**Exhibit 99.3**

 

Management’s Discussion and Analysis should be read in conjunction withthe Consolidated Financial Statements and Auditors’ Report included in thisAnnual Report. The Consolidated Financial Statements have been prepared inaccordance with accounting principles generally accepted in Canada.  The following discussion and analysis refersprimarily to 2005 compared with 2004 unless otherwise indicated.  The calculation of barrels of oil equivalent(“boe”) is based on a conversion rate of six thousand cubic feet of natural gasto one barrel of crude oil.

 

Management’sDiscussion and Analysis contains the term “cash flow from operations”, which isdetermined before changes in non-cash working capital and should not beconsidered an alternative to, or more meaningful than, “cash flow fromoperating activities” as determined in accordance with generally acceptedaccounting principles (“GAAP”).  CanadianSuperior’s determination of cash flow from operations may not be comparable tothat reported by other corporations.  Areconciliation between net earnings and cash flow from operations can be foundin the consolidated statements of cash flows in the audited financialstatements.  The Corporation alsopresents cash flow from operations per share whereby per share amounts arecalculated using weighted average shares outstanding in a manner consistentwith the calculation of earnings per share.

 

The MD&Acontains forward-looking or outlook information regarding the Corporation.Because forward-looking information addresses future events and conditions, itinvolves risks and uncertainties that could cause actual results to differmaterially from those contemplated by the forward-looking or outlookinformation. These risks and uncertainties include, but are not limited to:commodity price levels; production levels; the recoverability of reserves;transportation availability and costs; operating and other costs; interestrates and currency exchanges rates; and changes in environmental and otherlegislation and regulations.

 

This document contains forward-looking information on futureproduction, project start-ups and future capital spending. Actual results orestimated results could differ materially due to changes in project schedules,operating performance, demand for oil and gas, commercial negotiations or othertechnical and economic factors or revisions.

 

Statements contained in this document relating to future results,events and expectations are forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933, as amended and Section 21E of theSecurities Exchange Act of 1934, as amended. These forward-looking statementsinvolve known and unknown risks, uncertainties and other factors which maycause the actual results, performance or achievements of the Corporation, orindustry results, to be materially different from any future results,performance or achievements expressed or implied by such statements. Suchfactors include, among others, those described in the Corporation’s annual reporton Form 40-F on file with the U.S. Securities and Exchange Commission.

 

Additional informationrelating to Canadian Superior Energy Inc. is available on SEDAR atwww.sedar.com.

 

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NET INCOME AND CASH FLOW FROM OPERATIONS

 
| ** **                                             | ** ** | **($ 000’s)** |       | **($ per boe)** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| **Three months ended December 31** | ** ** | **2005**                | ** ** | **2004**                  | ** ** | **% change** |   | **2005** | ** ** | **2004** | ** ** | **% change** | ** ** |
| **Gross  revenue**                                     | ** ** | **$**                   | **18,822** | ** **                | $          | 11,185 |   | 68 |   | **$** | **69.28** | ** ** | $ | 44.60 |   | 55 |   |
| Transportation                                         | ** ** | **187**                 | ** ** | 171                       |       | 9 |   | **0.69** | ** ** | 0.68 |   | 1 |   |
| **Revenue**                                            | ** ** | **18,635**              | ** ** | 11,014                    |       | 69 |   | **68.59** | ** ** | 43.92 |   | 56 |   |
| Royalties, net  of ARTC                                | ** ** | **3,588**               | ** ** | 1,009                     |       | 256 |   | **13.21** | ** ** | 4.02 |   | 228 |   |
| Production and  operating expenses                     | ** ** | **2,027**               | ** ** | 1,985                     |       | 2 |   | **7.46** | ** ** | 7.91 |   | (6 | ) |
| **Operating  Netback**                                 | ** ** | **13,020**              | ** ** | 8,020                     |       | 62 |   | **47.92** | ** ** | 31.98 |   | 50 |   |
| General and  administrative expenses                   | ** ** | **1,394**               | ** ** | 1,423                     |       | (2 | ) | **5.13** | ** ** | 5.67 |   | (10 | ) |
| Interest and  other expense (income)                   | ** ** | **1,216**               | ** ** | 573                       |       | 112 |   | **4.48** | ** ** | 2.28 |   | 96 |   |
| Large  Corporations Tax                                | ** ** | **66**                  | ** ** | 56                        |       | 18 |   | **0.24** | ** ** | 0.22 |   | 9 |   |
| **Cash  Flow from Operations**                         | ** ** | **10,344**              | ** ** | 5,968                     |       | 73 |   | **38.07** | ** ** | 23.80 |   | 60 |   |
| Depletion and  amortization                            | ** ** | **7,428**               | ** ** | 5,761                     |       | 29 |   | **27.34** | ** ** | 22.97 |   | 19 |   |
| Future income  tax (recovery)                          | ** ** | **(591**                | **)**      | (953                      | )          | (38 | ) | **(2.18** | **)** | (3.80 | ) | (43 | ) |
| Stock  compensation expense                            | ** ** | **2,064**               | ** ** | 880                       |       | 135 |   | **7.60** | ** ** | 3.51 |   | 117 |   |
| **Net  income (loss)**                                 | ** ** | **$**                   | **1,443**  | ** **                | $          | 280 |   | 415 |   | **$** | **5.31** | ** ** | $ | 1.12 |   | 376 |   |

