Exhibit 99.2



|Vermilion
    Energy Inc. | 2016
    Management’s Discussion & Analysis
|------------------------- | -------------------------------------------





ABBREVIATIONS



|$M     | thousand dollars                                                                                                                                                                                                     
|------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|$MM    | million dollars                                                                                                                                                                                                      
|AECO   | the daily average
    benchmark price for natural gas at the AECO ‘C’ hub in southeast Alberta                                                                                                                       
|bbl(s) | barrel(s)                                                                                                                                                                                                            
|bbls/d | barrels per
    day                                                                                                                                                                                                  
|bcf    | billion cubic
    feet                                                                                                                                                                                               
|boe    | barrel of oil
    equivalent, including: crude oil, condensate, natural gas liquids, and natural gas (converted on the basis of one boe for
    six mcf of natural gas)                                              
|boe/d  | barrel of oil
    equivalent per day                                                                                                                                                                                 
|btu    | British thermal
    units                                                                                                                                                                                            
|DRIP   | Dividend Reinvestment
    Plan                                                                                                                                                                                       
|GJ     | gigajoules                                                                                                                                                                                                           
|mbbls  | thousand barrels                                                                                                                                                                                                     
|mboe   | thousand barrel
    of oil equivalent                                                                                                                                                                                
|mcf    | thousand cubic
    feet                                                                                                                                                                                              
|mcf/d  | thousand cubic
    feet per day                                                                                                                                                                                      
|mmboe  | million barrel
    of oil equivalent                                                                                                                                                                                 
|mmbtu  | million British
    thermal units                                                                                                                                                                                    
|mmcf   | million cubic
    feet                                                                                                                                                                                               
|mmcf/d | million cubic
    feet per day                                                                                                                                                                                       
|MWh    | megawatt hour                                                                                                                                                                                                        
|NBP    | the reference
    price paid for natural gas in the United Kingdom, quoted in pence per therm, at the National Balancing Point Virtual Trading
    Point.  Our production in Ireland is priced with reference to NBP.
|NGLs   | natural gas
    liquids, which includes butane, propane, and ethane                                                                                                                                                  
|PRRT   | Petroleum Resource
    Rent Tax, a profit based tax levied on petroleum projects in Australia                                                                                                                        
|TTF    | the price for
    natural gas in the Netherlands, quoted in MWh of natural gas, at the Title Transfer Facility                                                                                                       
|       | Virtual Trading
    Point                                                                                                                                                                                            
|WTI    | West Texas Intermediate,
    the reference price paid for crude oil of standard grade in US dollars at Cushing, Oklahoma                                                                                             



1


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




DISCLAIMER



Certain statements included or incorporated
by reference in this document may constitute forward looking statements or financial outlooks under applicable securities legislation.
Such forward looking statements or information typically contain statements with words such as "anticipate", "believe",
"expect", "plan", "intend", "estimate", "propose", or similar words suggesting
future outcomes or statements regarding an outlook. Forward looking statements or information in this document may include, but
are not limited to: capital expenditures; business strategies and objectives; operational and financial performance; estimated
reserve quantities and the discounted net present value of future net revenue from such reserves; petroleum and natural gas sales;
future production levels (including the timing thereof) and rates of average annual production growth; exploration and development
plans; acquisition and disposition plans and the timing thereof; operating and other expenses, including the payment and amount
of future dividends; royalty and income tax rates; and the timing of regulatory proceedings and approvals.



Such forward looking statements or information
are based on a number of assumptions, all or any of which may prove to be incorrect. In addition to any other assumptions identified
in this document, assumptions have been made regarding, among other things: the ability of Vermilion to obtain equipment, services
and supplies in a timely manner to carry out its activities in Canada and internationally; the ability of Vermilion to market
crude oil, natural gas liquids, and natural gas successfully to current and new customers; the timing and costs of pipeline and
storage facility construction and expansion and the ability to secure adequate product transportation; the timely receipt of required
regulatory approvals; the ability of Vermilion to obtain financing on acceptable terms; foreign currency exchange rates and interest
rates; future crude oil, natural gas liquids, and natural gas prices; and management’s expectations relating to the timing
and results of exploration and development activities.



Although Vermilion believes that the
expectations reflected in such forward looking statements or information are reasonable, undue reliance should not be placed on
forward looking statements because Vermilion can give no assurance that such expectations will prove to be correct. Financial
outlooks are provided for the purpose of understanding Vermilion’s financial position and business objectives, and the information
may not be appropriate for other purposes. Forward looking statements or information are based on current expectations, estimates,
and projections that involve a number of risks and uncertainties which could cause actual results to differ materially from those
anticipated by Vermilion and described in the forward looking statements or information. These risks and uncertainties include,
but are not limited to: the ability of management to execute its business plan; the risks of the oil and gas industry, both domestically
and internationally, such as operational risks in exploring for, developing and producing crude oil, natural gas liquids, and
natural gas; risks and uncertainties involving geology of crude oil, natural gas liquids, and natural gas deposits; risks inherent
in Vermilion's marketing operations, including credit risk; the uncertainty of reserves estimates and reserves life and estimates
of resources and associated expenditures; the uncertainty of estimates and projections relating to production and associated expenditures;
potential delays or changes in plans with respect to exploration or development projects; Vermilion's ability to enter into or
renew leases on acceptable terms; fluctuations in crude oil, natural gas liquids, and natural gas prices, foreign currency exchange
rates and interest rates; health, safety, and environmental risks; uncertainties as to the availability and cost of financing;
the ability of Vermilion to add production and reserves through exploration and development activities; the possibility that government
policies or laws may change or governmental approvals may be delayed or withheld; uncertainty in amounts and timing of royalty
payments; risks associated with existing and potential future law suits and regulatory actions against Vermilion; and other risks
and uncertainties described elsewhere in this document or in Vermilion's other filings with Canadian securities regulatory authorities.



The forward looking statements or information
contained in this document are made as of the date hereof and Vermilion undertakes no obligation to update publicly or revise
any forward looking statements or information, whether as a result of new information, future events, or otherwise, unless required
by applicable securities laws.



All oil and natural gas reserve information
contained in this document has been prepared and presented in accordance with National Instrument 51-101 Standards of Disclosure
for Oil and Gas Activitiesand the Canadian Oil and Gas Evaluation Handbook. The actual crude oil and natural gas reserves
and future production will be greater than or less than the estimates provided in this document. The estimated future net revenue
from the production of crude oil and natural gas reserves does not represent the fair market value of these reserves.



Natural gas volumes have been converted
on the basis of six thousand cubic feet of natural gas to one barrel of oil equivalent. Barrels of oil equivalent (boe) may be
misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet to one barrel of oil is based
on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at
the wellhead.



Financial data contained within this document are reported
in Canadian dollars, unless otherwise stated.



2


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




MANAGEMENT’S DISCUSSION
AND ANALYSIS



The following is Management’s
Discussion and Analysis (“MD&A”), dated February 24, 2017, of Vermilion Energy Inc.’s (“Vermilion”,
“we”, “our”, “us” or the “Company”) operating and financial results as at and
for the three months and year ended December 31, 2016 compared with the corresponding periods in the prior year.



This discussion should be read in conjunction
with the audited consolidated financial statements for the year ended December 31, 2016 and 2015, together with the accompanying
notes. Additional information relating to Vermilion, including its Annual Information Form, is available on SEDAR at www.sedar.comor on Vermilion’s website at www.vermilionenergy.com.



The audited consolidated financial statements
for the year ended December 31, 2016 and comparative information have been prepared in Canadian dollars, except where another
currency has been indicated, and in accordance with International Financial Reporting Standards (“IFRS” or, alternatively,
“GAAP”) as issued by the International Accounting Standards Board.



This MD&A includes references to
certain financial and performance measures which do not have standardized meanings prescribed by IFRS. These measures include:



|· | Fund
    flows from operations: Fund flows from operations is a measure of profit or loss in accordance with IFRS 8 “Operating
    Segments”.  Please see SEGMENTED INFORMATION in the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS for a reconciliation
    of fund flows from operations to net earnings.  We analyze fund flows from operations both on a consolidated basis
    and on a business unit basis in order to assess the contribution of each business unit to our ability to generate income necessary
    to pay dividends, repay debt, fund asset retirement obligations and make capital investments.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | Netbacks:
    Netbacks are per boe and per mcf performance measures used in the analysis of operational activities.  We assess
    netbacks both on a consolidated basis and on a business unit basis in order to compare and assess the operational and financial
    performance of each business unit versus other business units and also versus third party crude oil and natural gas producers.                                                                                                                                                                                                                     



In addition, this MD&A includes
references to certain financial measures which are not specified, defined, or determined under IFRS and are therefore considered
non-GAAP financial measures. These non-GAAP financial measures are unlikely to be comparable to similar financial measures presented
by other issuers. For a full description of these non-GAAP financial measures and a reconciliation of these measures to their
most directly comparable GAAP measures, please refer to “NON-GAAP FINANCIAL MEASURES”.



VERMILION’S BUSINESS



Vermilion is a Calgary, Alberta based
international oil and gas producer focused on the acquisition, exploration, development and optimization of producing properties
in North America, Europe, and Australia. We manage our business through our Calgary head office and our international business
unit offices.



This MD&A separately discusses each
of our business units in addition to our corporate segment.



CHANGE IN PRESENTATION



Prior to 2016, we reported our
condensate production in Canada and the Netherlands business units within the NGLs production line. Beginning in Q1 2016, we reported
condensate production within the crude oil and condensate production line.  We believe that this presentation better reflects
the historical and forecasted pricing for condensate, which is more closely correlated with crude oil pricing than with pricing
for propane, butane and ethane (collectively “NGLs” for the purposes of this report). Comparative periods have been
adjusted to reflect this change.



3


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




2016 REVIEW AND 2017 GUIDANCE



On November 9, 2015, we announced preliminary
2016 capital expenditure guidance of $350 million and production guidance of between 63,000-65,000 boe/d. On January 5, 2016,
in response to the continued weakness in commodity prices we reduced our 2016 capital expenditure guidance to $285 million with
corresponding production guidance of 62,500-63,500 boe/d. On February 29, 2016, we further revised our 2016 capital expenditure
guidance to $235 million as a result of continued commodity price deterioration. We maintained our production guidance of 62,500-63,500
boe/d. The February 29, 2016 reduction primarily reflected lower expected non-operated drilling activity in Canada, fewer workovers
in France, and a deferral of our Netherlands pipeline twinning program. On August 8, 2016, we modestly increased our 2016 capital
expenditure guidance to $240 million with the reinstatement of a four-well drilling program in the Champotran field in France
and added drilling activity in Canada, partially offset by capital cost savings achieved to date. Actual 2016 capital spending
of $242.4 million was within 1% of our guidance and 2016 production of 63,526 boe/d modestly exceeded the top end of our guidance
range.



On October 31, 2016, we released
our 2017 capital expenditure guidance of $295 million and associated production guidance of between 69,000-70,000 boe/d.



The following table summarizes
our guidance:



|                  |                       | Date | Capital
    Expenditures ($MM) | Production
    (boe/d)
|----------------- | --------------------- | ---- | ------------------------------ | ----------------------
|2016
    Guidance |                       |      |                               
|2016
    Guidance | November
    9, 2015  | 350  | 63,000
    to 65,000          
|2016
    Guidance | January
    5, 2016   | 285  | 62,500
    to 63,500          
|2016
    Guidance | February
    29, 2016 | 235  | 62,500
    to 63,500          
|2016
    Guidance | August
    8, 2016    | 240  | 62,500
    to 63,500          
|2017
    Guidance |                       |      |                               
|2017
    Guidance | October
    31, 2016  | 295  | 69,000
    to 70,000          

4


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




CONSOLIDATED RESULTS OVERVIEW



|                      |                                       | Three
    Months Ended |             | %
    change |  |               | Year
    Ended |  | %
    change
|--------------------- | ------------------------------------- | ---------------------- | ----------- | ------------ |  | ------------- | -------------- |  | ------------
|                      |                                       | Dec
    31,            | Sep
    30, | Dec
    31,  |  | Q4/16
    vs. | Q4/16
    vs.  |  |             
|                      |                                       | 2016                   | 2016        | 2015         |  | Q3/16         | Q4/15          |  |             
|Production            |                                       |                        |             |              |  |               |                |  |             
|                      | Crude
    oil and condensate (bbls/d) | 25,972                 | 27,842      | 31,304       |  | (7%)          | (17%)          |  |             
|                      | NGLs
    (bbls/d)                     | 2,467                  | 2,478       | 2,739        |  | -             | (10%)          |  |             
|                      | Natural
    gas (mmcf/d)              | 194.54                 | 199.66      | 162.09       |  | (3%)          | 20%            |  |             
|                      | Total
    (boe/d)                     | 60,863                 | 63,596      | 61,058       |  | (4%)          | -              |  |             
|Sales                 |                                       |                        |             |              |  |               |                |  |             
|                      | Crude
    oil and condensate (bbls/d) | 26,610                 | 30,111      | 32,306       |  | (12%)         | (18%)          |  |             
|                      | NGLs
    (bbls/d)                     | 2,467                  | 2,478       | 2,739        |  | -             | (10%)          |  |             
|                      | Natural
    gas (mmcf/d)              | 194.54                 | 199.66      | 162.09       |  | (3%)          | 20%            |  |             
|                      | Total
    (boe/d)                     | 61,501                 | 65,865      | 62,061       |  | (7%)          | (1%)           |  |             
|                      | Build
    (draw) in inventory (mbbls) | (58)                   | (209)       | (93)         |  |               |                |  |             
|Financial
    metrics |                                       |                        |             |              |  |               |                |  |             
|                      | Fund
    flows from operations ($M)   | 149,582                | 140,974     | 136,441      |  | 6%            | 10%            |  |             
|                      | Per
    share ($/basic share)         | 1.27                   | 1.21        | 1.22         |  | 5%            | 4%             |  |             
|                      | Net
    loss                          | (4,032)                | (14,475)    | (142,080)    |  | (72%)         | (97%)          |  |             
|                      | Per
    share ($/basic share)         | (0.03)                 | (0.12)      | (1.28)       |  | (75%)         | (98%)          |  |             
|                      | Net
    debt ($M)                     | 1,427,148              | 1,343,923   | 1,381,951    |  | 6%            | 3%             |  |             
|                      | Cash
    dividends ($/share)          | 0.645                  | 0.645       | 0.645        |  | -             | -              |  |             
|Activity              |                                       |                        |             |              |  |               |                |  |             
|                      | Capital
    expenditures ($M)         | 66,882                 | 41,039      | 128,996      |  | 63%           | (48%)          |  |             
|                      | Acquisitions
    ($M)                 | 78,713                 | 10,391      | 6,227        |  | 658%          | 1,164%         |  |             
|                      | Gross
    wells drilled               | 16.00                  | 6.00        | 8.00         |  |               |                |  |             
|                      | Net
    wells drilled                 | 12.02                  | 2.08        | 5.56         |  |               |                |  |             



Operational review



|· | Increased
    consolidated average production for the year ended December 31, 2016 by 16% versus 2015.  This increase was primarily
    due to the addition of Corrib production in Ireland.  For the three months ended December 31, 2016, production was
    relatively consistent with the comparable period in 2015 as the addition of Corrib production in Ireland was offset by natural
    declines and actively managed production in Canada, the Netherlands, and Australia.                                                                                                                                                                                                                                         
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | Achieved
    consolidated average production of 60,863 boe/d in Q4 2016, a 4% decrease from Q3 2016 due to natural declines, the timing
    of capital projects, and actively managed production in Canada, the Netherlands, and Australia.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|· | Incurred
    capital expenditures in Q4 2016 of $66.9 million primarily related to France and Canada.  In France, capital expenditures
    of $31.1 million were incurred related to the drilling of four wells in Champotran and other development activities in the
    quarter.  In Canada, capital expenditures of $16.9 million related primarily to drilling activity.                                                                                                                                                                                                                                                                                                                                                  
|· | For
    the year ended December 31, 2016, capital expenditures of $242.4 million primarily related to France, Canada, Australia, and
    the Netherlands.  In France, capital expenditures of $68.5 million related to drilling activity and other development
    activities, including workover and optimization programs in the Aquitaine and Paris basins.  In Canada, capital
    expenditures of $62.7 million related primarily to drilling activity.  In Australia, capital expenditures of $59.9
    million related primarily to drilling two sidetrack wells and our Wandoo Platforms Life Extension project. In the Netherlands,
    capital expenditures of $23.7 million related primarily to drilling activity.
|· | For the year ended December 31, 2016, acquisition spending of $98.5 million related primarily to Germany and the Netherlands. In Germany, acquisition spending of $48.4 million related to the acquisition of operated and non-operated interests in five oil and three gas producing fields. In the Netherlands, acquisition spending of $28.3 million related to the acquisition of an additional 30% working interest in the Drenthe VI production license, which adds 30,000 net acres of land, including 26,000 net acres of undeveloped land and a 30% after payout interest in one
well..                                                                                                                              



5


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Financial review



Net loss

|· | The
    net loss for Q4 2016 was $4.0 million ($0.03/basic share), compared to a net loss of $14.5 million ($0.12/basic share) in
    Q3 2016. The change in the net loss was primarily attributable to higher revenue as a result of higher commodity prices.                                                                                                                                    
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | The
    net loss for Q4 2016 was $4.0 million ($0.03/basic share), compared to a net loss of $142.1 million ($1.28/basic share) in
    Q4 2015.  The change was a result of a non-cash gain on business combination recognized in the current quarter and the
    absence of a non-cash impairment charge recognized in Q4 2015, partially offset by an unrealized loss on derivative instruments.
|· | The
    net loss for the year ended December 31, 2016 of $160.1 million compared to a net loss of $217.3 million for 2015.  The
    change was primarily a result of a lower non-cash impairment charge in 2016, partially offset by the impact of lower commodity
    prices and an unrealized loss on derivative instruments.                                                                   



Fund flows from operations

|· | Generated
    fund flows from operations of $149.6 million during Q4 2016, an increase of 6% from Q3 2016.  This quarter-over-quarter
    increase was primarily attributable to higher commodity prices, partially offset by lower sales volumes.                                                                                                                                                                    
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | Fund
    flows from operations increased by 10% in Q4 2016 as compared to Q4 2015 due to revenue from Ireland and higher crude oil
    pricing.  For the year ended December 31, 2016, fund flows from operations was relatively consistent with the corresponding
    period in 2015 despite significantly lower commodity prices due to production from Ireland and a 16% reduction in per unit
    operating costs.



Net debt

|· | Net
    debt increased to $1.43 billion as at December 31, 2016 from $1.38 billion at December 31, 2015 primarily due to changes in
    net current derivatives, partially offset by a decrease in long term debt of $25.7 million as fund flows from operations generated
    in excess of capital expenditures, abandonment expenditures, net dividends, and acquisitions was used to reduce debt.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Dividends

|· | Declared
    dividends of $0.215 per common share per month during the fourth quarter of 2016, totalling $2.58 per common share for the
    year ended December 31, 2016. This was consistent with dividends declared of $2.58 per common share for the year ended December
    31, 2015.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



6


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




COMMODITY
PRICES



|                                            | Three
    Months Ended |             | %
    change |  |               | Year
    Ended |  | %
    change
|------------------------------------------- | ---------------------- | ----------- | ------------ |  | ------------- | -------------- |  | ------------
|                                            | Dec
    31,            | Sep
    30, | Dec
    31,  |  | Q4/16
    vs. | Q4/16
    vs.  |  |             
|                                            | 2016                   | 2016        | 2015         |  | Q3/16         | Q4/15          |  |             
|Average
    reference prices                |                        |             |              |  |               |                |  |             
|Crude
    oil                               |                        |             |              |  |               |                |  |             
|WTI
    (US $/bbl)                          | 49.29                  | 44.94       | 42.18        |  | 10%           | 17%            |  |             
|Edmonton
    Sweet index (US $/bbl)         | 46.18                  | 42.06       | 39.72        |  | 10%           | 16%            |  |             
|Dated
    Brent (US $/bbl)                  | 49.46                  | 45.85       | 43.69        |  | 8%            | 13%            |  |             
|Natural
    gas                             |                        |             |              |  |               |                |  |             
|AECO
    ($/mmbtu)                          | 3.09                   | 2.32        | 2.46         |  | 33%           | 26%            |  |             
|NBP
    ($/mmbtu)                           | 7.51                   | 5.29        | 7.41         |  | 42%           | 1%             |  |             
|NBP
    (€/mmbtu)                           | 5.22                   | 3.63        | 5.07         |  | 44%           | 3%             |  |             
|TTF
    ($/mmbtu)                           | 7.21                   | 5.43        | 7.28         |  | 33%           | (1%)           |  |             
|TTF
    (€/mmbtu)                           | 5.01                   | 3.73        | 4.98         |  | 34%           | 1%             |  |             
|Henry
    Hub ($/mmbtu)                     | 3.98                   | 3.67        | 3.03         |  | 8%            | 31%            |  |             
|Henry
    Hub (US $/mmbtu)                  | 2.98                   | 2.81        | 2.27         |  | 6%            | 31%            |  |             
|Average
    foreign currency exchange rates |                        |             |              |  |               |                |  |             
|CDN
    $/US $                              | 1.33                   | 1.31        | 1.34         |  | 2%            | (1%)           |  |             
|CDN
    $/Euro                              | 1.44                   | 1.46        | 1.46         |  | (1%)          | (1%)           |  |             
|Average
    realized prices ($/boe)         |                        |             |              |  |               |                |  |             
|Canada                                      | 33.48                  | 28.75       | 28.94        |  | 16%           | 16%            |  |             
|France                                      | 63.71                  | 55.88       | 54.20        |  | 14%           | 18%            |  |             
|Netherlands                                 | 40.84                  | 31.80       | 42.61        |  | 28%           | (4%)           |  |             
|Germany                                     | 36.54                  | 30.47       | 39.68        |  | 20%           | (8%)           |  |             
|Ireland                                     | 44.29                  | 28.68       | -            |  | 54%           | 100%           |  |             
|Australia                                   | 69.05                  | 60.61       | 58.74        |  | 14%           | 18%            |  |             
|United
    States                           | 53.58                  | 44.53       | 41.94        |  | 20%           | 28%            |  |             
|Consolidated                                | 45.93                  | 38.40       | 41.04        |  | 20%           | 12%            |  |             
|Production
    mix (% of production)        |                        |             |              |  |               |                |  |             
|%
    priced with reference to WTI          | 18%                    | 19%         | 22%          |  |               |                |  |             
|%
    priced with reference to AECO         | 20%                    | 20%         | 24%          |  |               |                |  |             
|%
    priced with reference to TTF and NBP  | 33%                    | 32%         | 20%          |  |               |                |  |             
|%
    priced with reference to Dated Brent  | 29%                    | 29%         | 34%          |  |               |                |  |             



|· | Crude
    oil prices in Q4 2016 were higher as compared to both Q3 2016 and Q4 2015 as OPEC and select non-OPEC countries reached an
    agreement to cut output for the first six months of 2017.  This coordinated effort to curb the surplus supply of crude
    oil resulted in an increase in WTI of 10% as compared to Q3 2016 and 17% as compared to Q4 2015. Similarly, Dated Brent increased
    8% as compared to Q3 2016 and 13% as compared to Q4 2015.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|· | An
    early start to winter increased demand for AECO natural gas both domestically and for exports to the US. For the three months
    ended December 31, 2016, the AECO price increased 33% and 26%, respectively, versus Q3 2016 and Q4 2015.  In Q4 2016,
    Henry Hub prices increased by 6% and 31% versus Q3 2016 and Q4 2015, respectively, as US supply/demand fundamentals showed
    signs of tightening.                                             
|· | European
    natural gas prices increased in Q4 2016 as higher power sector demand, gas-in-storage constraints and lower-than-expected
    LNG imports resulted in tighter balances.  For the three months ended December 31, 2016, NBP and TTF increased by 42%
    and 33%, respectively, in Canadian dollar terms versus Q3 2016, and were effectively unchanged versus Q4 2015.                                                                                
|· | A
    highly anticipated 25 basis points rate hike by the US Federal Reserve in Q4 2016 resulted in the Canadian dollar weakening
    against the US dollar.                                                                                                                                                                                                                                                                                                       



