Connacher Oil and Gas Provides Operational Update

Source: 10/26/2010, Location: North America

Connacher Oil and Gas Limited announced that combined bitumen production from its Pod One and Algar steam assisted gravity drainage (“SAGD”) operations exceeded 13,200 bbl/d during the seven days ended October 22, 2010. This represents a 14 percent increase in output since our last report on October 4, 2010.

Algar and Pod One are located on the company’s Great Divide oil sands lease block, approximately 80 km southeast of Fort McMurray, Alberta. Production levels during ramp up can fluctuate on a daily basis, as produced emulsions in the early stages of a ramp up are variable, as new equipment at the surface is activated and as volumes escalate towards design capacity. At Algar, bitumen production averaged over 6,000 bbl/d for the seven days ended October 22, 2010, an increase of 20 percent during the past three weeks. To date, 15 of the project’s 17 SAGD well pairs have been converted to full SAGD production, with one well remaining on circulation. The seventeenth well pair has not yet been steamed.

The company recently completed brief workovers on selected well pairs at Algar to optimize steam injection and production from the middle of the well bores, in addition to the heel and toe of the well bores, a design innovation relative to Pod One. During this short time, our ramp up at Algar was temporarily flattened. Ramp up of total steam and fluid rates is now continuing as steam injection has been improved and as the steam chambers develop.

Readers should note that Algar production, related costs and revenues will be capitalized and will not be recorded in the company's operating and financial results until such time as a declaration of commerciality occurs. At Pod One, bitumen production averaged over 7,200 bbl/d for the seven days ended October 22, 2010. This represents an increase of eight percent over both September 2010 production and also over the average daily Pod One production during the three months ended September 30, 2010. The company recently added an additional free water knockout vessel at Pod One. This is anticipated to further improve the reliability of the emulsion treating process at Pod One and more closely align it to the treating system being used at Algar.

Connacher continues to advance technical innovation in its SAGD operations. The company received regulatory approval this month for the co-injection of methane (with steam) on the five northern well pairs at Pod One. It is expected this process will reduce steam:oil ratios (SORs) while maintaining or improving production levels from these well pairs. Steam could then be diverted to other well pairs, with lower SORs, to increase overall production. Connacher’s co-injection project is one of the first commercial approvals of its kind in the oil sands and its implementation aligns with Connacher’s strategy of continuously pursuing methods of improving the SAGD process.

When combined with Connacher’s current conventional production of approximately 2,260 boe/d, Connacher’s total production is now approximately 15,500 boe/d. Readers are cautioned that all references to barrels of oil equivalent (boe) are calculated on the basis of 6Mcf:1 bbl. This conversion is based on an energy equivalency method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Boes may be misleading, particularly if used in isolation.

Operations at the company’s 9,500 bbl/d heavy oil refinery located in Great Falls, Montana continue to be strong. Crude charged during the month of September averaged slightly in excess of 10,200 bbl/d, for a utilization rate of 108 percent. Weather-related paving conditions for asphalt have seen an improvement thus far in October 2010 over September 2010, facilitating current sales of asphalt at average prices in excess of US$90/bbl. Diesel and jet fuel prices continue to be robust.

The refinery’s results are anticipated to evidence the benefit of the temporary widening of heavy oil differentials related to the recent disruption in Enbridge Inc.’s crude pipeline delivery system. We anticipate this will partially offset the dampening effect of wider heavy oil differentials on the company’s upstream bitumen operations and related results during September and into October 2010. More normal pricing conditions are already evident for heavy oil.

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