 
| ** **                                | ** ** | **($ 000’s)** |       | **($ per boe)** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|---------------------------|------------|
| **Year ended December 31** | ** ** | **2005**                | ** ** | **2004**                  | ** ** | **% change** |   | **2005** | ** ** | **2004** | ** ** | **% change** | ** ** |
| **Gross  revenue**                        | ** ** | **$**                   | **55,223** |                      | $          | 39,299 |   | 41 |   | **$** | **57.48** |   | $ | 41.98 |   | 37 |   |
| Transportation                            | ** ** | **678**                 |       | 615                       |       | 10 |   | **0.71** |   | 0.66 |   | 7 |   |
| **Revenue**                               | ** ** | **54,545**              |       | 38,684                    |       | 41 |   | **56.79** |   | 41.32 |   | 37 |   |
| Royalties, net  of ARTC                   | ** ** | **9,716**               |       | 5,805                     |       | 67 |   | **10.11** |   | 6.20 |   | 63 |   |
| Production and  operating expenses        | ** ** | **7,239**               |       | 7,151                     |       | 1 |   | **7.54** |   | 7.64 |   | (1 | ) |
| **Operating  Netback**                    | ** ** | **37,590**              |       | 25,728                    |       | 46 |   | **39.13** |   | 27.48 |   | 42 |   |
| General and  administrative expenses      | ** ** | **5,398**               |       | 4,614                     |       | 17 |   | **5.62** |   | 4.93 |   | 14 |   |
| Interest and  other expense (income)      | ** ** | **1,730**               |       | 611                       |       | 183 |   | **1.80** |   | 0.65 |   | 176 |   |
| Large  Corporations Tax                   | ** ** | **129**                 |       | 261                       |       | (51 | ) | **0.13** |   | 0.28 |   | (52 | ) |
| **Cash  Flow from Operations**            | ** ** | **30,333**              |       | 20,242                    |       | 50 |   | **31.57** |   | 21.62 |   | 46 |   |
| Depletion and  amortization               | ** ** | **23,539**              |       | 22,177                    |       | 6 |   | **24.50** |   | 23.69 |   | 3 |   |
| Future income  tax (recovery)             | ** ** | **81**                  |       | (1,523                    | )          | (105 | ) | **0.08** |   | (1.63 | ) | (105 | ) |
| Stock  compensation expense               | ** ** | **3,657**               |       | 2,612                     |       | 40 |   | **3.81** |   | 2.79 |   | 36 |   |
| **Net  income (loss)**                    | ** ** | **$**                   | **3,056**  |                      | $          | (3,024 | ) | (201 | ) | **$** | **3.18** |   | $ | (3.23 | ) | (198 | ) |

 

----

 

The Corporationrecorded a net income of 1.4 million (0.01 per share) during the fourth quarterof 2005 up from a net income of $0.3 million ($0.00 per share) recorded in thefourth quarter of 2004. For the year, the Corporation posted a net income of$3.1 million (0.03 per share) up 201% compared to a net loss of $3.0 million(0.03 loss per share) over 2004.

