**Exhibit 99.3**

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS**

 

ThisManagement’s Discussion and Analysis (“MD&A”) has been prepared bymanagement as of March 27, 2008 and reviewed and approved by the Board ofDirectors of Canadian Superior Energy Inc. (“Canadian Superior” or the “Company”).  This MD&A is a review of the operationalresults of the Company with disclosure of oil and gas activities in accordancewith Canadian Securities Association National Instrument 51-101 Standards ofDisclosure for Oil and Gas Activities (“NI 51-101”) and a review of financialresults of the Company based on Canadian Generally Accepted AccountingPrinciples (“GAAP”).  The reportingcurrency is the Canadian dollar.  ThisMD&A should be read in conjunction with the audited consolidated financialstatements and accompanying notes for the years ended December 31, 2007and 2006.

 

*Non-GAAPMeasures* – ThisMD&A contains the term cash flow from operations and operating netback,which are non-GAAP financial measures that do not have any standardized meaningprescribed by GAAP and are, therefore, unlikely to be comparable to similarmeasures presented by other issuers. Management believes cash flow from operations and operating netback arerelevant indicators of the Company’s financial performance, ability to fundfuture capital expenditures and repay debt. Cash flow from operations and operating netback should not be consideredan alternative to or more meaningful than cash flow from operating activities,as determined in accordance with GAAP, as an indicator of the Company’sperformance.  In the Operating netbackand cash flow from Operations section of this MD&A, a reconciliation hasbeen prepared of cash flow from operations and operating netback to cash fromoperating activities, the most comparable measure calculated in accordance withGAAP.

 

*BoePresentation* –Production information is commonly reported in units of barrel of oilequivalent (“boe”).  For purposes ofcomputing such units, natural gas is converted to equivalent barrels of oil usinga conversion factor of six thousand cubic feet to one barrel of oil.  This conversion ratio of 6:1 is based on anenergy equivalent wellhead value for the individual products.  Such disclosure of boes may be misleading,particularly if used in isolation. Readers should be aware that historical results are not necessarilyindicative of future performance.

 

*Forward-LookingStatements* – Certaininformation regarding the Company presented in this document, includingmanagement’s assessment of the Company’s future plans and operations, mayconstitute forward-looking statements under applicable securities law andnecessarily involve risk associated with oil and gas exploration, production,marketing and transportation such as loss of market, volatility of commodityprices, currency fluctuations, imprecision of reserve estimates, environmentalrisk, competition from other producers and ability to access capital frominternal and external resources, and as a consequence, actual results maydiffer materially from those anticipated in the forward-looking statements.

 

Statementscontained in this document relate to forward-looking information, includingestimates, projections, interpretations, prognoses and other information thatmay relate to current past or future production, development(s), testing, welltest results, project start-ups and future capital spending.  Current, past and/or future actual resultsand/or reported results, estimates, projections, interpretations, prognoses,well results, test results, reserves, production, resource and/or resourcepotential, development(s), project start-ups, and capital spending, plansand/or estimated results could differ materially due to changes in projectschedules, operating performance, demand for oil and gas, commercialnegotiations or other technical and economic factors or revisions.  This document may contain the reference tothe terms discovery, reserves and/or resources or resource potential which arethose quantities estimated to be contained in accumulations.  There is no certainty that any portion ofthese accumulations or estimated accumulations in this document may not changematerially; and that, if discovered, in this or any other discovery, theaccumulations or estimated accumulations may not be economically viable ortechnically feasible to produce.

 

Statementscontained in this document relating to estimates, results, events andexpectations are forward-looking statements within the meaning of Section 27Aof the Securities Act of 1933, as amended and Section 21E of theSecurities Exchange Act of 1934, as amended. These forward-looking statements involve known and unknown risks,uncertainties, scheduling, re-scheduling and other factors which may cause theactual results, performance, estimates, projections, interpretations,prognoses, schedules or achievements of the Company, or industry results, to bematerially different from any future results, performance or achievementsexpressed or implied by such statements. Such factors include, among others, those described in the Company’s’annual reports on Form 40-F or Form 20-F on file with the U.S.Securities and Exchange Commission.

 

**Businessof Canadian Superior**

 

Canadian Superior Energy Inc. (“Canadian Superior” orthe “Company”) is engaged in the exploration for, and acquisition, developmentand production of petroleum and natural gas primarily in Western Canada andoffshore Nova Scotia, Canada and Trinidad and Tobago.

 

1

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**Operating netback and cashflow from operations**

 
| ** **                                              | ** ** | **($ thousands)** |       | **($ per boe)** | ** ** |
|---------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| **Three months ended December 31,** | ** ** | **2007**               | ** ** | **2006**                  | ** ** | **% change** |   | **2007** | ** ** | **2006** | ** ** | **% change** | ** ** |
| Revenue                                                 | ** ** | ** **             | ** ** | ** **                | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Petroleum and natural gas sales                         | ** ** | **13,215**             | ** ** | 13,477                    |       | (2 | ) | **44.93** | ** ** | 46.17 |   | (3 | ) |
| Transportation                                          | ** ** | **(176**               | **)**      | (158                      | )          | (11 | ) | **(0.60** | **)** | (0.54 | ) | (11 | ) |
| Royalties net of royalty tax credit                     | ** ** | **(1,851**             | **)**      | (2,346                    | )          | 21 |   | **(6.29** | **)** | (8.04 | ) | 22 |   |
| ** **                                              |       | **11,188**             | ** ** | 10,973                    |       | 2 |   | **38.04** | ** ** | 37.58 |   | 1 |   |
| Operating expenses                                      | ** ** | **3,392**              | ** ** | 3,302                     |       | (3 | ) | **11.53** | ** ** | 11.31 |   | (2 | ) |
| Operating netback(1)                                    | ** ** | **7,796**              | ** ** | 7,671                     |       | 2 |   | **26.51** | ** ** | 26.27 |   | 1 |   |
| General and administrative                              | ** ** | **4,346**              | ** ** | 2,695                     |       | 61 |   | **14.78** | ** ** | 9.23 |   | 60 |   |
| Asset retirement expenditures                           | ** ** | **361**                | ** ** | —                    |       | n/a |   | **1.23** | ** ** | — |   | n/a |   |
| Forfeiture of Nova Scotia Term Deposits                 | ** ** | **(500**               | **)**      | (558                      | )          | (10 | ) | **(1.70** | **)** | (1.91 | ) | (11 | ) |
| Interest and other income                               | ** ** | **(230**               | **)**      | (1,171                    | )          | (80 | ) | **(0.78** | **)** | (4.01 | ) | (81 | ) |
| Foreign exchange gain loss                              | ** ** | **(234**               | **)**      | (191                      | )          | 23 |   | **(0.80** | **)** | (0.65 | ) | 22 |   |
| Interest                                                | ** ** | **965**                | ** ** | 309                       |       | 212 |   | **3.28** | ** ** | 1.06 |   | 210 |   |
| Capital taxes                                           | ** ** | **55**                 | ** ** | —                    |       | n/a |   | **0.19** | ** ** | — |   | n/a |   |
| Cash flow from operations(1)                            | ** ** | **3,033**              | ** ** | 6,587                     |       | (54 | ) | **10.31** | ** ** | 22.56 |   | (54 | ) |
| Changes in non-cash working capital                     | ** ** | **9,040**              | ** ** | (8,307                    | )          | 209 |   | **30.74** | ** ** | (28.45 | ) | 208 |   |
| Cash provided (used) by operating  activities           | ** ** | **12,073**             | ** ** | (1,720                    | )          | 802 |   | **41.05** | ** ** | (5.89 | ) | 797 |   |

