<Page>

                                                                       EXHIBIT 2

MANAGEMENT'S REPORT TO THE SHAREHOLDERS

The preparation of the accompanying consolidated financial statements in
accordance with accounting Canada is the responsibility of management. Financial
information contained elsewhere in this Annual Report is consistent with that in
the consolidated financial statements.


 Management is responsible for the integrity and objectivity of the financial
statements. Where necessary, the financial include estimates, which are based on
management's informed judgments. Management has established systems of
internal controls, which are designed to provide reasonable assurance those
assets are safeguarded from loss or unauthorized use and to produce reliable
accounting records for the preparation of financial information.


 The Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal control. It exercises its
responsibilities primarily through the Audit Committee, whose members are
non-management directors. The Audit Committee has reviewed the consolidated
financial statements with management and the auditors and has reported to the
approved the consolidated financial statements.


 KPMG LLP are independent auditors appointed by Canadian Superior Energy
Inc.'s shareholders. The auditors have audited the consolidated financial
statements in accordance with generally accepted auditing standards to enable
them to express an opinion on the fairness of the presentation of the financial
statements in accordance with Canadian generally accepted accounting principles.


                                                       [GREG S. NOVAL SIGNATURE]

                                                       Greg S. Noval
                                                       President


20              CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT


<Page>

AUDITORS' REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheet of Canadian Superior Energy Inc.
as at December 31, 2004 and 2003 and the consolidated statements of operations
and deficit and cash flows for the years then ended. These financial statements
are the responsibility of the Corporation's management. Our responsibility
is to express an opinion on these financial statements based on our audit.


 We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.


 In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Corporation as at December 31,
2004 and 2003 and the results of its operations and its cash flows for the years
then ended in accordance with Canadian generally accepted accounting principles.



                                                          [KPMG LLP SIGNATURE]

 CALGARY, CANADA                                           KPMG LLP
 March 31, 2005                                            CHARTERED ACCOUNTANTS



          CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT                    21


<Page>

CONSOLIDATED BALANCE SHEETS DECEMBER 31

(THOUSANDS OF DOLLARS)
<Table>
<Caption>
                                                                                  2004                 2003
                                                                          ----------------------------------
                                                                                                   RESTATED
                                                                                                   (NOTE 2)
<S>                                                                        <C>                 <C>
ASSETS
Current assets
  Cash and short-term investments                                          $     1,725         $      9,328
  Accounts receivable                                                            5,808                3,540
  Nova Scotia offshore drilling security deposit (Note 12)                           -               10,000
  Prepaid expenses                                                                 593                  568
                                                                          ----------------------------------
                                                                           $     8,126         $     23,436
Nova Scotia offshore term deposits (Note 4 and 12)                              14,169               13,839
Petroleum and natural gas properties (Note 5)                                  128,716              107,474
                                                                          ----------------------------------
                                                                           $   151,011         $    144,749
                                                                          ----------------------------------
LIABILITIES
Current liabilities
  Accounts payable and accrued liabilities                                 $    10,756         $     14,630
  Revolving production loan (Note 6)                                            10,750               12,550
                                                                          ----------------------------------
                                                                                21,506               27,180
Asset retirement obligation (Note 7)                                             7,177                5,979
Future income taxes (Note 8)                                                     8,778                9,220
                                                                          ----------------------------------
                                                                                37,461               42,379
                                                                          ----------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 9)                                                         114,626              102,404
Contributed surplus (Note 9)                                                     3,386                1,404
Deficit                                                                         (4,462)              (1,438)
                                                                          ----------------------------------
                                                                               113,550              102,370
                                                                          ----------------------------------
RELATED PARTY TRANSACTIONS (NOTE 10)
CONTINGENCIES AND COMMITMENTS (NOTE 12)
SUBSEQUENT EVENTS (NOTE 13)
                                                                           $   151,011         $    144,749
                                                                          ----------------------------------
                                                                          ----------------------------------
</Table>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Approved by the Board


             [GREG S. NOVAL SIGNATURE]                  [LEIGH BILTON SIGNATURE]

             Greg S. Noval                              Leigh Bilton
             Director                                   Director


 22               CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT

<Page>

                               CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
                                                         YEARS ENDED DECEMBER 31

(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>

                                                                          2004                    2003
                                                                ---------------------------------------
                                                                                              RESTATED
                                                                                              (NOTE 2)
<S>                                                              <C>                    <C>
Revenue
  Oil and gas                                                    $      38,684          $       31,618
  Royalties net of royalty tax credit                                   (5,805)                 (6,050)
                                                                ---------------------------------------
                                                                        32,879                  25,568
                                                                ---------------------------------------
Expenses
  Production and operating                                               7,151                   5,992
  General and administration (Note 5)                                    4,614                   4,849
  Interest                                                               1,104                   1,456
  Depletion, amortization and accretion                                 22,177                  14,291
  Stock based compensation                                               2,612                     771
                                                                ---------------------------------------
                                                                        37,658                  27,359
                                                                ---------------------------------------

