President's Message

During the quarter, we applied for a pilot project under Bill 21 in Quebec. In
addition to a comprehensive test of the carbon storage potential on our lands,
we propose to pilot zero-emissions hydrogen production. Following the
Government's recent investment in the carbon capture and storage space, we are
optimistic this could be an integral part of their strategy to meeting emissions
reduction targets.

On the legal front, a pre-trial ruling on our legal claim suspended key
provisions of Bill 21 pending a hearing on the merits of our case. The
Government has since been granted leave to appeal the ruling.

Carbon capture and storage ("CCS") is also important to our plans to build
assets outside Quebec. We are exploring opportunities to develop zero-emissions
projects using carbon storage with First Nations in Alberta. 

Earlier this year at a presentation to the Montreal Chamber of Commerce, the
Minister of Economy, Innovation and Energy of Quebec noted that for both small
businesses and large companies there will be energy shortages for probably about
a decade. Though the Minister noted that many new projects are prepared to wait,
in the interim Quebec would need to be frugal in how they consume electricity.
In addition to the electricity shortage, the natural gas market is shifting to a
more expensive product mix. The provincial gas distribution company is seeking
to replace conventional natural gas with renewable natural gas at a cost of at
least twice the price.

The Government is considering a nearly $200 billion investment by the provincial
utility over the next decade to build out additional hydro and offshore wind
capacity. We hope that they see our Clean Gas as an answer that is both more
timely and environmentally sustainable as a part of Quebec's energy mix.
Moreover, instead of requiring investment, it will contribute to provincial
revenue, increase GDP, and create jobs.

The electricity shortages in Quebec continue to grow with demand for electricity
reaching a new high last year of over 43 gigawatts, exceeding their installed
capacity of 38 gigawatts. This supply demand imbalance has a knock-on effect to
their plans for reducing emissions as electrification figures in plans to meet
these goals. It is here too, that our CCS pilot could make a difference.

Our pilot project will test the carbon storage potential of a deep formation in
the province. We have designed it to advance to commercial development with the
possibility for a carbon dioxide pipeline connecting to the industrial park at
Becancour. The second part of our pilot to demonstrate a small-scale
zero-emissions hydrogen process could help both reduce emissions and provide
clean energy.

As we work with the Government on our application and the related funding for
the project, we are proceeding with protecting our legal rights after Bill 21
was enacted. The questioning of Questerre and other license holders was
completed last month and later this summer, we will complete the questioning of
the Government representatives. The next step will be setting a date for the
hearing next year on the merits of our case.

As we work with the Government on our application and the related funding for
the project, we are proceeding with protecting our legal rights after Bill 21
was enacted. The questioning of Questerre and other license holders was
completed last month and later this summer, we will complete the questioning of
the Government representatives. The next step will be setting a date for the
hearing next year on the merits of our case.

The importance of emission reductions has also led Red Leaf to look at broader
applications of their technology. At its core, the technology combines
combustion in an oxygen-rich environment with carbon capture to generate heat
and power at relatively low pressure. We are helping them assess how this stacks
up against similar technologies as well as its costs relative to capture carbon
dioxide post combustion. It is still early days though the technology, if
sufficiently novel, could be a game-changer for industrial heat generation. 

Operating & Financial

At Kakwa Central, the last of three wells spud this month and, subject to
completions and tie-ins, will likely be on stream for the fourth quarter. Until
then, we expect our production volumes to decline naturally. Reflecting this
decline, our production volumes for the quarter decreased by under 10% over the
same period last year and averaged approximately 1,700 boe/d.

Lower commodity prices and production contributed to lower revenue and adjusted
funds flow from operations in the period. We generated $3 million in adjusted
funds flow from operations compared to $4.3 million last year. Net of capital
investment of $2.6 million, we nominally increased our working capital surplus
of mainly cash to just over $30 million. 

Outlook

Originally developed for Quebec, our zero-emissions project design that includes
CCS could be applied elsewhere in North America if decarbonization remains a
priority. Our newly appointed Director, Jauvonne Kitto, will help these efforts
with First Nations and the associated government funding opportunities. Although
this is a new business for us it leverages our expertise with both subsurface
and gas processing and compression facilities. Our main focus remains to unlock
our large, discovered resources.

This is particularly true in Quebec where we identified a prospective formation
for storage over three years ago. Our pitch to the Government is that
establishing the carbon storage potential is valuable to them regardless of the
outcome of our legal claim. On this basis, we hope they approve our application
and provide the necessary funding. Demonstrating how we can reduce emissions
from gas consumption will hopefully open the door to natural gas as a transition
fuel in Quebec's energy policy.

Michael Binnion, President and Chief Executive Officer