 

----

(1) Non-GAAP measure

 
| ** **                                               | ** ** | **($ thousands)** |       | **($ per boe)** | ** ** |
|----------------------------------------------------------|------------|------------------------|------------|---------------------------|------------|
| **Twelve months ended December 31,** | ** ** | **2007**               | ** ** | **2006**                  | ** ** | **% change** |   | **2007** | ** ** | **2006** | ** ** | **% change** | ** ** |
| Revenue                                                  | ** ** | ** **             | ** ** | ** **                | ** ** | ** ** |   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Petroleum and natural gas sales                          | ** ** | **48,492**             | ** ** | 49,428                    |       | (2 | ) | **46.72** | ** ** | 46.88 |   | 0 |   |
| Transportation                                           | ** ** | **(645**               | **)**      | (662                      | )          | 3 |   | **(0.62** | **)** | (0.63 | ) | 1 |   |
| Royalties net of royalty tax credit                      | ** ** | **(7,914**             | **)**      | (8,245                    | )          | 4 |   | **(7.63** | **)** | (7.82 | ) | 2 |   |
| ** **                                               |       | **39,933**             | ** ** | 40,521                    |       | (1 | ) | **38.48** | ** ** | 38.43 |   | 0 |   |
| Operating expenses                                       | ** ** | **9,883**              | ** ** | 9,042                     |       | 9 |   | **9.52** | ** ** | 8.58 |   | 11 |   |
| Operating netback(1)                                     | ** ** | **30,050**             | ** ** | 31,479                    |       | (5 | ) | **28.95** | ** ** | 29.86 |   | (3 | ) |
| General and administrative                               | ** ** | **13,315**             | ** ** | 9,312                     |       | 43 |   | **12.83** | ** ** | 8.83 |   | 45 |   |
| Asset retirement expenditures                            | ** ** | **361**                | ** ** | —                    |       | n/a |   | **0.35** | ** ** | — |   | n/a |   |
| Forfeiture of Nova Scotia Term Deposits                  | ** ** | **(500**               | **)**      | (558                      | )          | (10 | ) | **(0.48** | **)** | (0.53 | ) | (9 | ) |
| Interest and other income                                | ** ** | **(925**               | **)**      | (1,371                    | )          | (33 | ) | **(0.89** | **)** | (1.30 | ) | (31 | ) |
| Foreign exchange (gain) loss                             | ** ** | **1,690**              | ** ** | (69                       | )          | (2,549 | ) | **1.63** | ** ** | (0.07 | ) | (2,588 | ) |
| Interest                                                 | ** ** | **2,199**              | ** ** | 1,049                     |       | 110 |   | **2.12** | ** ** | 0.99 |   | 113 |   |
| Capital taxes                                            | ** ** | **55**                 | ** ** | 33                        |       | 67 |   | **0.05** | ** ** | 0.03 |   | 69 |   |
| Cash flow from operations(1)                             | ** ** | **13,855**             | ** ** | 23,083                    |       | (40 | ) | **13.35** | ** ** | 21.89 |   | (39 | ) |
| Changes in non-cash working capital                      | ** ** | **(4,993**             | **)**      | (8,453                    | )          | 41 |   | **(4.81** | **)** | (8.02 | ) | 40 |   |
| Cash provided by operating activities                    | ** ** | **8,862**              | ** ** | 14,630                    |       | (39 | ) | **8.54** | ** ** | 13.88 |   | (38 | ) |

 

----

(1) Non-GAAP measure

 

For the three months endedDecember 31, 2007, cash flow from operations was $3.0 million compared to $6.6million in 2006 and for the year ended December 31, 2007, $13.9 millioncompared to $23.1 million in 2006.  Thedecrease in cash flow from operations is mainly due to increased general andadministrative expenses for the commencement of the Trinidad and Tobago“Intrepid” Block 5(c) project, staffing increases and the payout of twomanagement contracts in the fourth quarter of 2007.  In addition, Canadian Superior incurred higherinterest costs due to increased capital expenditures for drilling of theoffshore Victory well in Trinidad and Tobago.

 

2

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**Production**

 
| ** **                                   | ** ** | **Three months ended** | ** ** | **Year ended** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|---------------------|------------|
| **December 31,**                        | ** ** | **2007**                         | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                             |       |                |       |   |   |   |   |
| Natural gas*(mcf/d)*                         | ** ** | **15,366**                       |       | 14,417              | ** ** | **13,496** |   | 13,414 |   |
| Crude oil and natural gas liquids *(bbls/d)* | ** ** | **636**                          |       | 770                 | ** ** | **594** |   | 653 |   |
| Total Production*(boe/d)  (6:1)*             | ** ** | **3,197**                        |       | 3,173               | ** ** | **2,843** |   | 2,889 |   |

 

Canadian Superior’sproduction for the fourth quarter averaged 3,197 boe per day and for the twelvemonths ended December 31, 2007 2,843 boe per day.  Successful drilling results and new welltie-ins more than offset natural declines in existing production.

 

**Petroleum and natural gas sales,net of transportation**

** **
| **($ thousands, except where otherwise noted)** | ** ** | **Three months ended** | ** ** | **Year ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------|------------|
| **December 31,**                                                    | ** ** | **2007**                         | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                     |       |                             |       |                |       |   |   |   |   |
| Petroleum and Natural Gas Sales, net of  transportation                  |       |                             |       |                |       |   |   |   |   |
| Natural gas                                                              | ** ** | **8,309**                        |       | 9,529               | ** ** | **33,111** |   | 34,014 |   |
| Crude oil and natural gas liquids                                        | ** ** | **4,703**                        |       | 3,798               | ** ** | **14,736** |   | 14,759 |   |
| Total                                                                    | ** ** | **13,039**                       |       | 13,327              | ** ** | **47,847** |   | 48,773 |   |
| Average Sales Price                                                      |       |                             |       |                |       |   |   |   |   |
| Natural gas***($/mcf)*                                                   | ** ** | **5.88**                         |       | 7.18                | ** ** | **6.72** |   | 6.95 |   |
| Crude oil and natural gas liquids*($/bbl)*                               | ** ** | **80.82**                        |       | 53.62               | ** ** | **67.95** |   | 61.95 |   |
| Total***($/boe)*                                                         | ** ** | **44.33**                        |       | 45.66               | ** ** | **46.10** |   | 46.26 |   |

 

Petroleum and natural gassales, net of transportation (“petroleum and natural gas sales”) were $13.0million in the fourth quarter of 2007, consisting of $8.3 million in naturalgas and $4.7 million of crude oil and natural gas liquids sales.  Benchmark natural gas prices weresignificantly lower in the fourth quarter of 2007 compared to 2006.  The decline in prices was marginally offsetby increased production volumes in 2007 compared to prior year.  During the quarter, Canadian Superiorrealized an average price for crude oil and natural gas liquids of $80.82 perbbl compared to $53.62 per bbl in 2006 which more than offset the 17% declinein crude oil and natural gas liquids production in 2007.

 

For the twelve months ended December 31,2007, petroleum and natural gas sales were $47.8 million compared to $48.8million in 2006.  Increased natural gasproduction during the year was more than offset by the impact of lower naturalgas prices in 2007 compared to 2006. Canadian Superior continued to benefit from higher crude oil prices in2007 which more than offset the impact of declining crude oil production duringthe year.

 

All the Company’s productionis currently sold on the spot market. Management is currently evaluating different hedging strategies todecrease the volatility of sales price and fluctuations in cash flow fromoperations.

