President's Message

We continued to invest in our conventional assets in Western Canada. This is
consistent with our goal of building a base for our business beyond our Utica
discovery. At Antler, we drilled an oil well and expanded our pilot pressure
support program. We also participated in drilling at Kakwa Central. New wells at
Kakwa North could spud late this fall or early next winter when gas prices
improve. 

Two years ago, the Government of Quebec introduced Bill 21 to revoke our
licences and effectively nationalize our discovery. Since then, preserving our
legal rights has been our top priority. A recent pre-trial ruling concurred that
the fundamental legal issues raised in our claim must be heard at trial. The
Justice suspended key elements of Bill 21 until the proceedings are complete.
Our goal remains to work collaboratively with the Government to find a political
and business solution. We are hopeful that the impending electricity crisis in
Quebec provides an opportunity for dialogue on energy security. 

As the process evolves in Quebec, we are applying the expertise developed here
on zero-emissions hubs to our other projects. Through our interest in Red Leaf,
we helped design a similar hub concept in the producing Uintah Basin in Utah
where they hold the rights for carbon storage. They are assessing how their
patented technology, that incorporates carbon capture, can be applied to heat
and power generation. Integrating carbon capture in industrial processes is
emerging as a more efficient carbon capture technique. In Canada, the proposed
Clean Electricity Regulations require that any new power generation from
non-renewable sources have abated emissions. 
During the year, they also completed the engineering of a small-scale commercial
project for their technology to be built in the Kingdom of Jordan.

St. Lawrence Lowlands, Quebec 

Signs of the electricity shortage in Quebec appeared as early as the fall of
2021 when the provincial utility's supply plan reported that the 'era of
surpluses is over' and, it launched a tender to fill the gap expected in 2027.
Two years later, it noted the need for more than 100 terawatt hours, or more
than half its annual generating capacity, to reach the province's goal of carbon
neutrality by 2050. While the Government's solution relies on additional
hydroelectric dams and wind farms in the long term and energy conservation in
the near term, it is far from clear this will solve the energy shortage. We
believe our Clean Gas project could be instrumental in closing this deficit with
greater security, lower global emissions and lower costs. 

As the Government and other industries seek new solutions to reduce emissions
and build the economy, leaving our gas in the ground for the last decade is a
lost opportunity on both fronts.
A 2010 study by the local gas distribution company, GazMetro, now known as
Energir, estimated that, on a business-as-usual basis, replacing imported gas
with local gas would reduce emissions by 440,000 tonnes of carbon dioxide
equivalent annually. Using our Clean Gas, which reduces the emissions by 75%
over a business as usual approach, would have had an even larger impact. 

A 2018 study for the Quebec Oil & Gas Association, estimated that between 2019
and 2024, our project would have supported nearly 4,000 jobs, created over $350
million in GDP and increased government revenue by $160 million annually. Over
the next ten years, the report estimates these benefits grow to nearly 7,000
jobs, $750 million in GDP and increase government revenue by $400 million
annually. This one decision alone could have made a dramatic improvement in
climate goals and improved affordability for everyday Quebecers.

In conclusion, with 20/20 hindsight the moratorium on natural gas increased
Canadian GHG emissions by over 5.7 megatonnes while reducing government revenue
by over $2 billion.

As a first step towards demonstrating our zero-emissions concept, we responded
to the Government's calls for carbon and hydrogen storage pilot projects under
Bill 21. We recently submitted a comprehensive application to assess the carbon
storage potential in Quebec and test new technology to produce hydrogen and
power with zero-emissions. At an estimated cost of over $100 million, we are
seeking Provincial and Federal government funding to move this forward.

Red Leaf Resources 

We are also helping Red Leaf design and seek government funding for a similar
but smaller scale carbon storage test in Utah. Proving up the sequestration
potential of their lands where they hold the rights for storage will be
essential for the zero-emissions park. The concept is to provide, as a utility,
the service of managing emissions from any industrial tenants at the park as
well as the permitted wax processing facility. This service would include the
pipelines and compression to either sequester these emissions underground or
recycle the carbon dioxide using innovative technologies. 

Red Leaf is also assessing how their patented technology can produce heat and
power for the park. Combusting gaseous fuel with carbon dioxide produces a
stream of pure carbon dioxide and water, dramatically reducing the costs of
capturing carbon dioxide. With limited takeaway capacity for produced natural
gas in the basin, this process could use this excess gas as fuel and improve the
air quality in the basin by reducing emissions.

The wax processing facility is a key element of the industrial park. It is a
large-scale project with a capital cost around US$600 million. The lack of
takeaway capacity for the highly waxy crude oil creates a market opportunity for
the facility. We continue to work with Red Leaf on the pre-requisites for
funding this project including securing supply contracts and off-take
arrangements.

Although it has taken longer than we expected, Red Leaf recently completed the
preliminary engineering for a small-scale commercial project. Discussions are
ongoing with a group of companies in the Kingdom of Jordan to construct and
operate the facility in country. We are reviewing the design with the goal of
establishing a project that can be operated at material scale on a continuous
basis at a reasonable cost. 

Operating & Financial 

With a full year of production from our working interest at Kakwa North our
production volumes increased by just under 10% and offset the fewer wells that
came on at Kakwa Central this year. Daily production averaged 1,848 boe per day
compared to 1,714 boe per day last year.

A 25% drop in realized prices, including a 50% drop in natural gas prices
contributed to adjusted funds flow from operations of $15.9 million compared to
$26.7 million last year. Under IFRS, the materially lower future gas prices and
a nominal reduction in our reserves resulted in an impairment in the book value
of our assets of $23 million. 

This resulted in a loss of $23.7 million this year compared to net income of
$14.1 million last year. Net of capital spending of $10.1 million, we increased
our cash position by just over $5 million during the year. 
Our approved capital program for this year is nearly $12 million and largely
represents the planned drilling at 
Kakwa Central. 

Outlook

We have built our working capital surplus to just over $30 million of
unrestricted cash and have an undrawn credit facility of $16 million. This
should fund the Kakwa North development and provide additional liquidity should
market conditions change. In Quebec, the next major milestone is the completion
of discoveries prior to setting a date for the hearing on the merits of our
case. Subject to the court schedule, this could be held next spring. 

We are also taking every opportunity to co-operate with the Government on a
project to test carbon storage, that, on any objective basis, is in our mutual
interest. As we noted last year, these discussions do not have any clear
milestones or timelines, which makes it challenging for our shareholders to
assess our progress. Nevertheless, we are confident that this collaborative
approach while protecting our rights is the best strategy to see the value of
our discovery.
 
Michael Binnion 
President and Chief Executive Officer