7


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




FUND FLOWS FROM OPERATIONS



|                                            | Three
    Months Ended |         |                  | Year
    Ended
|------------------------------------------- | ---------------------- | ------- | ---------------- | --------------
|                                            | Dec
    31, 2016       |         | Sep
    30, 2016 |               
|                                            | $M                     | $/boe   |                  | $M            
|Petroleum
    and natural gas sales         | 259,891                | 45.93   |                  | 232,660       
|Royalties                                   | (14,999)               | (2.65)  |                  | (12,969)      
|Petroleum
    and natural gas revenues      | 244,892                | 43.28   |                  | 219,691       
|Transportation                              | (9,565)                | (1.69)  |                  | (9,696)       
|Operating                                   | (59,616)               | (10.54) |                  | (54,825)      
|General
    and administration              | (11,464)               | (2.03)  |                  | (12,295)      
|PRRT                                        | (1,568)                | (0.28)  |                  | 272           
|Corporate
    income taxes                  | (5,840)                | (1.03)  |                  | (3,546)       
|Interest
    expense                        | (14,410)               | (2.55)  |                  | (14,150)      
|Realized
    gain on derivative instruments | 1,920                  | 0.34    |                  | 13,532        
|Realized
    foreign exchange gain (loss)   | 1,291                  | 0.23    |                  | 2,073         
|Realized
    other income (expense)         | 3,942                  | 0.70    |                  | (82)          
|Fund
    flows from operations              | 149,582                | 26.43   |                  | 140,974       



The following table shows a reconciliation
of the change in fund flows from operations:



|($M)                                                | Q4/16
    vs. Q3/16 | Q4/16
    vs. Q4/15 | 2016
    vs. 2015
|--------------------------------------------------- | ------------------- | ------------------- | -----------------
|Fund
    flows from operations – Comparative period | 140,974             | 136,441             | 516,167          
|Sales
    volume variance:                          |                     |                     |                  
|Canada                                              | (4,835)             | (14,094)            | (21,614)         
|France                                              | (2,111)             | (1,673)             | 699              
|Netherlands                                         | (3,279)             | (10,168)            | 8,917            
|Germany                                             | 135                 | (838)               | (2,249)          
|Ireland                                             | 1,612               | 42,670              | 109,099          
|Australia                                           | (11,171)            | (15,327)            | (3,500)          
|United
    States                                   | (127)               | (269)               | 3,343            
|Pricing
    variance on sales volumes:              |                     |                     |                  
|WTI                                                 | 6,708               | 7,821               | (26,730)         
|AECO                                                | 4,582               | 3,340               | (19,719)         
|Dated
    Brent                                     | 13,504              | 15,915              | (57,688)         
|TTF
    and NBP                                     | 22,213              | (1,805)             | (47,353)         
|Changes
    in:                                     |                     |                     |                  
|Royalties                                           | (2,030)             | 1,286               | 11,636           
|Transportation                                      | 131                 | 582                 | 2,149            
|Operating                                           | (4,791)             | 6,029               | 3,753            
|General
    and administration                      | 831                 | 967                 | 755              
|PRRT                                                | (1,840)             | (514)               | 5,310            
|Corporate
    income taxes                          | (2,294)             | (8,953)             | 26,127           
|Interest                                            | (260)               | 2,174               | 2,895            
|Realized
    derivatives                            | (11,612)            | (19,244)            | 24,020           
|Realized
    foreign exchange                       | (782)               | 1,543               | 3,418            
|Realized
    other income                           | 4,024               | 3,699               | (28,644)         
|Fund
    flows from operations – Current period     | 149,582             | 149,582             | 510,791          



Fund flows from operations was $149.6
million during Q4 2016, an increase of 6% from Q3 2016. This quarter-over-quarter increase was primarily attributable to higher
commodity prices, partially offset by lower sales volumes.



Fund flows from operations increased
by 10% in Q4 2016 as compared to Q4 2015 due to revenue from Ireland and higher crude oil pricing. For the year ended December
31, 2016, fund flows from operations was relatively consistent with the corresponding period in 2015 despite significantly lower
commodity prices due to production from Ireland and a 16% reduction in per unit operating costs.



Fluctuations in fund flows from operations
may occur as a result of changes in commodity prices and costs to produce petroleum and natural gas. In addition, fund flows from
operations may be significantly affected by the timing of crude oil shipments in Australia and France. When crude oil inventory
is built up, the related operating expense, royalties, and depletion expense are deferred and carried as inventory on the consolidated
balance sheet. When the crude oil inventory is subsequently drawn down, the related expenses are recognized.



8


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




CANADA BUSINESS UNIT



Overview

| | · | Production
                                         and assets focused in West Pembina near Drayton Valley, Alberta and Northgate in southeast
                                         Saskatchewan.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Potential
                                         for three significant resource plays sharing the same surface infrastructure in the West
                                         Pembina region in Alberta:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Cardium light oil (1,800m depth)
                                         – in development phase
| | - | ------------------------------------------------------------------------------------------------

| | - | Mannville condensate-rich gas (2,400
                                         – 2,700m depth) – in development phase
| | - | --------------------------------------------------------------------------------------------------------------------

| | - | Duvernay condensate-rich gas (3,200
                                         – 3,400m depth) – in appraisal phase with no investment at present
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| | · | Canadian
                                         cash flows are fully tax-sheltered for the foreseeable future.
| | - | ----------------------------------------------------------------------------------------------------------------



Operational and financial review



|                                |                                        | Three
    Months Ended | %
    change |               |               | Year
    Ended | %
    change
|------------------------------- | -------------------------------------- | ---------------------- | ------------ | ------------- | ------------- | -------------- | ------------
|Canada
    business unit        | Dec
    31,                            | Sep
    30,            | Dec
    31,  | Q4/16
    vs. | Q4/16
    vs. |                |             
|($M
    except as indicated)    | 2016                                   | 2016                   | 2015         | Q3/16         | Q4/15         |                |             
|Production
    and sales        |                                        |                        |              |               |               |                |             
|                                | Crude
    oil and condensate (bbls/d)  | 7,945                  | 8,984        | 10,413        | (12%)         | (24%)          |             
|                                | NGLs
    (bbls/d)                      | 2,444                  | 2,448        | 2,710         | -             | (10%)          |             
|                                | Natural
    gas (mmcf/d)               | 75.12                  | 77.62        | 87.90         | (3%)          | (15%)          |             
|                                | Total
    (boe/d)                      | 22,910                 | 24,368       | 27,773        | (6%)          | (18%)          |             
|Production
    mix (% of total) |                                        |                        |              |               |               |                |             
|                                | Crude
    oil and condensate           | 35%                    | 37%          | 37%           |               |                |             
|                                | NGLs                                   | 11%                    | 10%          | 10%           |               |                |             
|                                | Natural
    gas                        | 54%                    | 53%          | 53%           |               |                |             
|Activity                        |                                        |                        |              |               |               |                |             
|                                | Capital
    expenditures               | 16,895                 | 10,421       | 27,554        | 62%           | (39%)          |             
|                                | Acquisitions                           | 1,378                  | 10,380       | 6,169         |               |                |             
|                                | Gross
    wells drilled                | 11.00                  | 4.00         | 5.00          |               |                |             
|                                | Net
    wells drilled                  | 7.02                   | 1.20         | 2.56          |               |                |             
|Financial
    results           |                                        |                        |              |               |               |                |             
|                                | Sales                                  | 70,573                 | 64,453       | 73,952        | 9%            | (5%)           |             
|                                | Royalties                              | (7,390)                | (4,817)      | (7,146)       | 53%           | 3%             |             
|                                | Transportation                         | (3,504)                | (3,978)      | (3,784)       | (12%)         | (7%)           |             
|                                | Operating                              | (18,161)               | (15,579)     | (24,575)      | 17%           | (26%)          |             
|                                | General
    and administration         | (2,035)                | (3,010)      | (3,669)       | (32%)         | (45%)          |             
|                                | Fund
    flows from operations         | 39,483                 | 37,069       | 34,778        | 7%            | 14%            |             
|Netbacks
    ($/boe)            |                                        |                        |              |               |               |                |             
|                                | Sales                                  | 33.48                  | 28.75        | 28.94         | 16%           | 16%            |             
|                                | Royalties                              | (3.51)                 | (2.15)       | (2.80)        | 63%           | 25%            |             
|                                | Transportation                         | (1.66)                 | (1.77)       | (1.48)        | (6%)          | 12%            |             
|                                | Operating                              | (8.62)                 | (6.95)       | (9.62)        | 24%           | (10%)          |             
|                                | General
    and administration         | (0.97)                 | (1.34)       | (1.44)        | (28%)         | (33%)          |             
|                                | Fund
    flows from operations netback | 18.72                  | 16.54        | 13.60         | 13%           | 38%            |             
|Realized
    prices             |                                        |                        |              |               |               |                |             
|                                | Crude
    oil and condensate ($/bbl)   | 62.13                  | 53.96        | 53.44         | 15%           | 16%            |             
|                                | NGLs
    ($/bbl)                       | 18.12                  | 12.49        | 7.89          | 45%           | 130%           |             
|                                | Natural
    gas ($/mmbtu)              | 3.05                   | 2.39         | 2.57          | 28%           | 19%            |             
|                                | Total
    ($/boe)                      | 33.48                  | 28.75        | 28.94         | 16%           | 16%            |             
|Reference
    prices            |                                        |                        |              |               |               |                |             
|                                | WTI
    (US $/bbl)                     | 49.29                  | 44.94        | 42.18         | 10%           | 17%            |             
|                                | Edmonton
    Sweet index (US $/bbl)    | 46.18                  | 42.06        | 39.72         | 10%           | 16%            |             
|                                | Edmonton
    Sweet index ($/bbl)       | 61.60                  | 54.89        | 53.04         | 12%           | 16%            |             
|                                | AECO
    ($/mmbtu)                     | 3.09                   | 2.32         | 2.46          | 33%           | 26%            |             



Production

| | · | Q4
                                         2016 average production in Canada decreased by 6% quarter-over-quarter and 18% year-over-year
                                         due to production declines, cold weather related issues and the voluntary curtailment
                                         of approximately 13 mmcf/d (2,350 boe/d) of gas weighted production during the quarter.
                                         Full year average production increased 1% versus 2015 primarily due to strong organic
                                         production in our Mannville condensate-rich gas play offsetting declines in our Cardium
                                         and Saskatchewan Midale light oil plays.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




| | · | Cardium
                                         production averaged approximately 6,100 boe/d in Q4 2016, a 7% decrease quarter-over-quarter.
                                         Full year 2016 production averaged approximately 6,700 boe/d.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Mannville
                                         production averaged approximately 9,600 boe/d in Q4 2016 representing a 6% decrease quarter-over-quarter.
                                         Full year 2016 production averaged more than 11,000 boe/d.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Production
                                         from southeast Saskatchewan averaged approximately 2,100 boe/d in Q4 2016, a decrease
                                         of 13% quarter-over-quarter.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Activity review

| | · | Vermilion
                                         drilled seven (6.0 net) operated wells and participated in the drilling of five (1.5
                                         net) non-operated wells during Q4 2016. During 2016, Vermilion drilled 14 (12.6 net)
                                         operated wells and participated in the drilling of 15 (5.0 net) non-operated wells in
                                         Canada.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Cardium

| | - | In 2016, we participated in the
                                         drilling of two (0.2 net) non-operated wells and three (0.5 net) non-operated wells were
                                         brought on production.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | In 2017, we plan to drill or participate
                                         in nine (6.0 net) wells.
| | - | ----------------------------------------------------------------------------------------------------------



Mannville

| | - | During Q4 2016, we drilled seven
                                         (6.0 net) operated wells and participated in the drilling of four (1.5 net) non-operated
                                         wells.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | In 2016, we drilled or participated
                                         in 20 (12.0 net) wells.
| | - | ----------------------------------------------------------------------------------------------------

| | - | In 2017, we plan to drill or participate
                                         in 23 (15.0 net) wells and complete and tie-in six (5.0 net) wells drilled in 2016.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



Saskatchewan

| | - | During Q1 and Q2 2016, we drilled
                                         four (4.0 net) operated wells and participated in three (1.5 net) non-operated wells.
                                         We plan to complete and bring the four operated wells on production in Q1 2017. The non-operated
                                         wells were brought on production during the first half of 2016.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | In 2017, we plan to drill or participate
                                         in 13 (11.3 net) wells.
| | - | ---------------------------------------------------------------------------------------------------------



Sales

| | · | The
                                         realized price for our crude oil and condensate production in Canada is linked to WTI,
                                         and is also subject to market conditions in western Canada. These market conditions can
                                         result in fluctuations in the pricing differential to WTI, as reflected by the Edmonton
                                         Sweet index price. The realized price of our NGLs in Canada is based on product specific
                                         differentials pertaining to trading hubs in the United States. The realized price of
                                         our natural gas in Canada is based on the AECO index in Canada.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Q4
                                         2016 sales per boe increased versus Q3 2016 and Q4 2015 due to stronger crude oil and
                                         natural gas pricing.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Sales
                                         per boe for the year ended December 31, 2016 decreased versus the comparable period in
                                         2015, primarily as a result of lower average crude oil and natural gas pricing.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Royalties

| | · | Royalties
                                         as a percentage of sales for Q4 2016 increased to 10.5% as compared to 7.5% in Q3 2016
                                         and 9.7% in Q4 2015 due to the impact of higher reference prices on the sliding scale
                                         used to determine royalty rates.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Royalties
                                         as a percentage of sales for the year ended December 31, 2016 was 8.5% versus 8.8% in
                                         2015 as the impact of lower reference prices more than offset wells coming off of incentive
                                         royalty rates after reaching specified production thresholds.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Transportation

| | · | Transportation
                                         expense relates to the delivery of crude oil and natural gas production to major pipelines
                                         where legal title transfers.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Transportation
                                         expense for Q4 2016 was lower than Q3 2016 and Q4 2015 due to lower production.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| | · | Transportation
                                         expense for the year ended December 31, 2016 was 6% lower than the prior year while production
                                         increased 1%. This was due to a lower oil weighting, which incurs a higher per unit expense,
                                         and a reduction in transportation rates.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







Operating

| | · | Operating
                                         expense was higher on an absolute dollar and per boe basis in Q4 2016 versus Q3 2016.
                                         This was primarily due to the timing of project and maintenance activity that was executed
                                         in the current quarter.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Operating
                                         expense for the three months and year ended December 31, 2016 decreased by 10% and 20%
                                         respectively on a per unit basis versus the comparable periods in 2015. Our continued
                                         focus on cost reduction initiatives including major project, transportation and other
                                         costs resulted in an annual reduction to operating expenses of $17.5 million while growing
                                         production by 1%.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



General and administration

| | · | General
                                         and administration expense fluctuation in Q4 2016 as compared to Q3 2016 was the result
                                         of timing of expenditures.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Year-over-year,
                                         2016 general and administration expense was 30% lower than 2015 due to initiatives to
                                         reduce our cost structure.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




FRANCE BUSINESS UNIT



Overview

| | · | Entered
                                         France in 1997 and completed three subsequent acquisitions, including two in 2012.
| | - | -----------------------------------------------------------------------------------------------------------------------------------

| | · | Largest
                                         oil producer in France, constituting approximately three-quarters of domestic oil production.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| | · | Low
                                         base decline producing assets comprised of large conventional oil fields with high working
                                         interests located in the Aquitaine and Paris Basins.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Identified
                                         inventory of workover, infill drilling, and secondary recovery opportunities.
| | - | ---------------------------------------------------------------------------------------------------------------------------------



Operational and financial review



|                             |                                 | Three
    Months Ended |             | %
    change |               |               | Year
    Ended | %
    change
|---------------------------- | ------------------------------- | ---------------------- | ----------- | ------------ | ------------- | ------------- | -------------- | ------------
|France
    business unit     | Dec
    31,                     | Sep
    30,            | Dec
    31, |              | Q4/16
    vs. | Q4/16
    vs. |                |             
|($M
    except as indicated) | 2016                            | 2016                   | 2015        |              | Q3/16         | Q4/15         |                |             
|Production                   |                                 |                        |             |              |               |               |                |             
|                             | Crude
    oil (bbls/d)          | 11,220                 | 11,827      | 12,537       |               | (5%)          | (11%)          |             
|                             | Natural
    gas (mmcf/d)        | 0.38                   | 0.42        | 1.36         |               | (10%)         | (72%)          |             
|                             | Total
    (boe/d)               | 11,283                 | 11,897      | 12,763       |               | (5%)          | (12%)          |             
|Sales                        |                                 |                        |             |              |               |               |                |             
|                             | Crude
    oil (bbls/d)          | 12,209                 | 12,617      | 12,490       |               | (3%)          | (2%)           |             
|                             | Natural
    gas (mmcf/d)        | 0.38                   | 0.42        | 1.36         |               | (11%)         | (72%)          |             
|                             | Total
    (boe/d)               | 12,272                 | 12,687      | 12,717       |               | (3%)          | (3%)           |             
|Inventory
    (mbbls)        |                                 |                        |             |              |               |               |                |             
|                             | Opening
    crude oil inventory | 239                    | 312         | 239          |               |               |                |             
|                             | Crude
    oil production        | 1,032                  | 1,088       | 1,153        |               |               |                |             
|                             | Crude
    oil sales             | (1,123)                | (1,161)     | (1,149)      |               |               |                |             
|                             | Closing
    crude oil inventory | 148                    | 239         | 243          |               |               |                |             
|Activity                     |                                 |                        |             |              |               |               |                |             
|                             | Capital
    expenditures        | 31,127                 | 11,110      | 24,085       |               | 180%          | 29%            |             
|                             | Acquisitions                    | -                      | -           | 79           |               |               |                |             
|                             | Gross
    wells drilled         | 4.00                   | -           | -            |               |               |                |             
|                             | Net
    wells drilled           | 4.00                   | -           | -            |               |               |                |             
|Financial
    results        |                                 |                        |             |              |               |               |                |             
|                             | Sales                           | 71,926                 | 65,221      | 63,411       |               | 10%           | 13%            |             
|                             | Royalties                       | (6,692)                | (7,069)     | (7,198)      |               | (5%)          | (7%)           |             
|                             | Transportation                  | (3,983)                | (3,586)     | (4,275)      |               | 11%           | (7%)           |             
|                             | Operating                       | (11,482)               | (12,933)    | (15,792)     |               | (11%)         | (27%)          |             
|                             | General
    and administration  | (5,101)                | (4,590)     | (4,894)      |               | 11%           | 4%             |             
|                             | Other
    income                | 3,822                  | -           | -            |               | 100%          | 100%           |             
|                             | Current
    income taxes        | (2,867)                | 955         | 4,529        |               | (400%)        | (163%)         |             
|                             | Fund
    flows from operations  | 45,623                 | 37,998      | 35,781       |               | 20%           | 28%            |             
|Netbacks
    ($/boe)         |                                 |                        |             |              |               |               |                |             
|                             | Sales                           | 63.71                  | 55.88       | 54.20        |               | 14%           | 18%            |             
|                             | Royalties                       | (5.93)                 | (6.06)      | (6.15)       |               | (2%)          | (4%)           |             
|                             | Transportation                  | (3.53)                 | (3.07)      | (3.65)       |               | 15%           | (3%)           |             
|                             | Operating                       | (10.17)                | (11.08)     | (13.50)      |               | (8%)          | (25%)          |             
|                             | General
    and administration  | (4.52)                 | (3.93)      | (4.18)       |               | 15%           | 8%             |             
|                             | Other
    income                | 3.39                   | -           | -            |               | 100%          | 100%           |             
|                             | Current
    income taxes        | (2.54)                 | 0.82        | 3.87         |               | (410%)        | (166%)         |             
|                             | Fund
    flows from operations  | 40.41                  | 32.56       | 30.59        |               | 24%           | 32%            |             
|Realized
    prices          |                                 |                        |             |              |               |               |                |             
|                             | Crude
    oil ($/bbl)           | 63.99                  | 56.14       | 54.88        |               | 14%           | 17%            |             
|                             | Natural
    gas ($/mmbtu)       | 1.55                   | 1.58        | 2.81         |               | (2%)          | (45%)          |             
|                             | Total
    ($/boe)               | 63.71                  | 55.88       | 54.20        |               | 14%           | 18%            |             
|Reference
    prices         |                                 |                        |             |              |               |               |                |             
|                             | Dated
    Brent (US $/bbl)      | 49.46                  | 45.85       | 43.69        |               | 8%            | 13%            |             
|                             | Dated
    Brent ($/bbl)         | 65.97                  | 59.84       | 58.34        |               | 10%           | 13%            |             