 

3

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**Royalties**

** **
| **($ thousands, except where otherwise noted)** | ** ** | **Three months ended** | ** ** | **Year ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------|------------|
| **December 31,**                                                    | ** ** | **2007**                         | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                     |       |                             |       |                |       |   |   |   |   |
| Royalties                                                                |       |                             |       |                |       |   |   |   |   |
| Crown                                                                    | ** ** | **1,160**                        |       | 2,076               | ** ** | **5,901** |   | 6,866 |   |
| Freehold and overriding                                                  | ** ** | **691**                          |       | 395                 | ** ** | **2,013** |   | 1,879 |   |
| Alberta royalty tax credit                                               | ** ** | **—**                       |       | (125                | )          | **—** |   | (500 | ) |
| Total                                                                    | ** ** | **1,851**                        |       | 2,346               | ** ** | **7,914** |   | 8,245 |   |
| Royalties per boe                                                        | ** ** | **6.29**                         |       | 8.04                | ** ** | **7.63** |   | 7.82 |   |
| Average royalty rate *(%)*                                               | ** ** | **14.2**                         |       | 17.6                | ** ** | **16.5** |   | 16.9 |   |

 

Canadian Superior paysroyalties to provincial governments, freehold landowners and overriding royaltyowners.  Royalties are calculated andpaid based on petroleum and natural gas sales net of transportation.  Natural gas and liquids royalties for thefourth quarter of 2007 were $1.9 million or 14.2% of total petroleum andnatural gas sales.  The decrease inroyalties from prior year is due to certain wells reverting to low productivitystatus.  For the twelve months ended December 31,2007, natural gas and liquids royalties were $7.9 million or 16.5% of totalpetroleum and natural gas sales compared to $8.2 million or 16.9% in 2006.

 

**Alberta royalty review**

 

The Government of Alberta hascompleted a comprehensive review of the province’s oil and natural gas royaltystructure.  The Company is currentlyevaluating how the potential changes may impact the Company’s operations.  The Company believes that there could be anegative effect to the financial operations due to higher royalties on theCompany’s petroleum and natural gas sales.

 

**Operatingexpenses**

 

Operating expenses were $3.4 million or $11.53 perboe for the fourth quarter.  For thetwelve months ended December 31, 2007, operating expenses were $9.9million or $9.52 per boe compared to $9.0 million or $8.58 per boe in2006.  Canadian Superior incurred higheroperating expenses in 2007 as a result of increased field and processing costs.

 

**General and administrative expenses**

 
| **($ thousands, except where otherwise noted)** | ** ** | **Three months ended** | ** ** | **Year ended** | ** ** |
|--------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------|------------|
| **December 31,**                                                    | ** ** | **2007**                         | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                     |       |                             |       |                |       |   |   |   |   |
| Gross general and administrative expense                                 | ** ** | **4,467**                        |       | 4,440               | ** ** | **16,122** |   | 16,866 |   |
| Capitalized general and administrative  expense                          | ** ** | **(121**                         | **)**      | (1,745              | )          | **(2,807** | **)** | (7,554 | ) |
| Net general and administrative expense                                   | ** ** | **4,346**                        |       | 2,695               | ** ** | **13,315** |   | 9,312 |   |
| General and administrative expense***($/boe)*                            | ** ** | **14.78**                        |       | 9.23                | ** ** | **12.83** |   | 8.83 |   |

 

For the twelve months ended December 31, 2007,G&A expense was $13.3 million or $12.83 per boe.  The increase from prior year is mainly due tothe significant startup costs that Canadian Superior incurred in 2007 todevelop the technical team and resources needed for the “Intrepid” Block 5(c) projectin Trinidad and Tobago.  In addition, theCompany recognized approximately $3.7 million in obligations to a number ofofficers and directors due to corporate restructuring during the year of which$1.9 million was paid.

 

**Stock based compensation**

 

Duringthe year ended December 31, 2007, Canadian Superior incurred stock basedcompensation expenses of $4.2 million compared to $5.9 million in 2006.  The decrease from prior year is due to alower amount of stock options being granted in 2007 compared to 2006.

 

4

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**Depletion, depreciation andaccretion**

 

Depletion,depreciation and accretion (“DD&A”) was $26.6 million or $25.62 per boe forthe twelve months ended December 31, 2007 of which $7.6 million or $25.88per boe was incurred in the fourth quarter. In calculating DD&A expense for 2007 the Company included anestimated $8.7 million (2006 - $9.3 million) for future development capitalassociated with proven undeveloped reserves and excluded $54.4 million (2006 -$67.0 million) related to unproved properties and projects under constructionor development.  Of the costs excluded$20.8 million (2006 - $22.7 million) relates to Western Canada, $8.8 million(2006 - $8.8 million) to East Coast Canada and $24.8 million (2006 - $35.5million) to Trinidad and Tobago. Canadian Superior’s DD&A per boe is high compared to otherexploration and production companies its size, due to significant expendituresincurred to drill and evaluate the Company’s offshore wells in the East Coastof Canada being included in the depletable base with no associated provenreserves reflected.

 

**Income taxes**

 

Canadian Superior’s currentand future income taxes are dependent on factors such as production, commodityprices and tax classification of drilled exploration and developmentwells.  The Company had a future incometax expense for the fourth quarter of $3.3 million and a future income taxrecovery of $6.0 million for the year ended December 31, 2007.

 

At December 31, 2007, theCompany had $149.7 million in tax pools and $3.0 million in non-capital lossesthat are available for future deduction against taxable income.

 
| ** **                            | ** ** | **December 31** | ** ** |
|---------------------------------------|------------|----------------------|------------|
| **($ thousands)**                | ** ** | **2007**             | ** ** |
| Canadian exploration expense          | ** ** | **32,154**           | ** ** |
| Canadian oil and gas property expense | ** ** | **45,197**           | ** ** |
| Canadian development expense          | ** ** | **29,335**           | ** ** |
| Undepreciated capital costs           | ** ** | **22,060**           | ** ** |
| Share issue costs                     | ** ** | **4,098**            | ** ** |
| Foreign exploration expense           | ** ** | **16,048**           | ** ** |
| Other                                 | ** ** | **781**              | ** ** |
| Total                                 | ** ** | **149,673**          | ** ** |

 

Non-capital losses expire as follows:

 
| **($ thousands)** | ** ** | ** ** | ** ** |
|------------------------|------------|------------|------------|
| 2008                   | ** ** | **—** | ** ** |
| 2009                   | ** ** | **—** | ** ** |
| 2010                   | ** ** | **—** | ** ** |
| 2011 and thereafter    | ** ** | **2,970**  | ** ** |
| ** **             | ** ** | **2,970**  | ** ** |

 

**Capital expenditures**

** **
| **($ thousands)**           | ** ** | **Three months ended** | ** ** | **Year ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------|------------|
| **December 31,**            | ** ** | **2007**                         | ** ** | **2006**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|                             |       |                             |       |                |       |   |   |   |   |
| Acquisitions (dispositions)      | ** ** | **120**                          |       | (823                | )          | **(41,061** | **)** | (716 | ) |
| Exploration and development      | ** ** | **20,148**                       |       | 7,630               | ** ** | **52,191** |   | 37,872 |   |
| Plants, facilities and pipelines | ** ** | **2,753**                        |       | 2,209               | ** ** | **7,246** |   | 6,675 |   |
| Land and lease                   | ** ** | **1,608**                        |       | 665                 | ** ** | **3,789** |   | 3,984 |   |
| Capitalized expenses             | ** ** | **121**                          |       | 1,745               | ** ** | **2,807** |   | 7,554 |   |
| Net capital expenditures         | ** ** | **24,750**                       |       | 11,426              | ** ** | **24,972** |   | 55,369 |   |

 

5

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The Company invested $24.8million for capitalexpenditures during the fourth quarter of which the majority was spent tocomplete the drilling of the “Victory” well offshore Trinidad, to drill 5 grosswells (4.8 net) in the Drumheller area and to purchase Crown land at the PeaceRiver Arch area.  During the year ended December 31,2007, the Company expended $25.0 million of which the majority related tocommencement of the Trinidad and Tobago “Intrepid” Block 5(c) projectwhich included drilling the first well “Victory” in the three wellproject.  In addition, the Companydrilled 73 gross (25 net) wells in Western Canada, which includes 40 wellsdrilled to earn gross overriding royalties ranging from 10%-15%.

