##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 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(Address of principal executive office)
    
    V6C 3E1(zip code)
 (604) 688-8323  (registrants telephone number, including area code)
 (Former name, former address and former fiscal year, if changed since last report)
  þ o
  o þ o
  o þ




---



##### 



TABLE OF CONTENTS
 PagePART I
    
    Financial InformationItem 1
    
    Financial StatementsUnaudited Condensed Consolidated Balance Sheets as at June 30, 2006
and December 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations and Accumulated
Deficit for the Three-Month and Six-Month Periods Ended June 30, 2006 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flow for the
Three-Month and Six-Month Periods Ended June 30, 2006 and 2005
    
    
    5Notes to the Unaudited Condensed Consolidated Financial
Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    26Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risks
    
    
    41Item 4.
    
    Controls and Procedures
    
    
    41PART II
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    42Item 1A.
    
    Risk Factors
    
    
    42Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    42Item 3.
    
    Defaults Upon Senior Securities
    
    
    42Item 4.
    
    Submission of Matters To a Vote of Securityholders
    
    
    42Item 5.
    
    Other Information
    
    
    42Item 6.
    
    Exhibits
    
    
    42
 2




---



##### 



Part I  Financial Information
 Item 1 Financial Statements
 IVANHOE ENERGY INC.
Unaudited Condensed Consolidated Balance Sheets
 June 30, 2006
    
    
    December 31, 2005AssetsCurrent AssetsCash and cash equivalents
    
    $
    25,808
    
    
    $
    6,724Accounts receivable (net of allowance for
doubtful accounts of $116 and $83 as at June 30,
2006 and December 31, 2005, respectively)
    
    
    7,967
    
    
    
    9,994Prepaid and other current assets
    
    
    391
    
    
    
    33834,166
    
    
    
    17,056Oil and gas properties and investments, net
    
    
    133,130
    
    
    
    119,654Intangible assets  technology
    
    
    102,111
    
    
    
    102,068Long term assets
    
    
    2,367
    
    
    
    2,099$
    271,774
    
    
    $
    240,877Liabilities and Shareholders EquityCurrent LiabilitiesAccounts payable and accrued liabilities
    
    $
    15,179
    
    
    $
    25,791Project advance from partner
    
    
    3,249
    
    
    
    Notes payable  current portion
    
    
    3,730
    
    
    
    1,667Asset retirement obligations  current portion
    
    
    
    
    
    
    95022,158
    
    
    
    28,408Long term debt
    
    
    3,971
    
    
    
    4,972Asset retirement obligations
    
    
    1,525
    
    
    
    830Long term obligation
    
    
    1,900
    
    
    
    1,900Commitments and contingenciesShareholders EquityShare capital, issued 241,173,798 common shares;December 31, 2005 220,779,335 common shares
    
    
    318,673
    
    
    
    291,088Purchase warrants
    
    
    23,955
    
    
    
    5,150Contributed surplus
    
    
    4,664
    
    
    
    3,820Accumulated deficit
    
    
    (105,072
    )
    
    
    (95,291
    )242,220
    
    
    
    204,767$
    271,774
    
    
    $
    240,877
  3




---



##### 



IVANHOE ENERGY INC.  Unaudited Condensed Consolidated Statements of Operations and Accumulated Deficit
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenueOil and gas revenue
    
    $
    12,814
    
    
    $
    6,617
    
    
    $
    22,640
    
    
    $
    12,310Interest income
    
    
    270
    
    
    
    28
    
    
    
    308
    
    
    
    7113,084
    
    
    
    6,645
    
    
    
    22,948
    
    
    
    12,381ExpensesOperating costs
    
    
    3,858
    
    
    
    1,771
    
    
    
    6,574
    
    
    
    3,533General and administrative
    
    
    2,727
    
    
    
    1,506
    
    
    
    4,727
    
    
    
    3,917Business and product development
    
    
    1,454
    
    
    
    1,178
    
    
    
    3,116
    
    
    
    1,897Depletion and depreciation
    
    
    9,189
    
    
    
    2,567
    
    
    
    17,036
    
    
    
    4,774Interest expense and financing costs
    
    
    261
    
    
    
    375
    
    
    
    526
    
    
    
    495Write-down and provision for impairment
    
    
    
    
    
    
    279
    
    
    
    750
    
    
    
    27917,489
    
    
    
    7,676
    
    
    
    32,729
    
    
    
    14,895Net Loss
    
    
    4,405
    
    
    
    1,031
    
    
    
    9,781
    
    
    
    2,514Accumulated Deficit, beginning of period
    
    
    100,667
    
    
    
    83,262
    
    
    
    95,291
    
    
    
    81,779Accumulated Deficit, end of period
    
    $
    105,072
    
    
    $
    84,293
    
    
    $
    105,072
    
    
    $
    84,293Net Loss per share  Basic and Diluted
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.01Weighted Average Number of Shares (in thousands)
    
    
    235,388
    
    
    
    195,200
    
    
    
    229,997
    
    
    
    183,621
  4




---



##### 



IVANHOE ENERGY INC.  Unaudited Condensed Consolidated Statements of Cash Flow
 Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating ActivitiesNet loss
    
    $
    (4,405
    )
    
    $
    (1,031
    )
    
    $
    (9,781
    )
    
    $
    (2,514
    )Items not requiring use of cash:Depletion and depreciation
    
    
    9,189
    
    
    
    2,567
    
    
    
    17,036
    
    
    
    4,774Write-down and provision for impairment
    
    
    
    
    
    
    279
    
    
    
    750
    
    
    
    279Stock based compensation
    
    
    716
    
    
    
    534
    
    
    
    1,069
    
    
    
    830Other
    
    
    409
    
    
    
    24
    
    
    
    507
    
    
    
    40Changes in non-cash working capital items
    
    
    (2,287
    )
    
    
    (499
    )
    
    
    (3,879
    )
    
    
    (744
    )3,622
    
    
    
    1,874
    
    
    
    5,702
    
    
    
    2,665Investing ActivitiesCapital investments
    
    
    (3,710
    )
    
    
    (12,068
    )
    
    
    (8,602
    )
    
    
    (24,355
    )Merger, net of cash acquired
    
    
    
    
    
    
    (9,979
    )
    
    
    
    
    
    
    (9,979
    )Merger and acquisition related costs
    
    
    (325
    )
    
    
    (957
    )
    
    
    (502
    )
    
    
    (1,687
    )Proceeds from sale of assets
    
    
    
    
    
    
    
    
    
    
    5,350
    
    
    
    Advance payments
    
    
    (50
    )
    
    
    (300
    )
    
    
    (50
    )
    
    
    (600
    )Other
    
    
    (60
    )
    
    
    (76
    )
    
    
    (69
    )
    
    
    (76
    )Changes in non-cash working capital items
    
    
    (1,770
    )
    
    
    2,729
    
    
    
    (2,855
    )
    
    
    9,912(5,915
    )
    
    
    (20,651
    )
    
    
    (6,728
    )
    
    
    (26,785
    )Financing ActivitiesShares issued on private placements, net of share issue costs
    
    
    25,315
    
    
    
    10,153
    
    
    
    25,315
    
    
    
    10,153Proceeds from exercise of options and warrants
    
    
    358
    
    
    
    1,690
    
    
    
    449
    
    
    
    1,725Share issue costs on shares issued for Merger
    
    
    
    
    
    
    (93
    )
    
    
    
    
    