Loss from operations                                                    (4,779)                 (1,791)
Interest income                                                            493                     364
                                                                ---------------------------------------
Loss before income taxes                                                (4,286)                 (1,427)
Income taxes (reduction)
  Capital                                                                  261                     288
  Future reduction (Note 8)                                             (1,523)                   (763)
                                                                ---------------------------------------
                                                                        (1,262)                   (475)
                                                                ---------------------------------------
Net loss                                                                (3,024)                   (952)
                                                                ---------------------------------------

Deficit, beginning of year, as previously reported                        (312)                (17,057)
Accounting changes (Note 2)                                             (1,126)                   (486)
                                                                ---------------------------------------
Deficit, beginning of year, as restated                                 (1,438)                (17,543)
Reduction in stated capital (Note 9 (f))                                     -                  17,057
                                                                ---------------------------------------
Deficit, end of year                                             $      (4,462)          $      (1,438)
                                                                ---------------------------------------
                                                                ---------------------------------------
Loss per share                                                   $       (0.03)          $       (0.01)
                                                                ---------------------------------------
                                                                ---------------------------------------
Diluted loss per share                                           $       (0.03)          $       (0.01)
                                                                ---------------------------------------
                                                                ---------------------------------------
</Table>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


            CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT                  23


<Page>

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31

(THOUSANDS OF DOLLARS)
<Table>
<Caption>


                                                                                         2004                2003
                                                                               -----------------------------------
                                                                                                         RESTATED
                                                                                                         (NOTE 2)
<S>                                                                              <C>                 <C>
CASH PROVIDED BY (USED IN)

OPERATIONS
  Net loss                                                                       $     (3,024)       $       (952)
  Items not involved in cash for operations
    Depletion, depreciation and accretion                                              22,177              14,291
    Stock based compensation                                                            2,612                 771
    Future income taxes reduction                                                      (1,523)               (763)
                                                                               -----------------------------------
  Funds from operations                                                                20,242              13,347
  Change in non cash working capital (Note 3)                                          (2,541)              5,108
                                                                               -----------------------------------
                                                                                       17,701              18,455
                                                                               -----------------------------------

FINANCING
  Issue of shares                                                                      12,673              74,195
  Redemption (issue) of Nova Scotia offshore term and security deposits, net            9,670             (11,807)
  Increase (repayment) of revolving production loan                                    (1,800)              7,400
                                                                               -----------------------------------
                                                                                       20,543              69,788
                                                                               -----------------------------------

INVESTING ACTIVITIES
  Acquisition of oil and gas assets                                                    (1,070)            (54,160)
  Exploration and development expenditures                                            (41,151)            (29,835)
  Change in non-cash working capital (Note 3)                                          (3,626)              5,080
                                                                               -----------------------------------
                                                                                      (45,847)            (78,915)
                                                                               -----------------------------------
Increase (decrease) in cash and short term investments                                 (7,603)              9,328
Cash and short term investments, beginning of year                                      9,328                   -
                                                                               -----------------------------------
Cash and short term investments, end of year                                     $      1,725       $       9,328
                                                                               -----------------------------------
                                                                               -----------------------------------
</Table>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


24               CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT


<Page>

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                          YEARS ENDED DECEMBER 31, 2004 AND 2003
                         (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


NOTE 1 - ACCOUNTING POLICIES
      a) Principles of consolidation - The consolidated financial statements
         include the accounts of the Corporation and the accounts of its
         wholly-owned subsidiaries.

      b) Cash and short-term investments - Cash and short-term investments
         consist of balances with banks and investments in highly liquid
         short-term deposits with a maturity date of less than ninety days.

      c) Depletion and Amortization Canadian Superior Energy Inc. is engaged in
         the acquisition, exploration, development and production of oil and gas
         principally in Canada. The Corporation follows the full-cost method of
         accounting for oil and gas operations whereby all costs relating to the
         acquisition of, exploration for and development of oil and gas reserves
         are capitalized. Such costs include land acquisition costs, geological
         and geophysical expenses, carrying charges on nonproducing properties,
         costs of drilling both productive and nonproductive wells, costs of
         production equipment and overhead charges related to acquisition,
         exploration and development activities.
         The costs are amortized using the unit-of-production method based upon
         the estimated proved oil and gas reserves, before royalties, as
         determined by the Corporation's independent engineers. Oil and gas
         reserves and production are converted into equivalent units based upon
         relative energy content.
         Costs of acquiring and evaluating unproved properties are initially
         excluded from depletion calculations. These unevaluated properties are
         assessed periodically to ascertain whether impairment has occurred.
         When proved reserves are assigned or the property is considered to be
         impaired, the cost of the property or the amount of the impairment is
         added to costs subject to depletion calculations.