 

In2007, the Company entered into a farm in and joint operating agreement with BGInternational Limited (“BG”) to participate in the exploration drilling anddevelopment of the “Intrepid” Block 5(c) approximately sixty miles off theeast coast of the island of Trinidad. Under the terms of the farm-in and joint operating agreements, BGacquired a 30% working interest in Canadian Superior’s “Intrepid” Block 5(c) ProductionSharing Contract; the agreement was approved by the Government of Trinidad andTobago on October 29, 2007. Also, under the terms of the agreement withCanadian Superior, BG paid Canadian Superior approximately US$38.7 million andon a go forward basis will pay approximately 40% of the exploration costsassociated with the drilling of the three commitment wells required on Block5(c).  The farm in has been recorded as areduction to Trinidad capital and general and administrative costs in 2007.

 

**Well count**

 

The following table sets forth the number and statusof wells in which the Company has a working interest as at December 31,2007:

** **
| ** ** | ** ** | **Oil wells** | ** ** | **Natural gas wells** | ** ** |
|------------|------------|--------------------|------------|---------------------------------|------------|
| ** ** | ** ** | **Producing**      | ** ** | **Non-producing**               | ** ** | **Producing** | ** ** | **Non-producing** | ** ** |
| ** ** | ** ** | **Gross**          | ** ** | **Net**                         | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Net** | ** ** |
| Total      |       | 79                 |       | 59.6                            |       | 28 |   | 17.9 |   | 269 |   | 125 |   | 113 |   | 68 |   |

 

**Land holdings**

 

The following table sets out the Company’sundeveloped land holdings as at December 31, 2007:

** **
| ** **                   | ** **   | **Undeveloped** | ** **   |
|------------------------------|--------------|-----------------|--------------|
| ** **                   | ** **   | **Gross**       | ** **   | **Net** | ** ** |
| *(acres)*                    | *** *** | *** ***    | *** *** | *** *** | *** *** |
| British Columbia             |         | 1,974           |         | 694 |   |
| Alberta                      |         | 105,060         |         | 85,847 |   |
| Saskatchewan                 |         | 40              |         | 40 |   |
| Offshore Nova Scotia         |         | 1,234,546       |         | 1,234,546 |   |
| Offshore Trinidad and Tobago |         | 102,292         |         | 71,604 |   |
| Total                        |         | 1,443,912       |         | 1,392,731 |   |

 

**Liquidity and capitalresources**

 
| **($ thousands)**                                       | ** ** | ** **  | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|-------------|------------|------------|------------|
| **December 31,**                                        | ** ** | **2007**    | ** ** | **2006**   | ** ** |
| Working capital surplus excluding revolving  credit facility | ** ** | **30,447**  |       | 7,240      |       |
| Revolving credit facility                                    | ** ** | **(17,784** | )          | (7,910     | )          |
| Working capital surplus (deficit)                            | ** ** | **12,663**  |       | (670       | )          |

 

As at December 31, 2007, Canadian Superior had aworking capital surplus of $12.7 million. The Company had drawn $17.8 million against the $45 million revolvingcredit facility (“credit facility”) at a variable interest rate of prime +1%.  The credit facility is secured by a$100 million first floating charge demand debenture on the assets of theCompany and a general security agreement covering all of the assets of theCompany.  The credit facility hascovenants that require the Company to maintain its working capital ratio at 1:1or greater, tangible net worth to total liabilities at 1.5:1.0 or greater andtangible net worth at greater than $100 million while the credit facility isoutstanding.  The borrowing base of thecredit facility is subject to an annual review by the lender.  The Company 

 

6

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had $13.7 million in cash and short-term deposits and$14.6 million of term deposits posted as security against the remainingOffshore Nova Scotia work expenditure bids.

 

On November 16, 2007, the Companycompleted a private placement of 6,472,500 flow-through common shares at $3.50per share for gross proceeds of $22.7 million.

 

On December 31 2007, 500,000 warrantswere exercised into 500,000 common shares at US$ 2.50 per share for grossproceeds of US$1.3 million.

 

In 2007, the Companyentered into a farm in and joint operating agreement with BG InternationalLimited (“BG”) to participate in the exploration drilling and development ofthe “Intrepid” Block 5(c) approximately sixty miles off the east coast ofthe island of Trinidad. Under the terms of the farm-in and joint operatingagreements, BG acquired a 30% working interest in Canadian Superior’s “Intrepid”Block 5(c) Production Sharing Contract; the agreement was approved by theGovernment on October 29, 2007. Also, under the terms of the agreementwith Canadian Superior, BG paid Canadian Superior approximately US$38.7 millionand on a go forward basis will pay approximately 40% of the exploration costsassociated with the drilling of the three commitment wells required on Block5(c).

 

The Company generally relies on cash flow fromoperations, credit facility availability and equity financings to fund itscapital requirements and to provide liquidity. Cash is primarily used, and will continue to be used, to fundacquisitions, exploration and development of petroleum natural gas properties,expenses for continued operations, G&A costs and/or repayment of principaland interest outstanding on the credit facility.

 

TheCompany’s cash flow from operations is directly related to underlying commodityprices and production volumes.  Asignificant decrease in commodity prices could materially impact the Company’sfuture cash flow from operations and liquidity. In addition, a substantial decrease in commodity prices could impact theCompany’s borrowing base under the credit facility, therefore reducing thecredit facility available, and in some instances, require a portion of thecredit facility to be repaid.  CanadianSuperior has not entered into any risk management contracts to mitigate itscommodity price risk, however management is currently considering variousoptions.  The Company’s future liquidityis also dependent on its ability to increase reserves and production throughsuccessful drilling activity and acquisitions.

 

Canadian Superior’s 2008 exploration and developmentprogram will be financed through a combination of cash flow from operations,credit facility utilization, additional equity financings, potential farm outsor joint ventures and possibly through the release of secured offshore termdeposits as additional work expenditures are incurred.

 

**Contingencies and commitments**

 

*Nova Scotia*

 

During 2000, 2001 and 2003, the Companyacquired six exploration licenses from the Canada-Nova Scotia OffshorePetroleum Board (“CNSOPB”).  Each ofthese licenses is for a specific period of nine years, subject to certainrequirements being met during the first five years or six years.  As a condition of the licenses, the Companyis required to post security in the amount of 25% of its work expenditure bids.The deposit is refundable only to the extent of approved allowableexpenditures.  The duration of theinitial five year term, for a given license, can be extended one additionalyear to six years by posting an additional security drilling deposit in anamount of $250,000. Recently the CNSOPB implemented an additional extensionprogram that allows the six year period to be further extended up to nine yearsby payment of annual extension fees.  Asof December 31, 2007, as a result of the Company incurring certainexpenditures and drilling two exploration wells, the Company had fullyfulfilled its work expenditures on two of the exploration licenses, allowedthree licenses to return to the Crown, extended one license and held theremaining two under the regular licensing process.  At December 31, 2007, the Company’sowned 100% of five exploration licenses that have aggregate work expenditureoutstanding of $55.1 million and $14.6 million in term deposits assigned to theCanadian Receiver General through the CNSOPB.