    
    (93
    )Proceeds from debt obligations
    
    
    
    
    
    
    2,000
    
    
    
    
    
    
    
    8,000Payments of debt obligations
    
    
    (5,032
    )
    
    
    (417
    )
    
    
    (5,654
    )
    
    
    (833
    )Other
    
    
    
    
    
    
    (163
    )
    
    
    
    
    
    
    (426
    )20,641
    
    
    
    13,170
    
    
    
    20,110
    
    
    
    18,526Increase (decrease) in cash and cash equivalents, for the period
    
    
    18,348
    
    
    
    (5,607
    )
    
    
    19,084
    
    
    
    (5,594
    )Cash and cash equivalents, beginning of period
    
    
    7,460
    
    
    
    9,335
    
    
    
    6,724
    
    
    
    9,322Cash and cash equivalents, end of period
    
    $
    25,808
    
    
    $
    3,728
    
    
    $
    25,808
    
    
    $
    3,728
  5




---



##### 



Notes to the Condensed Consolidated Financial Statements
June 30, 2006
 1. BASIS OF PRESENTATION
 GAAP
  2. SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
 Ensyn Merger Merger Agreement
   3. OIL AND GAS PROPERTIES AND INVESTMENTS
  6




---



##### 



As at June 30, 2006Oil and GasU.S.
    
    
    China
    
    
    GTL
    
    
    EOR
    
    
    TotalOil and Gas Properties:Proved
    
    $
    94,687
    
    
    $
    104,354
    
    
    $
    
    
    
    $
    
    
    
    $
    199,041Unproved
    
    
    11,058
    
    
    
    5,674
    
    
    
    
    
    
    
    
    
    
    
    16,732105,745
    
    
    
    110,028
    
    
    
    
    
    
    
    
    
    
    
    215,773Accumulated depletion
    
    
    (18,355
    )
    
    
    (27,695
    )
    
    
    
    
    
    
    
    
    
    
    (46,050
    )Accumulated provision for impairment
    
    
    (50,350
    )
    
    
    (5,750
    )
    
    
    
    
    
    
    
    
    
    
    (56,100
    )37,040
    
    
    
    76,583
    
    
    
    
    
    
    
    
    
    
    
    113,623GTL and EOR Investments:Feasibility studies and other deferred costs
    
    
    
    
    
    
    
    
    
    
    4,942
    
    
    
    6,655
    
    
    
    11,597Commercial demonstration facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,600
    
    
    
    10,600Accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,893
    )
    
    
    (2,893
    )
    
    
    
    
    
    
    
    4,942
    
    
    
    14,362
    
    
    
    19,304Furniture and equipment
    
    
    487
    
    
    
    107
    
    
    
    
    
    
    
    73
    
    
    
    667Accumulated depreciation
    
    
    (400
    )
    
    
    (46
    )
    
    
    
    
    
    
    (18
    )
    
    
    (464
    )87
    
    
    
    61
    
    
    
    
    
    
    
    55
    
    
    
    203$
    37,127
    
    
    $
    76,644
    
    
    $
    4,942
    
    
    $
    14,417
    
    
    $
    133,130
 As at December 31, 2005Oil and GasU.S.
    
    
    China
    
    
    GTL
    
    
    EOR
    
    
    TotalOil and Gas Properties:Proved
    
    $
    99,721
    
    
    $
    71,760
    
    
    $
    
    
    
    $
    
    
    
    $
    171,481Unproved
    
    
    9,676
    
    
    
    5,320
    
    
    
    
    
    
    
    
    
    
    
    14,996109,397
    
    
    
    77,080
    
    
    
    
    
    
    
    
    
    
    
    186,477Accumulated depletion
    
    
    (15,920
    )
    
    
    (16,036
    )
    
    
    
    
    
    
    
    
    
    
    (31,956
    )Accumulated provision for impairment
    
    
    (50,350
    )
    
    
    (5,000
    )
    
    
    
    
    
    
    
    
    
    
    (55,350
    )43,127
    
    
    
    56,044
    
    
    
    
    
    
    
    
    
    
    
    99,171GTL and EOR Investments:Feasibility studies and other deferred costs
    
    
    
    
    
    
    
    
    
    
    4,570
    
    
    
    6,142
    
    
    
    10,712Commercial demonstration facility
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,599
    
    
    
    9,599
    
    
    
    
    
    
    
    4,570
    
    
    
    15,741
    
    
    
    20,311Furniture and equipment
    
    
    485
    
    
    
    95
    
    
    
    
    
    
    
    15
    
    
    
    595Accumulated depreciation
    
    
    (380
    )
    
    
    (37
    )
    
    
    
    
    
    
    (6
    )
    
    
    (423
    )105
    
    
    
    58
    
    
    
    
    
    
    
    9
    
    
    
    172$
    43,232
    
    
    $
    56,102
    
    
    $
    4,570
    
    
    $
    15,750
    
    
    $
    119,654
  GTL EOR
   7




---



##### 



RTP TM Technology Aera TM RTP TM CDF TM TM TM TM TM
 4. INTANGIBLE ASSETS  TECHNOLOGY
  RTP TM Technology
 TM TM TM
 Syntroleum Master License
 Syntroleum
  5. NOTES PAYABLE
  8




---



##### 



June 30,
    
    
    December 31,2006
    
    
    2005Non-interest bearing promissory note, due 2006 through 2009
    
    $
    6,566
    
    
    $
    Variable rate bank note, 8.375% as at June 30, 2006 and 7.375%
as at December 31, 2005, due 2006 though 2007
    
    
    1,806
    
    
    
    2,6398% promissory note, due 2007
    
    
    
    
    
    
    4,0008,372
    
    
    
    6,639Less:Unamortized discount
    
    
    (671
    )
    
    
    Current maturities
    
    
    (3,730
    )
    
    
    (1,667
    )(4,401
    )
    
    
    (1,667
    )$
    3,971
    
    
    $
    4,972
 Promissory Notes
    Bank Note
  Revolving Line of Credit
   9




---



##### 



2006
    
    $
    2,0642007
    
    
    3,4322008
    
    
    2,4602009
    
    
    416$
    8,372
 6. ASSET RETIREMENT OBLIGATIONS
 TM
 Balance as at December 31, 2005
    
    $
    1,780Liabilities transferred
    
    
    (32
    )Accretion expense
    
    
    34Revisions in estimated cash flows
    
    
    (257
    )Balance as at June 30, 2006
    
    $
    1,525
 7. COMMITMENTS AND CONTINGENCIES
 Zitong Block Exploration Commitment
 Phase 1
 Mitsubishi CNPC Zitong Partners" Phase 2
  10




---



##### 



Long Term Obligation
 TM
 Other Commitments
   8. SHARE CAPITAL
  Common Shares
    
    
    
    
    
    
    Stock OptionsWeightedAverageExerciseNumber
    
    
    
    
    
    
    Contributed
    
    
    Number
    
    
    Price(thousands)
    
    
    Amount
    
    
    Surplus
    
    
    (thousands)
    
    
    Cdn.$Balance December 31, 2005
    
    
    220,779
    
    
    $
    291,088
    
    
    $
    3,820
    
    
    
    10,278
    
    
    $
    2.21Shares issued for:Acquisition of oil and gas assets
    
    
    8,592
    
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    Private placements, net of share issue costs
    
    
    11,400
    
    
    
    6,510
    
    
    
    
    
    
    
    
    
    
    
