ANNUAL REPORT 2011 - Connacher Oil and Gas

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AR 2011 PG 10 Pilot results from July to year end 2011 exceeded expectations. Average production increases for the two wells was 29 percent with an average decrease in SORs of 17 percent. Moreover, solvent recovery in the field during steady-state solvent injection was greater than 85 percent. Pilot testing on additional wells will be required in 2012 to confirm repeatable results at which point full implementation of SAGD+ at Algar will be considered. Capital will be required for facility modifications in order to capture and recycle the recovered solvent. SAGD+ may be a very straightforward and rapid method of increasing bitumen production and optimizing steam allocation. Quigley Great Divide Pod One Thornbury Algar The refinery in Great Falls, Montana had strong results in 2011. Refinery throughput averaged 9,890 bbl/d. While prices for refined products in MRC’s market area remained healthy throughout the year. The margins or “crack spread” for key products produced by MRC (gasoline, diesel, jet fuel and asphalt) also remained strong during the year. Inventory management of asphalt was a focus in 2011 and, with good weather throughout most of the paving season, asphalt sales were maximized. MRC actively sells asphalt into the Canadian market as well as its local market in Montana. Excess naphtha is sold to Connacher’s bitumen operations for use as diluent. The refinery provides a physical hedge for the oil sands operations as it purchases Canadian heavy sour crude for processing into higher value products. When differentials (the difference between light oil and heavy oil prices) widen, the result is lower wellhead prices for bitumen. Fortunately, the refinery benefits as its crude feedstock becomes cheaper, providing better margins. 63 Bitumen accumulation In 2011, bitumen market access in North America and farther afield became a major challenge producers, pipeline companies, governments and other stakeholders including environmental groups. Ruptures, spills and outages in North American pipeline infrastructure throughout the year caused disruptions in the Alberta oil market, restricting access to market for producers. Public protests regarding new pipeline
AR 2011 PG 11 proposals helped to politicize and delay approvals for needed takeaway capacity. As a result, crude oil from Canada and many new rapidly expanding American oilfields faced a discount in market price relative to the benchmark West Texas Intermediate (“WTI”) oil price. WTI was, in turn, discounted relative to world oil prices, more specifically by the benchmark Brent oil price. As a risk mitigant to these issues, starting in early 2011, Connacher began moving dilbit by rail to markets that wanted to purchase and process bitumen but weren’t able to access Canadian heavy crude by pipeline. These markets are located both on the West coast and the Gulf coast. Prices received were as good as or better than local Canadian markets-net of transportation changes. As a result of these successful efforts to pioneer “dilbit by rail” Connacher has committed to expanding its leased rail car fleet and continues to explore new market opportunities. Using rail cars to transport crude oil is a strategy that many companies, particularly producers in North Dakota, are also pursuing. Asset sales continued throughout the year and added to cash balances. Battrum, Marten Creek, Halfway Creek, Latornell and minor undeveloped land were sold. Connacher’s strategy was to dispose of properties with limited upside but significant new capital or maintenance Connacher pioneered “dilbit by rail” to the Gulf Coast and West Coast capital expenditures, allowing the company to focus on projects with better potential. In addition, after significant review during 2010, a decision to sell natural gas properties was also advanced. Given the short to medium term direction for natural gas pricing (subsequently born out), it was decided that producing natural gas as a physical hedge for natural gas consumption in the production of steam in the oil sands was not necessary at present. As a result several gas properties were sold including the Marten Creek property. Overall conventional production declined over 50 percent, primarily as a result of the asset rationalization program. Two new light oil resource plays in central Alberta were tested in 2011. Although initial results were disappointing and production did not meet economic hurdles, there is significant oil in place at Twining and Penhold. Technical and geological review would suggest that the completion and frac techniques employed for these wells can be improved upon and optimized. However, the company is not prepared to invest more capital in these plays at this time. Joint venture processes to obtain a partner commenced in the oil sands and the light oil resources plays but neither process was satisfactorily resolved by year end. T 83 T 82 T 81 RG13 RG12 RG11W4 “Connacher has identified multiple SAGD horizontal well pair locations as part of the Great Divide expansion project.” EIA Well Pairs Existing Well Pairs Net SAGD Pay
Page 1 and 2: ANNUAL REPORT 2011 WELL POSITIONED
Page 3 and 4: AR 2011 PG 1 02 HIGHLIGHTS 05 LETTE
Page 5 and 6: AR 2011 PG 3 Years ended December 3
Page 7 and 8: AR 2011 PG 5 Volatility in the oil
Page 9 and 10: AR 2011 PG 7 “Thanks to our liqui
Page 11: AR 2011 PG 9 Review of Operations I
Page 15 and 16: AR 2011 PG 13 reservoir description
Page 17 and 18: AR 2011 PG 15 Connacher Oil and Gas
Page 19 and 20: AR 2011 PG 17 the movement of wildl
Page 21 and 22: AR 2011 PG 19 MANAGEMENT’S DISCUS
Page 23 and 24: AR 2011 PG 21 reduced interest rate
Page 25 and 26: AR 2011 PG 23 Connacher’s bitumen
Page 27 and 28: AR 2011 PG 25 OPERATING COSTS (1) T
Page 29 and 30: AR 2011 PG 27 SALES PRODUCT MIX (%)
Page 31 and 32: AR 2011 PG 29 Depletion expense is
Page 33 and 34: AR 2011 PG 31 NEW NOTES We issued U
Page 35 and 36: AR 2011 PG 33 Compensation of key m
Page 37 and 38: AR 2011 PG 35 ACCOUNTING POLICIES A
Page 39 and 40: AR 2011 PG 37 The company classifie
Page 41 and 42: AR 2011 PG 39 Management is respons
Page 43 and 44: AR 2011 PG 41 The production outloo
Page 45 and 46: AR 2011 PG 43 QUARTERLY HIGHLIGHTS
Page 47 and 48: AR 2011 PG 45 Independent Auditor
Page 49 and 50: AR 2011 PG 47 Consolidated Statemen
Page 51 and 52: AR 2011 PG 49 Consolidated Statemen
Page 53 and 54: AR 2011 PG 51 Impairment of assets
Page 55 and 56: AR 2011 PG 53 Goodwill is allocated
Page 57 and 58: AR 2011 PG 55 3.11 Leases Agreement
Page 59 and 60: AR 2011 PG 57 IAS 1 Presentation of
Page 61 and 62: AR 2011 PG 59 Reconciliation of seg
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AR 2011 PG 61 8.1 Petroleum and nat
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AR 2011 PG 63 10. PROPERTY, Plant a
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AR 2011 PG 65 Accounts receivable a
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AR 2011 PG 67 December 31, 2010 - C
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AR 2011 PG 69 13.3 Refinancing of l
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AR 2011 PG 71 Changes in present va
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AR 2011 PG 73 The provision for inc
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AR 2011 PG 75 The following table s
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AR 2011 PG 77 19. FINANCE Charges F
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AR 2011 PG 79 Compensation of key m
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AR 2011 PG 81 Estimates Hindsight w
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AR 2011 PG 83 Reconciliation of Con
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AR 2011 PG 85 27.3 Asset and Liabil
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AR 2011 PG 87 The following table s
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CORPORATE INFORMATION Board of Dire
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