## **Exhibit99.3**

## Management’s Discussion andAnalysis should be read in conjunction with the Consolidated FinancialStatements and Auditors’ Report included in this Annual Report. TheConsolidated Financial Statements have been prepared in accordance with accountingprinciples generally accepted in Canada. The following discussion and analysis refers primarily to 2006 comparedwith 2005 unless otherwise indicated. The calculation of barrels of oil equivalent (“boe”) is based on aconversion rate of six thousand cubic feet of natural gas to one barrel ofcrude oil.

Management’s Discussion and Analysis contains the term“cash flow from operations”, which is determined before changes in non-cashworking capital and should not be considered an alternative to, or moremeaningful than, “cash flow from operating activities” as determined inaccordance with generally accepted accounting principles (“GAAP”).  Canadian Superior’s determination of cashflow from operations may not be comparable to that reported by other corporations.The Corporation also presents cash flow from operations per share whereby pershare amounts are calculated using weighted average shares outstanding in amanner consistent with the calculation of earnings per share.

The MD&A contains forward-looking or outlookinformation regarding the Corporation. Because forward-looking informationaddresses future events and conditions, it involves risks and uncertaintiesthat could cause actual results to differ materially from those contemplated bythe forward-looking or outlook information. These risks and uncertaintiesinclude, but are not limited to: commodity price levels; production levels; therecoverability of reserves; transportation availability and costs; operatingand other costs; interest rates and currency exchanges rates; and changes inenvironmental and other legislation and regulations.

Thisdocument contains forward-looking information on future production, projectstart-ups and future capital spending. Actual results or estimated results coulddiffer materially due to changes in project schedules, operating performance,demand for oil and gas, commercial negotiations or other technical and economicfactors or revisions.

Statementscontained in this document relating to future results, events and expectationsare forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933, as amended and Section 21E of the Securities ExchangeAct of 1934, as amended. These forward-looking statements involve known andunknown risks, uncertainties and other factors which may cause the actualresults, performance or achievements of the Corporation, or industry results,to be materially different from any future results, performance or achievementsexpressed or implied by such statements. Such factors include, among others,those described in the Corporation’s annual report on Form 40-F on file withthe U.S. Securities and Exchange Commission.

Additional information relating to Canadian SuperiorEnergy Inc. is available on SEDAR at www.sedar.com.