    Services
    
    
    148
    
    
    
    401
    
    
    
    
    
    
    
    
    
    
    
    Exercise of options
    
    
    255
    
    
    
    674
    
    
    
    (225
    )
    
    
    (255
    )
    
    $
    2.13Options:Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,799
    
    
    $
    3.15Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (401
    )
    
    $
    3.56Stock based compensation
    
    
    
    
    
    
    
    
    
    
    1,069
    
    
    
    
    
    
    
    Balance June 30, 2006
    
    
    241,174
    
    
    $
    318,673
    
    
    $
    4,664
    
    
    
    11,421
    
    
    $
    2.31
 11




---



##### 



Purchase Warrants
  CommonPurchase
    
    
    SharesWarrants
    
    
    Issuable(thousands)Balance December 31, 2005
    
    
    25,469
    
    
    
    21,883Purchase warrants expired
    
    
    (7,173
    )
    
    
    (3,587
    )Private placements
    
    
    11,400
    
    
    
    11,400Balance June 30, 2006
    
    
    29,696
    
    
    
    29,696
    Purchase WarrantsPrice per
    
    
    
    
    
    
    
    
    
    
    Common
    
    
    
    
    
    
    
    
    
    
    ExerciseYear of
    
    Special
    
    
    
    
    
    
    
    
    
    
    Shares
    
    
    
    
    
    
    
    
    
    
    Price perIssue
    
    Warrant
    
    
    Issued
    
    
    Exercisable
    
    
    Issuable
    
    
    Value
    
    
    Expiry Date
    
    
    Share(thousands)
    
    
    ($U.S. 000)2005
    
    Cdn. $3.10
    
    
    4,100
    
    
    
    4,100
    
    
    
    4,100
    
    
    $
    2,412
    
    
    April 2007
    
    Cdn. $3.502005
    
    Cdn. $3.10
    
    
    1,000
    
    
    
    1,000
    
    
    
    1,000
    
    
    
    534
    
    
    July 2007
    
    Cdn. $3.502005
    
    
    U.S. $1.63
    
    
    
    11,196
    
    
    
    11,196
    
    
    
    11,196
    
    
    
    1,891
    
    
    November 2007
    
    
    U.S. $2.502005
    
    
    n/a
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    2,000
    
    
    
    313
    
    
    November 2007
    
    
    U.S. $2.002006
    
    
    U.S. $2.23
    
    
    
    11,400
    
    
    
    11,400
    
    
    
    11,400
    
    
    
    18,805
    
    
    April 2011
    
    
    U.S. $2.6329,696
    
    
    
    29,696
    
    
    
    29,696
    
    
    
    23,955
  B-S
 9. STOCK BASED COMPENSATION
   12




---



##### 



10. PROVISION FOR IMPAIRMENT
 PRC Windfall Levy Measures Windfall Levy
 11. SEGMENT INFORMATION
  Oil and Gas
  GTL
  EOR
 TM TM TM
 Corporate
 .
  13




---



##### 



Three-Month Period Ended June 30, 2006Oil and GasU.S.
    
    
    China
    
    
    GTL
    
    
    EOR
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    3,068
    
    
    $
    9,746
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    12,814Interest income
    
    
    52
    
    
    
    13
    
    
    
    
    
    
    
    
    
    
    
    205
    
    
    
    2703,120
    
    
    
    9,759
    
    
    
    
    
    
    
    
    
    
    
    205
    
    
    
    13,084Operating costs
    
    
    912
    
    
    
    2,946
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,858General and administrative
    
    
    549
    
    
    
    334
    
    
    
    
    
    
    
    
    
    
    
    1,844
    
    
    
    2,727Business and product development
    
    
    
    
    
    
    
    
    
    
    417
    
    
    
    1,037
    
    
    
    
    
    
    
    1,454Depletion and depreciation
    
    
    1,273
    
    
    
    6,239
    
    
    
    2
    
    
    
    1,673
    
    
    
    2
    
    
    
    9,189Interest expense and financing costs
    
    
    67
    
    
    
    61
    
    
    
    
    
    
    
    2
    
    
    
    131
    
    
    
    2612,801
    
    
    
    9,580
    
    
    
    419
    
    
    
    2,712
    
    
    
    1,977
    
    
    
    17,489Net (Income) Loss
    
    $
    (319
    )
    
    $
    (179
    )
    
    $
    419
    
    
    $
    2,712
    
    
    $
    1,772
    
    
    $
    4,405Capital Investments
    
    $
    788
    
    
    $
    1,934
    
    
    $
    155
    
    
    $
    833
    
    
    $
    
    
    
    $
    3,710
 Six-Month Period Ended June 30, 2006Oil and GasU.S.
    
    
    China
    
    
    GTL
    
    
    EOR
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    6,059
    
    
    $
    16,581
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    22,640Interest income
    
    
    66
    
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    227
    
    
    
    3086,125
    
    
    
    16,596
    
    
    
    
    
    
    
    
    
    
    
    227
    
    
    
    22,948Operating costs
    
    
    2,116
    
    
    
    4,458
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,574General and administrative
    
    
    922
    
    
    
    679
    
    
    
    
    
    
    
    
    
    
    
    3,126
    
    
    
    4,727Business and product development
    
    
    
    
    
    
    
    
    
    
    769
    
    
    
    2,347
    
    
    
    
    
    
    
    3,116Depletion and depreciation
    
    
    2,461
    
    
    
    11,663
    
    
    
    5
    
    
    
    2,904
    
    
    
    3
    
    
    
    17,036Interest expense and financing costs
    
    
    129
    
    
    
    106
    
    
    
    
    
    
    
    3
    
    
    
    288
    
    
    
    526Write-downs and provision for impairment
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7505,628
    
    
    
    17,656
    
    
    
    774
    
    
    
    5,254
    
    
    
    3,417
    
    
    
    32,729Net (Income) Loss
    
    $
    (497
    )
    
    $
    1,060
    
    
    $
    774
    
    
    $
    5,254
    
    
    $
    3,190
    
    
    $
    9,781Capital Investments
    
    $
    2,065
    
    
    $
    4,651
    
    
    $
    372
    
    
    $
    1,514
    
    
    $
    
    
    
    $
    8,602Identifiable Assets (As at June 30, 2006)
    
    $
    43,920
    
    
    $
    87,577
    
    
    $
    14,974
    
    
    $
    106,548
    
    
    $
    18,755
    
    
    $
    271,774Identifiable Assets (As at December 31, 2005)
    
    $
    48,070
    
    
    $
    65,020
    
    
    $
    14,609
    
    
    $
    107,869
    
    
    $
    5,309
    
    
    $
    240,877
 14




---



##### 



Three-Month Period Ended June 30, 2005Oil and GasU.S.
    