         The Corporation performs a ceiling test in a two-stage test performed
         at least annually:

         i)    Impairment is recognized if the carrying value of the oil and gas
               assets less accumulated depletion and amortization and the lesser
               of cost and fair value of unproven properties exceeds the
               estimated future cash flows from proved oil and gas reserves, on
               an undiscounted basis, using forecast prices and costs.

          ii)  If impairment is indicated by applying the calculations described
               in i) above, the Corporation will measure the amount of the
               impairment by comparing the carrying value of the oil and gas
               assets less accumulated depletion and amortization and the lesser
               of cost and fair value of unproven properties to the estimated
               future cash flows from the proved and probable oil and gas
               reserves, discounted at the Corporation's credit-adjusted
               risk-free rate of interest, using forecast prices and costs.

         Proceeds received from disposals of properties and equipment are
         credited against capitalized costs unless the disposal would alter the
         rate of depletion and depreciation by more than 20 percent, in which
         case a gain or loss on disposal is recorded.

      d) Joint Ventures - The Corporation's exploration and development
         activities related to oil and gas are conducted jointly with others.
         The accounts reflect only the Corporation's proportionate interest
         in such activities.

      e) Income Taxes - The Corporation follows the liability method of
         accounting for income taxes. Temporary differences arising from the
         differences between the tax basis of an asset or liability and its
         carrying amount on the balance sheet are used to calculate future
         income tax assets or liabilities. Future income tax assets or
         liabilities are calculated using tax rates anticipated to apply in the
         periods that the temporary differences are expected to reverse.

      f) Revenue recognition - Revenue from the sale of oil and gas is
         recognized based on volumes delivered to customers at contractual
         delivery points and rates. The costs associated with the delivery,
         including operating and maintenance costs, transportation, and
         production-based royalty expenses are recognized in the same period in
         which the related revenue is earned and recorded.

      g) Flow-through shares - The Corporation, from time to time, issues
         flow-through shares to finance a portion of its oil and gas exploration
         activities. The exploration and development expenditures funded by
         flow-through shares are renounced to subscribers in accordance with the
         Income Tax Act (Canada). The estimated value of the tax pools foregone
         is reflected as a reduction in share capital with a corresponding
         increase in the future income tax liability.

      h) Measurement Uncertainty - The preparation of financial statements in
         conformity with Canadian generally accepted accounting principles
         requires the Corporation's management to make estimates and
         assumptions that affect the reported amounts of assets and liabilities
         and disclosure of contingent assets and liabilities at the date of the
         financial statements, and the reported amounts of revenues and expenses
         during the reporting period. Actual results could differ materially
         from those estimates.

      i) Per Share Amounts - The Corporation follows the treasury stock method
         for the computation of diluted per share amounts. This method assumes
         the proceeds from the exercise of dilutive options and warrants are
         used to purchase common shares at the weighted average market price
         during the period.


          CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT                    25


<Page>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


NOTE 2 - CHANGE IN POLICY

      a)  STOCK BASED COMPENSATION AND OTHER STOCK BASED PAYMENTS
          Effective January 1, 2004, the Corporation retroactively adopted the
          new Canadian standard for "Stock Based Compensation". This standard
          requires that companies measure all stock based payments using the
          fair value method of accounting and recognize the compensation expense
          in their financial statements. Per the transitional provisions,
          adoption requires that compensation expense be calculated and recorded
          in the statement of operations for options and warrants issued on or
          after January 1, 2003.

      b)  ASSET RETIREMENT OBLIGATIONS
          Effective January 1, 2004 the Corporation retroactively adopted the
          new Canadian standard for "Asset Retirement Obligations". This
          standard requires the recognition of the fair value of obligations
          associated with the retirement of tangible long-lived assets to be
          recorded in the period the asset is put to use, with the corresponding
          increase to the carrying amount of the related asset. The obligations
          recognized are statutory, contractual or legal obligations. The
          liability is accreted over time for changes in the fair value of the
          liability through charges to asset retirement accretion which is
          included in depletion, amortization and accretion expense. The costs
          capitalized to the related assets are amortized to earnings in a
          manner consistent with the depreciation and amortization of the
          underlying assets. Revisions to the estimated timing of cash flows or
          to the result in an increase or decrease to the obligation. Actual
          costs incurred upon settlement of the retirement obligation are
          charged against the obligation to the extent of the liability
          recorded. Prior to January 1, 2004, the Corporation provided for
          future site restoration and abandonment costs over the life of the
          proved reserves on a unit-of-production basis.

      c)  HEDGING RELATIONSHIPS
          The Corporation has implemented new Canadian accounting guidelines for
          hedging relationships, which address the identification, designation,
          documentation and effectiveness of hedging transactions for the
          purposes of applying hedge accounting. It also established conditions
          for applying or discontinuing hedge accounting. Under the new
          guideline, hedging transactions must be documented and it must be
          demonstrated that the hedges are sufficiently effective in order to
          continue accrual accounting for position hedges with derivatives.

