During 2004, our management and professional staff have worked very hard to deliver shareholders a growth strategy based on our continued development of Western Canadian cash flow and production focusing on our Drumheller core producing area and several high impact opportunities we have in Western Canada, not to mention our recent success with our Coal Bed Methane ("CBM") production. This has been combined with "High Impact" opportunities Offshore Nova Scotia where we now hold the largest exploration acreage position of any public company and our "World-Class" holdings offshore Trinidad where a minimum of 5 wells are planned for drilling during the next 12 to 36 months. We are well positioned for sustained growth through 2005 and beyond. At the same time, we have applied, and continue to apply, sound business principles in prudently managing our balance sheet in order to be well positioned to pursue our exciting offshore Nova Scotia and Trinidad Projects, which provide "home run" opportunities for shareholders, as we continue to grow our core business in Western Canada.
Highlights of 2004 include:
- Revenues of $38.7 million, up 22 % compared to 2003.
- Cash flow from operations of $20.2 million, up 52% compared to 2003.
- Recorded average production of 2,565 boe/d, up 12% compared to 2003.
- Proved Reserves of 4,358 mboe, up 5 % compared to 2003.
- Proved Reserves valuation up $13.4 million.
- Proved plus Probable Reserves of 6,570 mboe, up 7% compared to 2003.
- Proved plus Probable Reserves valuation up $19.2 million.
- Completed drilling our second Offshore Nova Scotia exploration well, Canadian Superior's "Mariner" I-85 well, in March 2004.
- Acquired El Paso's Offshore Nova Scotia exploration and production assets in September 2004.
- In May 2004, successfully awarded, our "Intrepid" Block, Block 5© by the Trinidad and Tobago Ministry of Energy and Energy Industries in the historic 2003/2004 Competitive Bid Round.
- In addition, during the year Canadian Superior was actively involved and dedicated to community development; education, training and oil and gas research and development in Nova Scotia; cancer research in Alberta; and major sponsorship of various projects including the Western Canadian 4H on Parade, one of the largest farm shows in Canada, and the Calgary Stampede. We are also pleased to announce the recent establishment of the Canadian Superior Energy Canada - Trinidad and Tobago Charitable Foundation to undertake various additional programs including the promotion of educational training, as well as research and development activities, for students enrolled in undergraduate educational studies in Trinidad and Tobago.
TRINIDAD AND TOBAGO
In 2004, we continued to make steady progress in preparing for exploration and development on our offshore Trinidad and Tobago holdings. Trinidad is one of the most coveted oil and gas basins in the world today and we were honored to be awarded the right to explore on Block 5© in the Government of Trinidad and Tobago Ministry of Energy and Energy Industries' 2003/2004 Offshore Competitive Bid Round in May 2004. We have named this our "Intrepid" Block. "Intrepid" was the code name of a famous Canadian spy during World War II, and some historians have argued he was one of the most important factors in the Allies winning the war. The famous Canadian spy's name was William Stephenson. The name "Intrepid" in Webster's Dictionary is defined as "outstandingly courageous" or "fearless". We feel the name is very appropriate given the challenges we face daily in the oil and gas business, and given the challenges we have successfully faced and overcome during the past year. The "Intrepid" Block 5© covers 80,041 gross acres and has significant natural gas exploration and development potential offsetting the large Dolphin gas field operated by British Gas. We have recently received the detailed 3D seismic data over the "Intrepid" Block from the Government of Trinidad and Tobago and are interpreting that data to confirm several drilling locations. Based on detailed seismic, a number of large structural gas prospects have been identified on the "Intrepid" Block with multi-tcf potential. We have signed the Production Sharing Contract, and as per Trinidad and Tobago Government protocol, it is to be executed by the Prime Minister in due course. In anticipation of finalizing the Production Sharing Contract, we are working hard on the front-end activities required to prepare for drilling on "Intrepid". Accordingly, we are excited about the "Intrepid" Block, and if all goes as planned, we expect to be drilling the first well of a multi-well drilling program planned for this project, subject to Government and regulatory approval, later in 2005 on this block, off the east coast of Trinidad.