 

Cash flow from operations for the fourth quarter increased 73% to $10.3million from $6.0 million recorded in 2004. For the year, cash flow of $30.3million was up 50% from 2004 cash flow of $20.2 million. Higher product pricesreceived in 2005 combined with increased product volumes were the primarycontributor to the cash flow increases. This was achieved by Exploration andDevelopment drilling with no production acquisitions.

 

**PRODUCTION, PRICING AND REVENUE**

 

| ** **                                                           | ** ** | **Three Months Ended  December 31** | ** ** | **Year Ended  December 31** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                           | ** ** | **2005**                                           | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Natural Gas                                                          |       |                                               |       |                                  |       |   |   |   |   |
| Average Daily  Production (mcf/d)                                    | ** ** | **13.489**                                         |       | 12,209                                | ** ** | **12,083** |   | 11,533 |   |
| Average Sales  Price ($/mcf)                                         | ** ** | **$**                                              | **11.91**  |                                  | $          | 7.04 | ** ** | **$** | **9.40** |   | $ | 6.80 |   |
| **Natural  Gas Revenue net of transportation ($000’s)**         | ** ** | **$**                                              | **14,780** |                                  | $          | 7,908 | ** ** | **$** | **41,476** |   | $ | 28,623 |   |
|                                                                 |       |                                               |       |                                  |       |   |   |   |   |
| Oil & NGLs                                                       |       |                                               |       |                                  |       |   |   |   |   |
| Average Daily  Production (bbl/d)                                    | ** ** | **705**                                            |       | 691                                   | ** ** | **618** |   | 642 |   |
| Average Net  Sales Price ($/bbl)                                     | ** ** | **$**                                              | **59.45**  |                                  | $          | 48.82 | ** ** | **$** | **57.96** |   | $ | 42.91 |   |
| **Oil  & NGLs Revenue net of transportation ($000’s)**      | ** ** | **$**                                              | **3,855**  |                                  | $          | 3,106 | ** ** | **$** | **13,069** |   | $ | 10,060 |   |
|                                                                 |       |                                               |       |                                  |       |   |   |   |   |
| Barrels of Oil  Equivalent (6:1)                                     |       |                                               |       |                                  |       |   |   |   |   |
| Average Daily  Production (boe/d)                                    | ** ** | **2,953**                                          |       | 2,726                                 | ** ** | **2,632** |   | 2,565 |   |
| Average Sales  Price ($/boe)                                         | ** ** | **$**                                              | **68.59**  |                                  | $          | 43.92 | ** ** | **$** | **56.79** |   | $ | 41.33 |   |
| **Total  Oil & Gas Revenue net of transportation ($000’s)** | ** ** | **$**                                              | **18,635** |                                  | $          | 11,014 | ** ** | **$** | **54,545** |   | $ | 38.684 |   |

 

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Daily production for the fourth quarter of 2005 averaged 2,953 boe/dwhich was up 8% from 2004 production of 2,726 boe/d. The increased productionis the result of increased well tie-ins and operational efficiencies in thelast quarter as well as bringing the majority of our coal bed methane wellson-stream. Average daily production for the year, increased to 2,632 boe/d, upfrom 2,565 boe/d recorded in 2004.

 