      d)  IMPACT OF  POLICY CHANGES ON 2003 FINANCIAL STATEMENTS
          The adoption of the new accounting policies for stock based
          compensation and asset retirement obligations has been applied
          retroactively with the following impact on the 2003 comparative
          figures:

<Table>
<S>                                                                         <C>
Balance Sheet - debit (credit)
  Petroleum and natural gas properties                                      $     4,797
  Asset Retirement Obligation                                                    (5,979)
  Provision for Future Site Restoration                                           1,634
  Future Income Taxes                                                              (174)
  Contributed Surplus                                                            (1,404)
  Deficit, end of year                                                            1,126
  Deficit, beginning of year                                                        486
                                                                         ---------------
                                                                         ---------------

Statement of operations - debit (credit)
  Depletion, amortization and accretion                                     $     1,027
  Future site restoration                                                        (1,223)
  Stock based compensation                                                          771
  Future income tax reduction                                                        65
                                                                         ---------------
                                                                         ---------------
  Decrease in net income                                                    $       640
                                                                         ---------------
                                                                         ---------------
  Loss per share - basic and diluted                                        $     (0.01)
                                                                         ---------------
                                                                         ---------------
</Table>

26                 CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT


<Page>

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                          YEARS ENDED DECEMBER 31, 2004 AND 2003
                         (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


NOTE 3 - CHANGES IN NON-CASH WORKING CAPITAL AND OTHER CASH FLOW INFORMATION
<Table>
<Caption>

                                                                             2004                   2003
                                                                           CHANGE                 CHANGE
                                                                ------------------       ----------------
<S>                                                                <C>                     <C>
Accounts Receivable                                                 $      (2,268)         $         714
Nova Scotia offshore drilling security deposit                             10,000                (10,000)
Prepaid expenses                                                              (25)                 1,156
Accounts payable                                                           (3,874)                 8,318
                                                                ------------------       ----------------
  Change in non-cash working capital                               $        3,833          $         188
                                                                ------------------       ----------------
Related to:
Operating activity                                                  $      (2,541)         $       5,108
Financing activity                                                         10,000                (10,000)
Investing activity                                                         (3,626)                 5,080
                                                                ------------------       ----------------
  Change in non-cash working capital                               $        3,833          $         188

Interest paid during year                                          $        1,104          $       1,456
                                                                ------------------       ----------------
Taxes paid during year                                             $          271          $          76
                                                                ------------------       ----------------
                                                                ------------------       ----------------
</Table>

NOTE 4   NOVA SCOTIA OFFSHORE TERM DEPOSITS

     Under the terms of the licenses referred to in Note 12(a), the Corporation
     has assigned term deposits totaling $14,169,000 (2003 - $13,839,000).
     Accordingly, this amount has been classified as a noncurrent asset. To the
     extent that the expenditures are not incurred within the period allowed,
     the Corporation would forfeit its proportionate share of any remaining
     deposits relating to the unexpended work commitment.

NOTE 5   PETROLEUM AND NATURAL GAS PROPERTIES
<Table>
<Caption>
                                                                    Accumulated
                                                                  Depletion and
                                                      Cost         Amortization                 Net
                                                ----------------------------------------------------
<S>                                              <C>                   <C>                <C>
2004                                             $ 173,157             $ 44,441           $ 128,716
2003 - restated (Note 2)                           131,221               23,747             107,474
</Table>

Future development costs related to proven undeveloped reserves of $3,647,000
(2003 - $3,453,000) have been included in the depletion base calculation at
December 31, 2004.

At December 31, 2004, the Corporation has excluded $28,746,000 (2003 -
$27,281,000) of oil and gas properties relating to unproved properties from
costs subject to depletion, including $2.7 million relating to its interests in
Trinidad and Tobago.

General and administrative expenses totaling $4,445,000 (2003 - $4,063,000), of
which $767,000 (2003 - $390,000) pertained to the Nova Scotia project, that were
directly related to exploration and development activities have been capitalized
for the year ended December 31, 2004.

The benchmark prices, on which the ceiling test is based, are as follows:
<Table>
<Caption>

                       WTI Crude Oil       Exchange Rate       Edmonton Light Crude       AECO Natural Gas
Year                      US$/bbl             US$/CDN$               CDN$/bbl                CDN$/mmbtu
<S>                        <C>                  <C>                   <C>                       <C>
2005                       42.00                0.82                  50.25                     6.60
2006                       40.00                0.82                  47.75                     6.35
2007                       38.00                0.82                  45.50                     6.15
2008                       36.00                0.82                  43.25                     6.00
2009                       34.00                0.82                  40.75                     6.00
2010                       33.00                0.82                  39.50                     6.00
</Table>

Benchmark prices increase at a rate of 2.0% per year for both oil and natural
gas after 2010. Adjustments were made to the benchmark prices above, for
purposes of the ceiling test, to reflect forward contracts the Corporation has
in place, varied delivery points and quality differentials in the products
delivered. For the years ended December 31, 2003 and 2004, no ceiling test
write-down was required.


         CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT                     27


<Page>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


NOTE 6   REVOLVING PRODUCTION LOAN

     At December 31, 2004 the Corporation had a demand revolving production loan
     facility (the "facility") with a Canadian chartered bank of $24,000,000 of
     which it had drawn $10,750,000. The facility bears interest at prime plus
     0.75% on the first $22.5 million of the facility and prime plus 1.0% on the
     excess. The facility is secured by a $50 million first floating charge
     demand debenture on the assets of the Corporation and a general security
     agreement covering all of the assets of the Corporation. The facility
     expires May 31, 2005 unless extended. The Corporation is currently
     reviewing alternatives for replacement of its $24.0 million revolving
     production loan facility and is confident such financing will be available
     if required.

NOTE 7   ASSET RETIREMENT OBLIGATION

     The following table presents the reconciliation of the beginning and ending
     aggregate carrying amount of the obligation associated with the retirement
     of oil and gas properties.
<Table>
<Caption>

As at December 31 ($000's)                                                     2004               2003
                                                                       --------------     --------------
<S>                                                                      <C>               <C>
Asset retirement obligation, beginning of year                           $     5,979       $      1,043
Liabilities incurred                                                             900              4,652
Accretion expense                                                                456                284
Technical revision                                                              (158)                 -
                                                                       --------------     --------------
Asset retirement obligation, end of year                                 $     7,177       $      5,979
                                                                       --------------     --------------
                                                                       --------------     --------------
</Table>

The technical revision was the result of adjusting the credit adjusted risk free
rate to 8.5% for wells drilled in 2004 from 7.0% used in 2003 and prior. The
Corporation estimates the total undiscounted amount of cash flows required to
settle its asset retirement obligation is approximately $14,197,000 (2003
11,791,000) which will be incurred between 2015 and 2017.

NOTE 8  INCOME TAXES

     The net future income tax liability is comprised of:

     a)   Summary of temporary differences giving rise to future income tax
          liability:
<Table>
<Caption>
                                                                       2004                2003
                                                               -----------------------------------
                                                                                       Restated
                                                                                       (Note 2)
<S>                                                               <C>                <C>
Future income tax liabilities

  Oil and gas assets in excess of tax balances                   $   12,628         $   13,470
Future income tax assets

  Share issue costs                                                  (1,437)            (2,180)
  Asset retirement obligation                                        (2,413)            (2,070)
                                                               -----------------------------------
                                                                     (3,850)            (4,250)
                                                               -----------------------------------
Net future income tax liability                                  $    8,778         $    9,220
                                                               -----------------------------------
                                                               -----------------------------------
</Table>

     b)   Reconciliation of income taxes calculated at the Canadian statutory
          rate of 38.6% (2003 40.6%) with actual income taxes:
<Table>
<Caption>
                                                                                2004                 2003
                                                                        ----------------------------------
                                                                                                 Restated
                                                                                                 (Note 2)
<S>                                                                      <C>                  <C>
Loss before income taxes                                                 $   (4,286)          $   (1,427)
                                                                        ----------------------------------
Combined federal and provincial income tax rate                               38.6%                40.6%
                                                                        ----------------------------------
Computed income tax reduction                                            $   (1,654)          $     (579)
Increase (decrease) resulting from:
  Non deductible Crown Royalties, net of ARTC                                 1,224                1,755
  Resource Allowance                                                         (1,397)              (1,474)
  Stock based compensation                                                    1,008                  313
  Tax adjustment from rate change and other                                    (704)                (778)
                                                                        ----------------------------------
                                                                         $   (1,523)          $     (763)
                                                                        ----------------------------------
                                                                        ----------------------------------
</Table>

28                 CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT


<Page>

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                          YEARS ENDED DECEMBER 31, 2004 AND 2003
                         (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

NOTE 9  SHARE CAPITAL

     a)   Authorized:
          Unlimited number of common shares
          Unlimited number of preferred shares

     b)   Voting common shares issued:
<Table>
<Caption>

                                                                           Number                   Amount
                                                                    ---------------------------------------
     <S>                                                                  <C>                <C>
     Balance at January 1, 2003                                            65,032            $      49,927

     Reduction of stated capital                                                -                  (17,057)
     Issued for cash                                                       22,440                   35,000
     Issued upon exercise of stock options                                  1,625                    1,601
     Issued upon exercise of warrants                                       1,206                    2,412
     Issued for cash on flow-through shares                                 5,798                   17,765
     Tax benefits renounced on flow-through shares                              -                   (6,396)
     Issue costs, net of future tax reduction of $1,915                         -                   (3,157)
                                                                    ---------------------------------------
       Balance, as at December 31, 2003                                    96,101                   80,095
                                                                    ---------------------------------------
                                                                    ---------------------------------------