    
    China
    
    
    GTL
    
    
    EOR
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    3,294
    
    
    $
    3,323
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    6,617Interest income
    
    
    4
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    283,298
    
    
    
    3,324
    
    
    
    
    
    
    
    
    
    
    
    23
    
    
    
    6,645Operating costs
    
    
    1,152
    
    
    
    619
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,771General and administrative
    
    
    258
    
    
    
    137
    
    
    
    
    
    
    
    
    
    
    
    1,111
    
    
    
    1,506Business and product development
    
    
    
    
    
    
    
    
    
    
    319
    
    
    
    859
    
    
    
    
    
    
    
    1,178Depletion and depreciation
    
    
    1,315
    
    
    
    1,237
    
    
    
    3
    
    
    
    9
    
    
    
    3
    
    
    
    2,567Interest expense
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    291
    
    
    
    375Write-downs and provision for impairment
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    2792,809
    
    
    
    1,993
    
    
    
    601
    
    
    
    868
    
    
    
    1,405
    
    
    
    7,676Net (Income) Loss
    
    $
    (489
    )
    
    $
    (1,331
    )
    
    $
    601
    
    
    $
    868
    
    
    $
    1,382
    
    
    $
    1,031Capital Investments
    
    $
    1,722
    
    
    $
    8,700
    
    
    $
    516
    
    
    $
    1,130
    
    
    $
    
    
    
    $
    12,068
 Six-Month Period Ended June 30, 2005Oil and GasU.S.
    
    
    China
    
    
    GTL
    
    
    EOR
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    6,163
    
    
    $
    6,147
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    12,310Interest income
    
    
    10
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    716,173
    
    
    
    6,150
    
    
    
    
    
    
    
    
    
    
    
    58
    
    
    
    12,381Operating costs
    
    
    2,269
    
    
    
    1,264
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,533General and administrative
    
    
    414
    
    
    
    362
    
    
    
    
    
    
    
    
    
    
    
    3,141
    
    
    
    3,917Business and product development
    
    
    
    
    
    
    
    
    
    
    723
    
    
    
    1,174
    
    
    
    
    
    
    
    1,897Depletion and depreciation
    
    
    2,483
    
    
    
    2,271
    
    
    
    6
    
    
    
    11
    
    
    
    3
    
    
    
    4,774Interest expense
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    341
    
    
    
    495Write-downs and provision for impairment
    
    
    
    
    
    
    
    
    
    
    279
    
    
    
    
    
    
    
    
    
    
    
    2795,320
    
    
    
    3,897
    
    
    
    1,008
    
    
    
    1,185
    
    
    
    3,485
    
    
    
    14,895Net (Income) Loss
    
    $
    (853
    )
    
    $
    (2,253
    )
    
    $
    1,008
    
    
    $
    1,185
    
    
    $
    3,427
    
    
    $
    2,514Capital Investments
    
    $
    2,529
    
    
    $
    18,251
    
    
    $
    731
    
    
    $
    2,844
    
    
    $
    
    
    
    $
    24,355
 15




---



##### 



12. SUPPLEMENTAL CASH FLOW INFORMATION
  Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Cash paid during the period for:Income taxes
    
    $
    
    
    
    $
    2
    
    
    $
    6
    
    
    $
    4Interest
    
    $
    127
    
    
    $
    14
    
    
    $
    298
    
    
    $
    265Investing and Financing activities, non-cash:Acquisition of oil and gas assetsShares issued
    
    $
    
    
    
    $
    
    
    
    $
    20,000
    
    
    $
    Debt issued
    
    
    
    
    
    
    
    
    
    
    6,547
    
    
    
    Receivable applied to acquisition
    
    
    
    
    
    
    
    
    
    
    1,746
    
    
    
    $
    
    
    
    $
    
    
    
    $
    28,293
    
    
    $
    Shares issued for Merger
    
    $
    
    
    
    $
    75,000
    
    
    $
    
    
    
    $
    75,000Changes in non-cash working capital itemsOperating Activities:Accounts receivable
    
    $
    (835
    )
    
    $
    (275
    )
    
    $
    (1,856
    )
    
    $
    (314
    )Prepaid and other current assets
    
    
    157
    
    
    
    85
    
    
    
    (97
    )
    
    
    (45
    )Accounts payable and accrued liabilities
    
    
    (1,609
    )
    
    
    (309
    )
    
    
    (1,926
    )
    
    
    (385
    )(2,287
    )
    
    
    (499
    )
    
    
    (3,879
    )
    
    
    (744
    )Investing ActivitiesAccounts receivable
    
    
    61
    
    
    
    732
    
    
    
    2,137
    
    
    
    195Prepaid and other current assets
    
    
    59
    
    
    
    127
    
    
    
    44
    
    
    
    350Accounts payable and accrued liabilities
    
    
    (5,139
    )
    
    
    1,870
    
    
    
    (8,285
    )
    
    
    9,367Project advance from partner
    
    
    3,249
    
    
    
    
    
    
    
    3,249
    
    
    
    (1,770
    )
    
    
    2,729
    
    
    
    (2,855
    )
    
    
    9,912$
    (4,057
    )
    
    $
    2,230
    
    
    $
    (6,734
    )
    
    $
    9,168
 13. MERGER AND ACQUISITIONS
 Merger Shares TM
 Richfirst
 16




---



##### 



Sunwing
 CMA
 14. ADDITIONAL DISCLOSURE REQUIRED UNDER U.S. GAAP
  Condensed Consolidated Balance Sheets
 Shareholders Equity and Oil and Gas Properties and Investments
 As at June 30, 2006Oil and Gas
    
    
    Shareholders EquityPropertiesand
    
    
    Share Capital
    
    
    Contributed
    
    
    AccumulatedInvestments
    
    
    and Warrants
    
    
    Surplus
    
    
    Deficit
    
    
    TotalCanadian GAAP
    
    $
    133,130
    
    
    $
    342,628
    
    
    $
    4,664
    
    
    $
    (105,072
    )
    
    $
    242,220Adjustments for:Reduction in stated capital
    
    
    
    
    
    
    74,455
    
    
    
    
    
    
    
    (74,455
    )
    
    
    Accounting for stock based
compensation
    
    
    
    
    
    
    (373
    )
    
    
    (3,375
    )
    
    
    3,748
    
    
    
    Ascribed value of shares
issued for U.S.
royalty interests, net
    
    
    1,358
    
    
    
    1,358
    
    
    
    
    
    
    
    
    
    
    
    1,358Provision for impairment
    
    
    (14,600
    )
    
    
    
    
    
    
    
    
    
    
    (14,600
    )
    
    
    (14,600
    )Depletion adjustments due
to differences in
provision for impairment
    
    
    2,584
    
    
    
    
    
    
    
    
    
    
    
    2,584
    
    
    
    2,584GTL and EOR development
costs expensed
    
    
    (11,597
    )
    
    
    
    
    
    
    
    
    
    
    (11,597
    )
    
    
    (11,597
    )U.S. GAAP
    
    $
    110,875
    
    
    $
    418,068
    
    
    $
    1,289
    
    
    $
    (199,392
    )
    
    $
    219,965
 17




---



##### 



As at December 31, 2005Oil and Gas
    
    
    Shareholders EquityPropertiesand
    
    
    Share Capital
    
    
    Contributed
    
    
    AccumulatedInvestments
    
    
    and Warrants
    
    
    Surplus
    
    
    Deficit
    
    
    TotalCanadian GAAP
    
    $
    119,654
    
    
    $
    296,238
    
    
    $
    3,820
    
    
    $
    (95,291
    )
    
    $
    204,767Adjustments for:Reduction in stated capital
    
    
    
    
    
    
    74,455
    
    
    
    
    
    
    
    (74,455
    )
    
    
    Accounting for stock based
compensation
    
    
    
    
    
    
    (316
    )
    
    
    (3,432
    )
    
    
    3,748
    
    
    
    Ascribed value of shares
issued for U.S
royalty interests, net.
    