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**NET INCOME AND CASH FLOW FROM OPERATIONS**
| ** **                                             | ** ** | **($000’s)** | ** ** | ** ** | ** ** | **($ per boe)** | ** ** | ** ** | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|------------|------------|---------------------------|------------|------------|------------|
| **Three months ended December 31** | ** ** | **2006**          | ** ** | **2005**   | ** ** | **% change**         | ** ** | **2006**   | ** ** | **2005** | ** ** | **% change** | ** ** |
| **Gross  revenue**                                     | ** ** | **$**             | **13,477** |       | $          | 18,822                    |       | (28        | )          | **$** | **46.17** |   | $ | 69.28 |   | (33 | ) |
| Transportation                                         | ** ** | **158**           |       | 187        |       | (16                       | )          | **0.54**   |       | 0.69 |   | (21 | ) |
| **Revenue**                                            | ** ** | **13,319**        |       | 18,635     |       | (29                       | )          | **45.63**  |       | 68.59 |   | (33 | ) |
| Royalties, net of ARTC                                 | ** ** | **2,346**         |       | 3,588      |       | (35                       | )          | **8.04**   |       | 13.21 |   | (39 | ) |
| Production and operating expenses                      | ** ** | **3,302**         |       | 2,027      |       | 63                        | ** ** | **11.31**  |       | 7.46 |   | 52 |   |
| **Operating  Netback**                                 | ** ** | **7,671**         |       | 13,020     |       | (41                       | )          | **26.28**  |       | 47.92 |   | (45 | ) |
| General and administrative expenses                    | ** ** | **2,695**         |       | 1,394      |       | 93                        | ** ** | **9.23**   |       | 5.13 |   | 80 |   |
| Interest and other expense (income)                    | ** ** | **(623**          | **)**      | 1,171      |       | (153                      | )          | **(2.13**  | **)**      | 4.31 |   | (150 | ) |
| Foreign Expense Gain                                   | ** ** | **190**           |       | 45         |       | 322                       | ** ** | **0.65**   |       | 0.17 |   | 293 |   |
| Large Corporations Tax                                 | ** ** | **0**             |       | 66         |       | (100                      | )          | **0.00**   |       | 0.24 |   | (100 | ) |
| **Cash  Flow from Operations**                         | ** ** | **5,409**         |       | 10,344     |       | (48                       | )          | **18.53**  |       | 38.07 |   | (51 | ) |
| Depletion and amortization                             | ** ** | **7,304**         |       | 7,428      |       | (2                        | )          | **25.08**  |       | 27.34 |   | (8 | ) |
| Accretion expense for preferred shares                 | ** ** | **102**           |       | 0          |       | n/a                       | ** ** | **0.35**   |       | 0 |   | n/a |   |
| Loss on Investment                                     | ** ** | **0**             |       | 0          | ** ** | ** **                |       | **0**      |       | 0 |   |   |   |
| Foreign Expense Gain                                   | ** ** | **678**           |       | 0          |       | n/a                       | ** ** | **2.25**   |       | 0 |   | n/a |   |
| Future income tax (recovery)                           | ** ** | **1,313**         |       | (591       | )          | (322                      | )          | **4.50**   |       | (2.18 | ) | (307 | ) |
| Stock compensation expense                             | ** ** | **851**           |       | 2,064      |       | (59                       | )          | **2.92**   |       | 7.60 |   | (62 | ) |
| **Net income (loss)**                                  | ** ** | **$**             | **(4,839** | **)**      | $          | 1,443                     |       | (373       | )          | **$** | **(13.47** | **)** | $ | 5.31 |   | (354 | ) |

 
| ** **                                | ** ** | **($000’s)** | ** **  | ** ** | ** ** | **($ per boe)** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-------------------|-------------|------------|------------|---------------------------|------------|------------|------------|
| **Year ended December 31** | ** ** | **2006**          | ** **  | **2005**   | ** ** | **% change**         | ** ** | **2006**   | ** ** | **2004** | ** ** | **% change** | ** ** |
| **Gross  revenue**                        | ** ** | **$**             | **49,428**  |       | $          | 55,223                    |       | (10        | )          | **$** | **46.88** |   | $ | 57.49 |   | (18 | ) |
| Transportation                            | ** ** | **662**           |        | 678        |       | (2                        | )          | **0.63**   |       | 0.71 |   | (11 | ) |
| **Revenue**                               | ** ** | **48,766**        |        | 54,545     |       | (11                       | )          | **46.25**  |       | 56.79 |   | (19 | ) |
| Royalties, net of ARTC                    | ** ** | **8,245**         |        | 9,716      |       | (15                       | )          | **7.82**   |       | 10.12 |   | (23 | ) |
| Production and operating expenses         | ** ** | **9,042**         |        | 7,239      |       | 25                        | ** ** | **8.58**   |       | 7.54 |   | 14 |   |
| **Operating  Netback**                    | ** ** | **31,479**        |        | 37,590     |       | (16                       | )          | **29.86**  |       | 39.13 |   | (24 | ) |
| General and administrative expenses       | ** ** | **9,312**         |        | 5,398      |       | 73                        | ** ** | **8.83**   |       | 5.62 |   | 57 |   |
| Interest and other expense (income)       | ** ** | **319**           |        | 1,730      |       | (82                       | )          | **0.30**   |       | 1.80 |   | (83 | ) |
| Foreign Expense Gain                      | ** ** | **312**           |        | 0          |       | n/a                       | ** ** | **0.31**   |       | 0 |   | n/a |   |
| Large Corporations Tax                    | ** ** | **33**            |        | 129        |       | (74                       | )          | **0.03**   |       | 0.13 |   | (77 | ) |
| **Cash  Flow from Operations**            | ** ** | **21,503**        |        | 30,333     |       | (29                       | )          | **20.40**  |       | 31.58 |   | (35 | ) |
| Depletion and amortization                | ** ** | **25,686**        |        | 23,539     |       | 9                         | ** ** | **24.36**  |       | 24.51 |   | (1 | ) |
| Accretion expense for preferred shares    | ** ** | **357**           |        | 0          |       | n/a                       | ** ** | **0.34**   |       | 0 |   | n/a |   |
| Loss on Investment                        | ** ** | **600**           |        | 0          |       | n/a                       | ** ** | **0.57**   |       | 0 |   | n/a |   |
| Future income tax (recovery)              | ** ** | **(118**          | **)**       | 81         |       | (246                      | )          | **(0.11**  | **)**      | 0.08 |   | (233 | ) |
| Stock compensation expense                | ** ** | **5,891**         |        | 3,657      |       | 61                        | ** ** | **5.59**   |       | 3.81 |   | 47 |   |
| **Net income (loss)**                     | ** ** | **$**             | **(10,913** | **)**      | $          | 3,056                     |       | (457       | )          | **$** | **(10.35** | **)** | $ | 3.18 |   | (425 | ) |