11


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Production

| | · | Q4
                                         2016 production decreased 5% versus the prior quarter and 12% versus Q4 2015. Full year
                                         production decreased 4% versus 2015. Decreased production for the quarter and the year
                                         were primarily due to production declines, well downtime and third party restrictions
                                         impacting Vic Bilh gas production.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Activity review

| | · | During
                                         Q4 2016, we drilled four wells in Champotran and commenced drilling of a horizontal sidetrack
                                         well in the Vulaines field, with completion and tie-in planned for early 2017.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In
                                         2016, additional activity included workover and optimization programs in the Aquitaine
                                         and Paris Basins.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In
                                         2017, we plan to drill our first four (4.0 net) wells in the Neocomian fields in the
                                         Paris Basin, in addition to continuing our workover and optimization activities.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales

| | · | Crude
                                         oil in France is priced with reference to Dated Brent.
| | - | -----------------------------------------------------------------------------------------------------

| | · | Q4
                                         2016 sales per boe increased versus Q3 2016 and Q4 2015 as a result of stronger Dated
                                         Brent pricing.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Sales
                                         per boe for the year ended December 31, 2016, decreased versus the comparable period
                                         in 2015 as a result of lower average crude oil pricing.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Royalties

| | · | Royalties
                                         in France relate to two components: RCDM (levied on units of production and not subject
                                         to changes in commodity prices) and R31 (based on a percentage of sales).
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Royalties
                                         as a percentage of sales of 9.3% for the three months ended December 31, 2016 was lower
                                         than Q3 2016 (10.8%) and Q4 2015 (11.3%) as a result of the impact of fixed RCDM royalties
                                         coupled with higher realized pricing in the current quarter. On a year-over-year basis,
                                         the royalty rate increased to 11.0% versus 9.6% in 2015 due to lower realized pricing
                                         in the current year.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Transportation

| | · | Transportation
                                         expense per boe for Q4 2016 was higher than Q3 2016 and consistent with Q4 2015. The
                                         increase over Q3 2016 was due to the timing of project and maintenance activity executed
                                         in the current quarter.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Transportation
                                         expense decreased by 4% for 2016 versus 2015 as a result of initiatives to reduce our
                                         cost structure, which included vessel cost renegotiation and lower project activity.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating

| | · | Operating
                                         expense on a dollar and per boe basis decreased in Q4 2016 versus both Q3 2016 and Q4
                                         2015 due to the timing of expenditures and a continued focus on initiatives to reduce
                                         costs.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Year-over-year,
                                         operating expense decreased on a dollar and per boe basis in 2016 versus 2015 due to
                                         the continuation of focus on cost reduction initiatives identified in 2015 and new initiatives
                                         identified in 2016, which more than off-set unfavourable foreign exchange rates as the
                                         Canadian dollar weakened versus the Euro. After normalizing for the unfavorable foreign
                                         exchange, per unit costs decreased 4.5% in 2016.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



General and administration

| | · | General
                                         and administration expense for Q4 2016 was 11% higher than Q3 2016 and 4% higher than
                                         Q4 2015 due to the timing of expenditures and recoveries.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Year-over-year,
                                         2016 general and administration expense was 6% lower than 2015 due to the impact of cost
                                         reduction initiatives.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other income

| | · | In
                                         2015, Vermilion was awarded a recovery of costs resulting from an oil spill at the Ambès
                                         oil terminal in France that occurred in 2007. The court awarded Vermilion approximately
                                         €25 million (before taxes), of which 50% was due immediately to Vermilion upon posting
                                         a surety bond. The payment was received in 2015, with the remainder due upon conclusion
                                         of the appeal process. Approximately 90% of the recovery was recorded as other income
                                         in 2015.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In
                                         Q4 2016, the Court of Appeal of Versailles maintained this award. The remaining payment
                                         was received and Vermilion’s surety bond was returned in 2017. The remaining amount
                                         of the recovery was recognized as other income in 2016.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Current income taxes

| | · | In
                                         France, current income taxes are applied to taxable income, after eligible deductions,
                                         at a statutory rate of 34.4% for 2016.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Current
                                         income taxes in Q4 2016 were higher compared to Q3 2016 due to increased sales and other
                                         income. Q4 2016 current income taxes were higher compared to Q4 2015 due to increased
                                         sales and the reversal of tax depletion impairments taken in Q4 2015.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Current
                                         income taxes for the year ended December 31, 2016 were lower versus the comparative period
                                         in 2015 as a result of decreased sales and other income.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12


Vermilion Energy Inc.2016 Management’s Discussion & Analysis






NETHERLANDS BUSINESS UNIT



Overview

| | · | Entered
                                         the Netherlands in 2004.                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------
| | · | Second
                                         largest onshore gas producer.                                              
| | · | Interests
                                         include 24 onshore licenses and two offshore licenses.                  
| | · | Licenses
                                         include more than 800,000 net acres of land, 95% of which is undeveloped.



Operational and financial review



|                              |                                        | Three
    Months Ended | %
    change |               |               | Year
    Ended | %
    change
|----------------------------- | -------------------------------------- | ---------------------- | ------------ | ------------- | ------------- | -------------- | ------------
|Netherlands
    business unit | Dec
    31,                            | Sep
    30,            | Dec
    31,  | Q4/16
    vs. | Q4/16
    vs. |                |             
|($M
    except as indicated)  | 2016                                   | 2016                   | 2015         | Q3/16         | Q4/15         |                |             
|Production
    and sales      |                                        |                        |              |               |               |                |             
|                              | Condensate
    (bbls/d)                | 57                     | 86           | 110           | (34%)         | (48%)          |             
|                              | Natural
    gas (mmcf/d)               | 41.15                  | 47.62        | 56.34         | (14%)         | (27%)          |             
|                              | Total
    (boe/d)                      | 6,915                  | 8,023        | 9,500         | (14%)         | (27%)          |             
|Activity                      |                                        |                        |              |               |               |                |             
|                              | Capital
    expenditures               | 5,737                  | 6,441        | 18,810        | (11%)         | (70%)          |             
|                              | Acquisitions                           | 28,259                 | -            | -             |               |                |             
|                              | Gross
    wells drilled                | -                      | 2.00         | -             |               |                |             
|                              | Net
    wells drilled                  | -                      | 0.88         | -             |               |                |             
|Financial
    results         |                                        |                        |              |               |               |                |             
|                              | Sales                                  | 25,978                 | 23,470       | 37,243        | 11%           | (30%)          |             
|                              | Royalties                              | (294)                  | (312)        | (224)         | (6%)          | 31%            |             
|                              | Operating                              | (5,660)                | (4,854)      | (6,263)       | 17%           | (10%)          |             
|                              | General
    and administration         | (162)                  | 633          | (813)         | (126%)        | (80%)          |             
|                              | Current
    income taxes               | 100                    | (1,264)      | (2,930)       | (108%)        | (103%)         |             
|                              | Fund
    flows from operations         | 19,962                 | 17,673       | 27,013        | 13%           | (26%)          |             
|Netbacks
    ($/boe)          |                                        |                        |              |               |               |                |             
|                              | Sales                                  | 40.84                  | 31.80        | 42.61         | 28%           | (4%)           |             
|                              | Royalties                              | (0.46)                 | (0.42)       | (0.26)        | 10%           | 77%            |             
|                              | Operating                              | (8.90)                 | (6.58)       | (7.17)        | 35%           | 24%            |             
|                              | General
    and administration         | (0.26)                 | 0.86         | (0.93)        | (130%)        | (72%)          |             
|                              | Current
    income taxes               | 0.16                   | (1.71)       | (3.35)        | (109%)        | (105%)         |             
|                              | Fund
    flows from operations netback | 31.38                  | 23.95        | 30.90         | 31%           | 2%             |             
|Realized
    prices           |                                        |                        |              |               |               |                |             
|                              | Condensate
    ($/bbl)                 | 63.18                  | 49.43        | 48.30         | 28%           | 31%            |             
|                              | Natural
    gas ($/mmbtu)              | 6.78                   | 5.27         | 7.09          | 29%           | (4%)           |             
|                              | Total
    ($/boe)                      | 40.84                  | 31.80        | 42.61         | 28%           | (4%)           |             
|Reference
    prices          |                                        |                        |              |               |               |                |             
|                              | TTF
    ($/mmbtu)                      | 7.21                   | 5.43         | 7.28          | 33%           | (1%)           |             
|                              | TTF
    (€/mmbtu)                      | 5.01                   | 3.73         | 4.98          | 34%           | 1%             |             



Production

| | · | Q4
                                         2016 production decreased 14% quarter-over-quarter and 27% year-over-year due to production
                                         curtailments in accordance with extended well test plans and management of production
                                         to meet corporate production targets.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Full
                                         year 2016 production increased 7% versus 2015, primarily due to production additions
                                         from Slootdorp-06/07 and Diever-02 wells, which were on extended production test.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Production
                                         in the Netherlands is actively managed to optimize facility use and regulate declines.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



Activity review

| | · | During
                                         Q3 2016, Vermilion drilled two (0.9 net) wells. Langezwaag-3 (42% working interest) was
                                         completed and brought on production during Q4 2016, at a restricted rate of 7.5 mmcf/d.
                                         The Andel-6ST (45% working interest) encountered a large gas column of inadequate reservoir
                                         quality to justify completion.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | During
                                         Q4 2016, we acquired an additional 30% working interest in the Drenthe VI production
                                         license, adding 30,000 net acres of land, including 26,000 net acres of undeveloped land
                                         and a 30% after payout interest in one well.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In
                                         2017, we plan to drill two (1.0 net) exploration wells, acquire 230 square kilometres
                                         of 3D seismic and execute a major turnaround at the Garijp Treatment Centre.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





13


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Sales

| | · | The
                                         price of our natural gas in the Netherlands is based on the TTF index.                                                                                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Q4
                                         2016 sales per boe increased versus Q3 2016 consistent with an increase in the TTF reference
                                         price.                                                                                                                                                                                 
| | · | Sales
                                         per boe for the three months ended December 31, 2016 were relatively consistent with
                                         the comparable period in 2015. For the year ended December 31, 2016, sales per boe decreased
                                         consistent with a decrease in the TTF reference price.



Royalties

| | · | In
                                         the Netherlands, we pay overriding royalties on certain wells.  As such, fluctuations
                                         in royalty expense in the periods presented relate to the amount of production from those
                                         wells subject to overriding royalties.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Transportation

| | · | Our
                                         production in the Netherlands is not subject to transportation expense as gas is sold
                                         at the plant gate.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating

| | · | Q4
                                         2016 operating expense on a per boe basis increased versus Q3 2016 and Q4 2015 due to
                                         increased project activity and lower recoveries.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Year-over-year,
                                         2016 operating expense decreased by 9% on a dollar basis while growing production by
                                         7% resulting in a 14% per unit decrease as a result of focus on initiatives to reduce
                                         our cost structure.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



General and administration

| | · | Variances
                                         in general and administration expense from quarter to quarter relate to timing of expenditures,
                                         including the timing of allocations from Vermilion’s Corporate segment.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Year-over-year
                                         the decrease in general and administration is primarily due to lower head office allocations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------



Current income taxes

| | · | In
                                         the Netherlands, current income taxes are applied to taxable income, after eligible deductions
                                         and a 10% uplift deduction applied to operating expenses, eligible G&A and tax deductions
                                         for depletion and abandonment retirement obligations, at a tax rate of 50%.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Current
                                         income taxes in Q4 2016 were lower compared to Q3 2016 due to increased tax deductions
                                         for current year capital expenditures. Q4 2016 current income taxes were lower compared
                                         to Q4 2015 mainly due to decreased sales.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Current
                                         income taxes for the year ended December 31, 2016 were lower versus the comparative period
                                         in 2015 due to decreased operating income in 2016, partially offset by additional tax
                                         deductions for capital expenditures in 2015.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





14


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




GERMANY BUSINESS UNIT



Overview

| | · | Vermilion
                                         entered Germany in February 2014.
| | - | ------------------------------------------------------------------------------------

| | · | Hold
                                         a 25% interest in a four partner consortium. Associated assets include four gas producing
                                         fields spanning 11 production licenses as well as an exploration license in surrounding
                                         fields. Total license area comprises 204,000 gross acres, of which 85% is in the exploration
                                         license.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Entered
                                         into a farm-in agreement in July 2015 that provides Vermilion with participating interest
                                         in 18 onshore exploration licenses in northwest Germany, comprising approximately 850,000
                                         net undeveloped acres of oil and natural gas rights. Vermilion will operate 11 of the
                                         18 licenses during the exploration phase.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Awarded
                                         110,000 net acres (100% working interest) across two exploration licenses in the Lower
                                         Saxony basin in 2015.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In
                                         December 2016, Vermilion closed the acquisition of operated and non-operated interests
                                         in five oil and three gas producing fields from Engie E&P Deutschland GmbH. Vermilion
                                         will assume operatorship of six of the eight producing fields. During 2016, the assets
                                         produced approximately 2,000 boe/d (50% oil), representing our first operated producing
                                         properties in Germany.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operational and financial review



|                             |                                        | Three
    Months Ended | %
    change |               |               | Year
    Ended | %
    change
|---------------------------- | -------------------------------------- | ---------------------- | ------------ | ------------- | ------------- | -------------- | ------------
|Germany
    business unit    | Dec
    31,                            | Sep
    30,            | Dec
    31,  | Q4/16
    vs. | Q4/16
    vs. |                |             
|($M
    except as indicated) | 2016                                   | 2016                   | 2015         | Q3/16         | Q4/15         |                |             
|Production
    and sales     |                                        |                        |              |               |               |                |             
|                             | Natural
    gas (mmcf/d)               | 14.80                  | 14.52        | 16.17         | 2%            | (8%)           |             
|                             | Total
    (boe/d)                      | 2,467                  | 2,420        | 2,695         | 2%            | (8%)           |             
|Activity                     |                                        |                        |              |               |               |                |             
|                             | Capital
    expenditures               | 1,694                  | 978          | (441)         | 73%           | (484%)         |             
|                             | Acquisitions                           | 48,377                 | -            | -             |               |                |             
|                             | Gross
    wells drilled                | -                      | -            | -             |               |                |             
|                             | Net
    wells drilled                  | -                      | -            | -             |               |                |             
|Financial
    results        |                                        |                        |              |               |               |                |             
|                             | Sales                                  | 8,294                  | 6,783        | 9,840         | 22%           | (16%)          |             
|                             | Royalties                              | (12)                   | (246)        | (1,166)       | (95%)         | (99%)          |             
|                             | Transportation                         | (375)                  | (556)        | (508)         | (33%)         | (26%)          |             
|                             | Operating                              | (3,959)                | (3,321)      | (4,788)       | 19%           | (17%)          |             
|                             | General
    and administration         | (1,755)                | (1,657)      | (3,032)       | 6%            | (42%)          |             
|                             | Fund
    flows from operations         | 2,193                  | 1,003        | 346           | 119%          | 534%           |             
|Netbacks
    ($/boe)         |                                        |                        |              |               |               |                |             
|                             | Sales                                  | 36.54                  | 30.47        | 39.68         | 20%           | (8%)           |             
|                             | Royalties                              | (0.06)                 | (1.10)       | (4.70)        | (95%)         | (99%)          |             
|                             | Transportation                         | (1.65)                 | (2.50)       | (2.05)        | (34%)         | (20%)          |             
|                             | Operating                              | (17.44)                | (14.92)      | (19.31)       | 17%           | (10%)          |             
|                             | General
    and administration         | (7.73)                 | (7.44)       | (12.22)       | 4%            | (37%)          |             
|                             | Fund
    flows from operations netback | 9.66                   | 4.51         | 1.40          | 114%          | 590%           |             
|Reference
    prices         |                                        |                        |              |               |               |                |             
|                             | TTF
    ($/mmbtu)                      | 7.21                   | 5.43         | 7.28          | 33%           | (1%)           |             
|                             | TTF
    (€/mmbtu)                      | 5.01                   | 3.73         | 4.98          | 34%           | 1%             |             



Production

| | · | Q4
                                         2016 production remained consistent with the prior quarter, and decreased 8% versus Q4
                                         2015 and 6% for the full year 2016 versus 2015 mainly due to natural declines.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Activity review

| | · | In
                                         2016, the majority of activity was associated with permitting and pre-drill activities
                                         for the Burgmoor Z5 well.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | During
                                         December 2016, we completed the acquisition of oil and gas producing properties from
                                         Engie E&P Deutschland GmbH, which provides us with our first operated production
                                         in the country.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In
                                         2017, we plan to continue our ongoing analysis of the geologic data associated with the
                                         farm-in assets and to continue integration activities associated with the Engie acquisition.
                                         We will also continue permitting and pre-drill activities associated our first operated
                                         well in Germany, Burgmoor Z5 well (25% working interest) in the Dümmersee-Uchte
                                         area, which we plan to drill in 2018.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





15


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Sales

| | · | The
                                         price of our natural gas in Germany is based on the TTF index.
| | - | -----------------------------------------------------------------------------------------------------------

| | · | Q4
                                         2016 sales per boe increased versus Q3 2016, consistent with an increase in the TTF reference
                                         price. Q4 2016 sales per boe decreased versus Q4 2015 as a result of a decrease in the
                                         TTF month-ahead index on which sales in Germany are primarily based.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | For
                                         the year ended December 31, 2016, sales per boe decreased compared to 2015, consistent
                                         with a decline in the TTF reference price.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Royalties

| | · | Our
                                         production in Germany is subject to state and private royalties on sales after certain
                                         eligible deductions.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Q4
                                         2016 royalties as a percentage of sales was a negligible amount versus 3.6% in Q3 2016
                                         and 11.8% in Q4 2015. The decrease in Q4 2016 was due to favourable adjustments from
                                         prior periods.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Full
                                         year 2016 royalties as a percentage of sales was 7.2% versus 15.7% in 2015 as a result
                                         of favourable prior year adjustments impacting 2016.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Transportation

| | · | Transportation
                                         expense in Germany relates to costs incurred to deliver natural gas from the processing
                                         facility to the customer.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Q4
                                         2016 transportation expense decreased from Q3 2016 due to seasonal changes in the level
                                         of transportation facility maintenance, which is typically higher at the beginning of
                                         the year.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Year-over-year
                                         transportation expense decreased due to a decrease in volumes and a reduction in unfavourable
                                         prior period adjustments in 2016.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating

| | · | Operating
                                         expenses for Germany primarily relate to tariffs charged for facility operations and
                                         gas processing.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Operating
                                         expense for Q4 2016 increased versus Q3 2016 due to increased project activity.
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| | · | Full
                                         year operating expense was higher on a dollar and per boe basis due to an unfavorable
                                         adjustment from the prior year recorded in 2016 and increased project activity.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



General and administration

| | · | Q4
                                         2016 general and administration expense was higher than Q3 2016 and lower than Q4 2015
                                         due to timing of head office allocations.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Full
                                         year 2016 general and administration expense increased over 2015 due to higher staffing
                                         levels and office costs incurred to support our farm-in agreement as well as costs incurred
                                         to support asset acquisition activity.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | We
                                         expect per unit general and administration costs to improve as our production base in
                                         Germany grows.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





16


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




IRELAND BUSINESS UNIT



Overview

| | · | 18.5%
                                         non-operating interest in the offshore Corrib gas field located approximately 83 km off
                                         the northwest coast of Ireland.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Project
                                         comprises six offshore wells, offshore and onshore sales and transportation pipeline
                                         segments as well as a natural gas processing facility.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Production
                                         volumes reached full plant capacity of approximately 65 mmcf/d (10,900 boe/d), net to
                                         Vermilion, at the end of Q2 2016.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operational and financial review



|                             |                                        | Three
    Months Ended |             | %
    change |               |               | Year
    Ended |  | %
    change
|---------------------------- | -------------------------------------- | ---------------------- | ----------- | ------------ | ------------- | ------------- | -------------- |  | ------------
|Ireland
    business unit    | Dec
    31,                            | Sep
    30,            | Dec
    31, |              | Q4/16
    vs. | Q4/16
    vs. |                |  | Dec
    31, 
|($M
    except as indicated) | 2016                                   | 2016                   | 2015        |              | Q3/16         | Q4/15         |                |  | 2016        
|Production
    and sales     |                                        |                        |             |              |               |               |                |  |             
|                             | Natural
    gas (mmcf/d)               | 62.92                  | 59.28       | 0.12         |               | 6%            | 52,771%        |  |             
|                             | Total
    (boe/d)                      | 10,486                 | 9,879       | 20.00        |               | 6%            | 52,330%        |  |             
|Activity                     |                                        |                        |             |              |               |               |                |  |             
|                             | Capital
    expenditures               | 1,711                  | 2,416       | 12,493       |               | (29%)         | (86%)          |  |             
|Financial
    results        |                                        |                        |             |              |               |               |                |  |             
|                             | Sales                                  | 42,727                 | 26,065      | 57           |               | 64%           | 74,860%        |  |             
|                             | Transportation                         | (1,703)                | (1,576)     | (1,580)      |               | 8%            | 8%             |  |             
|                             | Operating                              | (5,148)                | (4,695)     | (15)         |               | 10%           | 34,220%        |  |             
|                             | General
    and administration         | (1,523)                | (955)       | (714)        |               | 59%           | 113%           |  |             
|                             | Fund
    flows from operations         | 34,353                 | 18,839      | (2,252)      |               | 82%           | (1,625%)       |  |             
|Netbacks
    ($/boe)         |                                        |                        |             |              |               |               |                |  |             
|                             | Sales                                  | 44.29                  | 28.68       | -            |               | 54%           | 100%           |  |             
|                             | Transportation                         | (1.77)                 | (1.73)      | -            |               | 2%            | 100%           |  |             
|                             | Operating                              | (5.34)                 | (5.17)      | -            |               | 3%            | 100%           |  |             
|                             | General
    and administration         | (1.58)                 | (1.05)      | -            |               | 50%           | 100%           |  |             
|                             | Fund
    flows from operations netback | 35.60                  | 20.73       | -            |               | 72%           | 100%           |  |             
|Reference
    prices         |                                        |                        |             |              |               |               |                |  |             
|                             | NBP
    ($/mmbtu)                      | 7.51                   | 5.29        | 7.41         |               | 42%           | 1%             |  |             
|                             | NBP
    (€/mmbtu)                      | 5.22                   | 3.63        | 5.07         |               | 44%           | 3%             |  |             



Production

| | · | Natural
                                         gas began to flow from our Corrib gas project on December 30, 2015 and production volumes
                                         reached full plant capacity of approximately 65 mmcf/d (10,900 boe/d), net to Vermilion
                                         at the end of Q2 2016.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Q4
                                         2016 production increased 6% quarter-over-quarter due to reduced downtime. Full year
                                         production averaged 51 mmcf/d (8,482 boe/d) while ramping up to full capacity.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Production
                                         results continued to benefit from better than expected well deliverability and minimal
                                         downtime.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Activity review

| | · | Following
                                         the conclusion of a successful offshore work campaign in Q3 2016 that included laying
                                         a flowline to the P2 well, all six wells are now available for production.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Sales

| | · | The
                                         price of our natural gas in Ireland is based on the NBP index.
| | - | -----------------------------------------------------------------------------------------------------------

| | · | Q4
                                         2016 sales per boe increased relative to Q3 2016, consistent with an increase in the
                                         NBP reference price.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Royalties

| | · | Our
                                         production in Ireland is not subject to royalties.
| | - | -----------------------------------------------------------------------------------------------