Also in 2004, in Trinidad and Tobago, we continued to lay the groundwork for commencement of the first phase of operations on our Mayaro/Guayaguayare (M/G) "Tradewinds" project, including the reprocessing of existing seismic data we have in hand and planning for the commencement of 3D seismic shooting and acquisition operations in 2005/2006, to be followed by drilling operations thereafter. Our "Tradewinds" project is an excellent oil project opportunity and we are very pleased to have this joint venture with the national oil company, the Petroleum Company of Trinidad and Tobago Limited ("Petrotrin"). This joint venture encompasses two near-shore Blocks (55,000 gross acres) off the east coast of Trinidad where we have the potential to establish significant oil reserves in the heart of a known producing hydrocarbons-bearing structural trend.
We see offshore Trinidad as a great exploration and development fit for Canadian Superior. Offshore Trinidad is a "World-Class" basin with multiple large exploration and development opportunities as evidenced by recent drilling successes in the Columbus Basin, as well as having well developed, and developing LNG facilities and capacity, and ready access to international markets. 80% of North America's LNG is supplied from Trinidad and some of the largest producing wells in the world are located in Trinidad close to our acreage. For example, 15 of the top 25 British Petroleum (BP) producing wells world-wide are located in Trinidad. When you align this with the stable fiscal and legal regime that is present in Trinidad and Tobago, you have a fair win-win situation for all those involved; and, the Government and people are very knowledgeable and supportive of the oil and gas industry and aggressive explorers like Canadian Superior.
As a result of the "Intrepid" Block 5© acquisition and our Mayaro/Guayaguayare (M/G) "Tradewinds" Joint Venture, Canadian Superior plans to drill at least five new offshore wells over the next 12 to 36 months off the east coast of Trinidad.
OFFSHORE NOVA SCOTIA, CANADA
Also, as will be highlighted further in this report, 2004 has been a busy year for us off the East Coast of Canada. We and our former joint venture partner El Paso Oil and Gas Canada, Inc. drilled the "Mariner" I- 85 exploration well. In the third Quarter, we released the results of an independent petrophysical evaluation of the "Mariner" I-85 exploration well completed by Al Lye & Associates, Inc. of Calgary, Alberta to analyze the well for hydrocarbon potential. Mr. Lye is a well known recognized expert in the field of well log analysis, evaluation and interpretation. In his independent assessment, 24.6 m (80.7 feet) of Net Pay was assigned to the "Mariner" I-85 well from his well log analysis. Further, in the report, it is stated that 4 (four) zones warranted flow testing in the well "based on the gas indications, calculated saturation and porosity values, and the pressure potential at the depth of these formations". Reserve Estimates were also addressed in the report. Although the "Mariner" I-85 well was not flow tested, the report states, "Potential reserve estimations can be generated based on well log data, and maps based on seismic interpretation" and has resulted in potential recoverable gas reserve estimates between 211 bcf and 632 bcf on this one "Mariner" structure on which the "Mariner" I-85 well was drilled and evaluated.
Further drilling is planned by Canadian Superior Offshore Nova Scotia off the East Coast of Canada. To better position the Corporation in this regard, in the third quarter of 2004, Canadian Superior acquired El Paso Corporation's ("El Paso") offshore Nova Scotia assets as part of El Paso's overall oil and gas exploration and production exit from Canada. The acquisition included El Paso's interests in the "Marquis" Blocks (EL 2401 & 2402), and in the "Mariner" Block (EL 2409) offshore Nova Scotia and in the "Mariner" I-85 well, all of El Paso's seismic data, all shared geophysical, geotechnical and environmental data, all "Marquis" L-35/L-35A well data, all "Mariner" I-85 well data, all related inventory and extensive tax pools.
This acquisition now provides us with the flexibility to move forward unimpeded in Nova Scotia.
Accordingly, during the fourth quarter of 2004, and into 2005, offshore Nova Scotia, we are actively preparing for further drilling on "Mariner". Based on front end geological and geophysical analysis completed over the past several months, two new prospective locations have been identified for drilling on our "Mariner" block. Drilling engineering, procurement and permitting activities to progress this additional drilling on our "Mariner" Project are well underway. The two new proposed locations can be seen on our maps in this report. Wellsite survey work was completed at these sites, as was the securing of the most critical long lead item for the well by purchasing the 10 3/4 inch and 9 7/8 inch casing, for the next "Mariner" well. We are preparing to undertake further drilling, upon finalizing joint venture partners and rig availability is fully assessed and integrated into the overall drilling schedule.