Oil and gas revenue, net of transportation costs of $187,000, duringthe fourth quarter of 2005 increased 68% to $18.6 million as compared to $11.0million in 2004. For the year, oil and gas revenues, net of transportationcosts of $678,000, of $54.5 million were 41% higher than 2004 revenues of $38.7million. The revenue increases are due to increased production volumes broughton in the third and fourth quarters of 2005 as well as higher averageprices.  The average sales price net oftransportation costs for the fourth quarter of 2005 was $68.59/boe ($11.91/mcffor natural gas and $59.45/bbl for oil and NGLs) up 40% from $43.92/boe in 2004($7.04/mcf for natural gas and $48.82/bbl for oil and NGLs). Average salesprices net of transportation costs for the year averaged $56.79/boe ($9.40/mcffor natural gas and $57.96/bbl for oil and NGLs) up 37% from $41.33/boe recordedin 2004 ($6.80/mcf for natural gas and $42.91/bbl for oil and NGLs). Gasvolumes of 13,489 mcf/d during the fourth quarter increased 10% compared to12,209 mcf/d in the same period in 2004, while oil volumes were up slightly to705 bbls per day an average of 691 bbls per day produced in 2004. 2005 averagegas volumes of 12,083 mcf/d were up 5% from 11,533 mcf/day recorded over thesame period in 2004 while oil volumes of 618 bbls/d for the year were down 4%from 2004 sales of 642 bbls/d

 

## **HEDGING**

 

The Corporation entersinto commodity sales agreements and certain derivative financial instruments toreduce its exposure to commodity price volatility.  These financial instruments are entered intosolely for hedging purposes to protect the Corporation against negativecommodity price movements and are not used for trading or other speculativepurposes.  These 2005 activities resultedin a loss of $22,696 which was recorded as a decrease in oil and gas revenuesduring the period.

 

At December 31,2005 the Corporation had the following contracts in place:

 
| **Contract** | ** ** | **Volume**       | ** ** | **Price**       | ** ** | **Term**                         |
|--------------|------------|------------------|------------|-----------------|------------|----------------------------------|
| ** **   | ** ** | ** **       | ** ** | ** **      | ** ** | ** **                       |
| Fixed Price  |       | 1000 gj/ Per day |       | 10.08/gj (Aeco) |       | January 1 – March 31,  2006 |

 

At December 31, 2005, theestimated fair value of the above financial instruments was a gain of $23,140.

 

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**ROYALTIES**

 

Royalties, net of theAlberta Royalty Tax Credit of $125,000, for the fourth quarter of 2005 of $3.6million, are up 256 percent from $1.0 million recorded in 2004. This increaseresults from higher revenues for the period combined with an $825,000adjustment for a 2003 audit provision as well as booking the full 2004 ARTCprovision in the fourth quarter of 2004. For the year, royalties, net of theAlberta Royalty Tax Credit of $500,000, were $9.7 million, up 67% from $5.8 millionrecorded in 2004. Increased product prices are the main contributor to higherroyalties in 2005. Lower royalties were attributed to 2004 which resulted froma $0.8 million royalty rebate, booked in the second quarter of 2004, relatingto capital expenditures incurred in 2002 and 2003. The average royalty rate forthe fourth quarter of 2005 was 19.3% of total revenues compared to 2004royalties of 9.2%. The average royalty rate for the year was 17.8% of totalrevenues, compared to 2004 crown royalty rate of 15.0%.

 
| **Three months ended December 31 ($ 000’s)** | ** ** | **2005** | ** ** | **2004**   | ** ** | **% Change** | ** ** |
|---------------------------------------------------------------------------------|------------|----------|------------|------------|------------|-------------------|------------|
| Crown                                                                           | ** ** | **$**    | **3,120**  | ** ** | $          | 1,735             |       | 80 |   |
| Adjustment for  2003 audit provision                                            |       |     | ** ** | (825       | )          |              |       |
| Freehold &  overriding                                                      | ** ** | **593**  | ** ** | 620        |       | (4                | )          |
| Total Royalties                                                                 | ** ** | **$**    | **3,713**  | ** ** | $          | 1,534             |       | 142 |   |
| Alberta Royalty  Tax Credit                                                     | ** ** | **(125** | **)**      | (500       | )          | (75               | )          |
| Net Royalties                                                                   | ** ** | **$**    | **3,588**  | ** ** | $          | 1,009             |       | 256 |   |
| Per boe                                                                         | ** ** | **$**    | **13.21**  | ** ** | $          | 4.02              |       | 229 |   |
| Percent of total  revenue                                                       | ** ** | **19.3** | **%**      | 9.2        | %          | n/a               |       |