 

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The Corporation recordeda net loss of 4.8  million (0.04 loss pershare) during the fourth quarter of 2006 down from net income of $1.4 million($0.01 per share) recorded in the fourth quarter of 2005. For the year, theCorporation posted a net loss of $10.9 million (0.09 loss per share) comparedto net income of $3.1 million (0.03 per share) over 2005.

Cashflow from operations for the fourth quarter decreased 48% to $5.4 million from$10.3 million recorded in 2005. For the year, cash flow of $21.5 million wasdown 29% from 2005 cash flow of $30.3 million. Lower product prices received in2006 combined with increased operating costs the primary contributors to thecash flow decreases.

**PRODUCTION,PRICING AND REVENUE**
|                                                                      | ** ** | **Three Months Ended** | ** ** | **Year Ended**  | ** ** |
|----------------------------------------------------------------------|------------|------------------------|------------|-----------------|------------|
| ** **                                                           | ** ** | **December 31**        | ** ** | **December 31** | ** ** |
| ** **                                                           | ** ** | **2006**               | ** ** | **2005**        | ** ** | **2006** | ** ** | **2005** | ** ** |
| Natural Gas                                                          | ** ** | ** **             |       |            | ** ** | ** ** |   |   |   |
| Average Daily Production (mcf/d)                                     | ** ** | **14,417**             |       | 13,489          | ** ** | **13,414** |   | 12,083 |   |
| Average Sales Price ($/mcf)                                          | ** ** | **$**                  | **7.18**   |            | $          | 11.91 | ** ** | **$** | **6.95** |   | $ | 9.40 |   |
| **Natural Gas Revenue net of transportation  ($000’s)**         | ** ** | **$**                  | **9,529**  |            | $          | 14,780 | ** ** | **$** | **34,014** |   | $ | 41,476 |   |
|                                                                 |       |                   |       |            |       |   |   |   |   |
| Oil & NGLs                                                       | ** ** | ** **             | ** ** | ** **      | ** ** | ** ** |   |   |   |
| Average Daily Production (bbl/d)                                     | ** ** | **770**                |       | 705             | ** ** | **653** |   | 618 |   |
| Average Net Sales Price ($/bbl)                                      | ** ** | **$**                  | **53.62**  |            | $          | 59.45 | ** ** | **$** | **61.95** |   | $ | 57.96 |   |
| **Oil & NGLs Revenue net of transportation  ($000’s)**      | ** ** | **$**                  | **3,798**  |            | $          | 3,855 | ** ** | **$** | **14,759** |   | $ | 13,069 |   |
| ** **                                                           | ** ** | ** **             |       |            | ** ** | ** ** |   |   |   |
| Barrels of Oil Equivalent (6:1)                                      | ** ** | ** **             |       |            | ** ** | ** ** |   |   |   |
| Average Daily Production (boe/d)                                     | ** ** | **3,173**              |       | 2,953           | ** ** | **2,889** |   | 2,632 |   |
| Average Sales Price ($/boe)                                          | ** ** | **$**                  | **45.66**  |            | $          | 68.59 | ** ** | **$** | **46.26** |   | $ | 56.79 |   |
| **Total Oil & Gas Revenue net of  transportation ($000’s)** | ** ** | **$**                  | **13,327** |            | $          | 18,635 | ** ** | **48,773** |   | $ | 54,545 |   |

