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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

Form 10-Q



|x  |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. 
|-- |  | -----------------------------------------------------------------------------------------
|   |  | For the quarterly period ended September 30, 2003                                        
|  
|or |  |                                                                                          
|  
|o  |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
|   |  | For the transition period from  to                                                       
|  
|   |  | Commission file number 000-30586                                                         

Ivanhoe Energy Inc.(Exact name of registrant as specified in its charter)

|                                                                            |  |                                               
|--------------------------------------------------------------------------- |  | ----------------------------------------------
|Yukon, Canada(State or other jurisdiction of
incorporation or organization) |  | 98-0372413(I.R.S. Employer
Identification No.)

Suite 654  999 Canada Place
Vancouver, British Columbia, Canada
V6C 3E1
(Address of principal executive office)

(604) 688-8323
(registrants telephone number, including area code)

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report:
Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.

|     |  |    
|---- |  | ---
|Yesþ |  | Noo

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)

|     |  |    
|---- |  | ---
|Yesþ |  | Noo

The number of shares of the registrants capital stock outstanding as of
September 30, 2003 was 156,692,939 Common Shares, no par value.



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TABLE OF CONTENTS

|        |  |                                                                                                                              |  |     
|------- |  | ---------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                                              |  | Page
|        |  |                                                                                                                              |  |     
|PART I  |  | Financial Information                                                                                                        |  |     
|        |  |                                                                                                                              |  |     
|Item 1. |  | Financial Statements                                                                                                         |  |     
|        |  |                                                                                                                              |  |     
|        |  | Consolidated Balance Sheets at September 30, 2003
(unaudited) and December 31, 2002                                          |  | 3   
|        |  |                                                                                                                              |  |     
|        |  | Unaudited Consolidated Statements of Loss and Deficit
for the Three and Nine-Month Periods Ended
September 30, 2003 and 2002 |  | 4   
|        |  |                                                                                                                              |  |     
|        |  | Unaudited Consolidated Statements of Cash Flow for the
Three and Nine-Month Periods Ended September 30,
2003 and 2002        |  | 5   
|        |  |                                                                                                                              |  |     
|        |  | Notes to the Unaudited Consolidated Financial
Statements                                                                     |  | 6   
|        |  |                                                                                                                              |  |     
|Item 2. |  | Managements Discussion and Analysis of Financial Condition
and Results of Operations                                        |  | 13  
|        |  |                                                                                                                              |  |     
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risks                                                                  |  | 18  
|        |  |                                                                                                                              |  |     
|Item 4. |  | Controls and Procedures                                                                                                      |  | 18  
|        |  |                                                                                                                              |  |     
|PART II |  | Other Information                                                                                                            |  |     
|        |  |                                                                                                                              |  |     
|Item 1. |  | Legal Proceedings                                                                                                            |  | 19  
|        |  |                                                                                                                              |  |     
|Item 2. |  | Changes in Securities and Use of Proceeds                                                                                    |  | 19  
|        |  |                                                                                                                              |  |     
|Item 3. |  | Defaults Upon Senior Securities                                                                                              |  | 19  
|        |  |                                                                                                                              |  |     
|Item 4. |  | Submission of Matters To a Vote of Securityholders                                                                           |  | 19  
|        |  |                                                                                                                              |  |     
|Item 5. |  | Other Information                                                                                                            |  | 19  
|        |  |                                                                                                                              |  |     
|Item 6. |  | Exhibits and Reports on Form 8-K                                                                                             |  | 19  

2



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Part I  Financial Information

Item 1. Financial Statements

IVANHOE ENERGY INC.
Consolidated Balance Sheets
(stated in thousands of U.S. Dollars)

|                                                                               |  |                    |         |                   |  |   |         |  
|------------------------------------------------------------------------------ |  | ------------------ | ------- | ----------------- |  | - | ------- | -
|                                                                               |  | September 30, 2003 |         | December 31, 2002
|                                                                               |  |                    |         |                  
|                                                                               |  | (unaudited)        |         |                   |  |  
|Assets                                                                         |  |                    |         |                   |  |   |         |  
|Current Assets                                                                 |  |                    |         |                   |  |   |         |  
|Cash and cash equivalents                                                      |  | $                  | 7,686   |                   |  | $ | 3,980   |  
|Accounts receivable                                                            |  |                    | 2,562   |                   |  |   | 2,519   |  
|Other                                                                          |  |                    | 128     |                   |  |   | 691     |  
|                                                                               |  |                    |         |                   |  |   |         |  
|                                                                               |  |                    | 10,376  |                   |  |   | 7,190   |  
|Long term assets                                                               |  |                    | 599     |                   |  |   | 462     |  
|Oil and gas properties, equipment and GTL investments, net                     |  |                    | 102,529 |                   |  |   | 99,436  |  
|                                                                               |  |                    |         |                   |  |   |         |  
|                                                                               |  | $                  | 113,504 |                   |  | $ | 107,088 |  
|                                                                               |  |                    |         |                   |  |   |         |  
|Liabilities and Shareholders Equity                                           |  |                    |         |                   |  |   |         |  
|Current Liabilities                                                            |  |                    |         |                   |  |   |         |  
|Accounts payable and accrued liabilities                                       |  | $                  | 4,880   |                   |  | $ | 4,797   |  
|Notes payable                                                                  |  |                    | 1,000   |                   |  |   | 500     |  
|Convertible debenture                                                          |  |                    |        |                   |  |   | 1,000   |  
|                                                                               |  |                    |         |                   |  |   |         |  
|                                                                               |  |                    | 5,880   |                   |  |   | 6,297   |  
|                                                                               |  |                    |         |                   |  |   |         |  
|Asset retirement obligation                                                    |  |                    | 510     |                   |  |   | 243     |  
|                                                                               |  |                    |         |                   |  |   |         |  
|Shareholders Equity                                                           |  |                    |         |                   |  |   |         |  
|Share capital, issued 156,693,000 common shares;
December 31, 2002 144,466,000 |  |                    | 144,347 |                   |  |   | 131,112 |  
|Deficit                                                                        |  |                    | (37,233 | )                 |  |   | (30,564 | )
|                                                                               |  |                    |         |                   |  |   |         |  
|                                                                               |  |                    | 107,114 |                   |  |   | 100,548 |  
|                                                                               |  |                    |         |                   |  |   |         |  
|                                                                               |  | $                  | 113,504 |                   |  | $ | 107,088 |  
|                                                                               |  |                    |         |                   |  |   |         |  

(see accompanying notes)

3



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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Loss and Deficit
(stated in thousands of U.S. Dollars except share and per share data)

|                                                 |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 
|------------------------------------------------ |  | ------------------- | ------- | ------------------- |  | ---- | ------- | ---- |  | - | ------- |  |  | - | ------- | 
|                                                 |  | Three Months        |         | Nine Months        
|                                                 |  | Ended September 30, |         | Ended September 30,
|                                                 |  |                     |         |                    
|                                                 |  | 2003                |         | 2002                |  | 2003 |         | 2002
|                                                 |  |                     |         |                     |  |      |         |     
|Revenue                                          |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 
|Oil and gas revenue                              |  | $                   | 2,405   |                     |  | $    | 2,328   |      |  | $ | 7,269   |  |  | $ | 5,972   | 
|Interest income                                  |  |                     | 18      |                     |  |      | 22      |      |  |   | 60      |  |  |   | 94      | 
|                                                 |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 
|                                                 |  |                     | 2,423   |                     |  |      | 2,350   |      |  |   | 7,329   |  |  |   | 6,066   | 
|                                                 |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 
|Expenses                                         |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 
|Operating costs                                  |  |                     | 1,148   |                     |  |      | 1,070   |      |  |   | 2,993   |  |  |   | 2,938   | 
|General and administrative                       |  |                     | 1,566   |                     |  |      | 1,095   |      |  |   | 5,098   |  |  |   | 4,083   | 
|Depletion and depreciation                       |  |                     | 915     |                     |  |      | 813     |      |  |   | 2,586   |  |  |   | 2,301   | 
|Write down of GTL investments                    |  |                     |        |                     |  |      | 2,436   |      |  |   | 3,321   |  |  |   | 2,436   | 
|                                                 |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 
|                                                 |  |                     | 3,629   |                     |  |      | 5,414   |      |  |   | 13,998  |  |  |   | 11,758  | 
|                                                 |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 
|Net Loss                                         |  |                     | 1,206   |                     |  |      | 3,064   |      |  |   | 6,669   |  |  |   | 5,692   | 
|Deficit, beginning of period                     |  |                     | 36,027  |                     |  |      | 26,123  |      |  |   | 30,564  |  |  |   | 23,495  | 
|                                                 |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 
|Deficit, end of period                           |  | $                   | 37,233  |                     |  | $    | 29,187  |      |  | $ | 37,233  |  |  | $ | 29,187  | 
|                                                 |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 
|Net Loss per share                               |  | $                   | 0.01    |                     |  | $    | 0.02    |      |  | $ | 0.05    |  |  | $ | 0.04    | 
|                                                 |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 
|Weighted Average Number of Shares (in thousands) |  |                     | 151,088 |                     |  |      | 144,631 |      |  |   | 146,940 |  |  |   | 141,546 | 
|                                                 |  |                     |         |                     |  |      |         |      |  |   |         |  |  |   |         | 