 

*Trinidad and Tobago*

 

The Company is committed to drill threeexploration wells on its “Intrepid” Block 5(c) under its Block 5(c) ProductionSharing Contract (“PSC”) with the Government of Trinidad and Tobago funded inpart by a related party participating on a promoted basis, paying 1/3 ofCanadian Superior’s Block 5(c) exploration program to obtain 25% ofCanadian Superior’s net revenue share of these prospects; and, also by anon-related party paying approximately 40% of the exploration cost, plus otherconsiderations, for a 30% interest in the Block 5(c) PSC.  The Company has contracted the Kan Tan IVSemi-Submersible Drilling Rig for a three well commitment on the Company’sTrinidad and Tobago “Intrepid” Block 5 (c). In 2007, the Company had drilledand commenced testing of the first well. The second well in 

 

7

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this program was spudded in February 2008.  The Company estimates that the costs to drillthe remaining two wells to be in the range of US $65.0 million to US $75.0million gross per well.  The wells willbe drilled and evaluated back to back, with this three well program expected tobe completed in 2008.

 

During the third quarter of 2007, the Companyreceived an exploration and development license from the Government of Trinidadand Tobago on the Mayaro-Guayaguayare block (“MG Block”) and as a result iscommitted to conducting 3D seismic and to drill two exploration wells on the MGblock in a joint venture with the Petroleum Company of Trinidad and TobagoLimited (“Petrotrin”).  The first wellhas to be drilled to a depth of 3,000 meters by January 2010 and thesecond to a depth of 1,800 meters by July 2010. The Company estimates thatits share of the cost of these wells to be in the range of US$15.0 million perwell, with the 3D seismic program to be completed in 2008 at a net cost to theCompany of approximately US$20.0 million.

 

*Flow-through shares*

 

At December 31, 2007, the Company hadyet to incur approximately $22.7 million of Canadian exploration expenses whichwere renounced for tax purposes.  Theseexpenses must be incurred by December 31, 2008.

 

*Litigation and claims*

 

The Company is involved in various claims andlitigation arising in the ordinary course of business.  In the opinion of Canadian Superior thevarious claims and litigations arising there from are not expected to have amaterial adverse effect on the Company’s financial position.  The Company maintains insurance, which in theopinion of the Company, is in place to address any unforeseen claims.

 

*Lease obligations*

 

At December 31, 2007,the Company is committed to future payments for office leases andequipment.  Payments required under thesecommitments for each of the next five years are as follows:

 
| ** **  | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **Thereafter** | ** ** |
|-------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Office rent |       | 317      |       | 249      |       | 226      |       | 57       |       | —         |       |
| Equipment   |       | 155      |       | 77       |       | 42       |       | —   |       | —         |       |
|        |       | 472      |       | 326      |       | 268      |       | 57       |       | —         |       |

 

**Related parties transactions**

 

During the year ended December 31 2007,the Company paid $1.9 million (2006 - $0.8 million), on industry terms, forequipment rentals to a company controlled by an officer and director ofCanadian Superior.  Also during 2007, theCompany invoiced $0.7 million (2006 - nil), at market rates, to this relatedparty company for payroll services.  Inaddition, Canadian Superior paid $0.2 million (2006 - $0.2 million) to aCompany controlled by a director, for oil field construction services onindustry terms.

 

At December 31, 2007, Canadian Superioris carrying a receivable in the amount of US$19.7 million (2006 – nil) from acompany which one of Canadian Superior’s officers and directors is ashareholder and director.  Thesereceivables pertain to transactions for Canadian Superior’s “Intrepid” Block 5(c) projectat Trinidad.  These transactions wereincurred under normal industry terms and conditions.  Subsequent to year end, the Company receivedpayment of US$20.0 million from this related company.

 

**Off-balance sheet arrangements**

 

The Company has no off-balance sheet arrangements.

 

8

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**Share capital**

 

As at March 27, 2008, the Company had 148.1million Class A common shares and 17.2 million stock options issued andoutstanding.

 

**Financial instruments**

 

*Fair value of financial assets and liabilities*

 

The carrying values of financial assets andliabilities approximate their fair value due to their short periods of maturityand the credit facility bearing interest at market rates.

 

*Credit risk*

 

The Company’s accounts receivable are with customersand joint venture partners in the petroleum and natural gas business undernormal industry sale and payment terms and are subject to normal creditrisks.  Purchasers of the Company’s oil,gas and natural gas liquids are subject to an internal credit review tominimize the risk of nonpayment.

 

*Foreign exchange risk*

 

The Company is exposed to foreign currencyfluctuations as oil and gas prices received are referenced to U.S. dollardenominated prices and convertible preferred shares are denominated in U.S.dollars.  The Company also has assets andliabilities based in US currency that is subject to interest rate fluctuations.

 

*Interest rate risk*

 

The Company is exposed to interest rate risk as thecredit facility bears interest at floating market interest rates.  The Company has no interest rate swaps or hedgesat December 31, 2007.

 

*Commodity price risk*

 

The Company enters into commodity sales agreementsand certain derivative financial instruments to reduce its exposure tocommodity price volatility.  Thesefinancial instruments are entered into solely for hedging purposes and are notused for trading or other speculative purposes. At December 31, 2007, theCompany had no contracts in place.

 

**Subsequent event**

 

On March 26, 2008, Canadian Superiorclosed the acquisition of Seeker Petroleum Ltd. (“Seeker”), a private companyfor consideration of approximately $51.2 million, before closing adjustmentsand including assumed net debt of approximately $8.5 million.  The purchase was funded through the issuanceof common shares of the Company and advances from the credit facility.

 

**Adoption ofnew accounting policies**

 

On January 1, 2007, CanadianSuperior adopted the following new accounting standards issued by the CanadianInstitute of Chartered Accountants (“CICA”): Comprehensive Income (Section 1530),Financial Instruments – Recognition and Measurement (Section 3855),Financial Instruments – Disclosure and Presentation (Section 3861) andHedges (Section 3865).  Inaccordance with the new standards, changes are adopted retroactively withoutrestatement of prior period information. The other effects of the implementation of these new standards arediscussed below.

 

*ComprehensiveIncome*

 

Section 1530provides for a new Statement of Comprehensive Income and establishesAccumulated Other Comprehensive Income (“AOCI”) as a separate component ofshareholders’ equity.  The Statement ofComprehensive Income is defined as a change in net assets arising fromtransactions and other events from non-owner sources.  The statement would present net income andeach component recognized in other comprehensive income (“OCI”) when suchamounts exist.  For the year ended December 31,2007, the Company did not recognize any OCI. Any future OCI recognized by the Company will be recognized in AOCI.

 

9

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*FinancialInstruments – Recognition and Measurement*

 

Section 3855requires all financial assets and liabilities, including derivatives, to becarried at fair value on the Company’s balance sheet with the exception ofloans and receivables, investments that are intended to be held to maturity andnon-trading financial liabilities which are carried at cost or amortized cost.

 

TheCompany has reviewed and classified its financial instruments as follows:

 

·                                          Cash, short-term investments and Nova Scotiaoffshore term deposits are classified as financial assets held for trading andare measured at their fair value.  Gainsor losses related to periodic revaluation are recorded to net income or loss.