Transportation

| | · | Transportation
                                         expense in Ireland relates to payments under a ship-or-pay agreement related to the Corrib
                                         project.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Q4
                                         2016 transportation expense increased versus Q3 2016 and Q4 2015 due to a prior period
                                         adjustment in the current quarter offsetting the decrease in the ship-or-pay obligation.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Full
                                         year 2016 transportation expense decreased versus 2015 due to the decrease in the ship
                                         or pay obligation.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





17


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Operating

| | · | Q4
                                         2016 operating expense on a per unit basis was consistent with Q3 2016, contributing
                                         to full year 2016 per unit costs of $6.01/boe.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



General and administration

| | · | General
                                         and administrative expense for the three months ended December 31, 2016 was higher versus
                                         Q3 2016 due to timing of expenditures.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | General
                                         and administrative expense for the three months and year ended December 31, 2016 was
                                         higher than the comparable periods in 2015 due to increased corporate support provided
                                         in the first full year of operations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





18


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




AUSTRALIA BUSINESS UNIT



Overview

| | · | Entered
                                         Australia in 2005.
| | - | -------------------------------------------------------------------

| | · | Hold
                                         a 100% operated working interest in the Wandoo field, located approximately 80 km offshore
                                         on the northwest shelf of Australia.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Production
                                         is operated from two off-shore platforms, and originates from 18 well bores and five
                                         lateral sidetrack wells.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Wells
                                         that utilize horizontal legs (ranging in length from 500 to 3,000 plus metres) are located
                                         600 metres below the seabed in approximately 55 metres of water depth.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operational and financial review



|                             |                                        | Three
    Months Ended | %
    change |               |               | Year
    Ended |  | %
    change
|---------------------------- | -------------------------------------- | ---------------------- | ------------ | ------------- | ------------- | -------------- |  | ------------
|Australia
    business unit  | Dec
    31,                            | Sep
    30,            | Dec
    31,  | Q4/16
    vs. | Q4/16
    vs. |                |  | Dec
    31, 
|($M
    except as indicated) | 2016                                   | 2016                   | 2015         | Q3/16         | Q4/15         |                |  | 2016        
|Production                   |                                        |                        |              |               |               |                |  |             
|                             | Crude
    oil (bbls/d)                 | 6,388                  | 6,562        | 7,824         | (3%)          | (18%)          |  |             
|Sales                        |                                        |                        |              |               |               |                |  |             
|                             | Crude
    oil (bbls/d)                 | 6,038                  | 8,041        | 8,873         | (25%)         | (32%)          |  |             
|Inventory
    (mbbls)        |                                        |                        |              |               |               |                |  |             
|                             | Opening
    crude oil inventory        | 82                     | 218          | 172           | (62%)         | (52%)          |  |             
|                             | Crude
    oil production               | 588                    | 604          | 720           | (3%)          | (18%)          |  |             
|                             | Crude
    oil sales                    | (555)                  | (740)        | (817)         | (25%)         | (32%)          |  |             
|                             | Closing
    crude oil inventory        | 115                    | 82           | 75            |               |                |  |             
|Activity                     |                                        |                        |              |               |               |                |  |             
|                             | Capital
    expenditures               | 5,236                  | 6,908        | 40,852        | (24%)         | (87%)          |  |             
|                             | Gross
    wells drilled                | -                      | -            | 1.00          |               |                |  |             
|                             | Net
    wells drilled                  | -                      | -            | 1.00          |               |                |  |             
|Financial
    results        |                                        |                        |              |               |               |                |  |             
|                             | Sales                                  | 38,352                 | 44,835       | 47,952        | (14%)         | (20%)          |  |             
|                             | Operating                              | (14,905)               | (13,011)     | (13,941)      | 15%           | 7%             |  |             
|                             | General
    and administration         | (1,998)                | (1,289)      | (1,768)       | 55%           | 13%            |  |             
|                             | PRRT                                   | (1,568)                | 272          | (1,054)       | (676%)        | 49%            |  |             
|                             | Current
    income taxes               | (2,703)                | (2,916)      | 1,201         | (7%)          | (325%)         |  |             
|                             | Fund
    flows from operations         | 17,178                 | 27,891       | 32,390        | (38%)         | (47%)          |  |             
|Netbacks
    ($/boe)         |                                        |                        |              |               |               |                |  |             
|                             | Sales                                  | 69.05                  | 60.61        | 58.74         | 14%           | 18%            |  |             
|                             | Operating                              | (26.83)                | (17.59)      | (17.08)       | 53%           | 57%            |  |             
|                             | General
    and administration         | (3.60)                 | (1.74)       | (2.17)        | 107%          | 66%            |  |             
|                             | PRRT                                   | (2.82)                 | 0.37         | (1.29)        | (862%)        | 119%           |  |             
|                             | Current
    income taxes               | (4.87)                 | (3.94)       | 1.47          | 24%           | (431%)         |  |             
|                             | Fund
    flows from operations netback | 30.93                  | 37.71        | 39.67         | (18%)         | (22%)          |  |             
|Reference
    prices         |                                        |                        |              |               |               |                |  |             
|                             | Dated
    Brent (US $/bbl)             | 49.46                  | 45.85        | 43.69         | 8%            | 13%            |  |             
|                             | Dated
    Brent ($/bbl)                | 65.97                  | 59.84        | 58.34         | 10%           | 13%            |  |             



Production

| | · | Q4
                                         2016 production decreased 3% quarter-over-quarter and 18% year-over-year. The year-over-year
                                         decrease is primarily due to production decline from the horizontal sidetrack well drilled
                                         and placed on production in Q4 2015. Full year 2016 production decreased 2% versus 2015.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Production
                                         volumes are managed within corporate targets while meeting customer demands and the requirements
                                         of long-term supply agreements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | We
                                         continue to plan for long-term production levels of between 6,000 and 8,000 bbls/d.
| | - | -------------------------------------------------------------------------------------------------------------------------------



Activity review

| | · | The
                                         two sidetrack wells we drilled during Q2 2016 continued to demonstrate strong productive
                                         capability with combined production rates of approximately 4,300 bbls/d when utilized.
                                         Vermilion intends to produce these wells intermittently to meet corporate production
                                         targets while seeking to optimize ultimate recoveries and oil pricing. Following our
                                         successful 2015 and 2016 drilling campaigns, we do not expect to drill any additional
                                         wells in Australia until 2019.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Additional
                                         2016 activity included work on our Wandoo Platforms Life Extension project, CALM buoy
                                         maintenance and subsea inspections.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





19


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Sales

| | · | Crude
                                         oil in Australia is priced with reference to Dated Brent.
| | - | --------------------------------------------------------------------------------------------------------

| | · | Q4
                                         2016 sales per boe increased versus Q3 2016 and Q4 2015 consistent with an increase in
                                         the Dated Brent reference price. This increase in price was offset by lower sold volumes
                                         due to an inventory build in Q4 2016, resulting in a decrease in sales.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Sales
                                         per boe for the year ended December 31, 2016 decreased versus the comparable period in
                                         2015 consistent with a decrease in the Dated Brent reference price.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Royalties and transportation

| | · | Our
                                         production in Australia is not subject to royalties or transportation expense as crude
                                         oil is sold directly at the Wandoo B platform.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating

| | · | Operating
                                         expense on a dollar per boe basis increased in Q4 2016 versus Q3 2016 and Q4 2015. The
                                         increase was a result of increased project and maintenance work being completed in the
                                         current quarter as a result of the drill program being executed earlier in the year.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Operating
                                         expense on a dollar and per boe basis decreased in 2016 versus 2015 due to a continued
                                         focus on initiatives to reduce our cost structure resulting in lower diesel, vessel and
                                         maintenance costs.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



General and administration

| | · | Fluctuation
                                         in general and administration expense for Q4 2016 versus the comparable quarters was
                                         largely the result of the timing of expenditures. Full year 2016 general and administration
                                         expense increased due to higher employee benefit costs.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



PRRT and corporate income taxes

| | · | In
                                         Australia, current income taxes include both PRRT and corporate income taxes. PRRT is
                                         a profit based tax applied at a rate of 40% on sales less eligible expenditures, including
                                         operating expenses and capital expenditures. Corporate income taxes are applied at a
                                         rate of 30% on taxable income after eligible deductions, which include PRRT paid.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Current
                                         income taxes in Q4 2016 were lower compared to Q3 2016 due to decreased sales. Q4 2016
                                         current income taxes were higher compared to Q4 2015 as decreased sales were offset by
                                         lower tax deductions.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Current
                                         income taxes for the year ended December 31, 2016 were slightly higher versus the comparable
                                         period in 2015 as lower sales were offset with increased deductions for PRRT and foreign
                                         exchange in 2015.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | PRRT
                                         in Q4 2016 was higher compared to Q3 2016 due to the impact of an increase in full year
                                         sales (resulting from a significant increase in crude oil pricing) compared to our forecast
                                         in Q3 2016. Q4 2016 PRRT was higher compared to Q4 2015 as lower sales were offset with
                                         higher deductions for capital expenditures in Q4 2015.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | PRRT
                                         for the year ended December 31, 2016, was lower versus the comparable period in 2015
                                         as a result of decreased sales.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------







20


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




UNITED STATES BUSINESS UNIT



Overview

| | · | Entered
                                         the United States in September 2014.
| | - | -------------------------------------------------------------------------------------

| | · | Interests
                                         include approximately 97,200 net acres of land (97% undeveloped) in the Powder River
                                         Basin of northeastern Wyoming.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Tight
                                         oil development targeting the Turner Sand at a depth of approximately 1,500 metres.
| | - | ----------------------------------------------------------------------------------------------------------------------------------



Operational and financial review



|                                |                                        | Three
    Months Ended | %
    change |               |               | Year
    Ended | %
    change
|------------------------------- | -------------------------------------- | ---------------------- | ------------ | ------------- | ------------- | -------------- | ------------
|United
    States business unit | Dec
    31,                            | Sep
    30,            | Dec
    31,  | Q4/16
    vs. | Q4/16
    vs. |                |             
|($M
    except as indicated)    | 2016                                   | 2016                   | 2015         | Q3/16         | Q4/15         |                |             
|Production
    and sales        |                                        |                        |              |               |               |                |             
|                                | Crude
    oil (bbls/d)                 | 362                    | 383          | 420           | (5%)          | (14%)          |             
|                                | NGLs
    (bbls/d)                      | 23                     | 30           | 29            | (23%)         | (21%)          |             
|                                | Natural
    gas (mmcf/d)               | 0.18                   | 0.20         | 0.20          | (10%)         | (13%)          |             
|                                | Total
    (boe/d)                      | 414                    | 447          | 483           | (7%)          | (14%)          |             
|Activity                        |                                        |                        |              |               |               |                |             
|                                | Capital
    expenditures               | 4,037                  | 2,765        | 5,643         | 46%           | (28%)          |             
|                                | Acquisitions                           | 377                    | 11           | (21)          |               |                |             
|                                | Gross
    wells drilled                | 1.00                   | -            | 2.00          |               |                |             
|                                | Net
    wells drilled                  | 1.00                   | -            | 2.00          |               |                |             
|Financial
    results           |                                        |                        |              |               |               |                |             
|                                | Sales                                  | 2,041                  | 1,833        | 1,864         | 11%           | 9%             |             
|                                | Royalties                              | (611)                  | (525)        | (551)         | 16%           | 11%            |             
|                                | Operating                              | (301)                  | (432)        | (271)         | (30%)         | 11%            |             
|                                | General
    and administration         | (877)                  | (918)        | (897)         | (4%)          | (2%)           |             
|                                | Fund
    flows from operations         | 252                    | (42)         | 145           | 700%          | 74%            |             
|Netbacks
    ($/boe)            |                                        |                        |              |               |               |                |             
|                                | Sales                                  | 53.58                  | 44.53        | 41.94         | 20%           | 28%            |             
|                                | Royalties                              | (16.05)                | (12.74)      | (12.40)       | 26%           | 29%            |             
|                                | Operating                              | (7.91)                 | (10.50)      | (6.11)        | (25%)         | 29%            |             
|                                | General
    and administration         | (23.02)                | (22.30)      | (20.18)       | 3%            | 14%            |             
|                                | Fund
    flows from operations netback | 6.60                   | (1.01)       | 3.25          | 753%          | 103%           |             
|Realized
    prices             |                                        |                        |              |               |               |                |             
|                                | Crude
    oil ($/bbl)                  | 59.09                  | 51.29        | 47.59         | 15%           | 24%            |             
|                                | NGLs
    ($/bbl)                       | 19.48                  | 5.14         | 5.13          | 279%          | 280%           |             
|                                | Natural
    gas ($/mmbtu)              | 1.93                   | 0.64         | 0.52          | 202%          | 271%           |             
|                                | Total
    ($/boe)                      | 53.58                  | 44.53        | 41.94         | 20%           | 28%            |             
|Reference
    prices            |                                        |                        |              |               |               |                |             
|                                | WTI
    (US $/bbl)                     | 49.29                  | 44.94        | 42.18         | 10%           | 17%            |             
|                                | WTI
    ($/bbl)                        | 65.75                  | 58.65        | 56.32         | 12%           | 17%            |             
|                                | Henry
    Hub (US $/mmbtu)             | 2.98                   | 2.81         | 2.27          | 6%            | 31%            |             
|                                | Henry
    Hub ($/mmbtu)                | 3.98                   | 3.67         | 3.03          | 8%            | 31%            |             



Production

| | · | Q4
                                         2016 production decreased 7% quarter-over-quarter and 14% year-over-year due to natural
                                         declines.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Full
                                         year 2016 production increased 85% versus 2015 due to production from our two wells drilled
                                         in the East Finn prospect in Q4 2015.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Activity

| | · | In
                                         Q4 2016, we completed the Seedy Draw East Federal well. The nearly 1,400 metre horizontal
                                         lateral was stimulated with 32 frac stages, but due to a screen-out during treatment,
                                         only 23 stages were completed. We plan to clean sand out of this well and put it on production
                                         during Q1 2017, leaving the remaining nine stages for potential stimulation at a later
                                         date.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | During
                                         2016, we drilled one (1.0 net) well, and completed and tied-in two (2.0 net) wells drilled
                                         in Q4 2015.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In
                                         2017, we plan to drill and complete three (3.0 net) wells.
| | - | ------------------------------------------------------------------------------------------------------





21


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Sales

| | · | The
                                         price of crude oil in the United States is directly linked to WTI, but is also subject
                                         to market conditions in the United States.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Q4
                                         2016 sales per boe increased versus Q3 2016 and Q4 2015 consistent with an increase in
                                         the WTI reference price.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Sales
                                         per boe for the year ended December 31, 2016 decreased versus the comparable period in
                                         2015, consistent with a decrease in the WTI reference price.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Royalties

| | · | Our
                                         production in the United States is subject to federal and private royalties, severance
                                         tax, and ad valorem tax.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Royalties
                                         (including severance and ad valorem taxes) as a percentage of sales are approximately
                                         30% and has remained consistent across all periods.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Operating

| | · | The
                                         decrease in operating expense for Q4 2016 compared to Q3 2016 and increase from Q4 2015
                                         were primarily due to timing of maintenance and repair activity.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On
                                         a year-over-year basis, per unit costs have decreased 5% due to production growth and
                                         initiatives to reduce our cost structure.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



General and administration

| | · | On
                                         a year-over-year basis initiatives taken to reduce our cost structure have resulted in
                                         a 6% reduction in costs while growing production 85%.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




CORPORATE



Overview

| | · | Our
                                         Corporate segment includes costs related to our global hedging program, financing expenses,
                                         and general and administration expenses that are primarily incurred in Canada and are
                                         not directly related to the operations of our business units. Expenditures
                                         relating to our activities in Central and Eastern Europe are also included in the Corporate
                                         segment.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Financial review



|                                                  | Three
    Months Ended |             |             | Year
    Ended
|------------------------------------------------- | ---------------------- | ----------- | ----------- | --------------
|CORPORATE                                         | Dec
    31,            | Sep
    30, | Dec
    31, |               
|($M)                                              | 2016                   | 2016        | 2015        |               
|General
    and administration recovery (expense) | 1,987                  | (509)       | 3,356       |               
|Current
    income taxes                          | (370)                  | (321)       | 313         |               
|Interest
    expense                              | (14,410)               | (14,150)    | (16,584)    |               
|Realized
    gain on derivatives                  | 1,920                  | 13,532      | 21,164      |               
|Realized
    foreign exchange gain (loss)         | 1,291                  | 2,073       | (252)       |               
|Realized
    other income (expense)               | 120                    | (82)        | 243         |               
|Fund
    flows from operations                    | (9,462)                | 543         | 8,240       |               



General and administration

| | · | Fluctuations
                                         in general and administration costs for Q4 2016 versus all comparable periods is due
                                         to the timing of expenditures and allocations to the various business unit segments.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Current income taxes

| | · | Taxes
                                         in our corporate segment relate to holding companies that pay current taxes in foreign
                                         jurisdictions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Interest expense

| | · | Interest
                                         expense in Q4 2016 was relatively consistent with Q3 2016.
| | - | ------------------------------------------------------------------------------------------------------------

| | · | The
                                         decrease in interest expense for the three months and year ended December 31, 2016 compared
                                         to the same periods in 2015, was primarily due to the retiring of our 6.5% senior unsecured
                                         notes in February 2016 using funds from our revolving credit facility, partially offset
                                         by higher average borrowings under our revolving credit facility.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Hedging

| | · | The
                                         nature of our operations results in exposure to fluctuations in commodity prices, interest
                                         rates and foreign currency exchange rates. We monitor and, when appropriate, use derivative
                                         financial instruments to manage our exposure to these fluctuations and reduce cash flow
                                         volatility. All transactions of this nature entered into are related to an underlying
                                         financial position or to future crude oil and natural gas production. We do not use derivative
                                         financial instruments for speculative purposes. We have elected not to designate any
                                         of our derivative financial instruments as accounting hedges and thus account for changes
                                         in fair value in net earnings at each reporting period. We have not obtained collateral
                                         or other security to support our financial derivatives as we review the creditworthiness
                                         of our counterparties prior to entering into derivative contracts.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Our
                                         hedging philosophy is to hedge solely for the purposes of risk mitigation. Our approach
                                         is to hedge centrally to manage our global risk (typically with an outlook of 12 to 18
                                         months) up to 50% of net of royalty volumes through a portfolio of collars and swaps.
                                         We currently have European gas contracts for 2019 as an exception to our typical horizon.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | We
                                         believe that our hedging philosophy and approach increases the stability of revenues,
                                         cash flows, and future dividends while also assisting us in the execution of our capital
                                         and development plans.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The
                                         realized gain on derivatives in 2016 related primarily to amounts received on our European
                                         natural gas hedges.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | A
                                         listing of derivative positions as at December 31, 2016 is included in “Supplemental
                                         Table 2” of this MD&A.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





23


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




FINANCIAL PERFORMANCE REVIEW



|                                    |           | Year
    Ended
|----------------------------------- | --------- | --------------
|                                    |           | Dec
    31,   
|($M
    except per share)           | 2016      | 2015          
|Total
    assets                    | 4,087,184 | 4,209,220     
|Long-term
    debt                  | 1,362,192 | 1,162,998     
|Petroleum
    and natural gas sales | 882,791   | 939,586       
|Net
    (loss) earnings             | (160,051) | (217,302)     
|Net
    (loss) earnings per share   |           |               
|                                    | Basic     | (1.38)        
|                                    | Diluted   | (1.38)        
|Cash
    dividends ($/share)        | 2.58      | 2.58          



|                                    |         | Three
    Months Ended
|----------------------------------- | ------- | ----------------------
|                                    |         | Dec
    31,           
|($M
    except per share)           | 2016    | 2016                  
|Petroleum
    and natural gas sales | 259,891 | 232,660               
|Net
    (loss) earnings             | (4,032) | (14,475)              
|Net
    (loss) earnings per share   |         |                       
|                                    | Basic   | (0.03)                
|                                    | Diluted | (0.03)                



The following table shows a reconciliation
from fund flows from operations to net loss:



|                                                     |           | Three
    Months Ended |             |             |  | Year
    Ended |          
|---------------------------------------------------- | --------- | ---------------------- | ----------- | ----------- |  | -------------- | ---------
|                                                     |           | Dec
    31,            | Sep
    30, | Dec
    31, |  |                |          
|                                                     |           | 2016                   | 2016        | 2015        |  |                |          
|Fund
    flows from operations                       | 149,582   | 140,974                | 136,441     |             |  |                | 510,791  
|Equity
    based compensation                        | (19,489)  | (15,642)               | (21,533)    |             |  |                | (69,235) 
|Unrealized
    (loss) gain on derivative instruments | (74,943)  | 332                    | 27,393      |             |  |                | (137,993)
|Unrealized
    foreign exchange (loss) gain          | (2,457)   | 2,899                  | (6,357)     |             |  |                | (792)    
|Unrealized
    income (expense)                      | -         | (24)                   | (234)       |             |  |                | (131)    
|Accretion                                            | (6,308)   | (6,341)                | (6,324)     |             |  |                | (24,783) 
|Depletion
    and depreciation                       | (126,855) | (143,556)              | (107,812)   |             |  |                | (528,002)
|Deferred
    taxes                                   | 54,437    | 6,883                  | (32,031)    |             |  |                | 82,855   
|Gain
    on business combination                     | 22,001    | -                      | -           |             |  |                | 22,001   
|Impairment                                           | -         | -                      | (131,623)   |             |  |                | (14,762) 
|Net
    loss                                         | (4,032)   | (14,475)               | (142,080)   |             |  |                | (160,051)



The fluctuations in net income from period-to-period
are caused by changes in both cash and non-cash based income and charges. Cash based items are reflected in fund flows from operations.
Non-cash items include: equity based compensation expense, unrealized gains and losses on derivative instruments, unrealized foreign
exchange gains and losses, accretion, depletion and depreciation expense, and deferred taxes. In addition, non-cash items may
also include amounts resulting from business combinations or charges resulting from impairment or impairment reversals.



Equity based compensation

Equity based compensation expense relates primarily
to non-cash compensation expense attributable to long-term incentives granted to directors, officers, and employees under the
Vermilion Incentive Plan (“VIP”).



Equity based compensation in Q4 2016 increased
as compared to Q3 2016 due to a revision of performance estimates. For the three months and year ended December 31, 2016, the
decrease in equity based compensation is primarily due to the lower average grant value.