OTHER EAST COAST CANADA, OFFSHORE NOVA SCOTIA HOLDINGS
Canadian Superior has emerged as the public company with the largest exploration acreage holdings offshore Nova Scotia with 100% interests in six exploration licences totaling 1,293,946 acres; and, we are one of the few operators involved in the three main play types in the basin.
In addition to Canadian Superior's "Mariner" exploration project targeting Cretaceous and Jurassic gas bearing sands, we continue to work on our Abenaki Reef "Marquis" project and our "Mayflower" deepwater project. Our "Marquis Project" lands encompass two exploration licences with approximately 112,000 contiguous acres located in shallow water depths close to the existing Sable Offshore Energy Project producing infrastructure. The "Marquis Project" lands are located approximately 20 kilometres (12 miles) northwest of Sable Island and approximately 25 kilometres (16 miles) northeast of EnCana's Deep Panuke Abenaki reef natural gas discovery. During 2002 the first "Marquis" exploration well, L-35/L-35A, was drilled and confirmed the presence of a porous Abenaki reef reservoir in three separate zones within the Abenaki reef complex. Additional seismic data to provide detailed geophysical data that can now be tied to measured well bore data obtained through the drilling of the "Marquis" L-35/L-35A exploration well will be obtained in due course and should allow us to identify optimal future drilling locations on the Abenaki Reef up-dip from our 2002 "Marquis" L-35/L-35A well.
Canadian Superior's "Mariner", "Marauder", "Marconi" and "Marquis" Prospects comprise approximately 584,000 acres and are located in close proximity to Sable Island and the producing and non-producing ExxonMobil fields in the area.
Canadian Superior's "Mayflower" deepwater project exploration licence covers approximately 710,000 acres and is located approximately 460 kilometres (285 miles) east of Boston. Mapping to date indicates the presence of five sizeable deepwater prospects within the "Mayflower" block. These large prospects are structural and are typically formed by mobile salt tectonics. Prospect sizes range from 50 to 200 square kilometers (19 to 77 square miles) in size and are located in 1,300 to 2,500 metre (4,265 - 8,200 feet) water depths. We currently plan to proceed with a high resolution seismic program over the "Mayflower" block to further define targeted structures to enable future drilling.
We also have several other exciting Cretaceous and Jurassic prospects acquired in November 2003 on our new "Marauder" and "Marconi" exploration lands covering 370,881 additional acres offshore Nova Scotia. These exploration licences were targeted for acquisition based on analysis of recently shot proprietary seismic data and in-house geological evaluations. "Marauder", encompassing 312,037 acres, directly offsets three Significant Discovery Licences (Uniacke, Citnalta and Arcadia). "Marauder" has four seismically defined prospects, two of which lie on trend with and are related to the Uniacke and Citnalta significant discoveries. These provide Canadian Superior with additional attractive prospects in this proven area. "Marconi" (EL 2416), encompassing 58,844 (100% owned) acres, has a seismically defined tilted fault / anticlinal prospect similar to other Sable area fields such as Glenelg and Alma.
The Sable Island area gas supply is very important and strategic for the North Eastern United States gas supply, and we are confident that being the public company holding the largest exploration acreage position in this area will be very rewarding for Canadian Superior and our shareholders.
In addition to working hard on the "high impact" opportunities we have offshore Nova Scotia and in Trinidad and Tobago, during 2004, we have worked hard in Western Canada continuing to develop Western Canadian cash flow and production focusing on developing our Drumheller Alberta core area and several high impact drilling opportunities. Our Corporation acreage holdings in Drumheller continue to increase, and as of year end, Canadian Superior holds 181,995 gross acres in that area.
Drumheller is Canadian Superior's core producing area and it generates the majority of the Corporation's cash flow through the sale of oil and gas. We are pleased to report that 2004 was another successful year for the Corporation in Drumheller. During the year, Canadian Superior drilled or participated in 38 gross (24.8 net) wells in the Drumheller area with an overall success rate of over 90%. Of these 38 wells, 22 were operated and 16 were non-operated. The average working interest of the operated wells was 91.7% and for the non-operated wells, the average working interest was 28.9%. This supports Canadian Superior's strategy of controlling its own destiny by keeping control over its high interest wells and the timing for tie-in. Of the operated wells, 16 were successful oil or gas wells (15 are tied-in and producing, 1 is waiting on tie-in), 3 were suspended and 3 were D&A.
