**Exhibit99.3**

Management’sDiscussion and Analysis should be read in conjunction with the ConsolidatedFinancial Statements 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 ratesand currency exchanges rates; and changes in environmental and otherlegislation and regulations.

This document contains forward-looking information on future production,project start-ups and future capital spending. Actual results or estimatedresults could differ materially due to changes in project schedules, operatingperformance, demand for oil and gas, commercial negotiations or other technicaland economic factors or revisions.

Statements contained in this document relating to future results, eventsand expectations are forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended and Section 21E of the SecuritiesExchange Act of 1934, as amended. These forward-looking statements involveknown and unknown risks, uncertainties and other factors which may cause theactual results, performance or achievements of the Corporation, or industryresults, to be materially different from any future results, performance orachievements expressed or implied by such statements. Such factors include,among others, those described in the Corporation’s annual report on Form 40-Fon file with the U.S. Securities and Exchange Commission.

Additionalinformation relating to Canadian Superior Energy Inc. is available on SEDAR atwww.sedar.com.

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**NETINCOME 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 |   |
| 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                     |       | (435       | )          | **$** | **(16.58** | **)** | $ | 5.31 |   | (412 | ) |

 

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| ** **                                | ** ** | **($000’s)** | ** **  | ** ** | ** ** | **($ per boe)** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|-------------------|-------------|------------|------------|---------------------------|------------|------------|------------|
| **Year ended December 31** | ** ** | **2006**          | ** **  | **2005**   | ** ** | **% change**         | ** ** | **2006**   | ** ** | **2005** | ** ** | **% 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 | ) |

 

The Corporationrecorded a net loss of 4.8 million (0.04 loss per share) during the fourthquarter of 2006 down from net income of $1.4 million ($0.01 per share) recordedin the fourth quarter of 2005. For the year, the Corporation posted a net lossof $10.9 million ($0.09 loss per share) compared to net income of $3.1 million(0.03 per share) over 2005.

Cash flow fromoperations for the fourth quarter decreased 48% to $5.4 million from $10.3million recorded in 2005. For the year, cash flow of $21.5 million was down 29%from 2005 cash flow of $30.3 million. Lower product prices received in 2006combined with increased operating costs the primary contributors to the cashflow 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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Daily productionfor the fourth quarter of 2006 averaged 3,173 boe/d which was up 8% from 2005production of 2,953 boe/d. The increased production is mainly the result of newwell tie-ins. Average daily production for the year, increased to 2,889 boe/d, upfrom 2,632 boe/d recorded in 2005.

Oil and gasrevenue, net of transportation costs of $158,000, during the fourth quarter of2006 decreased 28% to $13.3 million as compared to $18.6 million in 2005. Forthe 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 revenuedecreases are due to lower product prices somewhat mitigated by increasedproduction volumes.  The average sales pricenet of transportation costs for the fourth quarter of 2006 was $45.66/boe($7.18/mcf for natural gas and $53.62/bbl for oil and NGLs) down 33% from$68.59/boe in 2005 ($11.91/mcf for natural gas and $59.45/bbl for oil andNGLs). Average sales prices net of transportation costs for the year averaged$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 foroil and NGLs). Gas volumes of 14,417 mcf/d during the fourth quarter increased7% compared to 13,489 mcf/d in the same period in 2005, while oil volumes wereup to 770 bbls per day an from an average of 705 bbls per day produced in 2005.2006 average gas volumes of 13,414 mcf/d were up 11% from 12,083 mcf/dayrecorded over the same period in 2005 while oil volumes of 653 bbls/d for theyear were up 6% from 2005 sales of 618 bbls/d.

**HEDGING**

The Corporationenters into commodity sales agreements and certain derivative financialinstruments to reduce 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 contractsin place.

**ROYALTIES**

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

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$3.7 millionrecorded in 2005. This decrease results from lower revenues for the period. Forthe year, royalties, net of the Alberta Royalty Tax Credit of $500,000, were$8.2 million, down 14% from $9.7 million recorded in 2005. Decreased productprices are the main contributor to lower royalties in 2006. The average royaltyrate for the fourth quarter of 2006 was 17.2% of total revenues compared to2005 royalties of 19.3%. The average royalty rate for the year was 16.8% of totalrevenues, compared to 2005 royalty rate 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 quarterproduction and operating expenses of $3.5 million were up 71% over 2005expenses of $2.0 million. Production and operating expenses for the year of$9.2 million were up 27% over 2005 expenses of $7.2 million. On a boe basis,fourth quarter 2006 production and operating expenses of 11.90/boe, were up 60%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 fourthquarter of 2006, G&A charges of $2.7 million was up 93% from the $1.4million recorded in 2005.  For the year,G&A charges of $9.3 million were up 73% from $5.4 million recorded in2005.  On a unit of production basis,G&A expenses for the quarter were up 80% 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,the CICA issued an amendment to section 3870 “Stock based compensation andother stock 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 $5.9million which was up from $3.7 reported in 2005.

