November 21, 2007

AN UPDATE WITH DICK GUSELLA

PRESIDENT OF CONNACHER OIL & GAS

(From November 20, 2007)

We are in a bit of a bizarre world right now, where oil prices

seem to be hitting ever new highs and yet oil stocks are sliding,

sometimes viciously in a market that seems to be centered

around the debt crisis in the U.S., but hitting stocks

worldwide.

It’s time to go for an update with Dick Gusella, the driving

force behind Connacher Oil & Gas, the one stock that is only

about a month away from production on its massive Great

Divide Project and at least it’s one oil and gas stock that relatively

speaking, is hanging in there.

David Pescod: First of all Dick, how about this oil and gas

market? I haven't seen anything like it. Oil hits new records

highs of $95 and everything in the oil and gas patch from

Exxon to ABC Resources is going the other way. What's going

on? Is the market telling us that commodity prices are

going to fall, or what?

Dick Gusella: I think the market is telling us there is a credit

crunch out there which could lead to a recession or a recessionary

like environment for awhile until the excesses are

wrung out of the system. We know a lot of deals have been

pulled from the U.S. debt market as investors are reluctant to

refinance out equity turned into debt with the LBO rage that

went on for awhile. On the other hand Connacher just raised

US$600 million because we had a good project - financing

Algar or Pod Two at Great Divide - and a sound business plan

that attracted investors. This new capital will allow us to

move ahead with minimal if any dilution. We set aside interest

for the first year's requirements while our cash flow from

all components - conventional production, including gas at

marten creek, the refinery and Pod One ramp up and then we

will have substantial coverage and we have no principal to be

repaid for eight years. Seems like a good plan to me and we

have stress tested it and we remain solid and viable to much

lower price levels even below our base case modeling of

US$65 for WTI.

D.P: Natural gas looks like it's becoming a disaster in the

Canadian Prairies. Any thoughts about what next for that

sector?

D.G: This is a temporary thing which will be self-correcting

as investment slows down in response to lower prices, the

royalty issue and difficulties for many players to access new

capital for growth and also not find a safety valve or exit

strategy through the trusts.

D.P: It's time for a hard question and it's something some

people are talking about and that's Connacher's diversification

(or should we use the hard words) deworsification.

Currently the Montana refinery has seen very

small margins - the purchase of Luke Oil a natural gas producer

could have been done today for $0.20 or $0.30 on the

dollar and now Petrolifera is having trouble. Your comment?

D.G: I think that is unfair and reflects a lack of real insight

and understanding into why we are doing what we are doing.

Our integrated strategy is well thought out and will increase

our netbacks over being a naked bitumen producer

by over 50 percent. So with a US$65 WTI instead of a modest

netback of say $22 at the wellhead after op costs and

royalties- yes with the new royalty scheme - we can look to

something like $37 per barrel produced without the full

hedge on the refining side. Obviously at higher prices, with a

constant differential, we do even better than that. As an

aside, our little refinery in Montana was one of two out of

eleven or thirteen refiners that reported in Q3 2007 that had

higher margins that the prior year - the other being frontier -

because they capture part of the heavy oil differential, which

is what our integrated strategy is about Dave.

Now anyone who says you could have bought Luke at 20 or

30 cents on the dollar has never done a deal or probably

never will. Our major concern in heading into production at

the oil sands in a post Katrina world was to eliminate one of

the big risks of burning natural gas to make steam - exposure

to post Katrina type gas prices which would impact on

operating costs for 25 to 40 years. We are physically

hedged now which improves our integrated netback and can

thus avoid what I jokingly call the triple witch of high oil diluent

prices, high gas prices and high differentials leading to

low wellhead netbacks. Seems to make sense in today's

world for various reasons and on top of it all, we are processing

some bitumen at our refinery to get an assay if you

will so we can avoid being discounted by other refiners

when they take our dilbit from Pod One and we are also for

the moment self sufficient in diluent by using our naphtha

from our refinery. This strategy is one of the reasons we

could raise debt money in the U.S. market in my opinion and

the investors concur with our approach. One final point -

our little refinery has more than paid out since we bought it -

including the cost of product inventory - in March 2006.

D.P: I guess the big question is Petrolifera. They had quite

a run based on success in Argentina, but now it looks like

Argentina is doing an Alberta Royalty Review-type of operation.

Do we know what it means yet? And how good or bad

it might be?

D.G: It ultimately does not mean too much except for the short term - the policy removes access to improving or

higher prices. I don't think it will last too long as Argentina is close to becoming an importer of energy and then

what? Pay world price for imports - a leakage in the economy - and suppress your domestic industry? Logic would

suggest otherwise. We are still doing very well in Argentina. As we indicated in our recent releases we keep making

discoveries, we have a waterflood coming on which will enhance productivity and we have the financial wherewithal to

explore and drill and still make decent returns - not as high as we would like to see - but we are profitable, unlike most

other smaller companies active in Argentina, we have low historic finding, development and op costs and we keep

finding new oil which will become evident as we ramp up production in early 2008 and beyond. And we have Peru and

Colombia as well which many other small companies do not. Our Peru blocks look good and we have Mr. Peru - Gary

Wine - as our president. We are very optimistic about it and I bet you an Edmonton nickel that people will be salivating

about our structures and their potential as we move into the second half of 2008.

D.P: Back to Connacher and the major asset on the company and that's on the Great Divide Project. We should only

be about a month away from production. Is there anything to be concerned about?

D.G: No.

D.P: Is everything on schedule?

D.G: Yes.

D.P: You filed all the paperwork for starting the next phase for the second Pod. Have you heard anything hopeful?

D.G: We have already had our sir's or supplemental information requests back and I think our answers are either filed

or nearing filing back to the EUB. This is a quicker turnaround than before. We will start - have already in fact - preordering

long lead items to beat the inflation bug - and while we have provided for a higher budget with a great level for

contingencies and for infrastructure as we are not next door to the highway like Pod One - and we have some scope

changes - we are funded Dave!!!

The annuity like long term production from the oil sands is an investor's dream - we like everyone are leveraged to the

price of oil but we are budgeting at US$65 for WTI and last time I looked it was US$95. While a strong Canadian dollar

has mitigated the benefits of higher prices, it is still pretty good and the market can't get us down as we are moving

ahead with confidence and conviction. Let's talk again when Connacher is at $8 and Petrolifera is back to $20!

D.P: Thank you so much, Mr. Gusella!