 

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Dailyproduction for the fourth quarter of 2006 averaged 3,173 boe/d which was up 8%from 2005 production of 2,953 boe/d. The increased production is mainly theresult of new well tie-ins. Average daily production for the year, increased to2,889 boe/d, up from 2,632 boe/d recorded in 2005.

Oiland gas revenue, net of transportation costs of $158,000, during the fourthquarter of 2006 decreased 28% to $13.3 million as compared to $18.6 million in2005. For the year, oil and gas revenues, net of transportation costs of$662,000, were $48.8 million, 10% lower than 2005 revenues of $54.5 million.The revenue decreases are due to lower product prices somewhat mitigated byincreased production volumes.  Theaverage sales price net of transportation costs for the fourth quarter of 2006was $45.66/boe ($7.18/mcf for natural gas and $53.62/bbl for oil and NGLs) down33% from $68.59/boe in 2005 ($11.91/mcf for natural gas and $59.45/bbl for oiland NGLs). Average sales prices net of transportation costs for the yearaveraged $46.26/boe ($6.95/mcf for natural gas and $61.95/bbl for oil and NGLs)down 19% from $56.79/boe recorded in 2005 ($9.40/mcf for natural gas and$57.96/bbl for oil and NGLs). Gas volumes of 14,417 mcf/d during the fourthquarter increased 7% compared to 13,489 mcf/d in the same period in 2005, whileoil volumes were up to 770 bbls per day an from an average of 705 bbls per dayproduced in 2005. 2006 average gas volumes of 13,414 mcf/d were up 11% from12,083 mcf/day recorded over the same period in 2005 while oil volumes of 653bbls/d for the year were up 6% from 2005 sales of 618 bbls/d.

**HEDGING**

The Corporation entersinto commodity sales agreements and certain derivative financial instruments toreduce its exposure to commodity price volatility.  These financial instruments are entered intosolely for hedging purposes to protect the Corporation against negativecommodity price movements and are not used for trading or other speculativepurposes.  These 2006 activities resultedin a gain of $265,000 which was recorded as an increase in oil and gas revenuesduring the period.

At December 31, 2006 the Corporation had no contracts in place.

**ROYALTIES**

Royalties, net of the Alberta Royalty Tax Credit of$125,000, for the fourth quarter of 2006 of $2.3 million, are down 36 percentfrom 

