Connacher reinstates normal operations at Pod One - Expects to reach pre-curtailment production levels in February

    CALGARY, Jan. 21 /CNW/ - Connacher Oil and Gas Limited (CLL - TSX)
announced today it is reinstating full steaming and attendant production
ramp-up of its Great Divide Pod One ("Pod One") steam-assisted gravity
drainage ("SAGD") project. Connacher expects to reach pre-curtailment bitumen
production levels of approximately 9,000 bbl/d by the end of February.
Improved market conditions, arising from narrowing heavy oil differentials and
contango in the crude oil market, are simultaneously anticipated to contribute
to acceptable and improved bitumen prices and netbacks during the next six
months, with further improvements possible as more normal commodity and
capital markets reemerge and the economic outlook brightens. The company will
utilize available hedging opportunities to crystallize these improvements
during this period.
    Bitumen production at Pod One was reduced to approximately 5,000 bbl/d at
the end of December 2008, by reducing the amount of steam injected into Pod
One's 15 SAGD well pairs. The curtailment was undertaken in response to a
deterioration of bitumen markets, evidenced by the emergence of lower crude
oil prices, the widening of heavy oil differentials (both absolutely and as a
percentage of the selling price for heavy oil) and the emergence of certain
bottlenecks and other market factors, which had adversely affected bitumen
pricing and field netbacks. Since that time, a number of market factors have
improved, leading to the decision to resume bitumen production ramp-up at Pod
One. While crude oil prices for the current month remain low, significant
improvement exists in forward crude oil prices and the Canadian dollar has
recently weakened against the US dollar; both of these factors partially
offset low crude oil prices. In addition, heavy oil differentials have
narrowed substantially, in some cases by as much as two-thirds of December
2008 levels, in response to demand from refineries.
    To crystallize the improvements and reduce the market risk associated
with the expansion of Pod One production and sales, Connacher has entered into
a term contract on a portion of bitumen production at locked in heavy
differentials, reduced blending and transportation costs and executed a WTI
hedge on 2,500 bbl/d from February through August 2009 at US$46/bbl. The
company also has in place for 2009 a foreign exchange collar which sets a
floor of C$1.1925 per US$1.00 and a ceiling of C$1.30 per US$1.00 on notional
monthly revenues of US$10 million. The company is actively pursuing additional
physical and financial crude oil arrangements to further mitigate market risk.
    The combination of improved market factors and resulting company actions
should restore improved bitumen wellhead prices (after deduction of diluent
and transportation costs) to Connacher from February 2009 through July 2009
and should also result in positive bitumen netbacks (after deduction of
royalties and operating costs) during the same period, once bitumen production
reaches pre-curtailment levels.
    During the period that production was reduced, Connacher injected
adequate steam volumes into Pod One's 15 SAGD well pairs, thereby avoiding the
risk of any significant undue or adverse impact of the curtailment on
prospective reservoir and well performance. This is expected to allow us to
restore operations to pre-curtailment levels relatively quickly. The company
now anticipates being able to reach design production capacity of 10,000 bbl/d
of bitumen in Q2 2009, now that all 15 of the company's original SAGD well
pairs are contributing to overall production.
    Notwithstanding the resumption of the bitumen production ramp-up at Pod
One, advancement of the construction program at Algar, Connacher's second
10,000 bbl/d SAGD project, remains on hold, except for completion of
preparation of the Algar plant site and the SAGD well pad sites and the
completion of construction of key equipment currently nearing finalization in
fabrication shops throughout North America. Our decision to resume activity at
Algar will be taken after an appropriate and timely assessment of the critical
factors which influence capital investment in our SAGD oil sands business,
which by its nature is long-term and capital intensive. These factors include
visibility in crude oil prices, a thaw in and improvement of capital markets
and improvement in the general economic conditions in North America. At this
point in time, we are unable to provide specific guidance as to when it will
be appropriate to reinstate our construction and assembly activity at Algar.
    Meanwhile, Connacher has continued to make advances in the production of
conventional crude oil and natural gas. We are currently producing
approximately 3,500 boe/d, benefiting from contributions from the
ahead-of-schedule tie-in of an excellent liquids-rich natural gas well
situated south of Grande Prairie Alberta. Additional new wells in this new
core area are being completed and tested for possible tie-in late in 2009.

    Connacher Oil and Gas Limited is a Calgary-based bitumen, crude oil and
natural gas company. It is primarily an oil sands company, with operations at
its 10,000 bbl/d Great Divide Pod One SAGD plant in northeastern Alberta and
with plans to construct its second similar sized SAGD project at Algar. It
owns conventional Canadian production and reserves and Connacher also owns a
9,500 bbl/d heavy oil refinery in Great Falls, Montana and a 24 percent equity
stake in Petrolifera Petroleum Limited (PDP-TSX), a successful production and
exploration company active in Argentina, Colombia and Peru in South America.
Connacher's shares and convertible debentures are listed for trading on the
Toronto Stock Exchange.

    Forward Looking Information

    This press release contains forward-looking information including the
reinstatement of operations at Pod One, anticipated production levels
following reinstatement, the anticipated timing for achieving design capacity
at Pod One, anticipated financial results from reinstatement of production at
Pod One, planned utilization of hedging opportunities, development of
conventional oil and gas properties and expectations regarding timing of and
factors influencing the recovery of commodity prices and general economic
conditions. Forward looking information is based on management's expectations
regarding future economic conditions, commodity prices and differentials,
results of operation, production, future capital and other expenditures
(including the amount, nature and sources of funding thereof), plans for and
results of drilling activity, environmental matters, business prospects and
opportunities. Forward-looking information involves significant known and
unknown risks and uncertainties, which could cause actual results to differ
materially from those anticipated. These risks include, but are not limited
to: the risks associated with the oil and gas industry (e.g., operational
risks in development, exploration and production; delays or changes in plans
with respect to exploration or development projects or capital expenditures;
the uncertainty of reserve and resource estimates; the uncertainty of
estimates and projections relating to production, costs and expenses, and
health, safety and environmental risks), the risk of commodity price and
foreign exchange rate fluctuations, risks and uncertainties associated with
securing and maintaining the necessary regulatory approvals and financing to
proceed with the continued expansion of the Great Divide project. In addition,
the current financial crisis has resulted in severe economic uncertainty and
resulting illiquidity in capital markets which increases the risk that actual
results will vary from forward looking expectations in this press release and
these variations may be material. These and other risks and uncertainties are
described in detail in Connacher's Annual Information Form for the year ended
December 31, 2007, which is available at www.sedar.com. Although Connacher
believes that the expectations in such forward-looking information are
reasonable, there can be no assurance that such expectations shall prove to be
correct. Readers are reminded that netbacks do not have a standardized meaning
prescribed by Canadian generally accepted accounting principles ("GAAP") and
therefore may not be comparable to similar measures used by other companies.
Total bitumen netbacks are calculated by deducting the related diluent,
transportation, field operating costs and royalties from bitumen revenues.
Unit netbacks are calculated by dividing total netbacks by production volumes.
Total netbacks are usually reconciled to net earnings when actual amounts are
presented. The forward-looking information included in this press release is
expressly qualified in their entirety by this cautionary statement. The
forward-looking information included in this press release is made as of the
date hereof and Connacher assumes no obligation to update or revise any
forward-looking information to reflect new events or circumstances, except as
required by law.