 
| **Years Ended December 31 ($ 000’s)** | ** ** | **2005**   | ** ** | **2004**   | ** ** | **% Change** | ** ** |
|---------------------------------------------------------------------|------------|------------|------------|------------|------------|-------------------|------------|
| Crown                                                               | ** ** | **$**      | **8,119**  | ** ** | $          | 5,871             |       | 38 |   |
| 2003 GCA  adjustment made in 2004                                   | ** ** | **—** | ** ** | (1,143     | )          | —            |       |
| Freehold &  overriding                                          | ** ** | **2,097**  | ** ** | 1,577      |       | 33                |       |
| Total Royalties                                                     | ** ** | **$**      | **10,216** | ** ** | $          | 6,305             |       | 62 |   |
| Alberta Royalty  Tax Credit                                         | ** ** | **(500**   | **)**      | (500       | )          | —            |       |
| Net Royalties                                                       | ** ** | **$**      | **9,716**  | ** ** | $          | 5,805             |       | 67 |   |
| Per boe                                                             | ** ** | **$**      | **10.11**  | ** ** | $          | 6.20              |       | 63 |   |
| Percent of total  revenue                                           | ** ** | **17.8**   | **%**      | 15.0       | %          | n/a               |       |

 

## **PRODUCTION ANDOPERATING EXPENSES**

 

Fourth quarter productionand operating expenses of $2.0 million were even with fourth quarter 2004expenses. Production and operating expenses for the year of $7.2 million werealso even with 2004 expenditures. On a boe basis, fourth quarter 2005production and operating expenses of 7.46/boe, were down 6 percent from$7.91/boe recorded for the same period in 2004 while yearly production andoperating expenses of $7.54/boe was down slightly from the 2004 rate of$7.64/boe.

 

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## **GENERAL ANDADMINISTRATIVE EXPENSES**

 

During the fourth quarter of 2005, G&A charges of $1.4 million wereeven with fourth quarter 2004 G&A charges. For the year, G&A charges of $5.4 million were up 17% from $4.6million recorded in  2004.  On a unit of production basis, G&Aexpenses for the quarter were reduced 10 percent to $5.13 per boe for 2005 from$5.67 per boe recorded in 2004, while yearly expenses increased to $5.62 perboe up 14% from $4.93 recorded in 2004. The main reason for the raise ingeneral and administrative costs is an increase in insurance costs, bankre-financing fees and an increase in staffing requirements, including staffingand opening our Trinidad office

 

**STOCK BASED COMPENSATION EXPENSE**

 

In September 2003, the CICA issued an amendment to section 3870 “Stockbased compensation and other stock based payments”. The amended section iseffective for fiscal years beginning on or after January 1, 2004. The amendmentrequires that companies measure all stock based payments using the fair valuemethod of accounting and recognize the compensation expense in their financialstatements. The Corporation implemented this amended standard in 2004. TheCorporation recorded $2.1 million in stock based compensation expense in thefourth quarter of 2005, up from $0.9 million in 2004. Stock based compensationfor the year was $3.7 million which was up from $2.6 reported in 2004.

 

## **INTEREST AND OTHEREXPENSE (INCOME)**

 

During the fourth quarter of 2005 the Corporation incurred $291,000 ininterest charges compared to $657,000 in 2004. For the year, the Corporationpaid $1,015,000 in interest, down from $1,104,000 incurred in 2004. At the endof the year the Corporation had a drawn balance of $12.9 million on a $25.0million revolving loan production facility. A one time charge of $1,012,000(inclusive of legal costs) was accrued at year end to recognize the settlementof a former employee alleged compensation claims payable by the Corporation..

 

Interest income of $87,000 was earned in the quarter by the Corporationin 2005 on its Offshore Nova Scotia license term deposits compared to $84,000earned in 2004. For the year, interest income was $297,000 compared to $493,000earned in 2004.

 

A one time charge of $1.0 million was accrued at year end to recognizethe pending settlement of litigation claims brought upon the Corporation in thenormal course of business.