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$3.7 million recorded in 2005. This decrease resultsfrom lower revenues for the period. For the year, royalties, net of the AlbertaRoyalty Tax Credit of $500,000, were $8.2 million, down 14% from $9.7 millionrecorded in 2005. Decreased product prices are the main contributor to lowerroyalties in 2006. The average royalty rate for the fourth quarter of 2006 was17.2% of total revenues compared to 2005 royalties of 19.3%. The averageroyalty rate for the year was 16.8% of total revenues, compared to 2005 royaltyrate of 17.8%.
| Three months ended December 31 ($000’s) | ** ** | **2006** | ** ** | **2005** | ** ** | **% Change** | ** ** |
|-----------------------------------------------------------------------|------------|----------|------------|----------|------------|-------------------|------------|
| Crown                                                                 | ** ** | **$**    | **2,076**  |     | $          | 3,120             |       | (33 | ) |
| Adjustment for  2003 audit provision  Freehold & overriding       |       | **395**  |       | 593      |       | (33               | )          |
| Total Royalties                                                       | ** ** | **$**    | **2,471**  |     | $          | 3,713             |       | (33 | ) |
| Alberta Royalty  Tax Credit                                           | ** ** | **(125** | **)**      | (125     | )          | 0                 |       |
| Net Royalties                                                         | ** ** | **$**    | **2,346**  |     | $          | 3,588             |       | (35 | ) |
| Per boe                                                               | ** ** | **$**    | **8.04**   |     | $          | 13.21             |       | (39 | ) |
| Percent of total revenue                                              | ** ** | **17.6** | **%**      | 19.3     | %          | n/a               |       |

 
| Years Ended December 31 ($000’s) | ** ** | **2006**   | ** ** | **2005** | ** ** | **% Change** | ** ** |
|-----------------------------------------------------------|------------|------------|------------|----------|------------|-------------------|------------|
| Crown                                                     | ** ** | **$**      | **6,866**  |     | $          | 8,119             |       | (15 | ) |
| 2003 GCA  adjustment made in 2004                         | ** ** | **—** |       |     |       | —            |       |
| Freehold &  overriding                                | ** ** | **1,879**  |       | 2,097    |       | (10               | )          |
| Total Royalties                                           | ** ** | **$**      | **8,745**  |     | $          | 10,216            |       | (14 | ) |
| Alberta Royalty  Tax Credit                               | ** ** | **(500**   | **)**      | (500     | )          | —            |       |
| Net Royalties                                             | ** ** | **$**      | **8,245**  |     | $          | 9,716             |       | (15 | ) |
| Per boe                                                   | ** ** | **$**      | **7.82**   |     | $          | 10.11             |       | (23 | ) |
| Percent of total  revenue                                 | ** ** | **16.9**   | **%**      | 17.8     | %          | n/a               |       |

 

**PRODUCTION AND OPERATING EXPENSES**

Fourth quarter productionand operating expenses of $3.5 million were up 71% over 2005 expenses of 2.0million. Production and operating expenses for the year of $9.2 million were up27% over 2005 expenses of 7.2 million. On a boe basis, fourth quarter 2006production and operating expenses of 11.90/boe, were up 60 percent from$7.46/boe recorded for the same period in 2005 while yearly production andoperating expenses of $8.74/boe was up 16% from the 2005 rate of $7.54/boe. Theincreased activity and scarcity of services has pushed the operating costs muchhigher throughout 2006.

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**GENERAL AND ADMINISTRATIVEEXPENSES**

During the fourth quarterof 2006, G&A charges of $2.7 million was up 93% from the 1.4 millionrecorded in 2005.  For the year, G&Acharges of $9.3 million were up 73% from $5.4 million recorded in 2005.  On a unit of production basis, G&Aexpenses for the quarter were up 80 percent to $9.23 per boe for 2006 from$5.13 per boe recorded in 2005, while yearly expenses increased to $8.83 perboe up 57% from $5.62 recorded in 2005. The main reason for the raise ingeneral and administrative costs includes staff increases, increased employeecompensation and salaries, increased costs associated with placing and filingthe preferred share issue and costs relating to ramping up the Corporation’sTrinidad and Tobago projects.