(see accompanying notes)

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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Cash Flow
(stated in thousands of U.S. Dollars)

|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|---------------------------------------------------------------- |  | ------------------- | ------ | ------------------- |  | ---- | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                                 |  | Three Months        |        | Nine Months        
|                                                                 |  | Ended September 30, |        | Ended September 30,
|                                                                 |  |                     |        |                    
|                                                                 |  | 2003                |        | 2002                |  | 2003 |        | 2002
|                                                                 |  |                     |        |                     |  |      |        |     
|Operating Activities                                             |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Net (loss)                                                       |  | $                   | (1,206 | )                   |  | $    | (3,064 | )    |  | $ | (6,669 | ) |  | $ | (5,692  | )
|Items not requiring use of cash:                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Depletion and depreciation                                       |  |                     | 915    |                     |  |      | 813    |      |  |   | 2,586  |   |  |   | 2,301   |  
|Write down of GTL investments                                    |  |                     |       |                     |  |      | 2,436  |      |  |   | 3,321  |   |  |   | 2,436   |  
|Changes in non-cash working capital items                        |  |                     | (1,258 | )                   |  |      | (757   | )    |  |   | 1,101  |   |  |   | (3,133  | )
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|                                                                 |  |                     | (1,549 | )                   |  |      | (572   | )    |  |   | 339    |   |  |   | (4,088  | )
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Investing Activities                                             |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Capital spending                                                 |  |                     | (4,097 | )                   |  |      | (4,639 | )    |  |   | (8,870 | ) |  |   | (16,471 | )
|Proceeds from sale of assets                                     |  |                     |       |                     |  |      | 2,560  |      |  |   |       |   |  |   | 3,760   |  
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|                                                                 |  |                     | (4,097 | )                   |  |      | (2,079 | )    |  |   | (8,870 | ) |  |   | (12,711 | )
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Financing Activities                                             |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Shares issued on private placements                              |  |                     | 11,603 |                     |  |      |       |      |  |   | 11,603 |   |  |   | 9,964   |  
|Shares issued on exercise of options                             |  |                     | 134    |                     |  |      |       |      |  |   | 134    |   |  |   | 119     |  
|Proceeds from notes                                              |  |                     |       |                     |  |      |       |      |  |   | 1,750  |   |  |   |        |  
|Payments of notes                                                |  |                     | (1,250 | )                   |  |      |       |      |  |   | (1,250 | ) |  |   |        |  
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|                                                                 |  |                     | 10,487 |                     |  |      |       |      |  |   | 12,237 |   |  |   | 10,083  |  
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Increase (decrease) in cash and cash equivalents, for
the period |  |                     | 4,842  |                     |  |      | (2,651 | )    |  |   | 3,706  |   |  |   | (6,716  | )
|Cash and cash equivalents, beginning of period                   |  |                     | 2,845  |                     |  |      | 5,632  |      |  |   | 3,980  |   |  |   | 9,697   |  
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Cash and cash equivalents, end of period                         |  | $                   | 7,686  |                     |  | $    | 2,981  |      |  | $ | 7,686  |   |  | $ | 2,981   |  
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Included in the above are the following:                         |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Taxes paid                                                       |  | $                   |       |                     |  | $    |       |      |  | $ | 6      |   |  | $ |        |  
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Interest paid                                                    |  | $                   | 43     |                     |  | $    | 21     |      |  | $ | 85     |   |  | $ | 56      |  
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Decrease (increase) in non-cash working capital items:           |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|Accounts receivable                                              |  | $                   | (423   | )                   |  | $    | (853   | )    |  | $ | (43    | ) |  | $ | (960    | )
|Other current assets                                             |  |                     | 51     |                     |  |      | (503   | )    |  |   | 563    |   |  |   | (356    | )
|Accounts payable and accrued liabilities                         |  |                     | (886   | )                   |  |      | 599    |      |  |   | 581    |   |  |   | (1,817  | )
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  
|                                                                 |  | $                   | (1,258 | )                   |  | $    | (757   | )    |  | $ | 1,101  |   |  | $ | (3,133  | )
|                                                                 |  |                     |        |                     |  |      |        |      |  |   |        |   |  |   |         |  

(see accompanying notes)

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Notes to the Consolidated Financial Statements
September 30, 2003
(all tabular amounts are expressed in thousands of U.S. dollars except per share data)
(Unaudited)

1.     GENERAL

The unaudited consolidated financial statements have been prepared on a basis
consistent with the accounting principles and policies reflected in the
December 31, 2002 consolidated financial statements, except for a change in the
policy of accounting for asset retirement obligations, and should be read in
conjunction therewith. The December 31, 2002 consolidated balance sheet was
derived from the audited consolidated financial statements, but does not
include all disclosures required by generally accepted accounting principles
(GAAP) in Canada and the U.S. All adjustments which are, in the opinion of
management, necessary for a fair presentation of the Companys financial
position as at September 30, 2003 and December 31, 2002 and the results of
operations and cash flows for the three and nine-month periods ended September
30, 2003 and 2002 have been included. The results of operations and cash flows
are not necessarily indicative of the results for a full year.

The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts and other disclosures in these
consolidated financial statements. Actual results may differ from those
estimates.

2.     SIGNIFICANT ACCOUNTING POLICIES

Asset Retirement

Prior to January 2003, the Company had estimated its future site restoration
and abandonment costs associated with its oil and gas properties and amortized
this estimate to operations using the unit-of-production method based upon
estimated proved reserves. The provision was included with depletion and
depreciation expense.

For fiscal years beginning after January 1, 2004, Canadian GAAP requires that
asset retirement costs and liabilities associated with site restoration and
abandonment of tangible long-lived assets be initially measured at a fair value
which approximates the cost a third party would incur in performing the tasks
necessary to retire such assets. The fair value is recognized in the financial
statements at the present value of expected future cash outflows to satisfy the
obligation. Subsequent to the initial measurement, the effect of the passage of
time on the liability for the asset retirement obligation (accretion expense)
and the amortization of the asset retirement cost are recognized in the results
of operations.

The Company has elected early implementation of this accounting policy.
Accordingly, effective January 1, 2003, the Company changed its accounting
policy to capitalize asset retirement costs as part of the carrying value of
its oil and gas properties and adjusted the amount of its site restoration
liability to the present value of the liability for the corresponding asset
retirement obligation as of this date. The Company has adopted the policy
without retroactive adjustment of prior years because implementation of this
change had an immaterial effect on the Companys financial position and results
of operations in prior years or in the current period (See notes 3 and 10).

6



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U.S. GAAP for asset retirement obligations conforms in all material respects to
Canadian GAAP. Implementation for U.S. GAAP is required for fiscal years
beginning after June 2002.

The asset retirement costs are being amortized using the unit of production
method based on estimated proved reserves. The amortization expenses and
accretion of the liability for the asset retirement obligation are included
with depletion and depreciation expense.

3.     OIL AND GAS PROPERTIES

Oil and gas properties, equipment and gas-to-liquids (GTL) investments are
net of accumulated depletion and depreciation of $9.0 million and $6.6 million
as well as a provision for impairment of oil and gas properties of $14.0
million as at September 30, 2003 and December 31, 2002, respectively.

Effective January 2003, the Company capitalized $0.3 million as a result of
implementation of a new accounting policy on asset retirement obligations. For
the three and nine-month periods ended September 30, 2003 $0.1 million of asset
retirement costs were capitalized.

In May 2003, discussions were terminated between Qatar Petroleum and the
Company in the negotiation of an agreement to develop a block in Qatars North
Field to produce natural gas liquids and GTL products. As a result, the Company
took a charge to income of $3.3 million for the write down of its investment in
Qatar.