Of the 16 non-operated wells, 9 of which are CBM (Coal Bed Methane), all were successful, three are tied-in and producing and 13 are waiting on final tie-in. As noted above, the Corporation participated in 10 CBM wells (1 operated) in 2004. These wells show initial average test rates of 150 mcf/d and this sets the stage for future activity in 2005 and beyond. We intend to use this encouraging 2004 program as a staging ground for future development of the extensive CBM potential that exists over our acreage base within the Drumheller area. Recent sales prices for Drumheller area lands with coal bed methane potential has exceeded $250,000 per section (approximately $390 per acre). We have approximately 108 net sections (69,120 acres) in the Drumheller area with potential for coal bed methane production.
Another very encouraging result was a 100% operated exploration well that was drilled by the Corporation in December of 2004. The well validated 5 sections of land and tested 2 mmcf/d gas from a Cretaceous exploratory target. Plans are to tie-in this well in early 2005 and follow up with more delineation drilling.
Another 12 to 14 operated locations are either surveyed or will be submitted for survey and drilling of these locations will commence in late winter or early spring of 2005, depending on spring break-up in the Drumheller area. The Corporation also shot or participated in two 2D seismic surveys and three 3D seismic surveys, the largest of the 3D's being 46 square kilometers and was completed in the late fall. Several locations will be drilled on these surveys in 2005. Other plans in the Drumheller area include some additional 3D seismic and a horizontal well in the Wildunn area.
Western Canadian High Impact Opportunities
Canadian Superior also holds operated high working interests in a number of other Alberta and British Columbia properties that are primarily in winter access areas. These other areas total an aggregate of 102,623 gross acres (83,686 net acres) in Alberta and 15,243 gross acres (11,766 net acres) in British Columbia. The main operated areas in Alberta are Windfall, Boundary Lake and Bison. In British Columbia, the main operated areas are Altares, Umbach and Parkland, all of which are considered to be potential high impact areas.
In March of 2004, Canadian Superior Energy Inc. shot a 62 square kilometer 3D seismic program in the East Ladyfern area to further evaluate the Slave Point potential demonstrated in the tested 7-2 well. The 3D indicated follow-up locations to the south and additional 2D seismic was shot. The 1-26-92-11W6 location was surveyed and prepared in late 2004 after freeze up. The well was spudded in late January of 2005 and it had been cased to the top of the Slave Point, but due to early break-up the well was not completed. Plans are to go back into the area in late 2005 and test the well after freeze-up.
Additional 2D seismic was shot in the Windfall area early in 2004 to evaluate several potential zones in the Cretaceous and the Jurassic. Two wells were planned and have been successfully drilled during the winter of 2004/2005. The first well, non-operated, was spudded in late December and was tested in early January. This well is currently being tied-in by the Operator. The second well, which was operated by Canadian Superior, was spudded in February of 2005 and awaits a completion that is scheduled before break up in late March / early April. Log results on this well look very encouraging and we look forward to completing and tieing-in this well.
In addition, the Corporation plans on entering one of its existing producing wells in this area and completing a highly perspective zone that is expected to further increase the area's production.
The Boundary Lake area has seen new emphasis in Canadian Superior's exploration effort. Several test seismic lines have been reprocessed which has initiated a larger reprocessing project and a renewed interest in this area. Exploration efforts are still in the planning stages, but with the current land base of over 9000 net acres, the Corporation is looking to this area for future potential reserve adds.
British Columbia - Umbach, Altares, Parkland
Although Canadian Superior continues to be active in Altares and the Parkland area of NEBC, and the Venus, Botha and Chinchaga areas of Northern Alberta, these areas have been re-evaluated over the last two quarters of 2004 and the Corporation has at this time shifted its emphasis to the core areas in Alberta, Offshore Nova Scotia and Offshore Trinidad. Several pending deals are being considered in British Columbia and these will help shape the future of these areas.