**STOCK BASED COMPENSATION EXPENSE**

In September 2003, theCICA issued an amendment to section 3870 “Stock based compensation and otherstock based payments”. The amended section is effective for fiscal yearsbeginning on or after January 1, 2004. The amendment requires that companiesmeasure all stock based payments using the fair value method of accounting andrecognize the compensation expense in their financial statements. TheCorporation implemented this amended standard in 2004. The Corporation recorded$0.9 million in stock based compensation expense in the fourth quarter of 2006,down from $2.1 million in 2005. Stock based compensation for the year was $5.9 millionwhich was up from $3.7 reported in 2005.

**INTEREST AND OTHER EXPENSE(INCOME)**

During the fourth quarterof 2006 the Corporation incurred $650,000 in interest charges compared to$291,000 in 2005. For the year, the Corporation paid $2,047,000 in interest, upfrom $1,015,000 incurred in 2005. At the end of the year the Corporation had adrawn balance of $7.9 million on a $30.0 million revolving loan productionfacility. The main reason for the increase in interest expense was thefinancing charges incurred for the preferred shares and arranging potentialfinancing needs.

Interest and other incomeof $1,171,000 was earned in the quarter by the Corporation compared to $87,000earned in 2005. For the year, interest income was $1,371,000 compared to$297,000 earned in 2005. The main increase was the interest earned on termdeposits including the term deposit for offshore Nova Scotia.

**DEPLETION AND AMORTIZATION**

Depletion andamortization expense for the fourth quarter of 2006 totaled $7.3 million, down2% from $7.4 million recorded in 2005. For the year, depletion and amortizationexpense totaled $25.7 million, up 9% from $23.5 million recorded in 2005. Depletionexpenses are high for a company our size because of the large expendituresrequired to evaluate and drill offshore wells on the East Coast of Canada.Certain East Coast exploration and drilling costs have been included in thedepletable pool, with no corresponding increase in reserves.

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**TAXES**

Effective January 1,2006, the Federal Large Corporation tax has been eliminated from Corporate taxrequirements. The Corporation is responsible for the Nova Scotia LargeCorporation tax which was under accrued in 2005, and therefore recorded in 2006in an amount of $33,930. A Future income tax credit of $1,024,000 was recordedin 2006.

TheCorporation does not expect to be cash taxable in 2007.

**CAPITAL EXPENDITURES**
|                                          | ** ** | **Three Months Ended** | ** ** | ** ** | ** ** | **Year Ended**  | ** ** | ** ** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|------------|------------|----------------------|------------|------------|------------|
| ** **                               | ** ** | **December 31**             | ** ** | **%**      | ** ** | **December 31** | ** ** | **%**      | ** ** |
| **($000’s)**                        | ** ** | **2006**                         | ** ** | **2005**   | ** ** | **change**           | ** ** | **2006**   | ** ** | **2005** | ** ** | **change** | ** ** |
| Acquisition/(Disposition)                |       | **$**                            | **(823**   | **)**      | $          | (67                  | )          | (1,128     | )          | **$** | **(716** | **)** | $ | (525 | ) | (36 | ) |
| Exploration  & Development           | ** ** | **7,630**                        |       | 8,499      |       | (20                  | )          | **37,872** |       | 23,849 |   | 55 |   |
| Plants &  Facilities & Pipelines | ** ** | **2,209**                        |       | 2,976      |       | (26                  | )          | **6,675**  |       | 5,749 |   | 16 |   |
| Land & Lease                         | ** ** | **665**                          |       | 667        |       | (0                   | )          | **3,984**  |       | 9,073 |   | (56 | ) |
| Capitalized  expenses                    | ** ** | **1,745**                        |       | 1,828      |       | 19                   | ** ** | **7,554**  |       | 5,937 |   | 35 |   |
| ** **                               |       | **$**                            | **11,426** |       | $          | 13,903               |       | (20        | )          | **$** | **55,369** |   | $ | 44,083 |   | 25 |   |

 

During the fourth quarter of 2006, the Corporationincurred $11.1 million of capital expenditures compared to $13.9 million spentin 2005. For the year, capital expenditures totaled $55.0 million compared to$44.1 million recorded during the same period in 2005