     Issued upon conversion of special warrants                             7,543                   22,834
     Issued upon exercise of stock options                                  1,299                    1,462
     Issued upon exercise of $2.00 purchase warrants                        3,002                    6,004
     Issued upon exercise of $3.20 purchase warrants                          484                    1,549
     Issued for cash on flow-through shares                                 1,377                    3,443
     Tax benefits renounced on flow-through shares                              -                   (1,188)
     Issue costs, net of future tax reduction of $106                           -                     (203)
     Value of stock compensation for exercised options                          -                      630
                                                                    ---------------------------------------
       Balance, as at December 31, 2004                                   109,806            $     114,626
                                                                    ---------------------------------------
                                                                    ---------------------------------------
</Table>

     c)  Special warrants issued:
<Table>
<Caption>
                                                                             Number                 Amount
                                                                    ---------------------------------------
     <S>                                                                    <C>             <C>
     Balance at January 1, 2003                                                   -         $            -
     Issued for cash:
       Flow-through special warrants                                            143                    500
       Tax benefits renounced on flow-through special warrants                    -                   (180)
       Special warrants                                                       7,225                 21,989
                                                                    ---------------------------------------
     Balance at December 31, 2003                                             7,368                 22,309

     Special warrants issued for cash                                           175                    525
     Converted upon issuance of common shares                                (7,543)               (22,834)
                                                                    ---------------------------------------
     Balance at December 31, 2004                                                 0         $            0
                                                                    ---------------------------------------
                                                                    ---------------------------------------
</Table>

     On February 6, 2004 the Corporation filed a short form prospectus
     qualifying the distribution of: (a) 7,400,180 common shares and 2,466,726
     common share purchase warrants upon the exercise of the 7,225,180 special
     warrants issued on December 16th and 24th, 2003 (as above) and an
     additional 175,000 special warrants issued on January 12, 2004 and (b)
     142,857 flow-through common shares upon the exercise of 142,857
     flow-through special warrants issued on December 31, 2003 (as above).

     d)   Purchase Warrants issued:

          i)   On March 20, 2003, the Corporation issued 9.0 million units for
               gross proceeds of $13.6 million, relating to a best efforts unit
               offering. Each $1.50 unit consisted of one common share and
               one-half of one share purchase warrant. Each whole warrant
               entitles the holder to purchase a common share until March 19,
               2004 at a price of $2.00 per common share.


            CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT                  29


<Page>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

     The following table summarizes the $2.00 purchase warrant activity:
<Table>
<Caption>
                                                                              Number
                                                                         -------------
     <S>                                                                    <C>
     Balance at January 1, 2003                                                    -
     Issued March 20, 2003                                                     4,574
     Exercised, total as at December 31, 2003                                 (1,206)
                                                                         -------------
     Balance, as at December 31, 2003                                          3,368
     Exercised January 1 - March 19, 2004                                     (3,002)
     Unexercised, and expired as of March 20, 2004                              (366)
                                                                         -------------
     Outstanding, as at December 31, 2004                                          0
                                                                         -------------
                                                                         -------------
</Table>



          ii)  As described in Note 9(c) in February 2004, the Corporation filed
               a short form prospectus qualifying the distribution of 2,466,726
               common share purchase warrants.

               The following table summarizes this $3.20 purchase warrant
               activity:
<Table>
<Caption>

                                                                            Number
                                                                         -------------
     <S>                                                                    <C>
     Balance, as at December 31, 2003                                           -
     Issued February 6, 2004                                                2,467
     Exercised                                                               (484)
     Expired                                                               (1,983)
                                                                         -------------
     Balance, as at December 31, 2004                                           0
                                                                         -------------
                                                                         -------------
</Table>

     e)   Stock options:

          The Corporation has a stock option plan for its directors, officers,
          employees and key consultants. The exercise price for stock options
          granted is no less than the quoted market price on the grant date with
          options vesting in equal increments over a three year period. An
          option's maximum term is ten years.
<Table>
<Caption>

                                                                 2004                                         2003
                                         -------------------------------------------------------------------------------------------
                                                                       Weighted Average                                  Weighted
                                             Number of Options              price              Number of Options       Average price
                                         -------------------------------------------------------------------------------------------
     <S>                                          <C>                 <C>                          <C>             <C>
     Balance, beginning of year                    5,133              $     1.29                     5,841         $       1.12
       Forfeited                                  (2,170)                   1.57                     (188)                 1.35
       Exercised                                  (1,299)                   1.13                   (1,625)                 0.99
       Granted                                     5,707                    1.85                     1,105                 1.73
                                         -------------------------------------------------------------------------------------------
     Balance, end of year                          7,371              $     1.66                     5,133         $       1.29
                                         -------------------------------------------------------------------------------------------
                                         -------------------------------------------------------------------------------------------
</Table>