4.     DERIVATIVE ACTIVITIES

The Companys results of operations are sensitive mainly to fluctuations in oil
and natural gas prices. The Company may periodically use different types of
derivative instruments to manage its exposure to price volatility, thus
mitigating fluctuations in commodity-related cash flows.

The Company entered into a costless collar derivative to hedge its cash flow
from the sale of 500 barrels of oil production per day over two six-month
periods starting October 2002 and June 2003. The derivatives have ceiling
prices of $30.45 and $28.95 per barrel for the June 2003 and October 2002
contracts, respectively, and a floor price of $24.00 per barrel using WTI as
the index traded on the NYMEX. Gains and losses on derivatives are recognized
in earnings as they are realized. For the nine-month period ended September 30,
2003, the Company had realized losses of $0.2 million on derivative
transactions. The Company had no realized derivative losses for the three-month
period ended September 30, 2003. The derivative losses are included in oil and
gas revenue.

7



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5.     SEGMENT INFORMATION

The following tables present the Companys interim segment information for the
three and nine-month periods ended September 30:

|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |        | 
|----------------------------------- | -------------- | - | -------------------------------------- | ----- | ----- | - | ----- | ----- | ---- | - | ----- | ----- | ----- | - | ----- | ------ |  | - | ----- | ----- |  | - | ------ | ------ | 
|                                    |                |   | Nine Month Periods Ended September 30,
|                                    |                |   |                                       
|                                    |                |   | 2003                                   |       | 2002 
|                                    |                |   |                                        |       |      
|                                    |                |   | U.S.                                   |       | China |   | Total |       | U.S. |   | China |       | Total
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |      
|Oil and gas revenue                 |                | $ | 4,074                                  |       |       | $ | 3,195 |       |      | $ | 7,269 |       |       | $ | 3,759 |        |  | $ | 2,213 |       |  | $ | 5,972  |       
|Interest income                     |                |   | 60                                     |       |       |   |      |       |      |   | 60    |       |       |   | 94    |        |  |   |      |       |  |   | 94     |       
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       
|                                    |                |   | 4,134                                  |       |       |   | 3,195 |       |      |   | 7,329 |       |       |   | 3,853 |        |  |   | 2,213 |       |  |   | 6,066  |       
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       
|Operating costs                     |                |   | 1,643                                  |       |       |   | 1,350 |       |      |   | 2,993 |       |       |   | 1,880 |        |  |   | 1,058 |       |  |   | 2,938  |       
|Depletion and depreciation          |                |   | 1,576                                  |       |       |   | 1,010 |       |      |   | 2,586 |       |       |   | 1,415 |        |  |   | 886   |       |  |   | 2,301  |       
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       
|                                    |                |   | 3,219                                  |       |       |   | 2,360 |       |      |   | 5,579 |       |       |   | 3,295 |        |  |   | 1,944 |       |  |   | 5,239  |       
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       
|Segment income before the following |                | $ | 915                                    |       |       | $ | 835   |       |      |   | 1,750 |       |       | $ | 558   |        |  | $ | 269   |       |  |   | 827    |       
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       
|Write down of GTL investments       |                |   |                                        |       |       |   |       |       |      |   | 3,321 |       |       |   |       |        |  |   |       |       |  |   | 2,436  |       
|General and administrative          |                |   |                                        |       |       |   |       |       |      |   | 5,098 |       |       |   |       |        |  |   |       |       |  |   | 4,083  |       
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       
|Net loss                            |                |   |                                        |       |       |   |       |       |      | $ | 6,669 |       |       |   |       |        |  |   |       |       |  | $ | 5,692  |       
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       
|Capital Expenditures:               |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       
|                                    | Oil and gas    |   | $                                      | 5,500 |       |   | $     | 2,835 |      |   | $     | 8,335 |       |   | $     | 12,270 |  |   | $     | 2,486 |  |   | $      | 14,756 | 
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       
|                                    | Gas-to-liquids |   |                                        |       |       |   |       |       |      |   |       | 535   |       |   |       |        |  |   |       |       |  |   |        | 1,715  | 
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       
|                                    |                |   |                                        |       |       |   |       |       |      | $ | 8,870 |       |       |   |       |        |  |   |       |       |  | $ | 16,471 |       
|                                    |                |   |                                        |       |       |   |       |       |      |   |       |       |       |   |       |        |  |   |       |       |  |   |        |       

|                     |                |  |                          |        |                         |  |   |        |  |   |         |        |  |  |   |        |  |  |   |        |  |   |         |        | 
|-------------------- | -------------- |  | ------------------------ | ------ | ----------------------- |  | - | ------ |  | - | ------- | ------ |  |  | - | ------ |  |  | - | ------ |  | - | ------- | ------ | 
|                     |                |  | As at September 30, 2003 |        | As at December 31, 2002
|                     |                |  |                          |        |                        
|Identifiable Assets: |                |  |                          |        |                         |  |   |        |  |   |         |        |  |  |   |        |  |  |   |        |  |   |         |       
|                     | Oil & gas      |  | $                        | 71,801 |                         |  | $ | 27,432 |  |   | $       | 99,233 |  |  | $ | 64,448 |  |  | $ | 25,281 |  |   | $       | 89,729 | 
|                     |                |  |                          |        |                         |  |   |        |  |   |         |        |  |  |   |        |  |  |   |        |  |   |         |       
|                     | Gas-to-liquids |  |                          |        |                         |  |   |        |  |   |         | 14,271 |  |  |   |        |  |  |   |        |  |   |         | 17,359 | 
|                     |                |  |                          |        |                         |  |   |        |  |   |         |        |  |  |   |        |  |  |   |        |  |   |         |       
|                     |                |  |                          |        |                         |  |   |        |  | $ | 113,504 |        |  |  |   |        |  |  |   |        |  | $ | 107,088 |       
|                     |                |  |                          |        |                         |  |   |        |  |   |         |        |  |  |   |        |  |  |   |        |  |   |         |       

|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|----------------------------------- |  | --------------------------------------- | ----- | ----- |  | ----- | ----- | ---- |  | ----- | ----- | ----- |  | - | ----- |  |  | - | --- |  |  | - | ----- | 
|                                    |  | Three Month Periods Ended September 30,
|                                    |  |                                        
|                                    |  | 2003                                    |       | 2002 
|                                    |  |                                         |       |      
|                                    |  | U.S.                                    |       | China |  | Total |       | U.S. |  | China |       | Total
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |      
|Oil and gas revenue                 |  | $                                       | 1,385 |       |  | $     | 1,020 |      |  | $     | 2,405 |       |  | $ | 1,454 |  |  | $ | 874 |  |  | $ | 2,328 | 
|Interest income                     |  |                                         | 18    |       |  |       |      |      |  |       | 18    |       |  |   | 22    |  |  |   |    |  |  |   | 22    | 
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|                                    |  |                                         | 1,403 |       |  |       | 1,020 |      |  |       | 2,423 |       |  |   | 1,476 |  |  |   | 874 |  |  |   | 2,350 | 
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|Operating costs                     |  |                                         | 630   |       |  |       | 518   |      |  |       | 1,148 |       |  |   | 710   |  |  |   | 360 |  |  |   | 1,070 | 
|Depletion and depreciation          |  |                                         | 588   |       |  |       | 327   |      |  |       | 915   |       |  |   | 518   |  |  |   | 295 |  |  |   | 813   | 
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|                                    |  |                                         | 1,218 |       |  |       | 845   |      |  |       | 2,063 |       |  |   | 1,228 |  |  |   | 655 |  |  |   | 1,883 | 
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|Segment income before the following |  | $                                       | 185   |       |  | $     | 175   |      |  |       | 360   |       |  | $ | 248   |  |  | $ | 219 |  |  |   | 467   | 
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|Write down of GTL investments       |  |                                         |       |       |  |       |       |      |  |       |      |       |  |   |       |  |  |   |     |  |  |   | 2,436 | 
|General and administrative          |  |                                         |       |       |  |       |       |      |  |       | 1,566 |       |  |   |       |  |  |   |     |  |  |   | 1,095 | 
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|Net loss                            |  |                                         |       |       |  |       |       |      |  | $     | 1,206 |       |  |   |       |  |  |   |     |  |  | $ | 3,064 | 
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|Capital Expenditures:               |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|Oil and gas                         |  | $                                       | 2,831 |       |  | $     | 1,144 |      |  | $     | 3,975 |       |  | $ | 3,515 |  |  | $ | 758 |  |  | $ | 4,273 | 
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|Gas-to-liquids                      |  |                                         |       |       |  |       |       |      |  |       | 122   |       |  |   |       |  |  |   |     |  |  |   | 366   | 
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 
|                                    |  |                                         |       |       |  |       |       |      |  | $     | 4,097 |       |  |   |       |  |  |   |     |  |  | $ | 4,639 | 
|                                    |  |                                         |       |       |  |       |       |      |  |       |       |       |  |   |       |  |  |   |     |  |  |   |       | 