**INTEREST AND OTHER EXPENSE(INCOME)**

During the fourthquarter of 2006 the Corporation incurred $650,000 in interest charges comparedto $291,000 in 2005. For the year, the Corporation paid $2,047,000 in interest,up from $1,015,000 incurred in 2005. At the end of the year the Corporation hada drawn 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 otherincome of $1,171,000 was earned in the quarter by the Corporation compared to$87,000 earned in 2005. For the year, interest income was $1,371,000 comparedto $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.Depletion expenses are high for a company our size because of the largeexpenditures required to evaluate and drill offshore wells on the East Coast ofCanada. Certain East 

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Coast explorationand drilling costs have been included in the depletable pool, with nocorresponding increase in reserves.

**TAXES**

Effective January1, 2006, the Federal Large Corporation tax has been eliminated from Corporatetax requirements. 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 $117,790 was recorded in2006.

The Corporationdoes 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      |       | (10                  | )          | **37,872** | ** ** | 23,849 |   | 59 |   |
| 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      |       | (5                   | )          | **7,554**  | ** ** | 5,937 |   | 27 |   |
|                                     |       | **$**                            | **11,426** | ** ** | $          | 13,903               |       | (18        | )          | **$** | **55,369** | ** ** | $ | 44,083 |   | 26 |   |

 

During the fourthquarter of 2006, the Corporation incurred $11.1 million of capital expenditurescompared to $13.9 million spent in 2005. For the year, capital expenditurestotaled $55.0 million compared to $44.1 million recorded during the same periodin 2005

**SUMMARY OF QUARTERLY RESULTS**

($000’s except productionamounts)
| ** **                 | ** ** | **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 productionamounts)

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**LIQUIDITY AND CAPITAL RESOURCES**

At December 31,2006 the Corporation had a demand revolving western Canada production loanfacility (the “facility”) with a Canadian chartered bank of $30.0 million ofwhich it had drawn $7.9 million. The facility is secured by a $100 millionfirst floating charge demand debenture on the assets of the Corporation and ageneral security agreement covering all of the assets of the Corporation. Thefacility expires, and is up for renewal on April 30, 2007. The Corporationcurrently has Cash deposits of $5.9 million available for corporatepurposes.  In addition to the $5.9million of available cash currently on hand, the Corporation has $14.8 millionof term deposits posted as security against its remaining Offshore Nova Scotiawork expenditure bids.

On February 1,2006, the Company completed a private placement in the amount of US $15,000,000by way of the issuance of Units consisting of 5% US Cumulative RedeemableConvertible Preferred Shares (the “Preferred Shares”) and Common Share PurchaseWarrants. Each Preferred Share will be convertible into forty Common Shares ofCanadian Superior (6,000,000 Common Shares in aggregate) at a price of US $2.50per Common Share. If Canadian Superior elects, it also has the option to paythe quarterly dividend by way of issuance of Common Shares at market, based ona 5.75% annualized dividend rate in lieu of the 5% annualized cash dividendrate. 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 a private placement of 2,500,000 shares at $2.37per share for gross proceeds of $5,924,990.

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The Corporation’s2007 Western Canadian exploration and development expenditures are expected tobe primarily 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 engagedin the oil and gas industry are exposed to a number of business risks, whichcan be described as operational and financial risks, many of which are outsideof Canadian 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 periods allowed,the Corporation would forfeit its proportionate share of any remaining depositsrelating to the unexpended work commitment. The Corporation is planning todrill offshore Nova Scotia in 2007 and accordingly the majority of these fundswould be returned to the Corporation.

Internal DisclosureControls

In accordance withMultilateral Instrument 52-109 — Certification of Disclosure in Issuers’ Annualand Interim Filings, the Company’s Chairman and Chief Executive Officer andChief Financial Officer have designed, or have caused to be designed undertheir supervision, disclosure controls and procedures.  The Chairman and Chief Executive Officer andthe Chief Financial Officer, after evaluating the effectiveness of theCompany’s disclosure controls and procedures as at December 31, 2006, haveconcluded that the Company’s disclosure controls and procedures providereasonable assurance that (i) information required to be disclosed by theCompany in its annual filings, interim filings or other reports filed orsubmitted by it under provincial and territorial securities legislation isrecorded, processed summarized and reported within the time periods specifiedin the provincial and territorial securities legislation; and (ii) materialinformation relating to the Company is accumulated and communicated to theCompany’s management, including the Chairman and Chief Executive Officer andthe Chief Financial Officer, in a timely manner. The Company would notefurther, that while the Chairman and Chief 

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Executive Officerand Chief Financial Officer believe that the Company’s disclosure controls andprocedures provide a reasonable level of assurance that they are effective,they do not expect that the Company’s disclosure controls and procedures orinternal control over financial reporting will prevent all errors andfraud.  A control system, no matter howwell conceived or operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met.

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