16:23 EST Wednesday, January 21, 2009

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.