8



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##### 



6.     SHARE CAPITAL

Following is a summary of the changes in share capital and stock options
outstanding for the nine-month period ended September 30, 2003:

|                           |                                         |  |               |       |               |   |             |        |        |  |                |      |   |   |                 |      | 
|-------------------------- | --------------------------------------- |  | ------------- | ----- | ------------- | - | ----------- | ------ | ------ |  | -------------- | ---- | - | - | --------------- | ---- | 
|                           |                                         |  | Common Shares |       | Stock Options
|                           |                                         |  |               |       |              
|                           |                                         |  |               |       |               |   |             |        |        |  |                |      |   |   | WeightedAverage
|                           |                                         |  | Number        |       |               |   |             |        | Number |  | Exercise Price
|                           |                                         |  | (thousands)   |       | Amount        |   | (thousands) |        | Cdn.$ 
|                           |                                         |  |               |       |               |   |             |        |       
|Balance December 31, 2002  |                                         |  | 144,466       |       |               | $ | 131,112     |        |        |  | 10,265         |      |   | $ | 2.69            |     
|                           | Shares issued on private placements     |  |               | 9,529 |               |   |             | 11,603 |        |  |                |      |   |   |                 |      | 
|                           | Shares issued for service               |  |               | 578   |               |   |             | 498    |        |  |                |      |   |   |                 |      | 
|                           | Shares issued for convertible debenture |  |               | 2,000 |               |   |             | 1,000  |        |  |                |      |   |   |                 |      | 
|                           | Shares issued on exercise of options    |  |               | 120   |               |   |             | 134    |        |  |                | (120 | ) |   | $               | 1.52 | 
|                           | Options issued                          |  |               |       |               |   |             |        |        |  |                | 150  |   |   | $               | 1.42 | 
|                           | Options cancelled/forfeited             |  |               |       |               |   |             |        |        |  |                | (584 | ) |   | $               | 4.48 | 
|                           |                                         |  |               |       |               |   |             |        |        |  |                |      |   |   |                 |     
|Balance September 30, 2003 |                                         |  | 156,693       |       |               | $ | 144,347     |        |        |  | 9,711          |      |   | $ | 2.58            |     
|                           |                                         |  |               |       |               |   |             |        |        |  |                |      |   |   |                 |     

During the three-month period ended September 30, 2003, the Company closed two
special warrant financings to advance its ongoing E&P and EOR activities in the
U.S. and China, to continue its ongoing pursuit of GTL project opportunities,
to pay down or restructure certain business indebtedness and for general
working capital purposes. The financings consisted of 6.0 million special
warrants at U.S.$1.00 per special warrant and 3.5 million special warrants at
U.S.$1.70 per special warrant. Each special warrant entitled the holder to
acquire one common share and one purchase warrant at no additional cost. Two
purchase warrants are exercisable to purchase an additional common share. Six
million purchase warrants are exercisable at U.S.$1.00 until August 2004 and at
U.S.$1.10 until August 2005 and 3.5 million purchase warrants are exercisable
at U.S.$1.70 until August 2004 and at U.S.$1.87 until August 2005. The net
proceeds from the special warrant financing have been apportioned to the common
shares. No amounts have been apportioned to the purchase warrants.

In October 2003, the Company arranged a special warrant financing to advance
the Companys worldwide oil and gas operations, GTL initiatives, and for
general corporate purposes. The financing consists of 3.125 million special
warrants at US$4.00 per special warrant. Each special warrant entitles the
holder to acquire one common share and one purchase warrant at no additional
cost. Two and a half purchase warrants are exercisable to purchase an
additional common share at U.S.$4.00 until the first anniversary of closing and
at U.S.$4.30 until the second anniversary of closing.

7.     STOCK BASED COMPENSATION

The Company accounts for its stock-based compensation plans using the
intrinsic-value of the options. Under this method, compensation costs are not
recognized in the financial statements for share options granted to employees
and directors when issued at market value. Had stock based compensation expense
been determined based on the fair value at the option grant date, the Companys
net loss and net loss per share for the three and nine-month periods ended
September 30 would have been as follows:

9



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##### 



|                             |  |                     |       |                     |  |      |       |      |  |   |       |  |  |   |       | 
|---------------------------- |  | ------------------- | ----- | ------------------- |  | ---- | ----- | ---- |  | - | ----- |  |  | - | ----- | 
|                             |  | Three Months        |       | Nine Months        
|                             |  | Ended September 30, |       | Ended September 30,
|                             |  |                     |       |                    
|                             |  | 2003                |       | 2002                |  | 2003 |       | 2002
|                             |  |                     |       |                     |  |      |       |     
|Pro forma net loss           |  | $                   | 1,316 |                     |  | $    | 3,269 |      |  | $ | 6,999 |  |  | $ | 6,064 | 
|                             |  |                     |       |                     |  |      |       |      |  |   |       |  |  |   |       | 
|Pro forma net loss per share |  | $                   | 0.01  |                     |  | $    | 0.02  |      |  | $ | 0.05  |  |  | $ | 0.04  | 
|                             |  |                     |       |                     |  |      |       |      |  |   |       |  |  |   |       | 

The foregoing is calculated in accordance with the Black-Scholes options
pricing model, using the following data and assumptions: 72% price volatility,
using the prior two years weekly average prices of the Companys common shares;
expected dividend yield of 0%; option terms to expiry of 5 years, as defined by
the option agreements; risk-free rate of return as of the date of the grant of
4.4% to 5.6%, based on one and five year Canada Bond yields.

8.     NOTES PAYABLE

In February 2003, the Company obtained a bank facility for up to $5.0 million
to drill 30 new oil wells and upgrade surface transmission and steam injection
facilities in the southern expansion of South Midway. Interest only is payable
in the first year of the loan at 0.25% above the banks prime rate or 2.75%
over the London Inter-Bank Offered Rate (LIBOR) at the option of the Company.
After the first year, the loan is repayable over three years plus interest at
0.50% above the banks prime rate or 3.0% over LIBOR, at the option of the
Company. The loan is secured by all the Companys rights and interests in the
South Midway properties. In June 2003, the Company borrowed $1.0 million
against the bank loan for a six-month fixed LIBOR rate of 3.87%.

As at September 30, 2003, the Company repaid $1.25 million in related party
loans plus accrued interest and has negotiated a revolving credit facility to
re-establish or extend that loan in the future as needs arise.

9.     CONVERTIBLE DEBENTURE

In June 2003, the lender elected to convert the $1.0 million unsecured
convertible debenture into 2 million of the Companys common shares at $0.50
per share. All accrued interest on the debenture has been paid as of the
conversion date.

10.   ASSET RETIREMENT OBLIGATION

Effective January 2003, the Company changed its policy on accounting for
liabilities associated with site restoration and abandonment of its oil and gas
properties. The undiscounted amount of expected cash flows required to settle
the asset retirement obligations is estimated at $1.0 million to be settled
over a twelve-year period starting in 2010. The liability for the expected cash
flows, as reflected in the financial statements, has been discounted at 7%.
Implementation of the policy resulted in an additional provision for asset
retirement of $0.2 million. For the three and ninemonth periods ended
September 30, 2003 $0.1 million was added to the carrying amount of the asset
retirement obligations.

11.   CLAIMS AND CONTINGENCIES

The Company and Aera Energy LLC (Aera) are in a dispute concerning certain
costs and cost overruns incurred during the drilling of the Northwest Lost
Hills # 1-22 well in the amount of approximately $2.7 million. Aera had
initiated arbitration proceedings over the issues. Agreement has been reached
over payment of the disputed amounts. The Company paid $1.5
million, of the amount owed, in September 2003 and intends to pay the remaining
$1.2 million on or before December 1, 2003. Discussions aimed at resolving
certain other issues between the Company and Aera, in respect of the Aera
Exploration Agreement, remain ongoing.

