President's Message

The world took a pivotal turn on January 20, 2025, with a new administration in
the United States. 
The energy shortage in Quebec and, more recently, the prospect of tariffs on
energy to the United States and their broader impacts revitalizes interest in
our discovery. To us, they highlight the importance of maintaining a pragmatic
and flexible approach while protecting our shareholders' legal rights.

We participated in drilling programs at both Kakwa joint ventures last year as
part of our strategy to build our assets outside Quebec. The Kakwa North wells
were tested in March. Over a one week period, the wells produced over 2,000 boe
per day net to Questerre(1). While encouraging, these rates are not necessarily
indicative of long-term performance or ultimate recovery. The wells should be
tied-in and on production by the end of April. We are being more selective in
our participation in future wells, particularly at Kakwa Central, to ensure we
maximize returns given current commodity prices. 

On the technical front, Red Leaf made meaningful progress. They completed a
pilot-scale lab test producing over one barrel of oil and proving the rock
mechanics inside the capsule. The engineering for a small-scale project in
Jordan was also finalized. However, the costs were higher than expected and Red
Leaf requires additional funding to conclude an agreement to advance this
opportunity. Going forward, we recently appointed a special committee of the Red
Leaf board to negotiate this agreement directly with the consortium in Jordan.

Highlights 

o	Submitted expert witness report on economic losses for legal claim in Quebec
o	Participated in six (2.25 net) wells at Kakwa including three (0.75 net) wells
on production and three (1.50 net) wells awaiting completions at year-end
o	Average daily production of 1,756 boe per day, net cash from operating
activities of $13.7 million and adjusted funds flow from operations of $14.6
million
o	Total proved and probable reserves declined by 10% to 23.8 MMboe with a before
tax NPV-10% of $195.3 million unchanged from last year

Quebec 

The 2023 loss of the Volkswagen battery plant by Quebec in part due to
insufficient power supply was, perhaps, an early warning of the impending energy
shortage in the province(2). 
In response, the Government introduced Bill 69 last year. Among other changes to
the regulatory regime, it included the requirement for integrated resource
management plans for electricity and natural gas every six years. The provincial
utility also announced plans to invest a minimum of $100 billion over the next
decade in hydro and wind power to increase capacity and meet future demand(3).

While these initiatives support their 2050 goal of carbon neutrality, concerns
about the costs to industrial and residential consumers are growing. The
Alliance for Quebec's Energy Competitiveness estimates under Bill 69 rates for
large industrial users could increase by 60% over ten years(4). Normand
Mousseau, director of the Trottier Energy Institute noted 'the Government has
capped residential rate increases to 3% per annum. While that can work for a few
years, it is untenable and can only lead to disturbances when rates will have to
catch up with reality(5). 

These concerns have been exacerbated by the impact of tariffs on competitiveness
and have led to the delay in implementing Bill 69 according to Quebec's energy
minister(6). The Bill is still under consideration by Quebec's National
Assembly. Though we expect final passage of the Bill by the end of spring, new
amendments and the political debate could delay its adoption. 

We remain committed to a political and business solution because local gas
production is the simplest and most proximal solution to Quebec's energy and
environmental goals. It can help with energy affordability, security, and
reliability. One example of the benefit of local gas is supplying the 550MW
natural gas fired power plant at Becancour that currently provides peaking power
during the winter. We estimate that a total of six wells per year over eight
years could supply the natural gas for this power plant for ten years. 

Perhaps more pressing is the threatened trade war with the United States. Local
gas could replace imports from the U.S., which currently supplies nearly half of
Quebec's natural gas(7).

We are equally committed to protecting our shareholders' rights and those of
impacted stakeholders. Our claim against the Government for the attempted
revocation of our licenses without just compensation is proceeding on the Court
schedule. Questioning of the Government's witnesses should commence this summer.
We anticipate a trial date could be set for next year. 

Operating and Financial 

Our production for the year averaged 1,756 boe per day, a 5% decrease from last
year. These volumes include the three (0.75 net) wells at Kakwa Central but
exclude the three (1.5 net) wells at Kakwa North that were completed during the
first quarter of 2025.

These slightly lower production volumes along with slightly lower realized
prices, offset by lower royalty and operating expenses contributed to cash flow
from operating activities of $13.7 million and adjusted funds flow from
operations of $14.6 million compared to $16.3 million and $15.9 million
respectively last year. Although we are advancing a pilot project with Red Leaf,
we impaired the carrying value of our Jordan assets as our exclusive rights are
set to expire this May if we do not have a new agreement before then. We are
optimistic these rights could be extended if the pilot project proceeds.

We financed our capital expenditures of $20.6 million through a combination of
our net cash from operating activities and cash on hand. At year-end, we held
$31.8 million in cash and cash equivalents and an unutilized credit facility of
$16 million. Our committed capital expenditures for 2025 are estimated at $14.4
million and largely reflect the completion and tie-in costs for the Kakwa North
wells. We intend to fund these costs through our existing resources.

Outlook

Our plans for projects to lower emissions including our carbon storage pilot in
Quebec and, more broadly, our hub concept remain contingent on government
funding. We recognize that these, and the timeline for net-zero targets globally
may be impacted by the recent changes enacted by the U.S. Government. These
include suspending funding under the Inflation Reduction Act and their
withdrawal from the Paris climate agreement.

As energy security and independence return as a priority, we hope the Government
of Quebec recognizes the role our discovery can play. As Canada seeks to
diversify its energy markets, our discovery can also provide the baseload supply
of natural gas for possible LNG exports from Quebec. In the interim, we are
following the legal process for our claim. 
 
Michael Binnion 
President and Chief Executive Officer


1.	Consisting of 4,970 MMcf/d of natural gas and 1,298 bbls/d of condensate and
estimated natural gas liquids.
2.	https://ici.radio-canada.ca/nouvelle/1963459/investissement-vw-canada-usine-b
atteries-saint-thomas-fitzgibbon-entrevue
3.	https://www.hydroquebec.com/data/a-propos/pdf/action-plan-2035.pdf
4.	https://www.theglobeandmail.com/business/article-industry-group-demands-quebe
c-reverse-course-on-planned-electricity/
5.	https://www.theglobeandmail.com/business/commentary/article-hydro-quebecs-amb
itious-plans-will-come-at-great-cost-to-consumers-and/
6.	https://www.montrealgazette.com/news/provincial-news/article567140.html
7.	https://www.canadianenergycentre.ca/big-vulnerability-how-ontario-and-quebec-
became-reliant-on-u-s-oil-and-gas/