 

## **DEPLETION ANDAMORTIZATION**

 

Depletion andamortization expense for the fourth quarter of 2005 totaled $7.4 million, up29% from $5.7 million recorded in 2004. For the year, depletion andamortization expense totaled $23.5 million, up 6% from $22.2 million recordedin 2004. Depletion expenses are high for a

 

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company our sizebecause of the large expenditures required to evaluate and drill offshore wellson the East Coast of Canada. Certain East Coast exploration and drilling costshave been included in the depletable pool, with no corresponding increase inreserves.

 

## **TAXES**

 

The Corporation recorded current taxes only in respect of the federalLarge Corporations Tax. The Large Corporations Tax is based on theCorporation’s year-end book value, and was $210,000 in 2005 compared to$261,000 recorded in 2004. Lower tax rates and an increase in the allowedcapital deduction claim resulted in the reduction of taxes payable. The 2005amount was offset by an over accrual of Large Corporation Tax in 2004 of$81,000 resulting in a net $129,000 charge to corporate tax expense for theperiod. Future income taxes of $81,000 were recorded in 2005 compared to afuture tax credit of $1.5 million in 2004. The Corporation does not expect tobe cash taxable in 2006.

 

**CAPITAL EXPENDITURES**

 
| ** **                               | ** ** | **Three Months Ended  December 31** | ** ** | **%**    | ** ** | **Year Ended  December 31** | ** ** | **%**      | ** ** |
|------------------------------------------|------------|----------------------------------------------------|------------|----------|------------|---------------------------------------|------------|------------|------------|
| **($ 000’s)**                  | ** ** | **2005**                                           | ** ** | **2004** | ** ** | **change**                            | ** ** | **2005**   | ** ** | **2004** | ** ** | **change** | ** ** |
| Acquisition/(Disposition)                | ** ** | **$**                                              | **(67**    | **)**    | $          | (1,330                                | )          | (95        | )          | **$** | **(525** | **)** | $ | 1,070 |   | (149 | ) |
| Exploration  & Development           | ** ** | **8,499**                                          |       | 6,772    |       | 26                                    | ** ** | **23,849** |       | 27,894 |   | (14 | ) |
| Plants &  Facilities & Pipelines | ** ** | **2,976**                                          |       | 1,686    |       | 77                                    | ** ** | **5,749**  |       | 6,696 |   | (14 | ) |
| Land & Lease                         | ** ** | **667**                                            |       | 138      |       | 382                                   | ** ** | **9,073**  |       | 2,116 |   | 329 |   |
| Capitalized  expenses                    | ** ** | **1,828**                                          |       | 1,462    |       | 25                                    | ** ** | **5,937**  |       | 4,445 |   | 34 |   |
| ** **                               |       | **$**                                              | **13,903** |     | $          | 8,728                                 |       | 59         | ** ** | **$** | **44,083** |   | $ | 42,221 |   | 4 |   |

 

During the fourthquarter of 2005, the Corporation incurred $13.8 million of capital expenditurescompared to $8.7 million spent in 2004. For the year, capital expenditurestotaled $44.1 million compared to $42.2 million recorded during the same periodin 2004

 

**SUMMARY OF QUARTERLY RESULTS**

 

($000’s except production amounts)