We are pleased to report that average daily production for 2004 increased to 2,565 boe/d, up 12 percent from 2,285 boe/d in 2003. The increase in production during 2004 is largely attributable to increased production in the Drumheller area.
Also, we are pleased to report that oil and gas revenue increased $7.1 million (22 percent) to $38.5 million in 2004, as compared to $31.6 million in 2003. This revenue increase is due to both higher production levels and higher average prices achieved during 2004. The average sales price in 2004 was $41.33/boe ($6.80/mcf for natural gas and $42.91/bbl for oil and NGLs) up 9 percent from $37.92/boe in 2003 ($6.60/mcf for natural gas and $33.03/bbl for oil and NGLs). Of the $7.1 million increase in oil and gas revenues recorded in 2004, $2.9 million of the increase is attributed to increased prices, while $4.2 million of the increase was created by increased production volumes for both oil and gas. Gas volumes increased 13% to 11,533 mcf per day in 2004, up from 10,210 mcf per day in 2003, while oil volumes increased 10% to 642 bbls per day in 2004, up from an average of 583 bbls per day produced in 2003.
Cash flow from operations also increased, up 52% to $20.2 million in 2004, from $13.3 million in 2003. Increased production and higher product prices received in 2004 are the primary contributor to the large cash flow increase.
Increased depletion (a non-cash item) resulted in the Corporation recording a net loss of $3.0 million, or $(0.03) per share, for 2004, as compared to a loss of $1.0 million $(0.01) per share, in 2003. The principal reason for this accounting loss in 2004 was the increased depletion expense of $22.2 million compared to $14.3 million in 2003.
We are pleased to provide the Corporation's December 31, 2004 Reserves and Values from Gilbert Lausten Jung Associates Ltd. evaluation of the Corporation's Western Canadian properties, effective December 31, 2004. As noted earlier in the Corporation's 2004 Highlights, we are pleased to report Proved Reserves of 4,358 mboe, up 5 % compared to 2003; Proved Reserves valuation up $13.4 million; Proved Plus Probable Reserves of 6,570, up 7% compared to 2003; and, Proved Plus Probable Reserves valuation up $19.2 million.
Oil Gas NGL MBOE (MSTB) (MMCF) (MBBLS) (6:1) Proved Producing 768 17,043 167 3,776 Proved Developed Non-producing 0 2,340 18 408 Proved Undeveloped 0 1,025 3 174 Total Proved 768 20,408 189 4,358 Total Proved Plus Probable 1,531 28,575 277 6,570 Value of Reserves (10% discounted cash flow, $000's) 2005 ------ Total Proved and Probable 89,219 Total Proved 68,572 Reserves refers to the total working interest share of remaining recoverable reserves owned by Canadian Superior before deduction of royalties payable to others. Price Forecast, Gilbert Lausten Jung Associates Ltd., effective January 1, 2005. Oil AECO NGL NGL NGL WTI(1) Price(2) Spot Gas(3) Propane Butane Pentanes ($US/STB) $Cdn/STB ($/MMBTU) ($/BBL) ($BBL) ($BBL) Current Year Forecast 2005 42.00 50.25 6.60 32.25 37.25 50.75 Future Forecast 2006 40.00 47.75 6.35 30.50 35.25 48.25 2007 38.00 45.50 6.15 29.00 33.75 46.00 2008 36.00 43.25 6.00 27.75 32.00 43.75 2009 34.00 40.75 6.00 26.00 30.25 41.25 (1) West Texas Intermediate Crude Oil at Cushing, Oklahoma. (2) Equivalent price for Light Sweet Crude (40 API/0.3% S) landed in Edmonton, Alberta (3) Price paid at AECO delivery point.
Our undeveloped land acreage in Western Canada at the end of 2004 was approximately 170,978 gross acres (145,846 net acres) with an average working interest of 85%. We intend to actively add to our large undeveloped land holdings, with a particular focus on the Drumheller area.
Canadian Superior is the public company holding the largest exploration land position offshore Nova Scotia, where Canadian Superior currently holds 100% working interests in six licences covering an aggregate of 1,293,946 acres.
