liabilities that are not identifiable by segment are allocated.


	Upstream									Downstream									Chemical
millions of dollars	2013			2012			2011			2013			2012			2011			2013			2012			2011
Revenues and other income
Operating revenues (a)		6,016			4,674			5,278			25,450			25,077			23,909			1,256			1,302			1,287
Intersegment sales		4,026			4,110			4,460			1,978			2,603			2,784			318			299			354
Investment and other income		145			46			168			59			81			63			-			-			-
		10,187			8,830			9,906			27,487			27,761			26,756			1,574			1,601			1,641
Expenses
Exploration		123			83			92			-			-			-			-			-			-
Purchases of crude oil and products		3,778			3,056			3,581			21,628			21,316			21,642			1,065			1,115			1,222
Production and manufacturing (b)		3,389			2,704			2,484			1,695			1,569			1,451			210			185			179
Selling and general		5			1			7			886			935			973			66			67			64
Federal excise tax		-			-			-			1,423			1,338			1,320			-			-			-
Depreciation and depletion (b)		636			498			528			452			242			214			12			12			13
Financing costs (note 12)		9			(1	)		2			2			-			(1	)		-			-			-
Total expenses		7,940			6,341			6,694			26,086			25,400			25,599			1,353			1,379			1,478
Income before income taxes		2,247			2,489			3,212			1,401			2,361			1,157			221			222			163
Income taxes (note 3)
Current		(14	)		72			593			395			486			372			62			67			43
Deferred		549			529			162			(46	)		103			(99	)		(3	)		(10	)		(2	)
Total income tax expense		535			601			755			349			589			273			59			57			41
Net income		1,712			1,888			2,457			1,052			1,772			884			162			165			122
Cash flows from (used in) operating activities		1,690			2,625			3,252			1,453			1,961			1,315			198			127			53
Capital and exploration expenditures (c)		7,755			5,518			3,880			187			140			166			9			4			4
Property, plant and equipment
Cost		38,819			30,602			25,327			7,146			7,038			6,990			771			765			760
Accumulated depreciation and depletion		(10,749	)		(10,146	)		(9,747	)		(4,347	)		(3,967	)		(3,803	)		(586	)		(576	)		(560	)
Net property, plant and equipment (d)		28,070			20,456			15,580			2,799			3,071			3,187			185			189			200
Total assets (e)		30,553			22,317			17,222			5,732			6,409			6,700			397			372			397

	Corporate and Other									Eliminations									Consolidated
millions of dollars	2013			2012			2011			2013			2012			2011			2013			2012			2011
Revenues and other income
Operating revenues (a)		-			-			-			-			-			-			32,722			31,053			30,474
Intersegment sales		-			-			-			(6,322	)		(7,012	)		(7,598	)		-			-			-
Investment and other income		3			8			9			-			-			-			207			135			240
		3			8			9			(6,322	)		(7,012	)		(7,598	)		32,929			31,188			30,714
Expenses
Exploration		-			-			-			-			-			-			123			83			92
Purchases of crude oil and products		-			-			-			(6,316	)		(7,011	)		(7,598	)		20,155			18,476			18,847
Production and manufacturing (b)		-			-			-			(6	)		(1	)		-			5,288			4,457			4,114
Selling and general		125			78			124			-			-			-			1,082			1,081			1,168
Federal excise tax		-			-			-			-			-			-			1,423			1,338			1,320
Depreciation and depletion (b)		10			9			9			-			-			-			1,110			761			764
Financing costs (note 12)		-			-			2			-			-			-			11			(1	)		3
Total expenses		135			87			135			(6,322	)		(7,012	)		(7,598	)		29,192			26,195			26,308
Income before income taxes		(132	)		(79	)		(126	)		-			-			-			3,737			4,993			4,406
Income taxes (note 3)
Current		(18	)		(32	)		(53	)		-			-			-			425			593			955
Deferred		(16	)		12			19			-			-			-			484			634			80
Total income tax expense		(34	)		(20	)		(34	)		-			-			-			909			1,227			1,035
Net income		(98	)		(59	)		(92	)		-			-			-			2,828			3,766			3,371
Cash flows from (used in) operating activities		(49	)		(33	)		(131	)		-			-			-			3,292			4,680			4,489
Capital and exploration expenditures (c)		69			21			16			-			-			-			8,020			5,683			4,066
Property, plant and equipment
Cost		429			360			339			-			-			-			47,165			38,765			33,416
Accumulated depreciation and depletion		(163	)		(154	)		(144	)		-			-			-			(15,845	)		(14,843	)		(14,254	)
Net property, plant and equipment (d)		266			206			195			-			-			-			31,320			23,922			19,162
Total assets (e)		581			704			1,418			(45	)		(438	)		(308	)		37,218			29,364			25,429

(a)	Includes export sales to the United States of $5,217 million (2012 - $4,358 million, 2011 - $4,175 million). Export sales to the United States were recorded in all operating segments, with the largest effects in the Upstream segment.

(b)

A 2013 charge in the Downstream segment of $377 million ($280 million, after-tax) associated with the company’s decision to convert the Dartmouth refinery to a terminal included the write-down of refinery plant and equipment not included in the terminal conversion of $245 million, reported as part of depreciation and depletion expenses, and decommissioning, environmental and employee-related costs of $132 million, reported as part of production and manufacturing expenses. By the end of 2013, amounts incurred associated with decommissioning, environmental and employee-related costs totalled $40 million.

(c)	Capital and exploration expenditures (CAPEX) include exploration expenses, additions to property, plant, equipment and intangibles and additions to capital leases.

(d)	Includes property, plant and equipment under construction of $9,234 million (2012 - $13,846 million).

(e)

The majority of the goodwill has been assigned to the Downstream segment. Goodwill of $20 million was recognized in 2013 in the Upstream segment as a result of the Celtic acquisition (note 18). There have been no goodwill impairment losses or write-offs due to sales in the past three years. Fair value used in quantitative goodwill impairment tests was Level 3 (unobservable inputs).