10



---



##### 



12.   ADDITIONAL DISCLOSURE REQUIRED UNDER U.S. GAAP

The consolidated financial statements have been prepared in accordance with
Canadian GAAP, which conforms to U.S. GAAP except as below:

Consolidated Balance Sheets

|              |                                                                     |   |                          |        |                         |   |             |        |               |   |        |        |   |   |         |        |  
|------------- | ------------------------------------------------------------------- | - | ------------------------ | ------ | ----------------------- | - | ----------- | ------ | ------------- | - | ------ | ------ | - | - | ------- | ------ | -
|              |                                                                     |   | As at September 30, 2003 |        | As at December 31, 2002
|              |                                                                     |   |                          |        |                        
|              |                                                                     |   | Oil and Gas              |        | Shareholders'           |   | Oil and Gas |        | Shareholders'
|              |                                                                     |   | Properties               |        | Equity                  |   | Properties  |        | Equity       
|              |                                                                     |   |                          |        |                         |   |             |        |              
|Canadian GAAP |                                                                     | $ | 102,529                  |        |                         | $ | 107,114     |        |               | $ | 99,436 |        |   | $ | 100,548 |       
|              | Adjustment to ascribed value of shares
issued for royalty interests |   |                          | 1,358  |                         |   |             | 1,358  |               |   |        | 1,358  |   |   |         | 1,358  |  
|              | Impairment provision for China properties, net                      |   |                          | (9,856 | )                       |   |             | (9,856 | )             |   |        | (9,922 | ) |   |         | (9,922 | )
|              | Write off of GTL development costs                                  |   |                          | (3,817 | )                       |   |             | (3,817 | )             |   |        | (6,603 | ) |   |         | (6,603 | )
|              | OCI  derivative mark-to-market adjustment                          |   |                          |       |                         |   |             | (30    | )             |   |        |       |   |   |         | (102   | )
|              |                                                                     |   |                          |        |                         |   |             |        |               |   |        |        |   |   |         |       
|U.S. GAAP     |                                                                     | $ | 90,214                   |        |                         | $ | 94,769      |        |               | $ | 84,269 |        |   | $ | 85,279  |       
|              |                                                                     |   |                          |        |                         |   |             |        |               |   |        |        |   |   |         |       

Under U.S. GAAP, changes in the fair value of derivative instruments that meet
specific cash-flow hedge accounting criteria are reported in other
comprehensive income (OCI). The gains and losses on cash-flow derivative
transactions that are reported in OCI are reclassified to
earnings in the period in which earnings are affected by changes in the cash
flow of the underlying hedged item. The Companys derivative contracts qualify
for hedge accounting treatment.

Under U.S. GAAP, the transfer of deficit to share capital, which occurred in
1999, would not be recognized and Shareholders Equity would be presented as
follows:

|                                            |  |               |          |              |  |   |          |  
|------------------------------------------- |  | ------------- | -------- | ------------ |  | - | -------- | -
|                                            |  | September 30, |          | December 31,
|                                            |  | 2003          |          | 2002        
|                                            |  |               |          |             
|Share capital (including adjustments above) |  | $             | 220,160  |              |  | $ | 206,925  |  
|Deficit (including adjustments above)       |  |               | (125,361 | )            |  |   | (121,544 | )
|Accumulated other comprehensive income      |  |               | (30      | )            |  |   | (102     | )
|                                            |  |               |          |              |  |   |          |  
|                                            |  | $             | 94,769   |              |  | $ | 85,279   |  
|                                            |  |               |          |              |  |   |          |  

|                                                                 |                                        |   |                                        |        |           |   |         |       |           |   |       |       |   |   |         |      | 
|---------------------------------------------------------------- | -------------------------------------- | - | -------------------------------------- | ------ | --------- | - | ------- | ----- | --------- | - | ----- | ----- | - | - | ------- | ---- | 
|                                                                 |                                        |   | Nine Month Periods Ended September 30,
|                                                                 |                                        |   |                                       
|                                                                 |                                        |   | 2003                                   |        | 2002     
|                                                                 |                                        |   |                                        |        |          
|                                                                 |                                        |   | Net                                    |        | Net Loss  |   | Net     |       | Net Loss 
|                                                                 |                                        |   | Loss                                   |        | Per Share |   | Loss    |       | Per Share
|                                                                 |                                        |   |                                        |        |           |   |         |       |          
|Canadian GAAP                                                    |                                        | $ | 6,669                                  |        |           | $ | 0.05    |       |           | $ | 5,692 |       |   | $ | 0.04    |     
|                                                                 | Depletion adjustment  China           |   |                                        | (66    | )         |   |         |      |           |   |       | (56   | ) |   |         |     | 
|                                                                 | GTL development costs written off, net |   |                                        | (2,786 | )         |   |         | (0.02 | )         |   |       | 1,279 |   |   |         | 0.01 | 
|                                                                 |                                        |   |                                        |        |           |   |         |       |           |   |       |       |   |   |         |     
|U.S. GAAP                                                        |                                        | $ | 3,817                                  |        |           | $ | 0.03    |       |           | $ | 6,915 |       |   | $ | 0.05    |     
|                                                                 |                                        |   |                                        |        |           |   |         |       |           |   |       |       |   |   |         |     
|Weighted Average Number of Shares under
U.S. GAAP
(in thousands) |                                        |   |                                        |        |           |   | 146,940 |       |           |   |       |       |   |   | 141,546 |     
|                                                                 |                                        |   |                                        |        |           |   |         |       |           |   |       |       |   |   |         |     

11



---



##### 



|                                                                 |                                        |   |                                         |     |           |   |         |   |           |   |       |     |   |   |         |   | 
|---------------------------------------------------------------- | -------------------------------------- | - | --------------------------------------- | --- | --------- | - | ------- | - | --------- | - | ----- | --- | - | - | ------- | - | 
|                                                                 |                                        |   | Three Month Periods Ended September 30,
|                                                                 |                                        |   |                                        
|                                                                 |                                        |   | 2003                                    |     | 2002     
|                                                                 |                                        |   |                                         |     |          
|                                                                 |                                        |   | Net                                     |     | Net Loss  |   | Net     |   | Net Loss 
|                                                                 |                                        |   | Loss                                    |     | Per Share |   | Loss    |   | Per Share
|                                                                 |                                        |   |                                         |     |           |   |         |   |          
|Canadian GAAP                                                    |                                        | $ | 1,206                                   |     |           | $ | 0.01    |   |           | $ | 3,064 |     |   | $ | 0.02    |  
|                                                                 | Depletion adjustment  China           |   |                                         | (22 | )         |   |         |  |           |   |       | (18 | ) |   |         |  | 
|                                                                 | GTL development costs written off, net |   |                                         | 122 |           |   |         |  |           |   |       | (70 | ) |   |         |  | 
|                                                                 |                                        |   |                                         |     |           |   |         |   |           |   |       |     |   |   |         |  
|U.S. GAAP                                                        |                                        | $ | 1,306                                   |     |           | $ | 0.01    |   |           | $ | 2,976 |     |   | $ | 0.02    |  
|                                                                 |                                        |   |                                         |     |           |   |         |   |           |   |       |     |   |   |         |  
|Weighted Average Number of Shares under
U.S. GAAP
(in thousands) |                                        |   |                                         |     |           |   | 151,088 |   |           |   |       |     |   |   | 144,631 |  
|                                                                 |                                        |   |                                         |     |           |   |         |   |           |   |       |     |   |   |         |  