    
    1,358
    
    
    
    1,358
    
    
    
    
    
    
    
    
    
    
    
    1,358Provision for impairment
    
    
    (8,150
    )
    
    
    
    
    
    
    
    
    
    
    (8,150
    )
    
    
    (8,150
    )Depletion adjustments due to
differences in
provision for impairment
    
    
    1,562
    
    
    
    
    
    
    
    
    
    
    
    1,562
    
    
    
    1,562GTL and EOR development
costs expensed
    
    
    (10,712
    )
    
    
    
    
    
    
    
    
    
    
    (10,712
    )
    
    
    (10,712
    )U.S. GAAP
    
    $
    103,712
    
    
    $
    371,735
    
    
    $
    388
    
    
    $
    (183,298
    )
    
    $
    188,825
 Shareholders Equity
   FASB SFAS No. 123(R)
 Oil and Gas Properties and Investments
  18




---



##### 



Ceiling Test Impairments
    
    
    (Increase)U.S. GAAP
    
    
    Canadian GAAP
    
    
    DecreaseU.S. PropertiesPrior to 2004
    
    $
    34,000
    
    
    $
    34,000
    
    
    $
    2004
    
    
    15,000
    
    
    
    16,350
    
    
    
    1,3502005
    
    
    2,800
    
    
    
    
    
    
    
    (2,800
    )2006
    
    
    
    
    
    
    
    
    
    
    51,800
    
    
    
    50,350
    
    
    
    (1,450
    )China PropertiesPrior to 2004
    
    
    10,000
    
    
    
    
    
    
    
    (10,000
    )2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    1,700
    
    
    
    5,000
    
    
    
    3,3002006
    
    
    7,200
    
    
    
    750
    
    
    
    (6,450
    )18,900
    
    
    
    5,750
    
    
    
    (13,150
    )$
    70,700
    
    
    $
    56,100
    
    
    $
    (14,600
    )
   Condensed Consolidated Statements of Operations
  19




---



##### 



Three-Month Periods Ended June 30,2006
    
    
    2005Net
    
    
    Net Loss
    
    
    Net
    
    
    Net LossLoss
    
    
    Per Share
    
    
    Loss
    
    
    Per ShareCanadian GAAP
    
    $
    4,405
    
    
    $
    0.02
    
    
    $
    1,031
    
    
    $
    0.01Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    (566
    )
    
    
    Depletion adjustments due to differences in
provision for impairment
    
    
    (737
    )
    
    
    
    
    
    
    (256
    )
    
    
    GTL and EOR development costs expensed, net
    
    
    314
    
    
    
    
    
    
    
    1,355
    
    
    
    U.S. GAAP
    
    $
    3,982
    
    
    $
    0.02
    
    
    $
    1,564
    
    
    $
    0.01Weighted Average Number of Shares under
U.S. GAAP (in thousands)
    
    
    
    
    
    
    235,388
    
    
    
    
    
    
    
    195,200
 Six Month Periods Ended June 30,2006
    
    
    2005Net
    
    
    Net Loss
    
    
    Net
    
    
    Net LossLoss
    
    
    Per Share
    
    
    Loss
    
    
    Per ShareCanadian GAAP
    
    $
    9,781
    
    
    $
    0.04
    
    
    $
    2,514
    
    
    $
    0.01Stock based compensation expense
    
    
    
    
    
    
    
    
    
    
    (798
    )
    
    
    Provision for impairment
    
    
    6,450
    
    
    
    0.03
    
    
    
    
    
    
    
    Depletion adjustments due to differences in
provision for impairment
    
    
    (1,022
    )
    
    
    
    
    
    
    (428
    )
    
    
    GTL and EOR development costs expensed, net
    
    
    885
    
    
    
    
    
    
    
    3,284
    
    
    
    0.02U.S. GAAP
    
    $
    16,094
    
    
    $
    0.07
    
    
    $
    4,572
    
    
    $
    0.03Weighted Average Number of Shares under
U.S. GAAP (in thousands)
    
    
    
    
    
    
    229,997
    
    
    
    
    
    
    
    183,621
    20




---



##### 



Stock Based Compensation
    Expected term (in years)
    
    
    4.00Volatility
    
    
    81.80
    %Dividend Yield
    
    
    0.00
    %Risk-free rate
    
    
    4.20
    %
   Weighted-
    
    
    Weighted-Number
    
    
    Average
    
    
    Average
    
    
    Aggregateof Stock
    
    
    Exercise
    
    
    Contractual
    
    
    IntrinsicOptions
    
    
    Price
    
    
    Term
    
    
    Value(Cdn.$ in(thousands)
    
    
    (Cdn.$)
    
    
    
    
    
    
    thousands)Outstanding at December 31, 2005
    
    
    10,278
    
    
    $
    2.21Granted
    
    
    1,799
    
    
    $
    3.15Exercised
    
    
    (255
    )
    
    $
    2.13Cancelled/forfeited
    
    
    (401
    )
    
    $
    3.56Outstanding at June 30, 2006
    
    
    11,421
    
    
    $
    2.31
    
    
    
    3.0
    
    
    $
    8,889Options exercisable at June 30, 2006
    
    
    7,291
    
    
    $
    1.85
    
    
    
    2.1
    
    
    $
    8,654
   21




---



##### 



Weighted-Number
    
    
    Averageof Stock
    
    
    Grant DateOptions
    
    
    Fair Value(thousands)
    
    
    (Cdn.$)Outstanding at December 31, 2005
    
    
    3,731
    
    
    $
    1.47Granted
    
    
    1,799
    
    
    $
    1.42Vested
    
    
    (1,204
    )
    
    $
    1.30Cancelled/forfeited
    
    
    (196
    )
    
    $
    1.12Outstanding at June 30, 2006
    
    
    4,130
    
    
    $
    1.53
   For the three-month period ended June 30, 2005:Net loss under U.S. GAAP
    
    $
    1,564Stock-based compensation expense determined under the fair value
based method for employee and director awards
    
    
    597Pro forma net loss under U.S. GAAP
    
    $
    2,161Basic loss per common share under U.S. GAAP:As reported
    
    $
    0.01Pro forma
    
    $
    0.01Weighted Average Number of Shares under U.S. GAAP (in thousands)
    
    
    195,200For the six-month period ended June 30, 2005:Net loss under U.S. GAAP
    
    $
    4,572Stock-based compensation expense determined under the fair value
based method for employee and director awards
    
    
    860Pro forma net loss under U.S. GAAP
    
    $
    5,432Basic loss per common share under U.S. GAAP:As reported
    
    $
    0.03Pro forma
    
    $
    0.03Weighted Average Number of Shares under U.S. GAAP (in thousands)
    
    
    183,621
  Pro Forma Effect of Merger and Acquisition
  22




---



##### 



Three-Month Period EndedJune 30, 2005Net
    
    
    Net LossRevenue
    
    
    Loss
    
    
    Per ShareAs reported
    
    $
    6,645
    
    
    $
    1,564
    
    
    $
    0.01Pro forma adjustments
    
    
    6
    
    
    
    550
    
    
    
    $
    6,651
    
    
    $
    2,114
    
    
    $
    0.01Weighted Average Number of
Shares (in thousands)
    
    
    
    
    
    
    
    
    
    
    200,145
 Six-Month Period EndedJune 30, 2005Net
    
    
    Net LossRevenue
    
    
    Loss
    
    
    Per ShareAs reported
    
    $
    12,381
    
    
    $
    4,572
    
    
    $
    0.03Pro forma adjustments
    
    
    736
    
    
    
    730
    
    
    