 
| ** **                 | ** ** | **31-Dec-05** | ** ** | **30-Sep-05** | ** ** | **30-Jun-05** | ** ** | **31-Mar-05** | ** ** | **31-Dec-04** | ** ** | **30-Sep-04** | ** ** | **30-Jun-04** | ** ** | **31-Mar-04** | ** ** |
|----------------------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|---------------|------------|
| Production                 |       |          |       |          |       |          |       |          |       |          |       |          |       |          |       |          |       |
| Oil bbls/d                 |       | 705           |       | 647           |       | 555           |       | 562           |       | 691           |       | 653           |       | 603           |       | 614           |       |
| Gas mcf/d                  |       | 13,489        |       | 12,345        |       | 11,375        |       | 11,092        |       | 12,209        |       | 10,490        |       | 11,428        |       | 11,882        |       |
| Boe bbls/d                 |       | 2,953         |       | 2,705         |       | 2,451         |       | 2,411         |       | 2,726         |       | 2,401         |       | 2,508         |       | 2,594         |       |
|                       |       |          |       |          |       |          |       |          |       |          |       |          |       |          |       |          |       |
| Revenue                    |       | 18,635        |       | 14,982        |       | 10,808        |       | 10,120        |       | 11,014        |       | 9,282         |       | 9,315         |       | 9,072         |       |
| Net income  (loss)         |       | 1,443         |       | 1,429         |       | 13            |       | 105           |       | 280           |       | (2,267        | )          | (271          | )          | 0             |       |
| Income (loss)  per share   |       | 0.01          |       | 0.01          |       | 0.00          |       | 0.00          |       | (0.00         | )          | (0.02         | )          | (0.00         | )          | 0.01          |       |
| Cash flow from  operations |       | 10,344        |       | 8,871         |       | 5,775         |       | 5,343         |       | 5,968         |       | 4,526         |       | 5,312         |       | 4,436         |       |
| Cash flow per  share       |       | 0.09          |       | 0.08          |       | 0.05          |       | 0.05          |       | 0.06          |       | 0.04          |       | 0.05          |       | 0.04          |       |

 

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## **LIQUIDITY AND CAPITALRESOURCES**

 

At December 31, 2005, theCorporation has a $25.0 million revolving production loan facility of which$12.9 million was drawn. In addition, In August, the Corporation completed aprivate placement financing consisting of 5.5 million special warrants at aprice of $2.00 per special warrant for total proceeds of $11.0 million beforefinancing costs of $275,000. The special warrants allow purchasers to acquireone common share of Canadian Superior Energy Inc. and one half warrant. Eachfull warrant allows holders to acquire one share of Canadian Superior EnergyInc. at a price of $2.50 to the end of June 30, 2006. In December, theCorporation completed a private placement financing consisting of 2,976,400 flowthrough shares at a price of $3.00 per share for total proceeds of $8.9million. The Corporation has approximately $11.8 million in cash depositsavailable for corporate purpose. In addition, prior to year end the Corporationhad secured a financing of US$ 15 million that closed in January 2006 comprisedof Units consisting of ten 5% US Cumulative Redeemable Convertible PreferredShares (the “Preferred Shares”) and 80 Common Share Purchase Warrants. EachPreferred Share will be convertible into forty Common Shares of CanadianSuperior (6,000,000 Common Shares in aggregate) at a price of US $2.50 perCommon Share.  Also, on February 9, 2006the Corporation completed a private placement of 1,000,000 Units at a price of$2.40 per Unit for gross proceeds of $2,400,000.  Each Unit consists of one Common Share andone-half of one Common Share Purchase Warrant. The Warrants comprising part ofthe Units are exercisable until December 31, 2006 at an exercise price of$2.80 per Common Share.

 

The Corporation’s 2006 Western Canadian exploration and developmentexpenditures are expected to be primarily funded from operating cash flow.  Additional cash may be required to fundplanned 2007 and 2008 capital programs, including programs in Offshore NovaScotia and Offshore Trinidad. These expenditures may be sourced from cash flow,additional equity financings and/or potential farm outs or joint ventures orreleases of secured offshore term deposits as additional work expenditures areincurred

 

## **BUSINESS RISKS**

 

Companies engagedin the oil and gas industry are exposed to a number of business risks,comprised of and including, but not restricted to timing, estimates and/orprojections, which may or can be described as business, operational and/orfinancial risks, many of which are outside of Canadian Superior’s control.  More specifically, without restricting thegenerality thereof, these may be, can be and/or include

 

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risks ofeconomically finding reserves and producing oil and gas in commercialquantities, marketing the production, commodity prices and interest ratefluctuations and environmental and safety risks.  In order to mitigate these risks, theCorporation endeavors to employee a base of experienced qualified personnel,including operational, technical and financial personnel, and maintains aninsurance program that is consistent with industry standards.

 

At December 31,2005, the Corporation had $14.4 million of term deposits posted as securityagainst its remaining Offshore Nova Scotia work expenditure bids. To the extentthat expenditures are not incurred within the periods allowed, the Corporationwould forfeit its proportionate share of any remaining deposits relating to theunexpended work commitment.

 

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