President's Message

Although Bill 21 was enacted during the quarter, the Quebec election is now
over. There could be an opportunity for a less political approach to energy
security by the Quebec Government. The growing demand for clean energy in North
America, including Quebec, and, more urgently in Europe only highlights the
value of our project. Concurrently, to protect our legal rights we are advancing
the claim for breach of contract and unjust enrichment. A Superior Court judge
was appointed last month to separately manage all the claims related to Bill 21.
A hearing date for our claim should be set shortly. We remain open to a
political and business solution.

Effective the end of the quarter, we converted our royalty interest in the four
original farm-in wells at Kakwa North into a 50% working interest. This should
add approximately 500 boe/d over the remainder of this year. Based on our
discussions with the operator, drilling on a new three-well pad is planned for
late next year.

Highlights
o	Questerre converts Kakwa North royalty interest to working interest adding 500
boe/d for remainder of the year
o	Government of Quebec enacts Bill 21 and revokes exploration licenses
o	Average daily production of 1,629 boe/d and adjusted funds flow from
operations of $5.2 million

As the European Union is preparing for widespread blackouts in its member states
this winter, the current energy crisis is one of several places where our Quebec
Utica project could help make a difference. 

During the German Chancellor's visit to Canada to discuss energy supplies this
August, the Prime Minister commented about the difficulties of LNG exports from
Canada's East Coast. In our press release issued during the visit, we reiterated
the proximity of our discovery to a LNG export facility with a successful
environmental review. It would have shorter delivery times to the proposed
offshore terminals near Hamburg, Germany than any of the LNG export facilities
in the United States. To mitigate the financial and logistical challenges of
greenfield onshore terminals, we have been assessing floating LNG vessels. 

In the long term, demand and the infrastructure for hydrogen as a clean fuel is
likely to grow. Our Clean Gas can be used to produce zero-emissions or blue
hydrogen at large scale. It will compare favorably on an environmental basis
with green hydrogen, when considering ecological indicators as well as
emissions. 
In the medium term, there are growing concerns about future electricity
shortages in Canada. A recent report by the Polytechnique Montreal's Institut de
l'energie Trottier notes that many provinces will be incapable of meeting their
electricity needs. The Quebec premier recently acknowledged that the province
could indeed be short on electricity. With a secure supply of local natural gas,
our Clean Gas could help Quebec free up critical electricity.

Although the Government of Quebec perhaps did not prioritize these strategic
benefits, they nonetheless recognized the value. In their 2009-2010 budget
released shortly after we made the discovery, the Government estimated the
production value at $45 billion using $5/MMbtu gas prices on an undiscounted
basis. Of interest, the budget is still available online and the reference is
found on pages F74 and F75. 

Our legal claim is that by enacting Bill 21 and revoking our exploration
licenses, with no meaningful compensation, the province has been 'unjustly
enriched' by the value of our discovery. As we have previously noted, the
discovery once made, cannot be undiscovered and it has tremendous value to
whoever owns it. Our expert witness is working to quantify the value of this
discovery and our resulting damages. This should be finalized early in the new
year and submitted with our revised pleadings to the Superior Court. 

With our investee company, Red Leaf Resources Inc., we are evaluating their
assets in the oil-producing Uinta Basin in the state of Utah. These include over
7,000 acres of surface rights in the basin and a permit for a 40,000 bbl/d
upgrader. A study we commissioned for the upgrader suggests the original
business case still exists. It is a niche opportunity to capitalize on the
locally produced crude as a feedstock for high value lubricants and supply motor
fuels to a regional market. The current shortage of diesel in North America is
supportive of this project. We are expanding this study and intend to move the
project forward in the new year. 

Operating & Financial

Production volumes in the third quarter increased to 1,629 boe/d over 1,363
boe/d last year with the three (0.75 net) new Kakwa wells brought on stream in
May. By comparison, production in the prior quarter was 1,909 boe/d reflecting
flush production from these wells. Production in the quarter was also impacted
by an unexpected compressor outage at Kakwa. 

Although realized prices declined by 20% over the second quarter, they averaged
over $77/boe for the quarter and $87/boe year to date. Operating costs were
incrementally $1.5 million higher than last year reflecting a successful
workover program at Antler and escalating fuel and water handling costs at
Kakwa. We generated $5.2 million in adjusted funds flow from operations for the
quarter and $21.7 million year to date. The increased cash flow from operations
funded our capital investment in these wells and translated to a working capital
surplus of $14.4 million at the end of the quarter. 

Outlook

Assuming commodity prices remain relatively stable, the incremental cash flow
from Kakwa North production will improve our working capital position. Along
with our undrawn credit facility, we should be well positioned to fund a future
50/50 drilling program at Kakwa North later next year.

We appreciate that our shareholders' top concern is the status of our legal
claim. While the timing and eventual outcome is uncertain, we remain committed
to realizing, either through production or compensation, the value of our
discovery.
 
Michael Binnion
President and Chief Executive Officer

(1)	Refer to Non-GAAP Measures disclosures included in the Management's
Discussion and Analysis