    $
    13,117
    
    
    $
    5,302
    
    
    $
    0.03Weighted Average Number of
Shares (in thousands)
    
    
    
    
    
    
    
    
    
    
    200,527
  Three Months Ended June 30,2006
    
    
    2005Net (Income)
    
    
    Net (Income)
    
    
    
    
    
    
    Net (Income)
    
    
    Net (Income)Revenue
    
    
    Loss
    
    
    Loss Per Share
    
    
    Revenue
    
    
    Loss
    
    
    Loss Per ShareAs reported
    
    $
    13,084
    
    
    $
    3,982
    
    
    $
    0.02
    
    
    $
    6,645
    
    
    $
    1,564
    
    
    $
    0.02Pro forma
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,918
    
    
    
    (519
    )
    
    
    (0.01
    )$
    13,084
    
    
    $
    3,982
    
    
    $
    0.02
    
    
    $
    8,563
    
    
    $
    1,045
    
    
    $
    0.01Weighted Average Number of
Shares (in thousands)
    
    
    
    
    
    
    
    
    
    
    235,388
    
    
    
    
    
    
    
    
    
    
    
    203,791
 Six Months Ended June 30,2006
    
    
    2005Net (Income)
    
    
    Net (Income)
    
    
    
    
    
    
    Net (Income)
    
    
    Net (Income)Revenue
    
    
    Loss
    
    
    Loss Per Share
    
    
    Revenue
    
    
    Loss
    
    
    Loss Per ShareAs reported
    
    $
    22,948
    
    
    $
    16,094
    
    
    $
    0.07
    
    
    $
    12,381
    
    
    $
    4,572
    
    
    $
    0.02Pro forma
adjustments
    
    
    1,051
    
    
    
    (809
    )
    
    
    
    
    
    
    3,453
    
    
    
    (825
    )
    
    
    $
    23,999
    
    
    $
    15,285
    
    
    $
    0.07
    
    
    $
    15,833
    
    
    $
    3,747
    
    
    $
    0.02Weighted Average Number of
Shares (in thousands)
    
    
    
    
    
    
    
    
    
    
    232,418
    
    
    
    
    
    
    
    
    
    
    
    192,212
 Condensed Consolidated Statements of Cash Flow
  23




---



##### 



Impact of New and Pending Canadian GAAP Accounting Standards
   S.1530 S.3855 S.3865
  Impact of New and Pending U.S. GAAP Accounting Standards
  24




---



##### 



Consolidated Financial Statements
  25




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 TM
   SPECIAL NOTE TO CANADIAN INVESTORS
 National Instrument 51-101  Standards of Disclosure for Oil and Gas Activities Special Note to Canadian Investors
 Unless we indicate otherwise, all dollar amounts ($) are in U.S. dollars, and oil and gas volumes,
reserves and related performance measures are presented on a working-interest, before-royalties
basis.
  Boe
    
    = barrel of oil equivalentBbl
    
    = barrelMBbl
    
    = thousand barrelsMMBbl
    
    = million barrelsMboe
    
    = thousands of barrels of oil equivalentBopd
    
    = barrels of oil per day
 26




---



##### 



Bbls/d
    
    = barrels per dayBoe/d
    
    = barrels of oil equivalent per dayMboe/d
    
    = thousands of barrels of oil equivalent per dayMBbls/d
    
    = thousand barrels per dayMMBls/d
    
    = million barrels per dayMMBtu
    
    = million British thermal unitsMcf
    
    = thousand cubic feetMMcf
    
    = million cubic feetMcf/d
    
    = thousand cubic feet per dayMMcf/d
    
    = million cubic feet per day
 equivalents
  Executive Overview of 2006 Results
  TM
  27




---



##### 



Three-Month Periods Ended June
    
    Six-Month Periods Ended June30,
    
    30,(stated in thousands of U.S. dollars,except per share and production amounts)2006
    
    2005
    
    2006
    
    2005Oil and gas revenue
    
    $
    12,814
    
    
    $
    6,617
    
    
    $
    22,640
    
    
    $
    12,310Net loss
    
    $
    4,405
    
    
    $
    1,031
    
    
    $
    9,781
    
    
    $
    2,514Net loss per share
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.04
    
    
    $
    0.01Average production (Boe/d)
    
    
    2,280
    
    
    
    1,653
    
    
    
    2,147
    
    
    
    1,659Net operating revenue per Boe
    
    $
    43.16
    
    
    $
    32.21
    
    
    $
    41.34
    
    
    $
    29.23Capital investments
    
    $
    3,710
    
    
    $
    12,068
    
    
    $
    8,602
    
    
    $
    24,355Cash flow from operating activities
    
    $
    3,622
    
    
    $
    1,874
    
    
    $
    5,702
    
    
    $
    2,665
 Financial
Results  Change in Net Loss
  Three-Months
    
    
    Six-MonthsEnded
    
    
    Ended(stated in thousands of U.S. Dollars)
    
    June 30,
    
    
    June 30,Net Losses for 2005
    
    $
    1,031
    
    
    $
    2,514Favorable (unfavorable) variances:Cash Items:Net Operating Revenues:Production volumes
    
    
    3,280
    
    
    
    4,311Oil and gas prices
    
    
    2,917
    
    
    
    6,019Less: Operating costs
    
    
    (2,087
    )
    
    
    (3,041
    )4,110
    
    
    
    7,289General and administrative
    
    
    (1,113
    )
    
    
    (683
    )Business and product development
    
    
    (202
    )
    
    
    (1,107
    )Net interest
    
    
    480
    
    
    
    408Total Cash Variances
    
    
    3,275
    
    
    
    5,907Non-Cash Items:Depletion and depreciation
    
    
    (6,622
    )
    
    
    (12,261
    )Stock based compensation
    
    
    (182
    )
    
    
    (239
    )Write downs of GTL investments
    
    
    279
    
    
    
    279Impairment of China oil and gas properties
    
    
    
    
    
    
    (750
    )Other
    
    
    (124
    )
    
    
    (203
    )Total Non-Cash Variances
    
    
    (6,649
    )
    
    
    (13,174
    )Net Losses for 2006
    
    $
    4,405
    
    
    $
    9,781
   28




---



##### 



Net Operating Revenues
 
    
    Production Volumes 2006 vs. 2005
  Three-Month Periods Ended June 30,
    
    
    Six-Month Periods Ended June 30,Net Boes
    
    
    Percentage
    
    
    Net Boes
    
    
    Percentage2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeChina:Dagang
    
    
    149,174
    
    
    
    58,285
    
    
    
    156
    %
    
    
    267,090
    
    
    
    118,521
    
    
    
    125
    %Daqing
    
    
    6,414
    
    
    
    7,849
    
    
    
    -18
    %
    
    
    11,993
    
    
    
    19,848
    
    
    
    -40
    %155,588
    
    
    
    66,134
    
    
    
    135
    %
    
    
    279,083
    
    
    
    138,369
    
    
    
    102
    %U.S.:South Midway
    
    
    45,138
    
    
    
    51,551
    
    
    
    -12
    %
    
    
    91,213
    
    
    
    101,319
    
    
    
    -10
    %Citrus
    
    
    78
    
    
    
    8,817
    
    
    
    -99
    %
    
    
    4,419
    
    
    
    18,344
    
    
    
    -76
    %Knights Landing
    
    
    103
    
    
    
    16,624
    
    
    
    -99
    %
    
    
    146
    
    
    
    27,924
    
    
    
    -99
    %Others
    
    
    6,612
    
    
    
    7,332
    
    
    
    -10
    %
    
    
    13,823
    
    
    
    14,274
    
    
    
    -3
    %51,931
    
    
    
    84,324
    
    
    
    -38
    %
    
    
    109,601
    
    
    
    161,861
    
    
    
    -32
    %207,519
    
    
    
    150,458
    
    
    
    38
    %
    
    
    388,684
    
    
    
    300,230
    
    
    
    29
    %
  China
   29




---



##### 



U.S.
     