Unrealized gain or loss on derivative
instruments

Unrealized gain or loss on derivative instruments
arise as a result of changes in forecasted future commodity prices. As Vermilion uses derivative instruments to manage the commodity
price exposure of our future crude oil and natural gas production, we will normally recognize unrealized gains on derivative instruments
when forecasted future commodity prices decline and vice-versa.





24


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




For the year ended December 31, 2016, we recognized
an unrealized loss on derivative instruments of $138.0 million. This unrealized loss resulted from realizing gains on derivatives
for contracts settled during the period, coupled with higher forward prices for European natural gas as at December 31, 2016.
As at December 31, 2016, we have a net derivative liability position of $69.7 million.



Unrealized foreign exchange gain or loss

As a result of Vermilion’s international
operations, Vermilion has monetary assets and liabilities denominated in currencies other than the Canadian dollar. These monetary
assets and liabilities include cash, receivables, payables, long-term debt, derivative instruments and intercompany loans, primarily
denominated in the US dollar and Euro.



Unrealized foreign exchange gains and losses
result from translating these monetary assets and liabilities from their underlying currency to the functional currency of Vermilion
and its subsidiaries. Unrealized foreign exchange primarily results from the translation of Euro denominated financial assets
and US dollar denominated financial liabilities. As such, an appreciation in the Euro against the Canadian dollar will result
in an unrealized foreign exchange gain while an appreciation in the US dollar against the Canadian dollar will result in an unrealized
foreign exchange loss (and vice-versa).



For the three months ended December 31, 2016,
the Canadian dollar weakened against the US dollar and strengthened against the Euro, resulting in an unrealized foreign exchange
loss of $2.5 million. For the year ended December 31, 2016, the Canadian dollar strengthened more significantly against the Euro
than the US dollar, resulting in an unrealized foreign exchange loss of $0.8 million.



Accretion

Accretion expense is recognized to update the
present value of the asset retirement obligation balance. Accretion expense was relatively consistent with all comparative periods.



Depletion and depreciation

Depletion and depreciation expense is recognized
to allocate the capitalized cost of extracting natural resources and the cost of material assets over the useful life of the respective
assets. Fluctuations in depletion and depreciation expense are primarily the result of changes in produced crude oil and natural
gas volumes.



Depletion and depreciation on a per boe basis
for Q4 2016 of $22.42 was relatively consistent as compared to $23.69 in Q3 2016.



For the three months ended December 31, 2016,
depletion and depreciation on a per boe basis of $22.42 was higher than $18.88 in the same period of 2015 due to production from
Ireland. For the year ended December 31, 2016, depletion and depreciation on a per boe basis of $22.65 was relatively consistent
with $22.98 in the same period of 2015 as increased production from Ireland was offset by increased production from our Mannville
condensate-rich gas properties.



Deferred tax

Deferred tax recovery arises primarily as a
result of changes in the accounting basis and tax basis for capital assets and asset retirement obligations and changes in available
tax losses.



Impairment

In 2015, as a result of declines in price forecasts
for crude oil and Canadian natural gas, Vermilion recorded a non-cash impairment charge of $274.6 million ($219.8 million relating
to capital assets and $54.8 million relating to E&E assets) in the Canada segment. The impairment charge related to the light
crude oil play in Saskatchewan ($267.9 million based on a recoverable amount of $266.8 million) and shallow coal bed methane properties
in Alberta ($6.7 million based on a recoverable amount of $19.7 million).



In the first quarter of 2016, as a result of
declines in price forecasts for European natural gas, Vermilion recorded a non-cash impairment charge of $14.8 million (based
on a recoverable amount of $737.3 million).



Gain on business combination

In December of 2016, we acquired, through a
wholly-owned subsidiary, interests in production and exploration assets in Germany from Engie E&P Deutschland GmbH.



We recognized a non-cash gain on business combination
of $22.0 million that resulted from the recognition of additional reserve value when the acquisition closed in December 2016,
compared to the estimated value in June when Vermilion entered into a definitive purchase and sale agreement and the acquisition
price was determined.





25


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




TAXES



Corporate income tax rates

Vermilion pays corporate income taxes in France,
the Netherlands, and Australia. In addition, Vermilion pays PRRT in Australia. PRRT is a profit based tax applied at a rate of
40% on sales less operating expenses, capital expenditures, and other eligible expenditures. PRRT is deductible in the calculation
of taxable income in Australia.



Taxable income was subject to corporate income tax at the following
rates:



|Jurisdiction                                                                                                                                                                                                                 | 2016  | 2015             
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- | -----------------
|Canada
    (1)                                                                                                                                                                                                               | 27.0% | 25.5%
    / 27.0%
|France                                                                                                                                                                                                                       | 34.4% | 34.4%            
|Netherlands
    (2)                                                                                                                                                                                                          | 50.0% | 50.0%            
|Germany                                                                                                                                                                                                                      | 24.2% | 24.2%            
|Ireland                                                                                                                                                                                                                      | 25.0% | 25.0%            
|Australia                                                                                                                                                                                                                    | 30.0% | 30.0%            
|United
    States                                                                                                                                                                                                            | 35.0% | 35.0%            
|(1)Alberta corporate income tax rates increased from 10% to 12% effective July 1, 2015.                                                                                                                                     
|(2)In the Netherlands, an additional 10% uplift deduction is allowed against taxable income that is applied to operating
    expenses, eligible G&A and tax deductions for depletion and abandonment retirement obligations.



In 2012, the France government enacted a new
3% tax on dividend distributions made by entities subject to corporate income tax in France. The tax applies to any dividends
paid on or after April 17, 2012 and is not recovered by any tax treaties or deductible for French corporate income tax purposes.
In late December 2016, the French government passed legislation that will exempt any dividend distributions made by Vermilion
after January 1, 2017 from the 3% tax. Vermilion did not pay any dividends from its French entities in 2016.



Tax pools

As at December 31, 2016, we had the following tax pools:



|($M)              | Oil
    & Gas Assets |  | Tax
    Losses  | Other  | Total    
|----------------- | -------------------- |  | --------------- | ------ | ---------
|Canada            | 978,949
    (1)      |  | 489,702
    (5) | 32,503 | 1,501,154
|France            | 351,551
    (2)      |  | 13,360
    (6)  | -      | 364,911  
|Netherlands       | 68,139
    (3)       |  | -   (0)         | -      | 68,139   
|Germany           | 190,002
    (3)      |  | 57,156
    (7)  | 20,306 | 267,464  
|Ireland           | 942,129
    (4)      |  | 403,779
    (5) | -      | 1,345,908
|Australia         | 276,911
    (1)      |  | -   (0)         | -      | 276,911  
|United
    States | 34,885
    (1)       |  | 30,328
    (5)  | 797    | 66,010   
|Total             | 2,842,566
    (1)    |  | 994,325
    (0) | 53,606 | 3,890,497





|(1)Deduction calculated using various declining balance rates                                                                                               
|------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2)Deduction calculated using a combination of straight-line over the assets life and unit of production method                                             
|(3)Deduction calculated using a unit of production method                                                                                                   
|(4)Deduction for current development expenditures and tax losses at 100% against taxable income                                                             
|(5)Tax losses can be carried forward at 100% against taxable income                                                                                         
|(6)Tax losses carried forward are available to offset the first Euro 1million of taxable income and 50% of taxable profits
    in excess each taxation year 
|(7)Tax losses carried forward are available to offset the first Euro 1million of taxable income and 60% of taxable profits
    in excess each taxations year





26


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




FINANCIAL POSITION REVIEW



Balance sheet strategy

We believe that our balance sheet supports
our defined growth initiatives and our focus is on managing and maintaining a conservative balance sheet. To ensure that our balance
sheet continues to support our defined growth initiatives, we regularly review whether forecasted fund flows from operations is
sufficient to finance planned capital expenditures, dividends, and abandonment and reclamation expenditures. To the extent that
forecasted fund flows from operations is not expected to be sufficient to fulfill such expenditures, we will evaluate our ability
to finance any shortfall with debt (including borrowing using the unutilized capacity of our existing revolving credit facility),
issue equity, or by reducing some or all categories of expenditures to ensure that total expenditures do not exceed available
funds.



To ensure that we maintain a conservative balance
sheet, we monitor the ratio of net debt to fund flows from operations and typically strive to maintain an internally targeted
ratio of approximately 1.0 to 1.5 in a normalized commodity price environment. Where prices trend higher, we may target a lower
ratio and conversely, in a lower commodity price environment, an acceptable ratio may be higher. At times, we will use our balance
sheet to finance acquisitions and, in these situations, we are prepared to accept a higher ratio in the short term but will implement
a strategy to reduce the ratio to acceptable levels within a reasonable period of time, usually considered to be no more than
12 to 24 months. This plan could potentially include an increase in hedging activities, a reduction in capital expenditures, an
issuance of equity or the utilization of excess fund flows from operations to reduce outstanding indebtedness.



In the current low commodity price environment,
Vermilion’s net debt to fund flows from operations ratio is expected to be higher than the internally targeted ratio. During
this period, Vermilion will remain focused on maintaining a strong balance sheet by aligning capital expenditures within forecasted
fund flows from operations, which is continually monitored for revised forward price estimates, as well as by hedging additional
European natural gas volumes to maintain a diversified commodity portfolio.



Long-term debt

Our long-term debt as at December 31, 2016
consists entirely of borrowings against our revolving credit facility. We redeemed the senior unsecured notes that came due on
February 10, 2016 using funds drawn against the revolving credit facility.



The balances recognized on our balance sheet
are as follows:



|                              |  | As
    at  
|----------------------------- |  | -----------
|                              |  | Dec
    31,
|($M)                          |  | 2016       
|Revolving
    credit facility |  | 1,362,192  
|Senior
    unsecured notes    |  | -          
|Long-term
    debt            |  | 1,362,192  



Revolving Credit Facility

The following table outlines the current terms
of our revolving credit facility:



|                                  | As
    at  
|--------------------------------- | -----------
|                                  | Dec
    31,
|($M)                              | 2016       
|Total
    facility amount         | 2,000,000  
|Amount
    drawn                  | (1,362,192)
|Letters
    of credit outstanding | (20,100)   
|Unutilized
    capacity           | 617,708    



In addition, as at December 31, 2016, the revolving
credit facility was subject to the following covenants:



|                                                           |       |  | As
    at  
|---------------------------------------------------------- | ----- |  | -----------
|                                                           |       |  | Dec
    31,
|Financial
    covenant                                     | Limit |  | 2016       
|Consolidated
    total debt to consolidated EBITDA         | 4.0   |  | 2.36       
|Consolidated
    total senior debt to total capitalization | 55%   |  | 46%        





27


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Our covenants include financial measures defined
within our revolving credit facility agreement that are not defined under IFRS. These financial measures are defined by our revolving
credit facility agreement as follows:



| | · | Consolidated
                                         total debt: Includes all amounts classified as “Long-term debt”, “Current
                                         portion of long-term debt”, and “Finance lease obligation” on our balance
                                         sheet.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Consolidated
                                         total senior debt: Defined as consolidated total debt excluding unsecured and subordinated
                                         debt.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Consolidated
                                         EBITDA: Defined as consolidated net earnings before interest, income taxes, depreciation,
                                         accretion and certain other non-cash items.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Total
                                         capitalization: Includes all amounts on our balance sheet classified as “Shareholders’
                                         equity” plus consolidated total debt as defined above.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Net debt

Net debt is reconciled to long-term debt, as
follows:



|                                                    | As
    at  
|--------------------------------------------------- | -----------
|                                                    | Dec
    31,
|($M)                                                | 2016       
|Long-term
    debt                                  | 1,362,192  
|Current
    liabilities(1)                          | 290,862    
|Current
    assets                                  | (225,906)  
|Net
    debt                                        | 1,427,148  
|                                                    |            
|Ratio
    of net debt to fund flows from operations | 2.8        

| | (1) | Current liabilities at December
                                         31, 2015 includes $224,901 relating to the current portion of long-term debt.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------



As at December 31, 2016, long term debt decreased
to $1.36 billion (December 31, 2015 - $1.39 billion, including the current portion of long-term debt) as fund flows from operations
generated in excess of capital expenditures, abandonment expenditures, acquisitions, and cash dividends was used to reduce debt.
The decrease in long-term debt was coupled with working capital changes, such that net debt increased from $1.38 billion at December
31, 2015 to $1.43 billion at December 31, 2016. Weaker commodity prices versus the prior period decreased fund flows from operations,
resulting in the ratio of net debt to fund flows from operations increasing slightly from 2.7 to 2.8.



Shareholders’ capital

During the year ended December 31, 2016, we
maintained monthly dividends at $0.215 per share and declared dividends which totalled $299.1 million.



The following table outlines our dividend payment
history:



|Date                                  | Monthly
    dividend per unit or share
|------------------------------------- | --------------------------------------
|January
    2003 to December 2007     | $0.170                                
|January
    2008 to December 2012     | $0.190                                
|January
    2013 to December 31, 2013 | $0.200                                
|January
    2014 to Present           | $0.215                                



Our policy with respect to dividends is to
be conservative and maintain a low ratio of dividends to fund flows from operations. During low commodity price cycles, we will
initially maintain dividends and allow the ratio to rise. Should low commodity price cycles remain for an extended period of time,
we will evaluate the necessity of changing the level of dividends, taking into consideration capital development requirements,
debt levels, and acquisition opportunities.



In February of 2015, we amended our existing
dividend reinvestment plan to include a Premium DividendTM Component. The Premium DividendTM Component, when combined
with our continuing Dividend Reinvestment Component, increases our access to the lowest cost sources of equity capital available.
While the Premium DividendTM results in a modest amount of equity issuance, we believe it represents the most prudent approach
to preserving near-term balance sheet strength. Both components of our program can be reduced or eliminated at the company’s
discretion, offering considerable flexibility.



As previously announced, we commenced proration
of the Premium DividendTM of our Dividend Reinvestment Plan by 25% beginning with our October dividend payment. Eligible
shareholders who have elected to participate in the Premium DividendTM component were then receiving the 1.5% premium
on 75% of their participating shares and the regular cash dividend on the remaining 25% of their shares. We increased the proration
factor by a further 25% beginning with the January 2017 dividend payment. Subject to unexpected changes in the commodity price
outlook, we expect to continue to increase the proration by 25% per quarter during the first half of 2017, such that, by the beginning
of the third quarter, there would be no further equity issuance under the Premium DividendTM component of our Dividend
Reinvestment Plan. We also reduced the discount associated with our traditional Dividend Reinvestment Plan from 3% to 2%, beginning
with the January 2017 dividend payment.





28


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Although we expect to be able to maintain our
current dividend, fund flows from operations may not be sufficient during this low commodity price environment to fund cash dividends,
capital expenditures, and asset retirement obligations. We will evaluate our ability to finance any shortfall with debt, issuances
of equity, or by reducing some or all categories of expenditures to ensure that total expenditures do not exceed available funds.



The following table reconciles the change in
shareholders’ capital:



|Shareholders’
    Capital                                 | Number
    of Shares ('000s) |         | Amount
    ($M)
|--------------------------------------------------------- | ---------------------------- | ------- | ---------------
|Balance
    as at December 31, 2015                       |                              | 111,991 |                
|Shares
    issued for the DRIP(1)                         |                              | 4,671   |                
|Vesting
    of equity based awards                        |                              | 1,320   |                
|Share-settled
    dividends on vested equity based awards |                              | 87      |                
|Shares
    issued for equity based compensation           |                              | 194     |                
|Balance
    as at December 31, 2016                       |                              | 118,263 |                

(1) DRIP Refers to Vermilion’s
Premium DividendTM and Dividend Reinvestment Plan.



As at December 31, 2016, there were approximately
1.7 million VIP awards outstanding. As at February 24, 2017, there were approximately 118.7 million common shares issued and outstanding.



CONTRACTUAL OBLIGATIONS AND COMMITMENTS



As at December 31, 2016, we had the following contractual obligations
and commitments:



|($M)                                                     | Less
    than 1 year | 1
    - 3 years | 3
    - 5 years | After
    5 years | Total    
|-------------------------------------------------------- | -------------------- | --------------- | --------------- | ----------------- | ---------
|Long-term
    debt                                       | -                    | 1,335,600       | -               | -                 | 1,335,600
|Operating
    lease obligations                          | 12,683               | 21,087          | 18,228          | 1,657             | 53,655   
|Ship
    or pay agreement relating to the Corrib project | 4,241                | 7,331           | 6,074           | 31,427            | 49,073   
|Purchase
    obligations                                 | 9,007                | 3,852           | 7               | -                 | 12,866   
|Drilling
    and service agreements                      | 5,437                | 9,850           | 20,511          | 26,870            | 62,668   
|Total
    contractual obligations and commitments        | 31,368               | 1,377,720       | 44,820          | 59,954            | 1,513,862



ASSET RETIREMENT OBLIGATIONS



As at December 31, 2016, asset retirement obligations
were $525.0 million compared to $305.6 million as at December 31, 2015.



The increase in asset retirement obligations
is largely attributable to an overall decrease in the discount rates applied to the abandonment obligation, additional obligations
recognized on our acquisition in Germany, and accretion expense.



RISKS AND UNCERTAINTIES



Crude oil and natural gas exploration, production,
acquisition and marketing operations involve a number of risks and uncertainties including financial risks and uncertainties.
These include fluctuations in commodity prices, exchange rates and interest rates as well as uncertainties associated with reserve
and resource volumes, sales volumes and government regulatory and income tax regime changes. These and other related risks and
uncertainties are discussed in additional detail below.



Commodity prices

Our operational results and financial condition
is dependent on the prices received for crude oil and natural gas production. Crude oil and natural gas prices have fluctuated
significantly during recent years and are determined by supply and demand factors, including weather and general economic conditions
as well as conditions in other crude oil and natural gas producing regions.



Exchange rates

Much of our revenue stream is priced in U.S.
dollars and as such an increase in the strength of the Canadian dollar relative to the U.S. dollar may result in the receipt of
fewer Canadian dollars with respect to our production. In addition, we incur expenses and capital costs in U.S. dollars, Euros
and Australian dollars and accordingly, the Canadian dollar equivalent of these expenditures as reported in our financial results
is impacted by the prevailing exchange rates at the time the transaction occurs. We monitor risks associated with exchange rates
and, when appropriate, use derivative financial instruments to manage our exposure to these risks.





29


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Production and sales volumes

The operation of crude oil and natural gas
wells and facilities involves a number of operating and natural hazards which may result in blowouts, environmental damage and
other unexpected or dangerous conditions resulting in damage to us and possible liability to third parties. We maintain liability
insurance, where available, in amounts consistent with industry standards. Business interruption insurance may also be purchased
for selected operations, to the extent that such insurance is commercially viable. We may become liable for damages arising from
such events against which we cannot insure or against which we may elect not to insure because of high premium costs or other
reasons. Costs incurred to repair such damage or pay such liabilities may materially impact our financial results.



Continuing production from a property, and
to some extent the marketing of produced volumes, is largely dependent upon the ability of the operator of the property. To the
extent the operator fails to perform these functions properly, revenue may be reduced. Payments from production generally flow
through the operator and there is a risk of delay and additional expense in receiving such revenues if the operator becomes insolvent.
Although satisfactory title reviews are generally conducted in accordance with industry standards, such reviews do not guarantee
or certify that a defect in the chain of title may not arise to defeat our claim to certain properties. Such circumstances could
negatively affect our financial results.



An increase in operating costs or a decline
in our production level could have an adverse effect on our financial results. The level of production may decline at rates greater
than anticipated due to unforeseen circumstances, many of which are beyond our control. A significant decline in production could
result in materially lower revenues.



Interest rates

An increase in interest rates could result
in a significant increase in the amount we pay to service debt.



Reserve volumes

Our reserve volumes and related reserve values
support the carrying value of our crude oil and natural gas assets on the consolidated balance sheets and provide the basis to
calculate the depletion of those assets. There are numerous uncertainties inherent in estimating quantities of reserves and future
net revenues to be derived therefrom, including many factors beyond our control. These include a number of assumptions relating
to factors such as initial production rates, production decline rates, ultimate recovery of reserves, timing and amount of capital
expenditures, marketability of production, future prices of crude oil, NGLs and natural gas, operating expenses, well abandonment
and salvage values, royalties and any government levies that may be imposed over the producing life of the reserves. These assumptions
were based on estimated prices in use at the date the evaluation was prepared, and many of these assumptions are subject to change
and are beyond our control. Actual production and income derived therefrom will vary from these evaluations, and such variations
could be material.



Asset retirement obligations

Our asset retirement obligations are based
on environmental regulations and estimates of future costs and the timing of expenditures. Changes in environmental regulations,
the estimated costs associated with reclamation activities and the related timing may impact our financial position and results
of operations.



Government regulation and income tax regime

Our operations are governed by many levels
of government, including municipal, state, provincial and federal governments, in Canada, France, the Netherlands, Australia,
Germany, Ireland, Hungary, Croatia, Slovakia and the United States. We are subject to laws and regulations regarding environment,
health and safety issues, lease interests, taxes and royalties, among others. Failure to comply with the applicable laws can result
in significant increases in costs, penalties and even losses of operating licences. The regulatory process involved in each of
the countries in which we operate is not uniform and regulatory regimes vary as to complexity, timeliness of access to, and response
from, regulatory bodies and other matters specific to each jurisdiction. If regulatory approvals or permits are delayed or not
obtained, there can also be delays or abandonment of projects and decreases in production and increases in costs, potentially
resulting in us being unable to fully execute our strategy. Governments may also amend or create new legislation and regulatory
bodies may also amend regulations or impose additional requirements which could result in increased capital, operating and compliance
costs.



There can be no assurance that income tax laws
and government incentive programs relating to the crude oil and natural gas industry in Canada and the foreign jurisdictions in
which we operate, will not be changed in a manner which adversely affects the results of our operations.



A change in the royalty regime resulting in
an increase in royalties would reduce our net earnings and could make future capital expenditures or our operations uneconomic
and could, in the event of a material increase in royalties, make it more difficult to service and repay outstanding debt. Any
material increase in royalties would also significantly reduce the value of the associated assets.





30


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




FINANCIAL RISK MANAGEMENT



To mitigate the aforementioned risks whenever
possible, we seek to hire personnel with experience in specific areas. In addition, we provide continued training and development
to staff to further develop their skills. When appropriate, we use third party consultants with relevant experience to augment
our internal capabilities with respect to certain risks.



We consider our commodity price risk management
program as a form of insurance that protects our cash flow and rate of return. The primary objective of the risk management program
is to support our dividends and our internal capital development program. The level of commodity price risk management that occurs
is highly dependent on the amount of debt that is carried. When debt levels are higher, we will be more active in protecting our
cash flow stream through our commodity price risk management strategy.



When executing our commodity price risk management
programs, we use derivative financial instruments encompassing over-the-counter financial structures as well as fixed/collar structures
to economically hedge a part of our physical crude oil and natural gas production. We have strict controls and guidelines in relation
to these activities and contract principally with counterparties that have investment grade credit ratings.