**SUMMARYOF QUARTERLY RESULTS**

 ($000’s except production amounts)
| ** **                 | ** ** | **31-dec-06** | ** ** | **30-Sep-06** | ** ** | **30-Jun-06** | ** ** | **31-Mar-06** | ** ** | **31-Dec-05** | ** ** | **30-Sep-05** | ** ** | **30-Jun-05** | ** ** | **31-Mar-05** | ** ** |
|----------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Production                 |       |          |       |          |       |          |       |          |       |          |       |          |       |          |       |          |       |
| Oil bbls/d                 |       | 770           |       | 645           |       | 570           |       | 625           |       | 705           |       | 647           |       | 555           |       | 562           |       |
| Gas mcf/d                  |       | 14,417        |       | 12,983        |       | 12,674        |       | 13,580        |       | 13,489        |       | 12,345        |       | 11,375        |       | 11,092        |       |
| Boe bbls/d                 |       | 3,173         |       | 2,808         |       | 2,682         |       | 2,889         |       | 2,953         |       | 2,705         |       | 2,45          |       | 2,411         |       |
|                       |       |          |       |          |       |          |       |          |       |          |       |          |       |          |       |          |       |
| Revenue                    |       | 13,327        |       | 11,185        |       | 10,839        |       | 13,423        |       | 18,635        |       | 14,982        |       | 10,808        |       | 10,120        |       |
| Net income  (loss)         |       | (4,839        | )          | (5,753        | )          | 254           |       | (575          | )          | 1,443         |       | 1,495         |       | 13            |       | 105           |       |
| Income (loss)  per share   |       | (0.04         | )          | (0.05         | )          | 0.00          |       | 0.00          |       | 0.01          |       | 0.01          |       | 0.00          |       | 0.00          |       |
| Cash flow from  operations |       | 5,409         |       | 3,992         |       | 5,341         |       | 6,761         |       | 10,344        |       | 8,871         |       | 5,775         |       | 5,343         |       |
| Cash flow per share        |       | $             | 0.05       |          | $          | 0.03          |       | $             | 0.04       |          | $          | 0.06          |       | $             | 0.09       |          | $          | 0.08 |   | $ | 0.05 |   | $ | 0.05 |   |
|                            |            |               |            |               |            |               |            |               |            |               |            |               |            |               |            |               |            |  |  |  |  |  |  |  |  |

 

($000’s except production amounts)

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**LIQUIDITYAND CAPITAL RESOURCES**

At December 31, 2006 theCorporation had a demand revolving western Canada production loan facility (the“facility”) with a Canadian chartered bank of $30.0 million of which it haddrawn $7.9 million. The facility is secured by a $100 million first floatingcharge demand debenture on the assets of the Corporation and a general securityagreement covering all of the assets of the Corporation. The facility expires,and is up for renewal on April 30, 2007. The Corporation currently has Cashdeposits of $5.9 million available for corporate purposes.  In addition to the $5.9 million of availablecash currently on hand, the Corporation has $14.8 million of term depositsposted as security against its remaining Offshore Nova Scotia work expenditurebids.

On February 1, 2006, theCompany completed a private placement in the amount of US $15,000,000 by way ofthe issuance of Units consisting of 5% US Cumulative Redeemable ConvertiblePreferred Shares (the “Preferred Shares”) and Common Share Purchase Warrants.Each Preferred Share will be convertible into forty Common Shares of CanadianSuperior (6,000,000 Common Shares in aggregate) at a price of US $2.50 perCommon Share. If Canadian Superior elects, it also has the option to pay thequarterly dividend by way of issuance of Common Shares at market, based on a5.75% annualized dividend rate in lieu of the 5% annualized cash dividend rate.In addition, the Preferred Shares are redeemable and retractable five yearsfrom the date of issue or earlier, subject to earlier redemption or retractionin certain events. 15,000 Units, each consisting of 10 US $100 PreferredShares, along with 1,200,000 Common Share Purchase Warrants are being issued toWest Coast Asset Management, Inc.. The Warrants comprising part of the Unitsare exercisable for a period of thirty (36) months from the date of issue at anexercise price of US $3.00 per Common Share. As a result of the issuance of theconvertible preferred share, the Corporation has a long term liability in theamount of $15.2 million