    
    Oil and Gas Prices 2006 vs. 2005
  China
  U.S.
  30




---



##### 




    
    Operating Costs 2006 vs. 2005
  China
     U.S.
   31




---



##### 



Three-Month Periods Ended June 30,2006
    
    
    2005U.S.
    
    
    China
    
    
    Total
    
    
    U.S.
    
    
    China
    
    
    TotalNet Production:Boe
    
    
    51,931
    
    
    
    155,588
    
    
    
    207,519
    
    
    
    84,324
    
    
    
    66,134
    
    
    
    150,458Boe/day for the period
    
    
    570
    
    
    
    1,710
    
    
    
    2,280
    
    
    
    926
    
    
    
    727
    
    
    
    1,653
 Per Boe
    
    
    Per BoeOil and gas revenue
    
    $
    59.08
    
    
    $
    62.64
    
    
    $
    61.75
    
    
    $
    39.07
    
    
    $
    50.25
    
    
    $
    43.98Field operating costs
    
    
    12.59
    
    
    
    11.67
    
    
    
    11.90
    
    
    
    10.14
    
    
    
    8.15
    
    
    
    9.26Production tax and Windfall Levy
    
    
    1.46
    
    
    
    6.57
    
    
    
    5.29
    
    
    
    0.53
    
    
    
    
    
    
    
    0.30Engineering support
    
    
    3.51
    
    
    
    0.69
    
    
    
    1.40
    
    
    
    3.00
    
    
    
    1.21
    
    
    
    2.2117.56
    
    
    
    18.93
    
    
    
    18.59
    
    
    
    13.67
    
    
    
    9.36
    
    
    
    11.77Net operating revenue
    
    
    41.52
    
    
    
    43.71
    
    
    
    43.16
    
    
    
    25.40
    
    
    
    40.89
    
    
    
    32.21Depletion
    
    
    24.52
    
    
    
    40.10
    
    
    
    36.20
    
    
    
    15.38
    
    
    
    18.70
    
    
    
    16.84Net revenue from operations
    
    $
    17.00
    
    
    $
    3.61
    
    
    $
    6.96
    
    
    $
    10.02
    
    
    $
    22.19
    
    
    $
    15.37
 Six-Month Periods Ended June 30,2006
    
    
    2005U.S.
    
    
    China
    
    
    Total
    
    
    U.S.
    
    
    China
    
    
    TotalNet Production:Boe
    
    
    109,601
    
    
    
    279,083
    
    
    
    388,684
    
    
    
    161,861
    
    
    
    138,369
    
    
    
    300,230Boe/day for the period
    
    
    605
    
    
    
    1,542
    
    
    
    2,147
    
    
    
    894
    
    
    
    765
    
    
    
    1,659
 Per Boe
    
    
    Per BoeOil and gas revenue
    
    $
    55.28
    
    
    $
    59.41
    
    
    $
    58.25
    
    
    $
    38.08
    
    
    $
    44.42
    
    
    $
    41.00Field operating costs
    
    
    14.14
    
    
    
    11.60
    
    
    
    12.31
    
    
    
    10.44
    
    
    
    7.95
    
    
    
    9.29Production tax and Windfall Levy
    
    
    1.38
    
    
    
    3.66
    
    
    
    3.02
    
    
    
    0.52
    
    
    
    
    
    
    
    0.28Engineering support
    
    
    3.79
    
    
    
    0.72
    
    
    
    1.58
    
    
    
    3.06
    
    
    
    1.19
    
    
    
    2.2019.31
    
    
    
    15.98
    
    
    
    16.91
    
    
    
    14.02
    
    
    
    9.14
    
    
    
    11.77Net operating revenue
    
    
    35.97
    
    
    
    43.43
    
    
    
    41.34
    
    
    
    24.06
    
    
    
    35.28
    
    
    
    29.23Depletion
    
    
    22.22
    
    
    
    41.79
    
    
    
    36.27
    
    
    
    15.08
    
    
    
    16.40
    
    
    
    15.69Net revenue from operations
    
    $
    13.75
    
    
    $
    1.64
    
    
    $
    5.07
    
    
    $
    8.98
    
    
    $
    18.88
    
    
    $
    13.54
 General and Administrative 2006 vs. 2005
  Three-Months
    
    
    Six-MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2006 vs.
    
    
    2006 vs.2005
    
    
    2005Favorable (unfavorable) variances:Oil and Gas Activities:China
    
    $
    (197
    )
    
    $
    (317
    )U.S.
    
    
    (291
    )
    
    
    (508
    )Corporate
    
    
    (733
    )
    
    
    15(1,221
    )
    
    
    (810
    )Less: stock based compensation
    
    
    108
    
    
    
    127$
    (1,113
    )
    
    $
    (683
    )
 32




---



##### 



China
  U.S.
  Corporate
 SOX
 Business and Product Development 2006 vs. 2005
  Three-Months
    
    
    Six-MonthsEnded
    
    
    EndedJune 30,
    
    
    June 30,2006 vs.
    
    
    2006 vs.2005
    
    
    2005Favorable (unfavorable) variances:GTL
    
    $
    (98
    )
    
    $
    (46
    )EOR
    
    
    (178
    )
    
    
    (1,173
    )(276
    )
    
    
    (1,219
    )Less: stock based compensation
    
    
    74
    
    
    
    112$
    (202
    )
    
    $
    (1,107
    )
 33




---



##### 



TM TM TM
 Depletion and Depreciation 2006 vs. 2005
 TM
 China
  
    
    As noted in prior periodic reports on Forms 10K and 10Q and in related shareholder
communications, we suspended new drilling activity in December 2005 at our Dagang field in
order that we may assess production decline performances on recently drilled wells, as
well as maximizing cash flow from these operations. As a result, we reduced our estimate
of the overall development program and our independent engineering evaluators, GLJ
Petroleum Consultants Ltd., revised downward their estimate of our proved reserves at
December 31, 2005.
    
    In the second quarter of 2005, we impaired the cost of our first Zitong block
exploration well, Dingyuan 1, resulting in $12.5 million of those and other associated
costs being included with our proved properties and therefore subject to depletion.
  U.S.
  34




---



##### 



EOR
 TM TM TM
 Impairment of Oil and Gas Properties 2006 vs. 2005
   Capital Investments
  Three-Month Periods Ended
    
    
    Six-Month Periods EndedJune 30,
    
    
    June 30,(Increase)
    
    
    
    
    
    
    
    
    
    
    (Increase)2006
    
    
    2005
    
    
    Decrease
    
    
    2006
    
    
    2005
    
    
    DecreaseOil and Gas Activities:China
    
    $
    1,934
    
    
    $
    8,700
    
    
    $
    6,766
    
    
    $
    4,651
    
    
    $
    18,251
    
    
    $
    13,600U.S.
    
