Questerre files Q1 2024 Report

May 10, 202423:09 UTC

President's Message

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

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

Carbon capture and storage ("CCS") is also important to our plans to buildassets outside Quebec. We are exploring opportunities to developzero-emissionsprojects using carbon storage with First Nations in Alberta.

Earlier this year at a presentation to the Montreal Chamber of Commerce, theMinister of Economy, Innovation and Energy of Quebec noted that for both smallbusinesses and large companies there will be energy shortages for probablyabouta decade. Though the Minister noted that many new projects are prepared towait,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 toamore expensive product mix. The provincial gas distribution company is seekingto replace conventional natural gas with renewable natural gas at a cost of atleast twice the price.

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

The electricity shortages in Quebec continue to grow with demand forelectricityreaching a new high last year of over 43 gigawatts, exceeding their installedcapacity of 38 gigawatts. This supply demand imbalance has a knock-on effecttotheir plans for reducing emissions as electrification figures in plans to meetthese 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 formationinthe province. We have designed it to advance to commercial development withthepossibility for a carbon dioxide pipeline connecting to the industrial park atBecancour. The second part of our pilot to demonstrate a small-scalezero-emissions hydrogen process could help both reduce emissions and provideclean energy.

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

The importance of emission reductions has also led Red Leaf to look at broaderapplications of their technology. At its core, the technology combinescombustion in an oxygen-rich environment with carbon capture to generate heatand power at relatively low pressure. We are helping them assess how thisstacksup against similar technologies as well as its costs relative to capturecarbondioxide post combustion. It is still early days though the technology, ifsufficiently 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 tocompletions and tie-ins, will likely be on stream for the fourth quarter.Untilthen, we expect our production volumes to decline naturally. Reflecting thisdecline, our production volumes for the quarter decreased by under 10% overthesame period last year and averaged approximately 1,700 boe/d.

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

Outlook

Originally developed for Quebec, our zero-emissions project design thatincludesCCS could be applied elsewhere in North America if decarbonization remains apriority. Our newly appointed Director, Jauvonne Kitto, will help theseeffortswith First Nations and the associated government funding opportunities.Althoughthis is a new business for us it leverages our expertise with both subsurfaceand gas processing and compression facilities. Our main focus remains tounlockour large, discovered resources.

This is particularly true in Quebec where we identified a prospectiveformationfor storage over three years ago. Our pitch to the Government is thatestablishing the carbon storage potential is valuable to them regardless oftheoutcome of our legal claim. On this basis, we hope they approve ourapplicationand provide the necessary funding. Demonstrating how we can reduce emissionsfrom gas consumption will hopefully open the door to natural gas as atransitionfuel in Quebec's energy policy.

Michael Binnion, President and Chief Executive Officer

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