CRITICAL ACCOUNTING ESTIMATES



The preparation of financial statements in
accordance with IFRS requires management to make estimates, judgments and assumptions that affect reported assets, liabilities,
income and expenses, as well as disclosures of any possible contingencies. These estimates and assumptions are developed based
on the best available information which management believed to be reasonable at the time such estimates and assumptions were made.
As such, these assumptions are uncertain at the time estimates are made and could change, resulting in a material impact on our
consolidated financial statements or financial performance. Estimates are reviewed by management on an ongoing basis, and as a
result, certain estimates may change from period to period due to the availability of new information or changes in circumstances.
Additionally, as a result of the unique circumstances of each jurisdiction in which we operate, the critical accounting estimates
may affect one or more jurisdictions.



The following discussion outlines what management
believes to be the most critical accounting policies involving the use of estimates and assumptions.



| | · | Asset
                                         retirement obligations: Asset retirement obligations are based on judgments regarding
                                         regulatory requirements, estimates of future costs, and the expected timing of expenditures.
                                         The carrying balance of asset retirement obligations and accretion expense may differ
                                         due to changes in: laws and regulations, technology, the expected timing of expenditures,
                                         and market conditions affecting the discount rate applied.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Determination
                                         of CGUs: CGU determination is subject to management’s judgment of the lowest level
                                         at which there are identifiable cash inflows that are largely independent of the cash
                                         inflows of other groups of assets. The factors used by Vermilion to determine CGUs vary
                                         by jurisdiction due to their unique operating and geographic conditions. In general,
                                         Vermilion will assess the following factors: geographic proximity of the assets within
                                         a group to one another, geographic proximity of the group of assets to other groups of
                                         assets, homogeneity of the production from the group of assets and the sharing of infrastructure
                                         used to process and/or transport production. The composition of CGUs can directly impact
                                         the calculated recoverable amount of a CGU and the recorded impairment loss or recovery.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Assessment
                                         of impairments or recovery of previous impairments: The calculation of the recoverable
                                         amount of a CGU is based on market factors and estimates of reserves and resources. Reserve
                                         and resource estimates are based on: engineering data, estimated future commodity prices,
                                         expected future rates of production, and assumptions regarding the timing and amount
                                         of future expenditures. Changes in these judgments, estimates and assumptions can directly
                                         impact the calculated recoverable amount of a CGU and the recorded impairment loss or
                                         recovery.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Income
                                         Taxes:Tax interpretations, regulations, and legislation in the various jurisdictions
                                         in which Vermilion and its subsidiaries operate are subject to change and interpretation.
                                         Changes in laws and interpretations can affect the timing of the reversal of temporary
                                         tax differences, the tax rates in effect when such differences reverse and Vermilion’s
                                         ability to use tax losses and other tax pools in the future. The Company’s income
                                         tax filings are subject to audit by taxation authorities in numerous jurisdictions and
                                         the results of such audits may increase or decrease the tax liability.The determination
                                         of tax amounts recognized in the consolidated financial statements are based on management’s
                                         assessment of the tax positions, which includes consideration of their technical merits,
                                         communications with tax authorities and management’s view of the most likely outcome.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



OFF BALANCE SHEET ARRANGEMENTS



We have certain lease agreements that are entered
into in the normal course of operations, including operating leases for which no asset or liability value has been assigned to
the consolidated balance sheet as at December 31, 2016.



We have not entered into any guarantee or off
balance sheet arrangements that would materially impact our financial position or results of operations.



31


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED



The following IFRS have been issued by the IASB but are not yet
effective:



| | · | IFRS
                                         9 “Financial Instruments” will be adopted January 1, 2018. IFRS 9 includes
                                         changes to the classification and measurement of financial instruments and general hedge
                                         accounting.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | IFRS
                                         15 “Revenue from Contracts with Customers” will be adopted January 1, 2018.
                                         IFRS 15 specifies recognition and measurement requirements for contracts with customers.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | IFRS
                                         16 “Leases” will be adopted January 1, 2019. IFRS 16 requires lessees to
                                         recognize a lease obligation and right-of-use asset for the majority of leases.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On the adoption of IFRS 9, Vermilion does not
currently anticipate changes to the measured amount of financial instruments and correspondingly does not currently anticipate
material changes to net earnings.



In the adoption of IFRS 15, Vermilion has in
place a transition team that will perform a detailed review of the Company’s standard contracts with customers in accordance
with the issued IFRS.



The impact of the adoption of IFRS 16 is currently
being evaluated.



HEALTH, SAFETY AND ENVIRONMENT



We are committed to ensuring we conduct our
activities in a manner that will protect the health and safety of our employees, contractors, and the public.  Our health,
safety, and environment (“HSE”) vision is to fully integrate health, safety, and environment into our business, where
our culture is recognized as a model by industry and stakeholders, resulting in a safe and healthy workplace. Our mantra is HSE:
Everywhere. Everyday. Everyone.



We maintain health, safety and environmental
practices and procedures in compliance with or exceeding regulatory requirements and industry standards.  All of our personnel
are expected to work safely and in accordance with established regulations and procedures, and we seek to keep our people safe
and to reduce impacts to land, water and air. During 2016 we:



| | - | Maintained clear priorities around 5
                                         key focus areas of HSE Culture, Communication and Knowledge Management, Technical Safety
                                         Management, Incident Prevention and Operational Stewardship & Sustainability;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Completed and published our Corporate
                                         Sustainability Report;
| | - | -----------------------------------------------------------------------------------------------------

| | - | Reported our CO2e emissions
                                         to the Carbon Disclosure Project, achieving a position on the Climate “A”
                                         list. One of only 5 oil and gas companies world-wide to achieve this ranking.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Completed a corporate wide HSE perception
                                         survey to monitor program progress and verify plan forward;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------

| | - | Emphasized improving energy efficiency,
                                         greenhouse gas emissions reduction and water efficiency optimization;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Further refined and expanded our enterprise
                                         wide corporate risk register;
| | - | ------------------------------------------------------------------------------------------------------------------

| | - | Developed and delivered a robust organization-wide
                                         HSE leadership training program to improve hazard identification and risk reduction;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Maintained focus on our recently developed
                                         risk mitigation program around our top fatal risk and energy type exposures;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Continued development of a robust hazard
                                         identification and risk mitigation program specific to environmentally sensitive areas;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Implemented our Corporate Process Hazards
                                         Analysis Standard in support of our focus on process safety;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| | - | Initiated the development of our Corporate
                                         Process Safety Management System;
| | - | ---------------------------------------------------------------------------------------------------------------------

| | - | Further progressed our Asset Integrity
                                         Management System;
| | - | --------------------------------------------------------------------------------------------------

| | - | Completed a comprehensive review of
                                         our Management of Change procedures across the organization;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| | - | Reduced long-term environmental liabilities
                                         through decommissioning, abandoning and reclaiming well leases and facilities;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Performed auditing, management inspections
                                         and workforce observations to identify potential hazards and apply risk reduction measures;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Developed, communicated and measured
                                         against leading and lagging HSE key performance indicators;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| | - | Further enhanced of our competency and
                                         training programs;
| | - | --------------------------------------------------------------------------------------------------

| | - | Managed our waste products by reducing,
                                         recycling and recovering; and
| | - | --------------------------------------------------------------------------------------------------------------

| | - | Continued risk management efforts in
                                         addition to detailed emergency-response planning.
| | - | -------------------------------------------------------------------------------------------------------------------------------



We are a member of several organizations concerned
with environment, health and safety, including numerous regional co-operatives and synergy groups.  In the area of stakeholder
relations, we work to build long-term relationships with environmental stakeholders and communities.



32


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




SUSTAINABILITY



As a responsible oil and gas producer, we consistently
seek to deliver long-term shareholder value by operating in an economically, environmentally and socially sustainable manner that
is recognized as a model in our industry.



Vermilion regularly communicates with its stakeholders,
including shareholders and potential investors, and we continually monitor trends and best practices in stakeholder engagement.
Reporting on sustainability, or corporate social responsibility, is an increasingly important way to reflect Company performance
for shareholders and potential investors. As a result, Vermilion published its first sustainability report in August 2014, in
compliance with the comprehensive option of the Global Reporting Initiative’s G4 reporting framework. We continue to report
on this basis annually, as it provides an opportunity to share how we identify our economic, environmental and social impacts,
integrate their associated opportunities and risks into our business strategies, and chart our progress.



Our stakeholders expect us to deliver strong
financial results in a responsible and ethical way. Reflecting this, we strive to operate in a manner that protects the health
and safety of our staff and communities, provides responsible stewardship over the environment, and treats staff, contractors,
partners and suppliers respectfully and fairly.



As a result, we align expectations for economic
success with the elements of our sustainability commitments, leading us to prioritize our objectives as follows:

| | · | The
                                         safety and health of our staff and those involved directly or indirectly in our operations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| | · | Our
                                         responsibility to protect the environment. We follow the Precautionary Principle introduced
                                         in 1992 by the United Nations "Rio Declaration on Environment and Development"
                                         by using environmental risk as part of our development decision criteria, and by continually
                                         seeking improved environmental performance in our operations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Economic
                                         success through a focus on operational excellence across our business, which includes
                                         technical and process excellence, efficiency, expertise and stakeholder relations.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Vermilion’s
                                         sustainability performance has earned consistently higher rankings. In 2016, Corporate
                                         Knights ranked Vermilion 9th in their Future 40 listing, up from 15thin 2015 and 32nd in 2014.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



CORPORATE GOVERNANCE



We are committed to a high standard of corporate
governance practices, a dedication that begins at the Board level and extends throughout the Company. We believe good corporate
governance is in the best interest of our shareholders, and that successful companies are those that deliver growth and a competitive
return along with a commitment to the environment, to the communities where they operate and to their employees.



We comply with the objectives and guidelines
relating to corporate governance adopted by the Canadian Securities Administrators and the Toronto Stock Exchange. In addition,
the Board monitors and considers the implementation of corporate governance standards proposed by various regulatory and non-regulatory
authorities in Canada. A discussion of corporate governance policies is included each year in our proxy materials for our annual
general meeting of shareholders, copies of which are available on SEDAR (www.sedar.com).



A summary of the significant differences between the governance
practices of the Company and those required of U.S. domestic companies under the New York Stock Exchange listing standards can
be found in the Governance section of the Company’s website athttp://www.vermilionenergy.com/about/governance.cfm.



DISCLOSURE CONTROLS AND PROCEDURES



Our officers have established and maintained
disclosure controls and procedures and evaluated the effectiveness of these controls in conjunction with our filings.



As of December 31, 2016, we have evaluated
the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded and certified that our disclosure controls and procedures are effective.



33


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




INTERNAL CONTROL OVER FINANCIAL REPORTING



A company's internal control over financial
reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control
over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use,
or disposition of the company's assets that could have a material effect on the financial statements.



The Chief Executive Officer and the Chief Financial
Officer of Vermilion have assessed the effectiveness of Vermilion’s internal control over financial reporting as defined
in Rule 13a-15 under the US Securities Exchange Act of 1934 and as defined in Canada by National Instrument 52-109, Certification
of Disclosure in Issuers’ Annual and Interim Filings. The assessment was based on the framework in Internal Control –
Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.The Chief
Executive Officer and the Chief Financial Officer of Vermilion have concluded that Vermilion’s internal control over financial
reporting was effective as of December 31, 2016. The effectiveness of Vermilion’s internal control over financial reporting
as of December 31, 2016 has been audited by Deloitte LLP, as reflected in their report included in the 2016 audited annual financial
statements filed with the US Securities and Exchange Commission. No changes were made to Vermilion’s internal control over
financial reporting during the year ended December 31, 2016, that have materially affected, or are reasonably likely to materially
affect, the internal controls over financial reporting.



34


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Supplemental Table 1: Netbacks



The following table includes financial statement
information on a per unit basis by business unit. Natural gas sales volumes have been converted on a basis of six thousand cubic
feet of natural gas to one barrel of oil equivalent.



|                                       |                                          |                 |                                  |  |                |                 |         |              |  | Three
    Months |  | Year         
|-------------------------------------- | ---------------------------------------- | --------------- | -------------------------------- |  | -------------- | --------------- | ------- | ------------ |  | ---------------- |  | -------------
|                                       |                                          |                 |                                  |  |                |                 |         |              |  | Ended
    Dec    |  | Ended
    Dec
|                                       | Three
    Months Ended December 31, 2016 |                 | Year
    Ended December 31, 2016 |  |                | 31,
    2015    |         | 31,
    2015
|                                       | Crude
    Oil,                           |                 |                                  |  | Crude
    Oil, |                 |         |              |  |                  | 
|                                       | Condensate                               |                 |                                  |  | Condensate     |                 |         |              |  |                  | 
|                                       | &
    NGLs                               | Natural
    Gas | Total                            |  | &
    NGLs     | Natural
    Gas | Total   |              |  | Total            |  | Total        
|                                       | $/bbl                                    | $/mcf           | $/boe                            |  | $/bbl          | $/mcf           | $/boe   |              |  | $/boe            |  | $/boe        
|Canada                                 |                                          |                 |                                  |  |                |                 |         |              |  |                  |  |              
|Sales                                  | 51.77                                    | 3.05            | 33.48                            |  | 43.58          | 2.14            | 26.81   |              |  | 28.94            |  | 34.32        
|Royalties                              | (6.17)                                   | (0.22)          | (3.51)                           |  | (4.37)         | (0.09)          | (2.28)  |              |  | (2.80)           |  | (3.01)       
|Transportation                         | (2.34)                                   | (0.18)          | (1.66)                           |  | (2.36)         | (0.17)          | (1.63)  |              |  | (1.48)           |  | (1.75)       
|Operating                              | (9.49)                                   | (1.32)          | (8.62)                           |  | (8.05)         | (1.20)          | (7.59)  |              |  | (9.62)           |  | (9.54)       
|Operating
    netback                  | 33.77                                    | 1.33            | 19.69                            |  | 28.80          | 0.68            | 15.31   |              |  | 15.04            |  | 20.02        
|General
    and administration         |                                          |                 | (0.97)                           |  |                |                 | (1.25)  |              |  | (1.44)           |  | (1.81)       
|Fund
    flows from operations netback |                                          |                 | 18.72                            |  |                |                 | 14.06   |              |  | 13.60            |  | 18.21        
|France                                 |                                          |                 |                                  |  |                |                 |         |              |  |                  |  |              
|Sales                                  | 63.99                                    | 1.55            | 63.71                            |  | 55.42          | 1.59            | 55.15   |              |  | 54.20            |  | 62.67        
|Royalties                              | (5.95)                                   | (0.36)          | (5.93)                           |  | (6.08)         | (0.34)          | (6.05)  |              |  | (6.15)           |  | (6.00)       
|Transportation                         | (3.55)                                   | -               | (3.53)                           |  | (3.32)         | -               | (3.30)  |              |  | (3.65)           |  | (3.42)       
|Operating                              | (10.13)                                  | (3.12)          | (10.17)                          |  | (11.15)        | (2.51)          | (11.17) |              |  | (13.50)          |  | (11.30)      
|Operating
    netback                  | 44.36                                    | (1.93)          | 44.08                            |  | 34.87          | (1.26)          | 34.63   |              |  | 30.90            |  | 41.95        
|General
    and administration         |                                          |                 | (4.52)                           |  |                |                 | (4.27)  |              |  | (4.18)           |  | (4.50)       
|Other
    income                       |                                          |                 | 3.39                             |  |                |                 | 0.85    |              |  | -                |  | 7.08         
|Current
    income taxes               |                                          |                 | (2.54)                           |  |                |                 | (0.64)  |              |  | 3.87             |  | (5.29)       
|Fund
    flows from operations netback |                                          |                 | 40.41                            |  |                |                 | 30.57   |              |  | 30.59            |  | 39.24        
|Netherlands                            |                                          |                 |                                  |  |                |                 |         |              |  |                  |  |              
|Sales                                  | 63.18                                    | 6.78            | 40.84                            |  | 44.93          | 5.67            | 34.15   |              |  | 42.61            |  | 46.77        
|Royalties                              | -                                        | (0.08)          | (0.46)                           |  | -              | (0.08)          | (0.50)  |              |  | (0.26)           |  | (1.12)       
|Operating                              | -                                        | (1.49)          | (8.90)                           |  | -              | (1.19)          | (7.05)  |              |  | (7.17)           |  | (8.24)       
|Operating
    netback                  | 63.18                                    | 5.21            | 31.48                            |  | 44.93          | 4.40            | 26.60   |              |  | 35.18            |  | 37.41        
|General
    and administration         |                                          |                 | (0.26)                           |  |                |                 | (0.52)  |              |  | (0.93)           |  | (1.51)       
|Current
    income taxes               |                                          |                 | 0.16                             |  |                |                 | (2.25)  |              |  | (3.35)           |  | (4.40)       
|Fund
    flows from operations netback |                                          |                 | 31.38                            |  |                |                 | 23.83   |              |  | 30.90            |  | 31.50        
|Germany                                |                                          |                 |                                  |  |                |                 |         |              |  |                  |  |              
|Sales                                  | -                                        | 6.09            | 36.54                            |  | -              | 5.33            | 31.97   |              |  | 39.68            |  | 43.10        
|Royalties                              | -                                        | (0.01)          | (0.06)                           |  | -              | (0.38)          | (2.30)  |              |  | (4.70)           |  | (6.75)       
|Transportation                         | -                                        | (0.28)          | (1.65)                           |  | -              | (0.53)          | (3.16)  |              |  | (2.05)           |  | (3.41)       
|Operating                              | -                                        | (2.91)          | (17.44)                          |  | -              | (2.27)          | (13.62) |              |  | (19.31)          |  | (11.41)      
|Operating
    netback                  | -                                        | 2.89            | 17.39                            |  | -              | 2.15            | 12.89   |              |  | 13.62            |  | 21.53        
|General
    and administration         |                                          |                 | (7.73)                           |  |                |                 | (9.15)  |              |  | (12.22)          |  | (7.69)       
|Fund
    flows from operations netback |                                          |                 | 9.66                             |  |                |                 | 3.74    |              |  | 1.40             |  | 13.84        
|Ireland                                |                                          |                 |                                  |  |                |                 |         |              |  |                  |  |              
|Sales                                  | -                                        | 7.38            | 44.29                            |  | -              | 5.86            | 35.16   |              |  | -                |  | -            
|Transportation                         | -                                        | (0.29)          | (1.77)                           |  | -              | (0.35)          | (2.09)  |              |  | -                |  | -            
|Operating                              | -                                        | (0.89)          | (5.34)                           |  | -              | (1.00)          | (6.01)  |              |  | -                |  | -            
|Operating
    netback                  | -                                        | 6.20            | 37.18                            |  | -              | 4.51            | 27.06   |              |  | -                |  | -            
|General
    and administration         |                                          |                 | (1.58)                           |  |                |                 | (1.54)  |              |  | -                |  | -            
|Fund
    flows from operations netback |                                          |                 | 35.60                            |  |                |                 | 25.52   |              |  | -                |  | -            
|Australia                              |                                          |                 |                                  |  |                |                 |         |              |  |                  |  |              
|Sales                                  | 69.05                                    | -               | 69.05                            |  | 60.33          | -               | 60.33   |              |  | 58.74            |  | 70.22        
|Operating                              | (26.83)                                  | -               | (26.83)                          |  | (20.95)        | -               | (20.95) |              |  | (17.08)          |  | (22.29)      
|PRRT
    (1)                           | (2.82)                                   | -               | (2.82)                           |  | (0.69)         | -               | (0.69)  |              |  | (1.29)           |  | (2.97)       
|Operating
    netback                  | 39.40                                    | -               | 39.40                            |  | 38.69          | -               | 38.69   |              |  | 40.37            |  | 44.96        
|General
    and administration         |                                          |                 | (3.60)                           |  |                |                 | (2.82)  |              |  | (2.17)           |  | (2.48)       
|Corporate
    income taxes             |                                          |                 | (4.87)                           |  |                |                 | (3.32)  |              |  | 1.47             |  | (3.12)       
|Fund
    flows from operations netback |                                          |                 | 30.93                            |  |                |                 | 32.55   |              |  | 39.67            |  | 39.36        



35


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




|                                          |                                          |                 |                                  |  |                |                 |         |              |  | Three
    Months |  | Year         
|----------------------------------------- | ---------------------------------------- | --------------- | -------------------------------- |  | -------------- | --------------- | ------- | ------------ |  | ---------------- |  | -------------
|                                          |                                          |                 |                                  |  |                |                 |         |              |  | Ended
    Dec    |  | Ended
    Dec
|                                          | Three
    Months Ended December 31, 2016 |                 | Year
    Ended December 31, 2016 |  |                | 31,
    2015    |         | 31,
    2015
|                                          | Crude
    Oil,                           |                 |                                  |  | Crude
    Oil, |                 |         |              |  |                  |  |              
|                                          | Condensate                               |                 |                                  |  | Condensate     |                 |         |              |  |                  |  |              
|                                          | &
    NGLs                               | Natural
    Gas | Total                            |  | &
    NGLs     | Natural
    Gas | Total   |              |  | Total            |  | Total        
|                                          | $/bbl                                    | $/mcf           | $/boe                            |  | $/bbl          | $/mcf           | $/boe   |              |  | $/bbl            |  | $/boe        
|United
    States                         |                                          |                 |                                  |  |                |                 |         |              |  |                  |  |              
|Sales                                     | 56.77                                    | 1.93            | 53.58                            |  | 46.89          | 0.85            | 43.70   |              |  | 41.94            |  | 47.53        
|Royalties                                 | (16.49)                                  | (1.72)          | (16.05)                          |  | (13.71)        | (0.62)          | (12.95) |              |  | (12.40)          |  | (13.93)      
|Operating                                 | (8.51)                                   | -               | (7.91)                           |  | (8.50)         | -               | (7.85)  |              |  | (6.11)           |  | (8.23)       
|Operating
    netback                     | 31.77                                    | 0.21            | 29.62                            |  | 24.68          | 0.23            | 22.90   |              |  | 23.43            |  | 25.37        
|General
    and administration            |                                          |                 | (23.02)                          |  |                |                 | (21.65) |              |  | (20.18)          |  | (42.51)      
|Fund
    flows from operations netback    |                                          |                 | 6.60                             |  |                |                 | 1.25    |              |  | 3.25             |  | (17.14)      
|Total
    Company                         |                                          |                 |                                  |  |                |                 |         |              |  |                  |  |              
|Sales                                     | 60.58                                    | 5.47            | 45.93                            |  | 51.73          | 4.18            | 37.88   |              |  | 41.04            |  | 47.07        
|Realized
    hedging gain                 | 0.45                                     | 0.04            | 0.34                             |  | 1.45           | 0.68            | 2.81    |              |  | 3.71             |  | 2.07         
|Royalties                                 | (4.92)                                   | (0.10)          | (2.65)                           |  | (4.28)         | (0.09)          | (2.33)  |              |  | (2.85)           |  | (3.30)       
|Transportation                            | (2.33)                                   | (0.19)          | (1.69)                           |  | (2.22)         | (0.20)          | (1.70)  |              |  | (1.78)           |  | (2.09)       
|Operating                                 | (13.33)                                  | (1.34)          | (10.54)                          |  | (11.88)        | (1.23)          | (9.53)  |              |  | (11.50)          |  | (11.32)      
|PRRT
    (1)                              | (0.59)                                   | -               | (0.28)                           |  | (0.14)         | -               | (0.07)  |              |  | (0.18)           |  | (0.34)       
|Operating
    netback                     | 39.86                                    | 3.88            | 31.11                            |  | 34.66          | 3.34            | 27.06   |              |  | 28.44            |  | 32.09        
|General
    and administration            |                                          |                 | (2.03)                           |  |                |                 | (2.27)  |              |  | (2.18)           |  | (2.68)       
|Interest
    expense                      |                                          |                 | (2.55)                           |  |                |                 | (2.44)  |              |  | (2.90)           |  | (3.00)       
|Realized
    foreign exchange gain (loss) |                                          |                 | 0.23                             |  |                |                 | 0.17    |              |  | (0.04)           |  | 0.03         
|Other
    income                          |                                          |                 | 0.70                             |  |                |                 | 0.17    |              |  | 0.04             |  | 1.64         
|Corporate
    income taxes(1)             |                                          |                 | (1.03)                           |  |                |                 | (0.78)  |              |  | 0.55             |  | (2.22)       
|Fund
    flows from operations netback    |                                          |                 | 26.43                            |  |                |                 | 21.91   |              |  | 23.91            |  | 25.86        



(1)
Vermilion considers Australian PRRT to be an operating item and, accordingly, has included PRRT in the calculation of operating
netbacks. Current income taxes presented above excludes PRRT.