Stock Based Compensation

Had compensation expense been determined based on fair value of options issued
to employees and directors at the stock option grant date, consistent with the
method of SFAS No. 123, Accounting for Stock-Based Compensation, the Companys
net loss and net loss per share would have been as follows:

|                                                                 |                                                                                         |   |                     |      |                     |   |         |      |      |   |         |       |  |   |         |       | 
|---------------------------------------------------------------- | --------------------------------------------------------------------------------------- | - | ------------------- | ---- | ------------------- | - | ------- | ---- | ---- | - | ------- | ----- |  | - | ------- | ----- | 
|                                                                 |                                                                                         |   | Three Months        |      | Nine Months        
|                                                                 |                                                                                         |   | Ended September 30, |      | Ended September 30,
|                                                                 |                                                                                         |   |                     |      |                    
|                                                                 |                                                                                         |   | 2003                |      | 2002                |   | 2003    |      | 2002
|                                                                 |                                                                                         |   |                     |      |                     |   |         |      |     
|Net loss under U.S. GAAP                                         |                                                                                         | $ | 1,306               |      |                     | $ | 2,976   |      |      | $ | 3,817   |       |  | $ | 6,915   |      
|                                                                 | Stock-based compensation expense
determined under fair-value method for
employee awards |   |                     | 428  |                     |   |         | 475  |      |   |         | 1,235 |  |   |         | 1,410 | 
|                                                                 |                                                                                         |   |                     |      |                     |   |         |      |      |   |         |       |  |   |         |      
|Pro forma net loss under U.S. GAAP                               |                                                                                         | $ | 1,734               |      |                     | $ | 3,451   |      |      | $ | 5,052   |       |  | $ | 8,325   |      
|                                                                 |                                                                                         |   |                     |      |                     |   |         |      |      |   |         |       |  |   |         |      
|Basic loss per common share under U.S. GAAP:                     |                                                                                         |   |                     |      |                     |   |         |      |      |   |         |       |  |   |         |      
|                                                                 | As reported                                                                             |   | $                   | 0.01 |                     |   | $       | 0.02 |      |   | $       | 0.03  |  |   | $       | 0.05  | 
|                                                                 | Pro forma                                                                               |   | $                   | 0.01 |                     |   | $       | 0.02 |      |   | $       | 0.03  |  |   | $       | 0.06  | 
|Weighted Average Number of Shares under
U.S. GAAP (in thousands) |                                                                                         |   | 151,088             |      |                     |   | 144,631 |      |      |   | 146,940 |       |  |   | 141,546 |      

Impact of New and Pending U.S. GAAP Accounting Standards

In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. SFAS No. 149 amends and
clarifies financial accounting and reporting for derivative instruments. This
statement is effective for contracts entered into or modified after June 30,
2003. Management does not believe that SFAS No. 149 will have a material impact
on the Companys financial statements.

12



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Item 2.     Managements Discussion and Analysis of Financial Condition
and Results of Operations

Forward-Looking Statements

With the exception of historical information, certain matters discussed in this
Form 10-Q are forward looking statements that involve risks and uncertainties.
Certain statements contained in this Form 10-Q, including statements which may
contain words such as could, should, expect, believe, will and
similar expressions and statements relating to matters that are not historical
facts are forward-looking statements. Such statements involve known and unknown
risks and uncertainties which may cause our actual results, performances or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Although
we believe that our expectations are based on reasonable assumptions, we can
give no assurance that our goals will be achieved. Important factors that
could cause actual results to differ materially from those in the
forward-looking statements herein include, but are not limited to, our ability
to raise capital as and when required, the timing and extent of changes in
prices for oil and gas, competition, environmental risks, drilling and
operating risks, uncertainties about the estimates of reserves and the
potential success of gas-to-liquids development technology, the prices of goods
and services, the availability of drilling rigs and other support services,
legislative and government regulations, political and economic factors in
countries in which we operate and implementation of our capital investment
program.

The following should be read in conjunction with the Companys consolidated
financial statements contained herein and in the Form 10-K for the year ended
December 31, 2002, along with Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in such Form 10-K. Any terms
used but not defined in the following discussion have the same meaning given to
them in the Form 10-K.

Results of Operations

For the three-month period ended September 30, 2003, the net loss was $1.2
million ($0.01 per share) compared to a net loss of $3.1 million ($0.02 per
share) for the same period in 2002. The net loss for the nine-month period
ended September 30, 2003 was $6.7 million ($0.05 per share) compared to a net
loss of $5.7 million ($0.04 per share) for the same period in 2002. The net
loss for the nine-month periods ended September 30, 2003 and 2002 includes a
$3.3 million ($0.02 per share) and a $2.4 million ($0.02 per share),
respectively, for write downs of our investments in GTL projects.

Cash from operating activities for the three and nine-month periods ended
September 30, 2003 was a $1.5 million deficit and a $0.3 million surplus,
respectively, compared to cash deficits from operating activities of $0.6
million and $4.1 million for the same periods in 2002. Our cash position
increased $3.7 million for the first nine months of 2003 primarily due to net
proceeds received from private placements of $11.6 million and net loan
proceeds of $0.5 million. This is partially offset by $8.9 million of capital
spending for the first nine-month period of 2003. Cash for the comparable
period in 2002 decreased $6.7 million primarily due to $16.5 million of capital
spending and $4.1 million cash deficit from operating activities, partially
offset by the $3.8 million proceeds from the sale of our Daqing and Spraberry
assets and the net proceeds from a private placement of $10.0 million.

13



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##### 



Production and Operations

Oil and gas revenues for the three and nine-month periods ended September 30,
2003 were $2.4 million and $7.3 million, respectively. This represents an
increase of $0.1 million and $1.3 million from the comparable periods in 2002
primarily as a result of an increase in oil and gas prices. Oil and gas prices
were up $1.55/boe and $5.23/boe for the three and nine-month periods ended
September 30, 2003, respectively, compared to the same periods in 2002.

For the three and nine-month periods ended September 30, 2003, net production
from the U.S was down 8% and 6%, respectively, compared to the same periods in
2002 due to the loss in production from Spraberry as a result of the sale of
certain Spraberry interests in the second half of 2002. This loss was partially
offset by an increase in production from South Midway of 28% and 38% for the
three and nine-month periods ended September 30, 2003, respectively, as a
result of the success of the cyclic steaming operations and increased drilling
in 2002 and the first nine months of 2003. Production levels in China are up 6%
for the three and nine-month periods ended September 30, 2003 primarily due to
an increase in production related to our Daqing royalty interest.

Operating costs per boe in the U.S. are up 6% and 4% for the three and
nine-month periods ended September 30, 2003, respectively, compared to the same
periods in 2002. Operating costs per boe in South Midway increased 7% and 29%
for the three and nine-month periods ended September 30, 2003, respectively, as
a result of additional costs associated with the full-scale cyclic steaming
program. These increases were mostly offset by a decrease in operating costs
per boe at Spraberry due to a maturing of those operations and continuing cost
controls. U.S. production taxes and engineering support are down 21% and 24%
for the three and nine-month periods, respectively, compared to the same
periods in 2002 as a result of the sale of certain Spraberry interests in the
second half of 2002. U.S. depletion costs per boe increased 27% and 21% for the
three and nine-month periods ended September 30, 2003, respectively, compared
to the same periods in 2002 primarily due to the partial impairment of
Northwest Lost Hills and certain other California and Texas properties during
the first nine months of 2003. This increase in depletion costs has been
partially offset as a result of an increase in proved reserves at South Midway.

Operating costs per boe in China increased 39% and 38% for the three and
nine-month periods ended September 30, 2003, respectively, compared to the same
periods in 2002 as a result of increased workover, routine maintenance and
utility costs in 2003. Depletion per boe in China increased 5% and 9% for the
three and nine-month periods ended September 30, 2003, respectively, compared
to the same periods in 2002 primarily due to a downward revision of our proved
reserves at Dagang as a result of increased oil prices.

14



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##### 



Production and operating information are detailed below:

|                             |                      |   |                                        |         |       |         |       |         |      |   |       |         |       |   |       |         |  |   |       |         |  |   |       |         | 
|---------------------------- | -------------------- | - | -------------------------------------- | ------- | ----- | ------- | ----- | ------- | ---- | - | ----- | ------- | ----- | - | ----- | ------- |  | - | ----- | ------- |  | - | ----- | ------- | 
|                             |                      |   | Nine Month Periods Ended September 30,
|                             |                      |   |                                       
|                             |                      |   | 2003                                   |         | 2002 
|                             |                      |   |                                        |         |      
|                             |                      |   | U.S.                                   |         | China |         | Total |         | U.S. |   | China |         | Total
|                             |                      |   |                                        |         |       |         |       |         |      |   |       |         |      
|Net Production:              |                      |   |                                        |         |       |         |       |         |      |   |       |         |       |   |       |         |  |   |       |         |  |   |       |        
|                             | BOE                  |   |                                        | 159,713 |       |         |       | 111,606 |      |   |       | 271,319 |       |   |       | 170,774 |  |   |       | 106,303 |  |   |       | 277,077 | 
|                             | BOE/day for the year |   |                                        | 585     |       |         |       | 409     |      |   |       | 994     |       |   |       | 626     |  |   |       | 389     |  |   |       | 1,015   | 
|                             |                      |   |                                        |         |       |         |       |         |      |   |       |         |       |   |       |         |  |   |       |         |  |   |       |        
|                             |                      |   |                                        |         |       | Per BOE |       |         |      |   |       |         |       |   |       | Per BOE |  |   |       |        
|                             |                      |   |                                        |        
|Oil and gas revenue          |                      | $ | 25.51                                  |         |       | $       | 28.63 |         |      | $ | 26.79 |         |       | $ | 22.01 |         |  | $ | 20.82 |         |  | $ | 21.55 |        
|                             |                      |   |                                        |         |       |         |       |         |      |   |       |         |       |   |       |         |  |   |       |         |  |   |       |        
|Operating costs              |                      |   | 7.29                                   |         |       |         | 8.18  |         |      |   | 7.65  |         |       |   | 7.04  |         |  |   | 5.93  |         |  |   | 6.61  |        
|Production taxes             |                      |   | 0.94                                   |         |       |         |      |         |      |   | 0.55  |         |       |   | 1.42  |         |  |   |      |         |  |   | 0.88  |        
|Engineering support          |                      |   | 2.07                                   |         |       |         | 3.92  |         |      |   | 2.83  |         |       |   | 2.55  |         |  |   | 4.02  |         |  |   | 3.11  |        
|                             |                      |   |                                        |         |       |         |       |         |      |   |       |         |       |   |       |         |  |   |       |         |  |   |       |        
|                             |                      |   | 10.30                                  |         |       |         | 12.10 |         |      |   | 11.03 |         |       |   | 11.01 |         |  |   | 9.95  |         |  |   | 10.60 |        
|Net Revenue before depletion |                      |   | 15.21                                  |         |       |         | 16.53 |         |      |   | 15.76 |         |       |   | 11.00 |         |  |   | 10.87 |         |  |   | 10.95 |        
|Depletion                    |                      |   | 9.45                                   |         |       |         | 9.05  |         |      |   | 9.29  |         |       |   | 7.80  |         |  |   | 8.34  |         |  |   | 8.01  |        
|                             |                      |   |                                        |         |       |         |       |         |      |   |       |         |       |   |       |         |  |   |       |         |  |   |       |        
|Net Revenue from operations  |                      | $ | 5.76                                   |         |       | $       | 7.48  |         |      | $ | 6.47  |         |       | $ | 3.20  |         |  | $ | 2.53  |         |  | $ | 2.94  |        
|                             |                      |   |                                        |         |       |         |       |         |      |   |       |         |       |   |       |         |  |   |       |         |  |   |       |         | 

|                             |                      |   |                                         |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |        | 
|---------------------------- | -------------------- | - | --------------------------------------- | ------ | ----- | ------- | ----- | ------ | ---- | - | ----- | ------ | ----- | - | ----- | ------- |  | - | ----- | ------ |  | - | ----- | ------ | 
|                             |                      |   | Three Month Periods Ended September 30,
|                             |                      |   |                                        
|                             |                      |   | 2003                                    |        | 2002 
|                             |                      |   |                                         |        |      
|                             |                      |   | U.S.                                    |        | China |         | Total |        | U.S. |   | China |        | Total
|                             |                      |   |                                         |        |       |         |       |        |      |   |       |        |      
|Net Production:              |                      |   |                                         |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       
|                             | BOE                  |   |                                         | 53,929 |       |         |       | 37,850 |      |   |       | 91,779 |       |   |       | 58,566  |  |   |       | 35,858 |  |   |       | 94,424 | 
|                             | BOE/day for the year |   |                                         | 586    |       |         |       | 411    |      |   |       | 998    |       |   |       | 637     |  |   |       | 390    |  |   |       | 1,026  | 
|                             |                      |   |                                         |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       
|                             |                      |   |                                         |        |       | Per BOE |       |        |      |   |       |        |       |   |       | Per BOE |  |   |       |       
|                             |                      |   |                                         |       
|Oil and gas revenue          |                      | $ | 25.69                                   |        |       | $       | 26.96 |        |      | $ | 26.21 |        |       | $ | 24.83 |         |  | $ | 24.38 |        |  | $ | 24.66 |       
|                             |                      |   |                                         |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       
|Operating costs              |                      |   | 8.32                                    |        |       |         | 8.77  |        |      |   | 8.51  |        |       |   | 7.86  |         |  |   | 6.31  |        |  |   | 7.27  |       
|Production taxes             |                      |   | 0.91                                    |        |       |         |      |        |      |   | 0.53  |        |       |   | 1.79  |         |  |   |      |        |  |   | 1.11  |       
|Engineering support          |                      |   | 2.45                                    |        |       |         | 4.91  |        |      |   | 3.46  |        |       |   | 2.48  |         |  |   | 3.71  |        |  |   | 2.94  |       
|                             |                      |   |                                         |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       
|                             |                      |   | 11.68                                   |        |       |         | 13.68 |        |      |   | 12.50 |        |       |   | 12.13 |         |  |   | 10.02 |        |  |   | 11.32 |       
|Net Revenue before depletion |                      |   | 14.01                                   |        |       |         | 13.28 |        |      |   | 13.71 |        |       |   | 12.70 |         |  |   | 14.36 |        |  |   | 13.34 |       
|Depletion                    |                      |   | 10.47                                   |        |       |         | 8.65  |        |      |   | 9.72  |        |       |   | 8.25  |         |  |   | 8.24  |        |  |   | 8.25  |       
|                             |                      |   |                                         |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |       
|Net Revenue from operations  |                      | $ | 3.54                                    |        |       | $       | 4.63  |        |      | $ | 3.99  |        |       | $ | 4.45  |         |  | $ | 6.12  |        |  | $ | 5.09  |       
|                             |                      |   |                                         |        |       |         |       |        |      |   |       |        |       |   |       |         |  |   |       |        |  |   |       |        | 

General and Administrative

For the three and nine-month periods ended September 30, 2003, general and
administrative costs increased by $0.5 million and $1.0 million, respectively,
compared to the same periods in 2002 primarily due to a decrease in such costs
being allocated to our exploration, development and GTL activities due to a
reduction in capital spending activity during 2003.

Exploration and Development Activities

Spending on these activities for the three and nine-month periods ended
September 30, 2003 was $4.1 million and $8.9 million, a decrease of $0.5
million and $7.6 million, respectively, over the amounts spent during the
comparable periods in 2002. These decreases are primarily due to the completion
of our exploration drilling at Northwest Lost Hills #1-22 in August 2002 and a
cessation of our Spraberry drilling program partially offset by an increase in
spending in our South Midway field and continuation of seismic reprocessing in
our Zitong project in China.

15



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In the South Midway expansion project, the first phase of drilling, which
included 15 producing wells in the second and third quarters of 2003, has been
completed. It is anticipated that the second phase will begin by the end of
the first quarter of 2004 with the drilling of 13 additional wells. Peak
production for the project is expected to occur in the fourth quarter of 2004.
In addition to the recent drilling activity, facilities have been expanded to
gather, test and cycle-steam the new production. A steam generator was
purchased and installed to accelerate the steam stimulation of producing wells
and reduce leasing costs. Net proved reserves in the southern expansion area
have increased 0.5 million barrels in 2003 as a result of the continued success
with cyclic steam injection and drilling program.

A contract was signed in the second quarter with Ensyn Petroleum International
(Ensyn), to test their Rapid Thermal Pyrolysis (RPT) technology to upgrade
the quality of heavy oil by producing lighter, more valuable crude oil. The
process also has the potential of supplying heat to generate steam for the
cyclic process being used in South Midway. We have the rights to test our
crude oil in a 250 barrels per day demonstration plant, which is currently
under construction. The test should be completed by the first quarter of 2004
and provide enough data to give a clear indication of the capital and operating
costs that could be used for scale up as well as to demonstrate the upgraded
product value.

We expect to begin drilling the first well on our Citrus prospect in the San
Joaquin Valley California in November. The Citrus #1 well will appraise the
potential for light oil and natural gas in the Upper Antelope Shale directly
offsetting existing production by other companies. The Upper Antelope Shale is
located at a depth of approximately 7,000 feet and additional potential may
exist in the deeper Antelope and McDonald Shale formations down to 9,000 feet.
The Citrus prospect will test the southern extension of the currently producing
Lost Hills field, which is unrelated to the deep-gas prospect at Northwest Lost
Hills located 15 miles to the north. We acquired an interest in over 1,700
potentially productive acres offsetting Lost Hills field where there has been
recent development drilling. We will be the operator and hold leases ranging
between 83% and 100% in the prospect leases. We expect to have the well
completed and tested by year-end. The horizontal drilling techniques planned
for the well at Citrus are similar to those that have successfully developed
other Antelope Shale reservoirs in the nearby North Shafter and Rose fields. If
further development is warranted, we estimate that there could be up to 20
additional horizontal drilling locations at Citrus. We may also plan future
wells to test deeper formations.