The following table summarizes information about the stock options outstanding
at December 31, 2004:
<Table>
<Caption>
                          Options Outstanding                                          Options Exercisable
------------------------------------------------------------------------------------------------------------------------------------
                                        Weighted Average
                                          of Remaining
                         Number of      Contractual Life      Weighted Average         Number of            Weighted Average
Exercise Price            Options           (years)            Exercise Price           Options              Exercise Price
------------------------------------------------------------------------------------------------------------------------------------
<S>                       <C>                <C>                  <C>                    <C>                   <C>
$  0.80-1.00                762              4.32                 $    0.82                762                 $    0.82
   1.01-1.50              1,533              7.73                      1.29              1,041                      1.27
   1.51-2.00              3,854              9.17                      1.73              1,048                      1.79
   2.00-3.00              1,222              8.82                      2.45                446                      2.69
------------------------------------------------------------------------------------------------------------------------------------
$  0.80-3.00              7,371              8.35                 $    1.66              3,297                 $    1.52
------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------
</Table>

30               CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT


<Page>

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                          YEARS ENDED DECEMBER 31, 2004 AND 2003
                         (TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)


     A modified Black-Scholes option pricing model, with the following weighted
     average assumptions was used to estimate the fair value of options on the
     date of the grant, for the inclusion as stock based compensation expense:
<Table>
<Caption>
                                                                      2004             2003
                                                                -----------------------------
          <S>                                                         <C>              <C>
          Risk free interest rate (%)                                  4.0              4.0
          Expected lives (years)                                       5.0              5.0
          Expected volatility (%)                                     93.9             65.0
          Dividend per share                                          0.00             0.00
</Table>

     The grant date weighted average fair value of options issued during 2004
     was $1.31 per option.

     The impact of adopting the new accounting standard for stock based
     compensation on the Balance sheet is:
<Table>
<Caption>
         CONTRIBUTED SURPLUS                                                   2004            2003
                                                                   ---------------------------------
         <S>                                                         <C>                <C>
         Restated Opening Balance                                    $       1,404      $      633
         Additions from issuance of stock options                            2,612             771
         Reduction from exercise of stock options                             (630)              0
                                                                   ---------------------------------
         Closing balance                                             $       3,386      $    1,404
                                                                   ---------------------------------
                                                                   ---------------------------------
</Table>

      f) On June 27, 2003, at the Corporation's Annual Meeting of
         Shareholders, a special resolution was approved authorizing a reduction
         in the stated capital account for the common shares of the Corporation
         of $17,057,000, being the Corporation's deficit as at December 31,
         2002.

      g) During the year ended December 31, 2004, the Corporation entered into
         flow-through share agreements to issue 1,377,000 common shares for cash
         consideration of $3,442,500 and to renounce $3,442,500 of qualified
         expenditures.

      h) During the year ended December 31, 2003, the Corporation entered into
         flow-through share agreements to issue 5,941,000 common shares for cash
         consideration of $18,265,000 and to renounce $18,265,000 of qualified
         expenditures.

      i) Per share amounts for Loss per share were calculated using the weighted
         average number of common shares outstanding of 106,465,000 for 2004 and
         85,082,000 for 2003. The exercise of stock options and warrants would
         be anti-dilutive in 2004 and 2003.

NOTE 10  RELATED PARTY TRANSACTIONS

      a) During the year ended December 31, 2004, the Corporation paid $628,000
         (2003 - $912,000) for oilfield equipment rentals to a company
         controlled by a director and for aircraft rentals to a company
         controlled by an officer and director of the Corporation. During the
         year, the Corporation paid $107,000 (2003 - nil) to a company
         controlled by an officer and director of the Corporation for consulting
         services. At December 31, 2004, accounts receivable included a $27,000
         advance on expenditures to an officer and director of the Corporation.
         This amount was recovered subsequent to December 2004. In November
         2004, the Corporation entered into farm-out and participation
         agreements of operations with a corporation controlled by an officer
         and director of the Corporation in respect of the Corporation's
         East Coast and Trinidad prospects. The corporation has the right to
         paticipate on a promoted basis for 16 2/3% of Canadian Superior's
         costs of the East Coast wells and 33 1/3 % of Canadian Superior's
         costs of certain earning wells in Trinidad.

      b) In March 2003, the Corporation received $1.5 million from a company
         controlled by an officer and director of the Corporation. The amount
         was fully repaid by the Corporation in November 2003, including
         interest in the amount of $99,986.