·                                          Accounts receivable are classified as loansand receivables and are initially measured at their fair value.  Subsequent periodic revaluations are recordedat their amortized cost using the effective interest rate method.

·                                          Accounts payable, accrued liabilities,revolving credit facility and convertible preferred shares are classified asother liabilities and are initially measured at fair value.  Subsequent periodic revaluations are recordedat their amortized cost using the effective interest rate method.

 

*Derivatives and Hedge Accounting*

 

Derivativesmay be embedded in other financial instruments (the “host instruments”).  Prior to the adoption of the new standards,such embedded derivatives were not accounted for separately from the hostinstrument.  Under the new standard,embedded derivatives are treated as separate derivatives when their economiccharacteristics and risks are not clearly and closely related to those of thehost instrument, the terms of the embedded derivative are the same as those ofthe stand-alone derivative, and the combined contract is not held for tradingor designated at fair value.  A review ofthe Company’s financial contracts determined that there were no embeddedderivatives.  In the event that theCompany enters into a contract that contains an embedded derivative, the embeddedderivative will be measured at fair value with subsequent changes recognized inearnings or loss.

 

AtJanuary 1, 2007 no transitional adjustments were required to the openingbalance of retained earnings or to the opening balance of AOCI arising from theadoption of sections 1530, 3855, and 3865.

 

**New accounting pronouncements**

 

The Company has assessed newand revised accounting pronouncements that have been issued that are not yeteffective and determined that the following may have a significant impact onthe Company:

 

As of January 1, 2008,the Company will be required to adopt the following two new CICA standards:Financial Instruments - Disclosures (Section 3862) and FinancialInstruments - Presentation (Section 3863), which will replace Financial Instruments- Disclosure and Presentation (Section 3861).  The new disclosure standard increases theemphasis on the risks associated with both recognized and unrecognizedfinancial instruments and how those risks are managed.  The new presentation standard carries forwardformer presentation requirements.

 

As of January 1, 2008,the Company will be required to adopt CICA standards, Capital Disclosures (Section 1535),which will require companies to disclose their objectives, policies andprocesses for managing capital.  Inaddition, disclosures are to include whether companies have complied withexternally imposed capital requirements.

 

Both new standards wereissued in December 2006 and the Company is assessing the impact on itsfinancial statements.

 

A strategic plan has beenadopted by the Accounting Standards Board for the future direction ofaccounting standards in Canada.  It isexpected that Canadian accounting standards for public companies will convergewith International Financial Reporting Standards (“IFRS”).  On December 31, 2008, the Company willbe required to provide a preliminary disclosure of policy impacts of uponadopting IFRS.  The Company is in theinitial stages of assessing IFRS and its impacts on the consolidated financialstatements.

 

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**Sensitivities**

 

The following sensitivityanalysis is provided to demonstrate the impact of changes in commodity priceson 2007 petroleum and natural gas sales and is based on the balances disclosedin this MD&A and the consolidated financial statements for the twelvemonths ended December 31, 2007:

 
| ** **                                                                            | ** ** | **Petroleum and** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                            | ** ** | **Natural Gas**   | ** ** |
| **($ thousands)**                                                                | ** ** | **Sales (1)**     | ** ** |
| Change in average sales price for natural  gas by $1.00/mcf                           | ** ** | **4,926**              | ** ** |
| Change in the average sales price for crude  oil and natural gas liquids by $1.00/bbl | ** ** | **217**                | ** ** |
| Change in natural gas production by 1  mmcf/d (2)                                     | ** ** | **2,453**              | ** ** |
| Change in crude oil and natural gas liquids  production by 100 bbls/d (2)             | ** ** | **2,480**              | ** ** |

 

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| *(1)* | *Reflects the change in petroleum and natural gas sales for the twelve  months ended December 31, 2007. Balances have not been annualized.*      |
|-------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| *(2)* | *Reflects  the change in production multiplied by the Company’s average sales prices for  the twelve month period ended December 31, 2007.* |

 

**Quarterlyfinancial summary**

($thousands except per share and production amounts)

 
| ** **                        | ** ** | **2007**   | ** ** | **2006** | ** ** |
|-----------------------------------|------------|------------|------------|----------|------------|
| ** **                        | ** ** | **Q4**     | ** ** | **Q3**   | ** ** | **Q2** | ** ** | **Q1** | ** ** | **Q4** | ** ** | **Q3** | ** ** | **Q2** | ** ** | **Q1** | ** ** |
| Production                        |       |       |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Natural gas mcf/d                 | ** ** | **15,366** |       | 12,838   |       | 11,802 |   | 13,984 |   | 14,417 |   | 12,983 |   | 12,674 |   | 13,580 |   |
| Oil and natural gas liquids bbl/d | ** ** | **636**    |       | 516      |       | 656 |   | 566 |   | 770 |   | 645 |   | 570 |   | 625 |   |
| Total boe/d                       | ** ** | **3,197**  |       | 2,656    |       | 2,623 |   | 2,897 |   | 3,173 |   | 2,808 |   | 2,682 |   | 2,889 |   |
|                              |       |       |       |     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Petroleum and natural gas sales   | ** ** | **13,039** |       | 10,248   |       | 11,961 |   | 12,599 |   | 13,327 |   | 11,185 |   | 10,839 |   | 13,423 |   |
| Net income (loss)                 | ** ** | **(9,129** | **)**      | (2,865   | )          | 2,187 |   | (129 | ) | (4,839 | ) | (5,753 | ) | 254 |   | (575 | ) |
| Earnings (loss) per share - basic | ** ** | **(0.07**  | **)**      | (0.02    | )          | 0.02 |   | 0.00 |   | (0.04 | ) | (0.05 | ) | 0.00 |   | 0.00 |   |
| Cash flow from operations         | ** ** | **3,033**  |       | 2,101    |       | 2,251 |   | 6,470 |   | 5,409 |   | 3,992 |   | 5,341 |   | 6,761 |   |
| Cash flow per share - basic       | ** ** | **0.02**   |       | 0.02     |       | 0.02 |   | 0.05 |   | 0.05 |   | 0.03 |   | 0.04 |   | 0.06 |   |

 

**Disclosurecontrols and procedures and internal control over financial reporting**

 

Disclosure controls and procedures are designed toprovide reasonable assurance that material information is gathered and reportedto senior management, including the Chief Executive Officer (“CEO”) and ChiefFinancial Officer (“CEO”), as appropriate to allow timely decisions regardingpublic disclosure.

 

Our management, including the CEO and CFO, hasevaluated the effectiveness of the Company’s disclosure control and proceduresas of December 31, 2007. Based on this evaluation, our managementconcluded that the Company’s disclosure controls and procedures, as defined inMultilateral Instrument 52-109 Certification of Disclosure in Issuer’s Annualand Interim Filings (“MI 52-109”), as of December 31, 2007 was noteffective to provide reasonable assurance that the information required to bedisclosed in reports that are filed or submitted under Canadian Securitieslegislation are recorded, processed, summarized and reported within the timeperiod specified in those rules.

 

During the fourth quarter of2007 a new CEO was hired along with a new CFO and finance and accounting teamin the first quarter of 2008. Although material weaknesses existed at December31, 2007, the Corporation has taken significant steps in the first quarter of 2008to alleviate in the near term some of the noted material weaknesses, such assegregation of duties and financial preparation and review procedures and hasimplemented an aggressive plan that by the end of 2008 all noted materialweaknesses at December 31, 2007 will be substantially eliminated.