Northwest Lost Hills # 1-22 has been temporarily abandoned until we can
identify one or more partners to share the costs of the testing program.
Temporary abandonment will permit reentering the well at a later date for
testing. Until it is tested, the wells commercial potential, if any, cannot be
determined.

In East Texas, contracts to farm-out shallow zones at Creslenn Ranch and at
Lone Star have been completed. Testing of the Pettit at Creslenn Ranch has
begun with the completion of one
well as a commercial gas producer and testing of the second well is currently
underway. If successful, up to five additional wells could be drilled at
Creslenn Ranch. At Lone Star, testing of the Cotton Valley and Travis Peak
zones will commence during the last two weeks of October 2003. We continue our
search for farm-out partners in our other East Texas prospects in return for
exploration drilling commitments.

Final approval of our Dagang Overall Development Program was received in the
second quarter 2003. Pre-drilling activities commenced in the third quarter of
2003 and the first of our development wells was spud in September. Plans are
to spud a total of six surface holes and to complete drilling of two
development wells prior to year-end. The surface holes are being drilled as
planned in order to facilitate the introduction of an advanced drilling fluid
system. At

16



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our Zitong project, we continue the seismic reprocessing activities
as part of the first three-year exploration period and will commence a new
geophysical survey prior to year-end.

Gas-to-Liquids Activities

Spending on GTL projects for the three and nine-month periods ended September
30, 2003 was $0.1 million and $0.5 million a decrease of $0.2 million and $1.2
million, respectively, over the amounts spent during the comparable periods in
2002. These decreases are due to the completion of technical and commercial
feasibility studies for both the Qatar and Egypt projects. In May 2003,
negotiations with Qatar Petroleum to construct and operate a GTL production
facility, terminated without reaching an agreement and we wrote down $3.3
million of our GTL investments for expenditures incurred in connection with
these negotiations.

In Egypt, proposals for alternative plant designs are being reviewed by the
Ministry of Petroleum. We are pursuing a GTL fuels, specialty products and
lubricants plant with Syntroleum. Discussions are ongoing that could lead to an
agreement with the Ministry of Petroleum and the initiation of a
commercialization study for a 45,000-barrel-per-day GTL plant.

In July 2003, we signed an agreement with Repsol-YPF Bolivia S.A. and
Syntroleum for a study to build a 90,000-barrel-per-day GTL plant in Bolivia.
The commercialization study is underway including an analysis of alternative
plant sites, transportation logistics and project economics. Upon determination
that the project is economically feasible and meets financing requirements, the
three parties will enter into discussions regarding a joint-venture agreement
prior to undertaking definitive engineering and design work.

Enhanced Oil Recovery (EOR)

We continue to pursue EOR opportunities in South America and the Middle East
including in the country of Iraq where our executives have had prior experience
and have recently opened up communications. Our contract with Ensyn gives us
exclusive rights to apply their RPT technology in two prospective foreign
countries where heavy oil fields have been proven but not fully developed.

Liquidity and Capital Resources

As at September 30, 2003 our cash position was $7.7 million as a result of net
bank and related party financings of $0.5 million and closing two special
warrant financings in the third quarter of 2003, which generated net proceeds
of $11.6 million. Our cash position and liquidity will be further enhanced from
the sale of 3.125 million shares for $12.5 million through a special warrant
financing we arranged in late October 2003. Additionally, we spent $2.0 million
on the expansion of our South Midway field during the third quarter of 2003, which
we could have but did not draw from our bank financing for the development of this
project. We plan to draw down such funds before the end of 2003.

In October 2003, we filed a base shelf prospectus with Canadian securities
regulatory authorities and a shelf registration statement with the U.S.
Securities and Exchange Commission to qualify for potential future sale in
Canada and the U.S. up to $100 million of various types of securities,
including common shares, preferred shares, warrants and debt securities. These
shelf filings will give us greater flexibility to fund our expansion and
capital programs and will allow us to take advantage of a broader range of
financing opportunities on a more timely basis.

17



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##### 



Our current cash position will enable us to execute our short-term objectives
of exploration in East Texas and Zitong and to initiate the development
programs in our Citrus and Dagang fields as well as further our GTL
initiatives.. We are also looking at acquisitions of proven and probable
reserves as a means of supplementing our growth strategy. However, to complete
the development of these fields and to execute our growth strategy and other
short and medium term objectives we will require additional funding. We plan to
seek such financing through a combination of equity, convertible debentures,
debt, mezzanine financing and joint venture partner participation. We cannot
assure you that we will be successful in raising the additional funds necessary
or securing joint venture partners to complete our expansion and capital
programs. If we are unsuccessful, we will have to prioritize such programs,
which may result in delaying and potentially losing some valuable business
opportunities.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

In June 2003 we took steps to mitigate fluctuations in our cash flows as a
result of changes in oil prices by entering into a costless collar hedge with a
ceiling price of $30.45 per barrel and a floor price of $24.00 per barrel using
WTI as the index traded on the NYMEX. The hedge is on the first 500 barrels of
oil produced per day for a six-month period starting June 2003.

Item 4.   Controls and Procedures

The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys CEO and CFO,
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to the 1934 Securities Exchange Act. Based
upon that evaluation, the CEO and CFO concluded that, as of September 30, 2003,
the Companys disclosure controls and procedures are effective in timely
alerting them to material information required to be included in the Companys
periodic SEC filings relating to the Company (including its consolidated
subsidiaries). There were no significant changes in the Companys internal
control over financial reporting or in other factors that could significantly
affect its internal controls during the period ended September 30, 2003, nor
any significant deficiencies or material weaknesses in such internal controls
requiring corrective actions. As a result, no corrective actions were taken.

18



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##### 



Part II  Other Information

Item 1.   Legal Proceedings:

This item incorporates by reference the information regarding legal proceedings
in Note 11 to the consolidated financial statements in Part I of this Form
10-Q.

Item 2.   Changes in Securities and Use of Proceeds: None

Item 3.   Defaults Upon Senior Securities: None

Item 4.   Submission of Matters To a Vote of Securityholders: None

Item 5.   Other Information: None

Item 6.   Exhibits and Reports on Form 8-K

(a)   Exhibits

|        |  |                                                                                                           
|------- |  | ----------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                           
|Number  |  | Description                                                                                               
|        |  |                                                                                                           
|31.1    |  | Certification by the Chief Executive Officer Relating to Internal
Disclosure Controls and Procedures      
|        |  |                                                                                                           
|31.2    |  | Certification by the Chief Financial Officer Relating to Internal
Disclosure Controls and Procedures      
|        |  |                                                                                                           
|32.1    |  | Certification by the Chief Executive Officer Relating to a Periodic
Report Containing Financial Statements
|        |  |                                                                                                           
|32.2    |  | Certification by the Chief Financial Officer Relating to a Periodic
Report Containing Financial Statements

(b)   Reports on Form 8-K.

None

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.

|                                                            |  | 
|----------------------------------------------------------- |  | 
|IVANHOE ENERGY INC.                                         |  | 
|                                                            |  | 
|                                                            |  | 
|By: /s/ John OKeefe                                        |  | 
|                                                            |  | 
|Name: John OKeefe                                          |  | 
|Title: Executive Vice-President and Chief Financial Officer |  | 

Dated: November 5, 2003

19



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INDEX TO EXHIBITS

|        |  |                                                                                                           
|------- |  | ----------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                           
|Number  |  | Description                                                                                               
|        |  |                                                                                                           
|31.1    |  | Certification by the Chief Executive Officer Relating to Internal
Disclosure Controls and Procedures      
|        |  |                                                                                                           
|31.2    |  | Certification by the Chief Financial Officer Relating to Internal
Disclosure Controls and Procedures      
|        |  |                                                                                                           
|32.1    |  | Certification by the Chief Executive Officer Relating to a Periodic
Report Containing Financial Statements
|        |  |                                                                                                           
|32.2    |  | Certification by the Chief Financial Officer Relating to a Periodic
Report Containing Financial Statements

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