In Trinidad and Tobago, Canadian Superior's Mayaro/Guayaguayare (M/G) "Tradewinds" joint venture lands cover 55,000 gross acres and our "Intrepid" Block 5©, awarded in the second quarter 2004, added an additional 80,041 gross acres. Total acreage is now 135,041 gross acres, resulting in Canadian Superior becoming one of the largest strategic landholders in Trinidad and Tobago once our licences are fully approved by the Government of Trinidad and Tobago, which we expect in the very near future.
Canadian Superior conducts its operations in Canada in a manner consistent with environmental regulations as stipulated in provincial and federal legislation. The Corporation is committed to meeting its responsibilities to protect the environment wherever it operates and anticipates making expenditures of both a capital and expense nature to ensure full compliance with laws relating to protection of the environment. The Corporation anticipates spending sufficient funds on environmental expenditures in 2005 in order to comply in all material respects with all environmental requirements related to its field operations. The Corporation does not anticipate that such expenditures, as a percentage of cash flow, will be greater than those expected, on average, by other industry operators. The Corporation will maintain insurance coverage where available, and financially desirable, in light of risk versus cost factors.
CORPORATE RESPONSIBILITY AND COMMUNITY INVOLVEMENT
Canadian Superior is a strong advocate of direct corporate involvement in communities contributing to, or affected by, its activities. We believe that direct community involvement enhances our ability to properly achieve common goals. Significant efforts are exerted to ensure that we have a responsible and responsive corporate presence. We conduct regular discussions with community representatives and stakeholders and we take care to ensure that planned activities are fully explained. Our attitude of direct involvement with local communities is consistently supported by sponsorship of community programs.
In Western Canada, Canadian Superior has been a sponsor of urban and rural communities, charitable organizations and sponsorships including cancer research in Alberta, the Calgary Chinook Scout Foundation, the Rockyview General Hospital, STARS and the Alberta Cancer Foundation. The Corporation is also a major sponsor of the Calgary Stampede and 4H on Parade, the latter being one of the largest rural youth agricultural shows in North America. We intend to actively continue with support for community and charitable programs and initiatives and we encourage our staff and management to do the same.
In Nova Scotia, Canadian Superior's contributions have included supporting education and training, as well as to oil and gas related research and development activities, for students enrolled in undergraduate education programs in Nova Scotia. We have provided Education, Training, and Research and Development funds to Dalhousie University, St. Francis Xavier University, the University College of Cape Breton and the Nova Scotia Community College.
In Trinidad and Tobago, Canadian Superior considers it important to promote the development of people by imparting to Trinidad and Tobago nationals technology and business expertise in all areas of energy sector activity, and is committed to a number of programs which are associated with the provisions of the proposed Production Sharing Contract between the Government of Trinidad and Tobago and the Ministry of Energy and Energy Industries and Canadian Superior regarding Block 5©. In addition, and separate from those programs, and also in recognition of our Mayaro/Guayguayare (M/G) Joint Venture with Petrotrin, Canadian Superior has recently established the Canadian Superior Energy Canada - Trinidad and Tobago Charitable Foundation to undertake various additional programs including the promotion of educational training, as well as research and development activities, for students enrolled in undergraduate educational studies in Trinidad and Tobago. This program is modeled after our very successful Nova Scotia program supporting undergraduate education, training and research and development, as briefly outlined above.
In summary, we look forward to continuing to actively support programs related to the communities and stakeholders that support our corporate objectives and growth strategies.
OUTLOOK - 2005 and Longer Term
Our strategic Corporate Objectives for sustainable growth are unwavering and remain:
- To continue to grow Western Canadian cash flow and production, focusing on the Drumheller area and high impact Western Canadian plays.
- To maintain high interest operational positions and a strong balance sheet.
- To continue forward with drilling and development of the Corporation's Offshore Nova Scotia and Offshore Trinidad and Tobago assets.
- To continue to focus on increasing the underlying value for shareholders through strategic drilling, development and acquisitions.
We expect the next several months will be very exciting for Canadian Superior and our shareholders. We thank you for your support during the past year and with the continued support of our shareholders and the exciting assets we have developed that underpin Canadian Superior, we are very confident that 2005 and the years ahead will be very rewarding. We intend to continue to strive to prudently manage our balance sheet while we remain focused on growth and achievement. We are confident that our continued hard work, along with your support, will result in continued success for our Company.
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