 

Management’s assessment identified the followingmaterial weaknesses in internal control over financial reporting as of December 31,2007:

 

·                  There are no effective controls or proceduresrelated to significant accounts or processes to provide reasonable assurancethat transactions are recorded accurately, are recorded timely and arecomplete;

·                  The Corporation was not adequately staffed with accounting personnel possessing an adequatelevel of technical expertise and did not maintain effective segregation ofduties over automated and manual transactions leading to ineffectivemonitoring, supervision and reviews.

·                  The Corporation did not maintain effectivecontrols over the safeguarding of monetary assets. The material weaknessaffects cash and short-term investments. 

 

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Remediation Effort

 

The Company is taking steps to augment and improvethe design of procedures and controls impacting these areas of weakness ininternal controls over financial reporting. These material weaknesses have beendiscussed with the Audit Committee by the new CFO. The Audit Committee is takingan active role in overseeing management’s implementation of the remedialmeasures described below. By implementing these remedial measures, managementintends to improve our internal control over financial reporting to reduce therisk of material misstatements in consolidated financial statements preparedfor external purposes, in the future. We have implemented or are implementingthe following measures, which will improve significantly our internal controlover financial reporting:

 
|   | · | The hiring  of a new CFO and Corporate Controller and key additional operational  accounting and financial reporting staff of which a number are Chartered  Accountants with Canadian and US financial and regulatory reporting  experience;                         |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | · | The  implementation of regular management meetings to provide operational,  financial, and accounting updates of the Corporation;                                                                                                                                    |
|   | · | A budgeting  process which will compare actual results to budgeted results for management  to review and query on a monthly basis;                                                                                                                                   |
|   | · | The  implementation of controls to safeguard monetary assets; and                                                                                                                                                                                                    |
|   | · | The  initiation of an ongoing and comprehensive review of financial controls and  procedures to address the issues identified above and to bring into  compliance with the requirements of the Sarbanes-Oxley Act with respect to  internal controls and procedures. |

 

Management believes that, through implementation ofthe measures noted above, we will address the conditions identified above asmaterial weaknesses. We will monitor the effectiveness of these measures, andour internal control over financial reporting on an ongoing basis. We willcontinue to asses our remediation plans and will take further action, asappropriate, to strengthen our internal control over financial reporting.

 

**Criticalaccounting estimates**

 

To prepare the financialstatements in accordance with GAAP, management is required to make judgmentsand estimates that could influence the financial results of the Company.  Management continually reviews its estimates,but changes in facts or circumstances may result in revised estimates andactual results may differ from these estimates. A summary of the Company’s critical accounting polices has been providedin note 1 of the consolidated financial statements.  The Company’s critical accounting estimatesare discussed below.

 

*Petroleumand Natural Gas Reserves*

 

The Company uses the fullcost method of accounting for its oil and gas activities, which are dependenton estimated reserves that management believes are recoverable from its oil andgas properties.  The process forestimating reserves is complex and subjective. The Company’s determination of reserves is based on a combination of:

 

·  geological,geophysical and engineering estimates;

·  futureproduction rates;

·  future commodity prices; and

·  future development and operating costs.

 

Management believes thesefactors to be reasonable based on the information that is available as of thetime of the estimate of reserves and is subsequently reviewed by itsindependent engineers.  Estimates ofthese factors can significantly change over time as additional data relating todevelopment, production, pricing and costs is received for its oil and gasproperties.

 

All of the Company’s reservesare evaluated and reported on by independent engineers in accordance with NI51-101.  In addition, the Company hasestablished a Reserves Committee to assist the Board of Directors and the 

 

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Audit Committee to review itsoil and gas reserves and other related disclosures.  The Reserves Committee is comprised of threemembers of the Board of Directors.

 

TheCompany’s estimate of reserves impacts the accounting for depletion andimpairment expense.  In addition,Canadian Superior’s borrowing base for the credit facility is determined basedon estimates of proved reserves.

 

*FullCost Impairment*

 

The Company evaluates its oiland gas properties for impairment if a significant event or change occurs.  This can include a significant decrease inoil and gas prices, revisions to proved reserves, changes in operating expensesor changes in its operating environment.

 

The Company’s oil and gasproperties are evaluated for impairment by comparing the undiscounted futurenet cash flows of the property against its carrying value.  The property is written down to its fairvalue if the carrying value is greater than the calculated fair value.  The Company calculates the fair value basedon the discounted cash flow approach.

 

The calculation ofundiscounted future net cash flows by management requires significantassumptions to be made for future prices and reserves.  The Company’s estimates for future prices arebased on benchmark prices compiled by independent engineers, adjusted toreflect risk management contracts, transportation expense or qualitydifferentials.

 

Management believes theassessment of impairment of oil and gas properties is a critical accountingestimate primarily due to the complexity of the assumptions used in thecalculation.

 

The Company’s oil and gasproperties were evaluated for impairment as at December 31, 2007, andbased on its estimates, no impairments were required.  In the existence of an impairment charge, theCompany would record an increase in depreciation and depletion expense for theperiod.

 

*AssetRetirement Obligations*

 

The Company has a legalobligation associated with the retirement of present and former operatingsites.  Management is required to makesignificant estimates and assumptions to calculate the estimated fair value offuture retirement of its tangible assets. This includes making estimates of future activities and environmental rules andregulations that could potentially impact the Company’s future retirementobligation.

 

The Company recognizes the fair value of a liability foran asset retirement obligation in the period in which it is incurred andrecords a corresponding increase in the carrying value of the related long-livedasset.  The fair value is determinedthrough a review of engineering studies, industry guidelines and management’sestimate on a site-by-site basis.  Theliability is subsequently adjusted for the passage of time and is recognized asaccretion expense in the statement of operations.  The liability is also adjusted due torevisions in either the timing or the amount of the original estimated cashflows associated with the liability.  Theincrease in the carrying value of the asset is amortized using theunit-of-production method based on estimated proved developed reserves asdetermined by independent engineers. Actual costs incurred upon settlement of the asset retirementobligations are charged against the asset retirement obligation to the extent ofthe liability recorded.  Any differencebetween the actual costs incurred upon settlement of the asset retirementobligations and the recorded liability is recognized as a gain or loss in theCompany’s statement of operations in the period in which the settlement occurs.

 

*IncomeTaxes*

 

The calculation of theCompany’s income tax provision and future income tax liability is complex andrequires making certain judgements and constant review of laws and regulationsin multiple jurisdictions.  Changes infacts and circumstances as a result of income tax audits, reassessments andchanges in existing legislation could result in a corresponding increase ordecrease in the Company’s provision for income taxes.

 

**Riskassessment**

 

There are a number of risks facing participants inthe oil and gas industry.  Some of therisks are common to all business, while others are specific to a sector.  The following reviews the general andspecific risks to which the Company is exposed. The Company’s management realizes that these risks cannot be eliminated,however they are committed to monitoring and mitigating these risks.

 

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*Risk Management*

 

Inorder to manage the Company’s exposure to commodity price, interest rate andforeign exchange risk, the Company developed a risk management policy.  Under this policy, it may enter intoagreements, including fixed price, forward price, physical purchases and sales,futures, currency swaps, financial swaps, option collars and put options.  The Company’s Board of Directors evaluatesand approves the need to enter into such arrangements.  At this time, the Company has chosen not toenter into such risk management arrangements.

 

*Term Deposits*

 

AtDecember 31, 2007, the Company had $14.6 million of term deposits postedas security against its remaining Offshore Nova Scotia work expenditurebids.  To the extent that expendituresare not incurred within the periods allowed, the Company would forfeit its proportionateshare of any remaining deposits relating to the unexpended workcommitment.  The Company is planning todrill offshore Nova Scotia in the future and it is expected that the majorityof these funds will be returned to the Company.