36


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Supplemental Table 2: Hedges



The prices in these tables may represent the
weighted averages for several contracts. The weighted average price for the portfolio of options listed below may not have the
same payoff profile as the individual contracts. As such, the presentation of the weighted average prices is purely for indicative
purposes.



The following tables outline Vermilion’s outstanding risk
management positions as at December 31, 2016:



|Crude
    Oil          | Period                  | Exercise
    date(1) | Currency | Bought
    Put
 Volume 
(bbl/d)   | Weighted
    
Average Bought 
Put Price / bbl    | Sold
                                         Call 
Volume
        (bbl/d) | Weighted
    
Average Sold 
Call Price / bbl    | Sold
    Put 
Volume 
(bbl/d)   | Weighted
                                         
Average
        Sold
        Put
        Price
        / bbl   | Swap
    
Volume (bbl/d)   | Weighted
    
Average Swap 
Price / bbl   | Additional
    Swap 
Volume 
(mmbtu/d) (2)
|---------------------- | ----------------------- | -------------------- | -------- | --------------------------------- | ------------------------------------------------ | -------------------------------------------------------------------------- | ----------------------------------------------- | ------------------------------- | ----------------------------------------------------------------------------------------------------------------- | -------------------------- | ----------------------------------------- | ------------------------------------------
|Dated
    Brent        |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|3-Way
    Collar       | Oct
    2016 - Mar 2017 |                      | USD      | 500                               | 50.00                                            | 500                                                                        | 60.00                                           | 500                             | 42.50                                                                                                             | -                          | -                                         | -                                         
|3-Way
    Collar       | Jan
    2017 - Dec 2017 |                      | USD      | 2,500                             | 51.00                                            | 2,500                                                                      | 60.50                                           | 2,500                           | 41.50                                                                                                             | -                          | -                                         | -                                         
|3-Way
    Collar       | Jul
    2017 - Jun 2018 |                      | USD      | 2,000                             | 55.00                                            | 2,000                                                                      | 64.06                                           | 2,000                           | 45.00                                                                                                             | -                          | -                                         | -                                         
|Swap                   | Jan
    2017 - Dec 2017 |                      | USD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 1,250                      | 55.50                                     | -                                         
|Swaption               | Jul
    2017 - Jun 2018 | Mar
    31, 2017     | USD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 500                        | 60.00                                     | -                                         
|Swaption               | Jul
    2017 - Jun 2018 | Jun
    30, 2017     | USD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 1,000                      | 60.00                                     | -                                         
|                       |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|WTI                    |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|3-Way
    Collar       | Jan
    2017 - Dec 2017 |                      | CAD      | 1,500                             | 70.00                                            | 1,500                                                                      | 75.00                                           | 1,500                           | 55.00                                                                                                             | -                          | -                                         | -                                         
|3-Way
    Collar       | Jan
    2017 - Mar 2017 |                      | USD      | 2,500                             | 50.00                                            | 2,500                                                                      | 55.00                                           | 2,500                           | 42.50                                                                                                             | -                          | -                                         | -                                         
|3-Way
    Collar       | Jul
    2017 - Dec 2017 |                      | USD      | 1,500                             | 53.67                                            | 1,500                                                                      | 63.00                                           | 1,500                           | 45.00                                                                                                             | -                          | -                                         | -                                         
|Swap                   | Jan
    2017 - Mar 2017 |                      | USD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 2,500                      | 53.10                                     | -                                         
|                       |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|North
    American Gas | Period                  | Exercise
    date(1) | Currency | Bought
    Put
 Volume 
(mmbtu/d) | Weighted
    
Average Bought
 Put Price / mmbtu  | Sold
    Call 
Volume 
(mmbtu/d)                                           | Weighted
    
Average Sold 
Call Price / 
mmbtu | Sold
    Put 
Volume 
(mmbtu/d) | Weighted

                                         Average
        Sold
        Put
        Price
        / mmbtu | Swap
    Volume 
(mmbtu/d) | Weighted
    
Average Swap
 Price / mmbtu | Additional
    Swap 
Volume 
(mmbtu/d) (2)
|AECO                   |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|Collar                 | Nov
    2016 - Oct 2017 |                      | CAD      | 7,109                             | 2.18                                             | 9,478                                                                      | 2.86                                            | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Collar                 | Nov
    2016 - Dec 2017 |                      | CAD      | 9,478                             | 2.33                                             | 9,478                                                                      | 3.02                                            | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Collar                 | Jan
    2017 - Dec 2017 |                      | CAD      | 4,739                             | 2.37                                             | 4,739                                                                      | 3.25                                            | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Swap                   | Nov
    2016 - Dec 2017 |                      | CAD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 2,370                      | 2.99                                      | -                                         
|Swap                   | Jan
    2017 - Mar 2017 |                      | CAD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 7,109                      | 3.35                                      | -                                         
|Swap                   | Jan
    2017 - Dec 2017 |                      | CAD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 7,109                      | 2.94                                      | -                                         
|Swap                   | Apr
    2017 - Oct 2017 |                      | CAD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 7,109                      | 3.01                                      | -                                         
|Swap                   | Nov
    2017 - Dec 2017 |                      | CAD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 7,109                      | 3.35                                      | -                                         
|                       |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|AECO
    Basis         |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|Swap                   | Jan
    2017 - Dec 2017 |                      | USD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 5,000                      | (0.75)                                    | -                                         
|Swap                   | Jan
    2018 - Dec 2018 |                      | USD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 10,000                     | (0.83)                                    | -                                         
|                       |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|NYMEX                  |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|Swap                   | Jan
    2017 - Dec 2017 |                      | USD      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 5,000                      | 3.00                                      | -                                         
|                       |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|European
    Gas       | Period                  | Exercise
    date(1) | Currency | Bought
    Put 
Volume 
(mmbtu/d) | Weighted
    
Average Bought 
Put Price / 
mmbtu | Sold
    Call 
Volume 
(mmbtu/d)                                           | Weighted
    
Average Sold 
Call Price / 
mmbtu | Sold
    Put 
Volume 
(mmbtu/d) | Weighted
                                         
Average
        Sold
        Put
        Price
        / mmbtu | Swap
    Volume 
(mmbtu/d) | Weighted
    
Average Swap 
price / mmbtu | Additional
    Swap 
Volume 
(mmbtu/d) (2)
|NBP                    |                         |                      |          |                                   |                                                  |                                                                            |                                                 |                                 |                                                                                                                   |                            |                                           |                                           
|Collar                 | Apr
    2016 - Mar 2017 |                      | GBP      | 2,500                             | 4.00                                             | 2,500                                                                      | 4.77                                            | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Collar                 | Oct
    2016 - Mar 2017 |                      | GBP      | 2,500                             | 3.30                                             | 5,000                                                                      | 3.72                                            | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Collar                 | Oct
    2016 - Sep 2017 |                      | GBP      | 5,000                             | 3.25                                             | 10,000                                                                     | 4.03                                            | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Collar                 | Oct
    2016 - Dec 2017 |                      | GBP      | 5,000                             | 3.25                                             | 10,000                                                                     | 4.07                                            | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Collar                 | Jan
    2017 - Dec 2017 |                      | GBP      | 5,000                             | 3.30                                             | 7,500                                                                      | 3.77                                            | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Collar                 | Jan
    2018 - Dec 2018 |                      | GBP      | 2,500                             | 3.15                                             | 2,500                                                                      | 3.82                                            | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Put                    | Dec
    2016 - Feb 2017 |                      | GBP      | 20,000                            | 4.00                                             | -                                                                          | -                                               | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Call                   | Oct
    2016 - Mar 2017 |                      | GBP      | -                                 | -                                                | 2,500                                                                      | 4.90                                            | -                               | -                                                                                                                 | -                          | -                                         | -                                         
|Swap                   | Jan
    2017 - Dec 2017 |                      | GBP      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 2,500                      | 4.22                                      | 2,500                                     
|Swap                   | Apr
    2017 - Mar 2018 |                      | GBP      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 5,300                      | 4.20                                      | -                                         
|Swap                   | Jul
    2017 - Dec 2017 |                      | GBP      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 2,500                      | 3.95                                      | -                                         
|Swap                   | Jan
    2018 - Dec 2018 |                      | GBP      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 2,500                      | 4.04                                      | 5,000                                     
|Swap                   | Jul
    2016 - Mar 2017 |                      | EUR      | -                                 | -                                                | -                                                                          | -                                               | -                               | -                                                                                                                 | 2,457                      | 5.73                                      | -                                         

| | (1) | The sold swaption instrument allows the counterparty,
                                         at the specified date, to enter into a swap with Vermilion at the above detailed terms.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | On the last business day of each month, the counterparty
                                         has the option to increase the contracted volumes for the following month.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------





37


Vermilion Energy Inc.2016 Management’s Discussion & Analysis






|European
    Gas                 | Period                   | Exercise
    date(1) | Currency | Bought
    Put
 Volume
 (mmbtu/d) | Weighted

    Average Bought
 Put Price /
 mmbtu | Sold
    Call
 Volume
 (mmbtu/d)  | Weighted

    Average Sold
Call Price /
 mmbtu | Sold
    Put
 Volume
 (mmbtu/d) | Weighted

                                         Average
        Sold
        Put
        Price
        / mmbtu | Swap
    Volume
 (mmbtu/d)    | Weighted

    Average Swap
 price / mmbtu | Additional
    Swap
 Volume
 (mmbtu/d) (2)                                                 
|-------------------------------- | ------------------------ | -------------------- | -------- | --------------------------------- | ------------------------------------------------ | --------------------------------- | ---------------------------------------------- | ------------------------------- | ----------------------------------------------------------------------------------------------------------------- | ----------------------------- | ----------------------------------------- | -------------------------------------------------------------------------------------------
|TTF                              |                          |                      |          |                                   |                                                  |                                   |                                                |                                 |                                                                                                                   |                               |                                           |                                                                                            
|3-Way
    Collar                 | Apr
    2017 - Sep 2017  |                      | EUR      | 9,827                             | 4.18                                             | 9,827                             | 5.06                                           | 9,827                           | 3.08                                                                                                              | -                             | -                                         | -                                                                                          
|3-Way
    Collar                 | Oct
    2017 - Dec 2019  |                      | EUR      | 7,370                             | 4.59                                             | 7,370                             | 5.42                                           | 7,370                           | 2.93                                                                                                              | -                             | -                                         | -                                                                                          
|3-Way
    Collar                 | Jan
    2018 - Dec 2018  |                      | EUR      | 9,827                             | 4.67                                             | 9,827                             | 5.42                                           | 9,827                           | 3.22                                                                                                              | -                             | -                                         | -                                                                                          
|3-Way
    Collar                 | Jan
    2018 - Dec 2019  |                      | EUR      | 3,685                             | 4.74                                             | 3,685                             | 5.52                                           | 3,685                           | 3.13                                                                                                              | -                             | -                                         | -                                                                                          
|Collar                           | Apr
    2016 - Mar 2017  |                      | EUR      | 4,913                             | 5.57                                             | 9,827                             | 6.70                                           | -                               | -                                                                                                                 | -                             | -                                         | -                                                                                          
|Collar                           | Jul
    2016 - Mar 2017  |                      | EUR      | 2,457                             | 5.35                                             | 4,913                             | 6.92                                           | -                               | -                                                                                                                 | -                             | -                                         | -                                                                                          
|Collar                           | Jul
    2016 - Mar 2018  |                      | EUR      | 2,457                             | 5.61                                             | 4,913                             | 6.90                                           | -                               | -                                                                                                                 | -                             | -                                         | -                                                                                          
|Collar                           | Oct
    2016 - Dec 2017  |                      | EUR      | 2,457                             | 5.28                                             | 2,457                             | 6.21                                           | -                               | -                                                                                                                 | -                             | -                                         | -                                                                                          
|Collar                           | Jan
    2017 - Dec 2017  |                      | EUR      | 9,827                             | 5.06                                             | 22,111                            | 6.37                                           | -                               | -                                                                                                                 | -                             | -                                         | -                                                                                          
|Collar                           | Apr
    2017 - Sept 2017 |                      | EUR      | 2,457                             | 3.81                                             | 4,913                             | 4.47                                           | -                               | -                                                                                                                 | -                             | -                                         | -                                                                                          
|Collar                           | Jan
    2018 - Dec 2018  |                      | EUR      | 4,913                             | 4.40                                             | 4,913                             | 5.31                                           | -                               | -                                                                                                                 | -                             | -                                         | -                                                                                          
|Call                             | Oct
    2016 - Mar 2017  |                      | EUR      | -                                 | -                                                | 2,457                             | 6.36                                           | -                               | -                                                                                                                 | -                             | -                                         | -                                                                                          
|Swap                             | Jul
    2016 - Jun 2018  |                      | EUR      | -                                 | -                                                | -                                 | -                                              | -                               | -                                                                                                                 | 2,559                         | 5.89                                      | -                                                                                          
|Swap                             | Jan
    2017 - Dec 2017  |                      | EUR      | -                                 | -                                                | -                                 | -                                              | -                               | -                                                                                                                 | 2,457                         | 5.32                                      | 2,457                                                                                      
|Swap                             | Oct
    2017 - Dec 2018  |                      | EUR      | -                                 | -                                                | -                                 | -                                              | -                               | -                                                                                                                 | 17,197                        | 4.80                                      | -                                                                                          
|Swap                             | Oct
    2017 - Dec 2019  |                      | EUR      | -                                 | -                                                | -                                 | -                                              | -                               | -                                                                                                                 | 7,370                         | 4.87                                      | -                                                                                          
|Swap                             | Jan
    2018 - Dec 2019  |                      | EUR      | -                                 | -                                                | -                                 | -                                              | -                               | -                                                                                                                 | 1,228                         | 5.00                                      | -                                                                                          
|Swap                             | Jan
    2019 - Dec 2019  |                      | EUR      | -                                 | -                                                | -                                 | -                                              | -                               | -                                                                                                                 | 2,457                         | 4.92                                      | -                                                                                          
|Put
    Spread                   | Apr
    2017 - Sep 2017  |                      | EUR      | 14,740                            | 4.40                                             | -                                 | -                                              | 14,740                          | 3.15                                                                                                              | -                             | -                                         | -                                                                                          
|Swaption                         | Apr
    2017 - Jun 2018  | Mar
    31, 2017     | EUR      | -                                 | -                                                | -                                 | -                                              | -                               | -                                                                                                                 | 4,913                         | 4.55                                      | -                                                                                          
|                                 |                          |                      |          |                                   |                                                  |                                   |                                                |                                 |                                                                                                                   |                               |                                           |                                                                                            
|Fuel
    and Electricity         | Period                   |                      | Currency |                                   |                                                  |                                   |                                                |                                 |                                                                                                                   | Swap
    Volume (unit/d)      |                                           | Weighted
                                         Average Swap
        price
        / unit
|AESO
    (mwh)                   |                          |                      |          |                                   |                                                  |                                   |                                                |                                 |                                                                                                                   |                               |                                           |                                                                                            
|Swap                             | Jan
    2017 - Dec 2017  |                      | CAD      |                                   |                                                  |                                   |                                                |                                 |                                                                                                                   | 65                            |                                           | 33.47                                                                                      
|                                 |                          |                      |          |                                   |                                                  |                                   |                                                |                                 |                                                                                                                   |                               |                                           |                                                                                            
|Interest
    Rate                |                          |                      |          |                                   |                                                  |                                   |                                                |                                 |                                                                                                                   | Notional
    amount           |                                           | Rate
    (%)                                                                               
|CDOR
    Swap                    | Sep
    2015 - Sep 2019  |                      | CAD      |                                   |                                                  |                                   |                                                |                                 |                                                                                                                   | 100,000,000                   |                                           | 1.00                                                                                       
|CDOR
    Swap                    | Oct
    2015 - Oct 2019  |                      | CAD      |                                   |                                                  |                                   |                                                |                                 |                                                                                                                   | 100,000,000                   |                                           | 1.10                                                                                       
|                                 |                          |                      |          |                                   |                                                  |                                   |                                                |                                 |                                                                                                                   |                               |                                           |                                                                                            
|Cross
    Currency Interest Rate |                          |                      |          |                                   |                                                  | Receive
    Notional amount (USD) |                                                | Rate
    (US%)                  |                                                                                                                   | Pay
    Notional amount (CAD) |                                           | Rate
    (CAD%)                                                                            
|Swap                             | Jan
    2017 - Feb 2017  |                      |          |                                   |                                                  | 891,088,800                       |                                                | 3.52                            |                                                                                                                   | 1,195,800,000                 |                                           | 3.17                                                                                       





| | (1) | The sold swaption instrument allows the counterparty,
                                         at the specified date, to enter into a swap with Vermilion at the above detailed terms.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | On the last business day of each month, the counterparty
                                         has the option to increase the contracted volumes for the following month.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | In January 2017, Vermilion repaid $1.2 billion
                                         of borrowings on the revolving credit facility bearing interest at CDOR plus applicable
                                         margins and simultaneously borrowed US $0.9 billion on the revolving credit facility
                                         bearing interest at LIBOR plus applicable margins.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



38


Vermilion Energy Inc.2016 Management’s Discussion & Analysis


Supplemental Table 3: Capital Expenditures
and Acquisitions



|                                                | Three
    Months Ended |             |             | Year
    Ended
|----------------------------------------------- | ---------------------- | ----------- | ----------- | --------------
|By
    classification                           | Dec
    31,            | Sep
    30, | Dec
    31, |               
|($M)                                            | 2016                   | 2016        | 2015        |               
|Drilling
    and development                    | 66,437                 | 41,039      | 128,996     |               
|Exploration
    and evaluation                  | 445                    | -           | -           |               
|Capital
    expenditures                        | 66,882                 | 41,039      | 128,996     |               
|                                                |                        |             |             |               
|Property
    acquisition                        | 78,713                 | 10,391      | 6,227       |               
|Acquisitions                                    | 78,713                 | 10,391      | 6,227       |               
|                                                |                        |             |             |               
|                                                | Three
    Months Ended |             |             | Year
    Ended
|By
    category                                 | Dec
    31,            | Sep
    30, | Dec
    31, |               
|($M)                                            | 2016                   | 2016        | 2015        |               
|Land                                            | 59                     | (36)        | 819         |               
|Seismic                                         | 1,757                  | 1,110       | 4,217       |               
|Drilling
    and completion                     | 38,233                 | 18,694      | 58,327      |               
|Production
    equipment and facilities         | 26,768                 | 18,046      | 55,662      |               
|Recompletions                                   | 3,293                  | 603         | 6,338       |               
|Other                                           | (3,228)                | 2,622       | 3,633       |               
|Capital
    expenditures                        | 66,882                 | 41,039      | 128,996     |               
|Acquisitions                                    | 78,713                 | 10,391      | 6,227       |               
|Total
    capital expenditures and acquisitions | 145,595                | 51,430      | 135,223     |               
|                                                |                        |             |             |               
|                                                | Three
    Months Ended |             |             | Year
    Ended
|By
    country                                  | Dec
    31,            | Sep
    30, | Dec
    31, |               
|($M)                                            | 2016                   | 2016        | 2015        |               
|Canada                                          | 18,273                 | 20,801      | 33,723      |               
|France                                          | 31,127                 | 11,110      | 24,164      |               
|Netherlands                                     | 33,996                 | 6,441       | 18,810      |               
|Germany                                         | 50,071                 | 978         | (441)       |               
|Ireland                                         | 1,711                  | 2,416       | 12,493      |               
|Australia                                       | 5,236                  | 6,908       | 40,852      |               
|United
    States                               | 4,414                  | 2,776       | 5,622       |               
|Corporate                                       | 767                    | -           | -           |               
|Total
    capital expenditures and acquisitions | 145,595                | 51,430      | 135,223     |               