On February 9,2006, the Corporation completed a private placement financing consisting of 1.0million Units at a price of $2.40 per Unit for gross proceeds of $2.4 million.Each Unit consists of one Common Share and one-half of one Common SharePurchase Warrant. The Warrants comprising part of the Units were exercisableuntil December 31, 2006 at an exercise price of $2.40 per common share

On December 13,2006 the Corporation completed a flow-through share agreement to issue6,000,000 common shares for consideration of $15,420,000.

On December 29, 2006 the Corporation completed aprivate placement of 2,500,000 shares at $2.37 per share for gross proceeds of$5,924,990.

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The Corporation’s 2007Western Canadian exploration and development expenditures are expected to beprimarily funded from operating cash flow. Additional cash may be required to fund planned 2007 and 2008 capitalprograms, including programs in Offshore Nova Scotia and Offshore Trinidad.These expenditures may be sourced from cash flow, additional equity financingsand/or potential farm outs or joint ventures or releases of secured offshoreterm deposits as additional work expenditures are incurred. The Corporation hasalready pre-paid a significant portion of the Trinidad and Tobago capitalprogram expenditures in an amount of approximately US$ 30 million.

**BUSINESS RISKS**

Companies engaged in theoil and gas industry are exposed to a number of business risks, which can bedescribed as operational and financial risks, many of which are outside ofCanadian Superior’s control.  Morespecifically these include risks of economically finding reserves and producingoil and gas in commercial quantities, marketing the production, commodityprices and interest rate fluctuations and environmental and safety risks.  In order to mitigate these risks, theCorporation has an experienced base of qualified personnel, both technical andfinancial, and maintains an insurance program that is consistent with industrystandards.

 At December 31, 2006, the Corporation had$14.8 million of term deposits posted as security against its remainingOffshore Nova Scotia work expenditure bids. To the extent that expenditures are not incurred within the periodsallowed, the Corporation would forfeit its proportionate share of any remainingdeposits relating to the unexpended work commitment. The Corporation isplanning to drill offshore Nova Scotia in 2007 and accordingly the majority ofthese funds would be returned to the Corporation.

Internal DisclosureControls

In accordance with MultilateralInstrument 52-109 – Certification of Disclosure in Issuers’ Annual and InterimFilings, the Company’s Chairman and Chief Executive Officer and Chief FinancialOfficer have designed, or have caused to be designed under their supervision,disclosure controls and procedures.  TheChairman and Chief Executive Officer and the Chief Financial Officer, afterevaluating the effectiveness of the Company’s disclosure controls andprocedures as at December 31, 2006, have concluded that the Company’sdisclosure controls and procedures provide reasonable assurance that (i)information required to be disclosed by the Company in its annual filings,interim filings or other reports filed or submitted by it under provincial andterritorial securities legislation is recorded, processed summarized andreported within the time periods specified in the provincial and territorialsecurities legislation; and (ii) material information relating to the Companyis accumulated and communicated to the Company’s management, including theChairman and Chief Executive Officer and the Chief Financial Officer, in atimely manner. The Company would note further, that while the Chairman and ChiefExecutive Officer and Chief Financial Officer believe that the Company’sdisclosure controls and procedures provide a reasonable level of assurance thatthey are effective, they do not expect that the Company’s disclosure controlsand procedures or internal control over financial reporting will prevent allerrors and fraud.  A control system, nomatter how well conceived or operated, can provide only reasonable, notabsolute, assurance that the objectives of the control system are met.

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