 

*Environmental and Safety*

 

The oil and natural gas industry is subject toenvironmental regulations pursuant to municipal, provincial and federallegislation in Canada and similar legislation in other countries.  Environmental legislation provides for, amongother things, restrictions and prohibitions on spills, releases or emissions ofvarious substances produced in association with oil and gas operations.  The legislation also requires that wells andfacility sites be operated, maintained, abandoned and reclaimed to thesatisfaction of the applicable regulatory authorities.  A breach of such legislation may result inthe imposition of fines or penalties, some of which could be material.  The Company is committed to meeting and exceedingenvironmental and safety standards.

 

Canadian Superior’s Board of Directors and managementteam monitor, develop and implement policies and procedures to mitigate theenvironmental and safety risks of the Company.

 

*Reserve Replacement*

 

The continued long-term success of Canadian Superioris dependent on its ability to find, acquire, develop and produce oil andnatural gas reserves.  The Company willneed to continually add new reserves to offset the natural decline andproduction from existing reserves.  TheCompany’s ability to increase reserves is dependent on its ability to exploreand develop its existing properties as well as its ability to select andacquire new properties or projects. There is no assurance that the Company will continue to be able toexplore, develop or acquire the reserves necessary to offset the naturaldecline and production from its existing reserves.

 

To mitigate this risk, Canadian Superior hasassembled a team of experienced technical professionals who have expertiseoperating and exploring in the core areas of the Company.  In addition, the Company targets prospectsthat have multi-zone potential and employs advanced geological and geophysicaltechniques to increase the likelihood of finding additional reserves.

 

*Reserve Estimates*

 

There is significantuncertainty inherent in the estimating of economically recoverable oil and gasreserves (including natural gas liquids) and the future net cash flows to bederived from these reserves.  The Company’sreserves are estimated by an independent engineering firm.  Estimates are made based on a number of variablefactors and assumptions, including future oil and gas prices, projectedproduction rates, timing and amount of capital expenditures, future operatingexpenses and royalties and impact of regulation by government agencies.  The Company’s actual production and futurecash flows may vary from its estimates, and such variations could be material.

 

*Operational*

 

Oil and gas exploration,development and production operations are subject to all the risks and hazardstypically associated with such operations, including hazards such as fire,explosion, blowouts, cratering, sour gas release and oil spills, each of whichcould result in substantial damage to oil and natural gas wells, productionfacilities, other property and the environment or in personal injury.  In accordance with industry practice,Canadian Superior is not fully insured against all of these risks, nor are allsuch risks insurable.  Canadian Superiormaintains liability insurance in an amount that it considers consistent withindustry practice.  However, due to thenature of these risks it is possible that liabilities could exceed policylimits, which could cause the Company to incur significant 

 

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costs that could have amaterially adverse effect on its financial condition.  Oil and natural gas operations are alsosubject to additional risks, including premature decline of reservoirs and theinvasion of water into producing formations.

 

Canadian Superior’s futureoil and gas exploration and development activities are dependent on the Company’sability to engage drilling and related equipment in the particular areas wherethe activities will be conducted.  Demandfor limited equipment or access restrictions may affect the Company’s abilityto complete future exploration and development activities.  The Company is exposed to additional risksassociated with oil and gas properties where Canadian Superior is not theoperator, and is dependent on the timing and success of such operators as theCompany will largely be unable to direct or control the activities.  The Company attempts to mitigate these risksby developing strong relationships with existing and potential partners,suppliers and contractors.

 

*CommodityPrices and Marketing*

 

CanadianSuperior is exposed to fluctuations in prices for natural gas, crude oil andnatural gas liquids, as all of the Company’s production is currently sold atspot prices that are subject to volatile trading activity.  Commodity prices fluctuate in response to,among other things, domestic and foreign supply and demand, import and exportbalances, government regulations, weather, and fluctuations in the availabilityand price of other replacement energy sources. A significant drop in commodity prices could materially impact theCompany’s petroleum and natural gas sales, the volume of production it couldproduce economically, require downward adjustments to proved reserves and couldmaterially impact the Company’s financial condition.  In addition, a substantial decrease incommodity prices could impact the Company’s borrowing base under the creditfacility, therefore reducing the credit facility available, and in someinstances, require a portion of the credit facility to be repaid.

 

CanadianSuperior’s ability to market its natural gas may depend on its ability toacquire space on pipelines that deliver natural gas to commercial markets.  The Company may also be affected bydeliverability uncertainties related to the proximity of its reserves topipelines and facilities as well as extensive government and regulationrelating to price, taxes, royalties, land tenure, allowable production, theexport of oil and natural gas and many other aspects of the oil and natural gasbusiness.

 

*Liquidity and Capital Resources*

 

CanadianSuperior will continue to require significant capital expenditures for theexploration, development, acquisition and production of oil and gas reserves inthe future.  The Company’s capitalprogram is currently funded by cash flow from operations, equity financing andcredit facility utilization.  From timeto time, the Company will consider raising additional debt or equity, onfavourable terms, to finance its exploration, development, acquisition andproduction of oil and gas reserves.  Cashflow from operations, equity financing and credit facility utilization may notbe sufficient to fund the necessary capital requirements to undertake orcomplete future drilling programs, and if so, there can be no assurance thatadditional debt or equity financing will be available to meet the requirementson acceptable terms.  Neither itsarticles nor by-laws limit the amount of indebtedness that the Company mayincur.  The level of indebtedness of theCompany, from time to time, could impair its ability to obtain additionalfinancing in the future and to take advantage of future business opportunities.

 

*Technology*

 

TheCompany relies on information technology to manage its day-to-day operationsand perform reporting obligations, including the preparation of financial statements,reporting to joint venture partners and various governments in relation topayment of royalties and taxes.

 

*Regulatory*

 

Oiland gas operations are subject to extensive controls and regulations imposed byvarious levels of government that may be amended from time to time.  Canadian Superior’s operations may requirelicenses and permits from various governmental authorities.  There can be no assurance that CanadianSuperior will be able to obtain all necessary licenses and permits that may berequired to carry out exploration and development of its projects.

 

*Title toProperties*

 

Although title reviews may beconducted prior to the purchase of most oil and natural gas producingproperties or the commencement of drilling wells, such reviews do not guaranteeor certify that an unforeseen defect in the chain 

 

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of title will not arise todefeat a claim of Canadian Superior, which could result in a reduction of therevenue received by the Company.

 

*Conflictsof Interest*

 

Certain of the directors andofficers of Canadian Superior are also directors and officers of other oil andgas companies involved in oil and gas exploration and development, and as suchmay, in certain circumstances, have a conflict of interest requiring them toabstain from certain decisions.

 

*Relianceon Key Personnel*

 

Canadian Superior is largelydependent on the performance of its management and key employees.  The Company does not carry any key personinsurance in effect for management or key employees, and therefore, there is arisk that the loss of services of such key personnel could have a materialadverse effect on the Company.  Inaddition, the competition for qualified personnel in the oil and natural gasindustry is intense and there can be no assurance that the Company can continueto attract and retain all personnel necessary to ensure the continuedexploration, development and operation of its business.  Investors must rely on the ability,expertise, judgement, discretion, integrity and good faith of management.

 

**Additionalinformation**

 

Additional informationrelating to Canadian Superior is filed on SEDAR and can be viewed atwww.sedar.com.  Information can also beobtained by contacting the Company at Canadian Superior Energy Inc., Suite 2700,605 – Fifth Avenue S.W., Calgary, Alberta, Canada T2P 3H5 and on the Company’swebsite at www.cansup.com.

 

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