39


Vermilion Energy Inc.2016 Management’s Discussion & Analysis


Supplemental Table 4: Production



|                  |                                     | Q4/16  | Q3/16  | Q2/16  | Q1/16  | Q4/15  | Q3/15  | Q2/15  | Q1/15  | Q4/14  | Q3/14  | Q2/14  | Q1/14 
|----------------- | ----------------------------------- | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------ | ------
|Canada            |                                     |        |        |        |        |        |        |        |        |        |        |       
|                  | Crude
    oil & condensate (bbls/d) | 7,945  | 8,984  | 9,453  | 10,317 | 10,413 | 11,030 | 11,843 | 12,163 | 12,681 | 12,755 | 14,108 | 10,390
|                  | NGLs
    (bbls/d)                   | 2,444  | 2,448  | 2,687  | 2,633  | 2,710  | 2,678  | 2,094  | 1,706  | 1,444  | 1,005  | 1,364  | 1,118 
|                  | Natural
    gas (mmcf/d)            | 75.12  | 77.62  | 87.44  | 97.16  | 87.90  | 71.94  | 64.66  | 61.78  | 58.36  | 57.07  | 57.59  | 49.53 
|                  | Total
    (boe/d)                   | 22,910 | 24,368 | 26,713 | 29,141 | 27,773 | 25,698 | 24,713 | 24,165 | 23,851 | 23,272 | 25,070 | 19,763
|                  | %
    of consolidated               | 38%    | 37%    | 42%    | 44%    | 45%    | 47%    | 48%    | 48%    | 49%    | 47%    | 49%    | 42%   
|France            |                                     |        |        |        |        |        |        |        |        |        |        |       
|                  | Crude
    oil (bbls/d)              | 11,220 | 11,827 | 12,326 | 12,220 | 12,537 | 12,310 | 12,746 | 11,463 | 11,133 | 11,111 | 11,025 | 10,771
|                  | Natural
    gas (mmcf/d)            | 0.38   | 0.42   | 0.54   | 0.44   | 1.36   | 1.47   | 1.03   | -      | -      | -      | -      | -     
|                  | Total
    (boe/d)                   | 11,283 | 11,897 | 12,416 | 12,293 | 12,763 | 12,555 | 12,917 | 11,463 | 11,133 | 11,111 | 11,025 | 10,771
|                  | %
    of consolidated               | 19%    | 19%    | 19%    | 19%    | 21%    | 22%    | 25%    | 23%    | 22%    | 22%    | 21%    | 23%   
|Netherlands       |                                     |        |        |        |        |        |        |        |        |        |        |       
|                  | Condensate
    (bbls/d)             | 57     | 86     | 96     | 114    | 110    | 109    | 112    | 63     | 81     | 63     | 96     | 69    
|                  | Natural
    gas (mmcf/d)            | 41.15  | 47.62  | 49.18  | 53.40  | 56.34  | 53.56  | 32.43  | 36.41  | 31.35  | 38.07  | 40.35  | 43.15 
|                  | Total
    (boe/d)                   | 6,915  | 8,023  | 8,293  | 9,015  | 9,500  | 9,035  | 5,517  | 6,132  | 5,306  | 6,407  | 6,822  | 7,260 
|                  | %
    of consolidated               | 11%    | 13%    | 13%    | 14%    | 16%    | 16%    | 11%    | 12%    | 11%    | 13%    | 13%    | 16%   
|Germany           |                                     |        |        |        |        |        |        |        |        |        |        |       
|                  | Natural
    gas (mmcf/d)            | 14.80  | 14.52  | 14.31  | 15.96  | 16.17  | 14.00  | 16.18  | 16.80  | 17.71  | 15.38  | 16.13  | 10.64 
|                  | Total
    (boe/d)                   | 2,467  | 2,420  | 2,385  | 2,660  | 2,695  | 2,333  | 2,696  | 2,801  | 2,952  | 2,563  | 2,689  | 1,773 
|                  | %
    of consolidated               | 4%     | 4%     | 4%     | 4%     | 4%     | 4%     | 5%     | 6%     | 6%     | 5%     | 5%     | 4%    
|Ireland           |                                     |        |        |        |        |        |        |        |        |        |        |       
|                  | Natural
    gas (mmcf/d)            | 62.92  | 59.28  | 47.26  | 33.90  | 0.12   | -      | -      | -      | -      | -      | -      | -     
|                  | Total
    (boe/d)                   | 10,486 | 9,879  | 7,877  | 5,650  | 20     | -      | -      | -      | -      | -      | -      | -     
|                  | %
    of consolidated               | 17%    | 16%    | 12%    | 9%     | -      | -      | -      | -      | -      | -      | -      | -     
|Australia         |                                     |        |        |        |        |        |        |        |        |        |        |       
|                  | Crude
    oil (bbls/d)              | 6,388  | 6,562  | 6,083  | 6,180  | 7,824  | 6,433  | 5,865  | 5,672  | 6,134  | 6,567  | 6,483  | 7,110 
|                  | %
    of consolidated               | 10%    | 10%    | 9%     | 9%     | 13%    | 11%    | 11%    | 11%    | 12%    | 13%    | 12%    | 15%   
|United
    States |                                     |        |        |        |        |        |        |        |        |        |        |       
|                  | Crude
    oil (bbls/d)              | 362    | 383    | 458    | 368    | 420    | 226    | 123    | 153    | 195    | -      | -      | -     
|                  | NGLs
    (bbls/d)                   | 23     | 30     | 26     | 39     | 29     | -      | -      | -      | -      | -      | -      | -     
|                  | Natural
    gas (mmcf/d)            | 0.18   | 0.20   | 0.20   | 0.26   | 0.20   | -      | -      | -      | -      | -      | -      | -     
|                  | Total
    (boe/d)                   | 414    | 447    | 518    | 450    | 483    | 226    | 123    | 153    | 195    | -      | -      | -     
|                  | %
    of consolidated               | 1%     | 1%     | 1%     | 1%     | 1%     | -      | -      | -      | -      | -      | -      | -     
|Consolidated      |                                     |        |        |        |        |        |        |        |        |        |        |       
|                  | Crude
    oil, condensate           |        |        |        |        |        |        |        |        |        |        |        |       
|                  | &
    NGLs (bbls/d)                 | 28,439 | 30,320 | 31,129 | 31,871 | 34,043 | 32,786 | 32,783 | 31,220 | 31,668 | 31,501 | 33,076 | 29,458
|                  | %
    of consolidated               | 47%    | 48%    | 48%    | 49%    | 56%    | 58%    | 63%    | 62%    | 64%    | 63%    | 63%    | 63%   
|                  | Natural
    gas (mmcf/d)            | 194.54 | 199.65 | 198.93 | 201.11 | 162.09 | 140.97 | 114.29 | 115.00 | 107.42 | 110.52 | 114.08 | 103.32
|                  | %
    of consolidated               | 53%    | 52%    | 52%    | 51%    | 44%    | 42%    | 37%    | 38%    | 36%    | 37%    | 37%    | 37%   
|                  | Total
    (boe/d)                   | 60,863 | 63,596 | 64,285 | 65,389 | 61,058 | 56,280 | 51,831 | 50,386 | 49,571 | 49,920 | 52,089 | 46,677





40


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




|                  |                                           | 2016   | 2015   | 2014   | 2013   | 2012   | 2011  
|----------------- | ----------------------------------------- | ------ | ------ | ------ | ------ | ------ | ------
|Canada            |                                           |        |        |        |        |       
|                  | Crude
    oil & condensate (bbls/d)       | 9,171  | 11,357 | 12,491 | 8,387  | 7,659  | 4,701 
|                  | NGLs
    (bbls/d)                         | 2,552  | 2,301  | 1,233  | 1,666  | 1,232  | 1,297 
|                  | Natural
    gas (mmcf/d)                  | 84.29  | 71.65  | 55.67  | 42.39  | 37.50  | 43.38 
|                  | Total
    (boe/d)                         | 25,771 | 25,598 | 23,001 | 17,117 | 15,142 | 13,227
|                  | %
    of consolidated                     | 40%    | 46%    | 47%    | 41%    | 40%    | 38%   
|France            |                                           |        |        |        |        |       
|                  | Crude
    oil (bbls/d)                    | 11,896 | 12,267 | 11,011 | 10,873 | 9,952  | 8,110 
|                  | Natural
    gas (mmcf/d)                  | 0.44   | 0.97   | -      | 3.40   | 3.59   | 0.95  
|                  | Total
    (boe/d)                         | 11,970 | 12,429 | 11,011 | 11,440 | 10,550 | 8,269 
|                  | %
    of consolidated                     | 19%    | 23%    | 22%    | 28%    | 28%    | 23%   
|Netherlands       |                                           |        |        |        |        |       
|                  | Condensate
    (bbls/d)                   | 88     | 99     | 77     | 64     | 67     | 58    
|                  | Natural
    gas (mmcf/d)                  | 47.82  | 44.76  | 38.20  | 35.42  | 34.11  | 32.88 
|                  | Total
    (boe/d)                         | 8,058  | 7,559  | 6,443  | 5,967  | 5,751  | 5,538 
|                  | %
    of consolidated                     | 13%    | 14%    | 13%    | 15%    | 15%    | 16%   
|Germany           |                                           |        |        |        |        |       
|                  | Natural
    gas (mmcf/d)                  | 14.90  | 15.78  | 14.99  | -      | -      | -     
|                  | Total
    (boe/d)                         | 2,483  | 2,630  | 2,498  | -      | -      | -     
|                  | %
    of consolidated                     | 4%     | 5%     | 5%     | -      | -      | -     
|Ireland           |                                           |        |        |        |        |       
|                  | Natural
    gas (mmcf/d)                  | 50.89  | 0.03   | -      | -      | -      | -     
|                  | Total
    (boe/d)                         | 8,482  | 5      | -      | -      | -      | -     
|                  | %
    of consolidated                     | 13%    | -      | -      | -      | -      | -     
|Australia         |                                           |        |        |        |        |       
|                  | Crude
    oil (bbls/d)                    | 6,304  | 6,454  | 6,571  | 6,481  | 6,360  | 8,168 
|                  | %
    of consolidated                     | 10%    | 12%    | 13%    | 16%    | 17%    | 23%   
|United
    States |                                           |        |        |        |        |       
|                  | Crude
    oil (bbls/d)                    | 393    | 231    | 49     | -      | -      | -     
|                  | NGLs
    (bbls/d)                         | 29     | 7      | -      | -      | -      | -     
|                  | Natural
    gas (mmcf/d)                  | 0.21   | 0.05   | -      | -      | -      | -     
|                  | Total
    (boe/d)                         | 457    | 247    | 49     | -      | -      | -     
|                  | %
    of consolidated                     | 1%     | -      | -      | -      | -      | -     
|Consolidated      |                                           |        |        |        |        |       
|                  | Crude
    oil, condensate & NGLs (bbls/d) | 30,433 | 32,716 | 31,432 | 27,471 | 25,270 | 22,334
|                  | %
    of consolidated                     | 48%    | 60%    | 63%    | 67%    | 67%    | 63%   
|                  | Natural
    gas (mmcf/d)                  | 198.55 | 133.24 | 108.85 | 81.21  | 75.20  | 77.21 
|                  | %
    of consolidated                     | 52%    | 40%    | 37%    | 33%    | 33%    | 37%   
|                  | Total
    (boe/d)                         | 63,526 | 54,922 | 49,573 | 41,005 | 37,803 | 35,202



41


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




Supplemental Table 5: Segmented Financial
Results



|                                            | Three
    Months Ended December 31, 2016
|------------------------------------------- | ----------------------------------------
|($M)                                        | Canada                                  
|Drilling
    and development                | 16,895                                  
|Exploration
    and evaluation              | -                                       
|Oil
    and gas sales to external customers | 70,573                                  
|Royalties                                   | (7,390)                                 
|Revenue
    from external customers         | 63,183                                  
|Transportation                              | (3,504)                                 
|Operating                                   | (18,161)                                
|General
    and administration              | (2,035)                                 
|PRRT                                        | -                                       
|Corporate
    income taxes                  | -                                       
|Interest
    expense                        | -                                       
|Realized
    gain on derivative instruments | -                                       
|Realized
    foreign exchange gain          | -                                       
|Realized
    other income                   | -                                       
|Fund
    flows from operations              | 39,483                                  



|                                            | Year
    Ended December 31, 2016
|------------------------------------------- | --------------------------------
|($M)                                        | Canada                          
|Total
    assets                            | 1,522,243                       
|Drilling
    and development                | 62,706                          
|Exploration
    and evaluation              | -                               
|Oil
    and gas sales to external customers | 252,867                         
|Royalties                                   | (21,475)                        
|Revenue
    from external customers         | 231,392                         
|Transportation                              | (15,392)                        
|Operating                                   | (71,543)                        
|General
    and administration              | (11,826)                        
|PRRT                                        | -                               
|Corporate
    income taxes                  | -                               
|Interest
    expense                        | -                               
|Realized
    gain on derivative instruments | -                               
|Realized
    foreign exchange gain          | -                               
|Realized
    other income                   | -                               
|Fund
    flows from operations              | 132,631                         





42


Vermilion Energy Inc.2016 Management’s Discussion & Analysis






NON-GAAP FINANCIAL MEASURES



This MD&A includes references to certain
financial measures which do not have standardized meanings and may not be comparable to similar measures presented by other issuers.
These financial measures include fund flows from operations, a measure of profit or loss in accordance with IFRS 8 “Operating
Segments” (please see SEGMENTED INFORMATION in the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS) and net debt, a measure
of capital in accordance with IAS 1 “Presentation of Financial Statements” (please see CAPITAL DISCLOSURES in the
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS).



In addition, this MD&A includes financial
measures which are not specified, defined, or determined under IFRS and are therefore considered non-GAAP financial measures and
may not be comparable to similar measures presented by other issuers. These non-GAAP financial measures include:



Capital expenditures:The sum of drilling
and development and exploration and evaluation from the Consolidated Statement of Cash Flows. We consider capital expenditures
to be a useful measure of our investment in our existing asset base. Capital expenditures are also referred to as E&D capital.



Cash dividends per share:Represents
cash dividends declared per share and is a useful measure of the dividends a common shareholder was entitled to during the period.



Covenants:The financial covenants on
our revolving credit facility contain non-GAAP measures. The definitions for these financial covenants are included in FINANCIAL
POSITION REVIEW.



Diluted shares outstanding:The sum
of shares outstanding at the period end plus outstanding awards under the VIP, based on current estimates of future performance
factors and forfeiture rates.



Free cash flow:Represents fund flows
from operations in excess of capital expenditures.  We consider free cash flow to be a key measure as it is used to determine
the funding available for investing and financing activities, including payment of dividends, repayment of long-term debt, reallocation
to existing business units, and deployment into new ventures.



Fund flows from operations per basic and
diluted share:Management assesses fund flows from operations on a per share basis as we believe this provides a measure of
our operating performance after taking into account the issuance and potential future issuance of Vermilion common shares. Fund
flows from operations per basic share is calculated by dividing fund flows from operations by the basic weighted average shares
outstanding as defined under IFRS. Fund flows from operations per diluted share is calculated by dividing fund flows from operations
by the sum of basic weighted average shares outstanding and incremental shares issuable under the VIP as determined using the
treasury stock method.



Net dividends:We define net dividends
as dividends declared less proceeds received for the issuance of shares pursuant to the dividend reinvestment and Premium DividendTM
plans. Management monitors net dividends and net dividends as a percentage of fund flows from operations to assess our ability
to pay dividends.



Operating netback:Sales less royalties,
operating expense, transportation costs, PRRT, and realized hedging gains and losses presented on a per unit basis. Management
assesses operating netback as a measure of the profitability and efficiency of our field operations. In contrast, fund flows from
operations netback also includes general and administration expense, corporate income taxes and interest. Fund flows from operations
netback is used by management to assess the profitability of our business units and Vermilion as a whole.



Payout:We define payout as net dividends
plus drilling and development costs, exploration and evaluation costs, dispositions, and asset retirement obligations settled.
Management uses payout to assess the amount of cash distributed back to shareholders and re-invested in the business for maintaining
production and organic growth.



43


Vermilion Energy Inc.2016 Management’s Discussion & Analysis




The following tables reconcile net dividends,
payout, and diluted shares outstanding from their most directly comparable GAAP measures as presented in our financial statements:



|                                         |          | Three
    Months Ended |             |             | Year
    Ended
|---------------------------------------- | -------- | ---------------------- | ----------- | ----------- | --------------
|                                         |          | Dec
    31,            | Sep
    30, | Dec
    31, |               
|($M)                                     | 2016     | 2016                   | 2015        |             |               
|Dividends
    declared                   | 76,096   | 75,465                 | 71,965      |             |               
|Shares
    issued for the DRIP(1)        | (43,580) | (50,912)               | (46,764)    |             |               
|Net
    dividends                        | 32,516   | 24,553                 | 25,201      |             |               
|Drilling
    and development             | 66,437   | 41,039                 | 128,996     |             |               
|Exploration
    and evaluation           | 445      | -                      | -           |             |               
|Asset
    retirement obligations settled | 3,327    | 2,066                  | 4,921       |             |               
|Payout                                   | 102,725  | 67,658                 | 159,118     |             |               



(1) DRIP Refers to Vermilion’s
dividend reinvestment and Premium DividendTM plans.



|                                                  | As
    at  
|------------------------------------------------- | -----------
|                                                  | Dec
    31,
|('000s
    of shares)                             | 2016       
|Shares
    outstanding                            | 118,263    
|Potential
    shares issuable pursuant to the VIP | 3,090      
|Diluted
    shares outstanding                    | 121,353    







44


Vermilion Energy Inc.2016 Management’s Discussion & Analysis








|DIRECTORS
        
        Lorenzo Donadeo 1
        Calgary, Alberta
        
        Larry J. Macdonald 2, 3, 4, 5, 6
        Chairman & CEO, Point Energy Ltd.
        Calgary, Alberta
        
        Claudio A. Ghersinich 3, 6
        Executive Director, Carrera Investments Corp.
        Calgary, Alberta
        
        Loren M. Leiker 6
        Houston, Texas
        William F. Madison 5, 6
        Sugar Land, Texas
        Timothy R. Marchant 5, 6
        Calgary, Alberta
        
        Anthony Marino
        Calgary, Alberta
        
        Robert Michaleski 3
        Calgary, Alberta
        
        Sarah E. Raiss 4, 5
        Calgary, Alberta
        
        Catherine L. Williams 3, 4
        Calgary, Alberta
        
        1 Chairman of the Board
        2 Lead Director
        3 Audit Committee
        4 Governance and Human
        Resources         Committee
        5 Health, Safety and Environment
Committee
        6 Independent Reserves Committee
        
        ABBREVIATIONS
        $M        thousand
        dollars
        $MM     million
        dollars
        AECO   the
        daily average benchmark price for natural gas at the AECO
        ‘C’ hub in southeast Alberta
        bbl(s)    
        barrel(s)
        bbls/d    barrels
        per day
        bcf        billion
        cubic feet
        boe       barrel
        of oil equivalent, including: crude oil, condensate, natural gas liquids, and natural gas (converted on the basis of one
        boe for six mcf of natural gas)
        boe/d    barrel
        of oil equivalent per day
        btu        British
        thermal units
        CGU     Cash
        generating unit, the basis upon which Vermilion’s assets are evaluated for potential impairments
        DRIP     Dividend
        Reinvestment Plan
        GJ        gigajoules
        HH        Henry
        Hub, a reference price paid for natural gas in US dollars at Erath, Louisiana
        mbbls   thousand
        barrels
        mboe    thousand
        barrel of oil equivalent
        mcf       thousand
        cubic feet
        mcf/d    thousand
        cubic feet per day
        mmboe million barrel
        of oil equivalent
        mmbtu  million
        British thermal units
        mmcf    million
        cubic feet
        mmcf/d million cubic
        feet per day
        MWh    megawatt
        hour
        NBP     the
        reference price paid for natural gas in the United Kingdom, quoted in pence per therm, at the National Balancing Point
        Virtual Trading Point operated by National Grid. Our production in Ireland is priced with reference to NBP.
        NGLs    natural
        gas liquids, which includes butane, propane, and ethane
        PRRT    Petroleum
        Resource Rent Tax, a profit based tax levied on petroleum projects in Australia
        TTF      the
        day-ahead price for natural gas in the Netherlands, quoted in MWh of natural gas, at the Title Transfer Facility Virtual
        Trading Point operated by Dutch TSO Gas Transport Services
        WTI      West
        Texas Intermediate, the reference price paid for |  | OFFICERS AND
                                         KEY PERSONNEL
        CANADA
        Anthony Marino
        President & Chief Executive Officer
        
        Curtis W. Hicks
        Executive Vice President & Chief Financial Officer
        
        Mona Jasinski
        Executive Vice President, People and Culture
        
        Michael Kaluza
        Executive Vice President & Chief
        Operating Officer
        
        Dion Hatcher
        Vice President Canada Business Unit
        
        Terry Hergott
        Vice President Marketing
        
        Daniel Goulet
        Director Corporate HSE
        
        Bryce Kremnica
        Director Field Operations – Canada
        Business Unit
        
        Kyle Preston
        Director Investor Relations
        
        Mike Prinz
        Director Information Technology &
        Information Systems
        
        Jenson Tan
        Director Business Development
        
        Robert (Bob) J. Engbloom
        Corporate Secretary
        
        UNITED STATES
        Daniel G. Anderson
        Managing Director – U.S. Business
        Unit
        
        Timothy R. Morris
        Director U.S. Business Development
        – U.S.
        Business Unit
        
        EUROPE
        Gerard Schut
        Vice President European Operations
        
        Darcy Kerwin
        Managing Director - France Business
        Unit
        
        Scott Seatter
        Managing Director - Netherlands Business
        Unit
        
        Albrecht Moehring
        Managing Director - Germany Business
        Unit
        
        Bryan Sralla
        Managing Director - Central & Eastern
        Europe Business Unit
        
        AUSTRALIA
        Bruce D. Lake
        Managing Director - Australia Business
        Unit |  | AUDITORS
        
        Deloitte LLP
        Calgary, Alberta
        
        BANKERS
        
        The Toronto-Dominion Bank
        Bank of Montreal
        Canadian Imperial Bank of Commerce
        
        National Bank of Canada
        
        Royal Bank of Canada
        The Bank of Nova Scotia
        HSBC Bank Canada
        
        Wells Fargo Bank N.A., Canadian Branch
        La Caisse Centrale Desjardins du Québec
        Alberta Treasury Branches
        
        Bank of America N.A., Canada Branch
        BNP Paribas, Canada Branch
        
        Citibank N.A., Canadian Branch - Citibank Canada
        
        JPMorgan Chase Bank, N.A., Toronto Branch
        
        Union Bank, Canada Branch
        
        Barclays Bank PLC
        
        Canadian Western Bank
        
        Goldman Sachs Lending Partners LLC
        EVALUATION ENGINEERS
        
        GLJ Petroleum Consultants Ltd.
        Calgary, Alberta
        
        LEGAL COUNSEL
        
        Norton Rose Fulbright Canada LLP
        Calgary, Alberta
        
        TRANSFER AGENT
        
        Computershare Trust Company of Canada
        
        STOCK EXCHANGE LISTINGS
        
        The Toronto Stock Exchange (“VET”)
        The New York Stock Exchange (“VET”)
        
        INVESTOR RELATIONS
        Kyle Preston
        Director Investor Relations
        403-476-8431 TEL
        403-476-8100 FAX
        1-866-895-8101 IR TOLL FREEinvestor_relations@vermilionenergy.com
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