NOTE 11  RISK MANAGEMENT

The carrying values of financial assets and liabilities approximate their fair
value due to their short periods to maturity, or the market interest rate on the
revolving production loan.
  A substantial portion of the Corporation's accounts receivable are with
customers and joint venture partners in the oil and gas industry and are subject
to normal industry credit risks. Purchasers of the Corporation's oil, gas
and natural gas liquids are subject to an internal credit review to minimize the
risk of nonpayment.
  The Corporation is exposed to foreign currency fluctuations as oil and gas
prices received are referenced to U.S. dollar denominated prices. The
Corporation is exposed to a floating interest rate on its revolving production
loan.
  The Corporation enters into commodity sales agreements and certain derivative
financial instruments to reduce its exposure to commodity price volatility.
These financial instruments are entered into solely for hedging purposes and are
not used for trading or other speculative purposes.
  At December 31, 2004, the Corporation had the following contracts in place:


           CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT                   31

<Page>

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2004 AND 2003
(TABULAR AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<Table>
<Caption>

     Contract                  Volume                     Price                          Term
     --------                  ------                     -----                          ----
     <S>                       <C>                        <C>                            <C>
     NATURAL GAS
     Fixed Price               1,000 gj per day           $9.37/gj (Aeco)                January 1   March 31, 2005
     Costless Collar           1,000 gj per day           $7 to $13.50/gj (Aeco)         January 1   March 31, 2005

     CRUDE OIL
     Fixed Price               100 bbls per day           $44.25 USD/bbl WTI             January 1   March 31, 2005
</Table>

     At December 31, 2004, the estimated fair value of the above financial
     instruments was a gain of $358,000.

     During 2004, the Corporation's hedging activities resulted in a loss
     of $496,000 which was recorded as a decrease in oil and gas revenues during
     the period.

NOTE 12  CONTINGENCIES AND COMMITMENTS

      a) Nova Scotia: During 2000, 2001 and 2003, the Corporation acquired six
         exploration licenses from the Canada - Nova Scotia Offshore Petroleum
         Board. These licenses are for a period of nine years in total, subject
         to certain requirements being met during the first five years. As a
         condition of the licenses, the Corporation is required to post security
         in the amount of 25% of its work expenditure bids. The deposit is
         refundable only to the extent of approved allowable expenditures. The
         duration of the initial five year term, for a given license, can be
         extended one additional year to six years by posting an additional
         security deposit in an amount of $250,000. At December 31, 2004, as a
         result of the Corporation having made certain expenditures, the
         Corporation had fulfilled its work expenditures on two of the six
         exploration licenses. The remaining four exploration licenses are
         currently owned 100 percent by the Corporation and have aggregate work
         expenditure outstanding of $57,877,000, and as such the Corporation has
         $14,469,000 in term deposits assigned to the Canada - Nova Scotia
         Offshore Petroleum Board, of which $14,169,000 is long term, and
         $300,000 is a current receivable relating to applications submitted for
         refunds. Under the terms of the Mariner I-85 exploration drilling
         program, the Corporation had a $10,000,000 drilling security deposit
         posted with the Canada - Nova Scotia Offshore Petroleum Board at
         December 31, 2003. This deposit, with interest, was returned to the
         Corporation in March 2004.

      b) Flow-through Expenditures: At December 31, 2004, the Corporation had
         yet to incur approximately $3.4 million of Canadian exploration
         expenses which were renounced for tax purposes. These expenses must be
         incurred by December 31, 2005.

      c) Litigation and Claims: The Corporation is involved in various claims
         and litigation arising in the ordinary course of business. In the
         opinion of Canadian Superior the various claims and litigations arising
         there from are not expected to have a material adverse effect on the
         Corporation's financial position. The Corporation maintains
         insurance, which in the opinion address any unforeseen claims.

         During 2004, a number of class action proceedings were initiated
         against the Corporation and certain of its directors and officers in
         the United States District Court, Southern District of New York, in
         the Ontario Superior Court of Justice and the Quebec Superior Court by
         Plaintiffs alleging to have purchased securities of the Corporation
         and alleging they suffered damages resulting from statements by the
         Corporation regarding the Corporation's Mariner I-85 exploration well
         drilled offshore Nova Scotia. The Corporation and the individuals
         involved categorically deny these allegations and have advised the
         Corporation's insurer of the same. The Corporation views these actions
         to be without merit and intends to aggressively deal with these
         matters.

      d) Prospect Commitment Fee: During 2002, the Corporation received a $10
         million prospect commitment fee related to its "Marquis"
         Prospect Offshore Nova Scotia. In the event that any natural gas or
         other hydrocarbons in commercial quantities are produced from a well on
         the "Marquis" Prospect, the Corporation will be obligated to
         repay the amount in 12 quarterly installments following commencement of
         commercial production.

      e) Lease Obligations: The Corporation has entered into agreements to lease
         premises and equipment requiring future minimum payments totaling
         $4,727,000. Minimum annual payments during the next five fiscal years
         are as follows:
<Table>
                <S>                <C>
                2005               $      1,312,000
                2006               $      1,269,000
                2007               $      1,036,000
                2008               $        891,000
                2009               $        219,000
</Table>


NOTE 13  SUBSEQUENT EVENTS
      a) Hedging Subsequent to December 31, 2004 the Corporation entered into a
         foreword `costless collar' transaction of oil with a floor
         price of $43.85 USD/bbl and a ceiling of $51.00 USD/bbl on 100 bbls/d
         for the period April 1, 2005 through December 31, 2005.


32             CANADIAN SUPERIOR ENERGY INC. 2004 ANNUAL REPORT