    
    788
    
    
    
    1,722
    
    
    
    934
    
    
    
    2,065
    
    
    
    2,529
    
    
    
    464EOR
    
    
    833
    
    
    
    1,130
    
    
    
    297
    
    
    
    1,514
    
    
    
    2,844
    
    
    
    1,330GTL
    
    
    155
    
    
    
    516
    
    
    
    361
    
    
    
    372
    
    
    
    731
    
    
    
    359$
    3,710
    
    
    $
    12,068
    
    
    $
    8,358
    
    
    $
    8,602
    
    
    
    24,355
    
    
    $
    15,753
 Oil and Gas Activities  China
   35




---



##### 



Oil and Gas Activities  U.S.
    South Midway
  Peach
  North Yowlumne
  36




---



##### 



Enhanced Oil Recovery and Heavy-To-Light Oil Activities
  RTPTMCommercial Demonstration Facility
 TM TM
 TM TM
  TM TM
 TM
 RTPTMPlant Design Package
 Colt RTP TM Plant o TM
 37




---



##### 



Iraq
 o
 TM
   Colombia
  Gas-To-Liquids Activities
 MOU EGAS
 Liquidity and Capital Resources
 Sources and Uses of Cash
 38




---



##### 



Three Months Ended June 30,
    
    
    Six Months Ended June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Cash flow from operating activities
    
    $
    3,622
    
    
    $
    1,874
    
    
    $
    5,702
    
    
    $
    2,665Investing ActivitiesCapital investments, after changes in non-cash working capital
    
    
    (8,729
    )
    
    
    (9,339
    )
    
    
    (14,706
    )
    
    
    (14,443
    )Merger, net of cash acquired
    
    
    
    
    
    
    (9,979
    )
    
    
    
    
    
    
    (9,979
    )Merger and acquisition related costs
    
    
    (325
    )
    
    
    (957
    )
    
    
    (502
    )
    
    
    (1,687
    )Proceeds from sale of assets
    
    
    
    
    
    
    
    
    
    
    5,350
    
    
    
    Project advance from partner
    
    
    3,249
    
    
    
    
    
    
    
    3,249
    
    
    
    Advance payments
    
    
    (50
    )
    
    
    (300
    )
    
    
    (50
    )
    
    
    (600
    )Other
    
    
    (60
    )
    
    
    (76
    )
    
    
    (69
    )
    
    
    (76
    )(5,915
    )
    
    
    (20,651
    )
    
    
    (6,728
    )
    
    
    (26,785
    )Financing ActivitiesProceeds from private placements, net of all share issue costs
    
    
    25,315
    
    
    
    10,060
    
    
    
    25,315
    
    
    
    10,060Proceeds from exercise of options and warrants
    
    
    358
    
    
    
    1,690
    
    
    
    449
    
    
    
    1,725Proceeds/redememption of advances from partner
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net debt financing
    
    
    (5,032
    )
    
    
    1,583
    
    
    
    (5,654
    )
    
    
    7,167Other
    
    
    
    
    
    
    (163
    )
    
    
    
    
    
    
    (426
    )20,641
    
    
    
    13,170
    
    
    
    20,110
    
    
    
    18,526Net Source (Use) of Cash
    
    $
    18,348
    
    
    $
    (5,607
    )
    
    $
    19,084
    
    
    $
    (5,594
    )
 Operating Activities
  Investing Activities
  Financing Activities
 39




---



##### 



Outlook for 2006
  Contractual Obligations
  Payments Due by Year(stated in thousands of U.S. dollars)Total
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    After 2009Consolidated Balance Sheets:Note payable
 current portion
    
    $
    3,730
    
    
    $
    1,844
    
    
    $
    1,886
    
    
    $
    
    
    
    $
    
    
    
    $
    Long term debt
    
    
    3,971
    
    
    
    
    
    
    
    1,234
    
    
    
    2,325
    
    
    
    412
    
    
    
    Asset retirement obligation
    
    
    1,525
    
    
    
    
    
    
    
    102
    
    
    
    822
    
    
    
    27
    
    
    
    574Long term obligation
    
    
    1,900
    
    
    
    
    
    
    
    1,900
    
    
    
    
    
    
    
    
    
    
    
    Other Commitments:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest payable
    
    
    759
    
    
    
    280
    
    
    
    340
    
    
    
    135
    
    
    
    4
    
    
    
    Lease commitments
    
    
    1,933
    
    
    
    392
    
    
    
    611
    
    
    
    475
    
    
    
    287
    
    
    
    168Zitong exploration commitment
    
    
    3,870
    
    
    
    3,870
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    17,688
    
    
    $
    6,386
    
    
    $
    6,073
    
    
    $
    3,757
    
    
    $
    730
    
    
    $
    742
 Off Balance Sheet Arrangements
  40




---



##### 



Outstanding Share Data
  Quarterly Financial Data In Accordance With Canadian and U.S. GAAP (Unaudited)
 QUARTER ENDED2006
    
    2005
    
    20042nd Qtr
    
    1st Qtr
    
    4th Qtr
    
    3rd Qtr
    
    2nd Qtr
    
    1st Qtr
    
    4th Qtr
    
    3rd QtrTotal revenue
    
    $
    13,084
    
    
    $
    9,864
    
    
    $
    8,651
    
    
    $
    8,907
    
    
    $
    6,645
    
    
    $
    5,736
    
    
    $
    6,212
    
    
    $
    4,932Net loss:Canadian GAAP
    
    $
    4,405
    
    
    $
    5,376
    
    
    $
    8,885
    
    
    $
    2,113
    
    
    $
    1,031
    
    
    $
    1,483
    
    
    $
    17,184
    
    
    $
    951U.S. GAAP
    
    $
    3,982
    
    
    $
    12,112
    
    
    $
    8,557
    
    
    $
    1,843
    
    
    $
    1,564
    
    
    $
    3,008
    
    
    $
    15,736
    
    
    $
    980Net loss per share:Canadian GAAP
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.04
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.09
    
    
    $
    0.01U.S. GAAP
    
    $
    0.02
    
    
    $
    0.05
    
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.09
    
    
    $
    0.01
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures
   41




---



##### 



Part
II  Other Information
 Item 1. Legal Proceedings: None
 Item 1A. Risk Factors:
  Item 2.
Unregistered Sales of Equity 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
 EXHIBITNUMBER
    
    DESCRIPTION10.1
    
    Employment Agreement, by and between the Company and Joseph I. Gasca, dated as of May 15, 2006
(Incorporated by reference to Exhibit 10.1 of Form 8-K filed with the Securities and Exchange
Commission on May 26, 2006).10.2
    
    Stock Purchase Agreement, by and among Ivanhoe Energy Inc., Sunwing Holding Corporation,
Sunwing Energy Ltd. and China Mineral Acquisition Corporation, dated as of May 12, 2006
(Incorporated by reference to Exhibit 10.1 of Form 8-K filed with the Securities and Exchange
Commission on May 12, 2006).31.1
    
    Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 42




---



##### 



By:
    
    /s/ W. Gordon LancasterName:
    
    W. Gordon LancasterTitle:
    
    Chief Financial Officer




---



##### 



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description10.1
    
    Employment Agreement, by and between the Company and Joseph I. Gasca, dated as of
May 15, 2006 (Incorporated by reference to Exhibit 10.1 of Form 8-K filed with the
Securities and Exchange Commission on May 26, 2006).10.2
    
    Stock Purchase Agreement, by and among Ivanhoe Energy Inc., Sunwing Holding
Corporation, Sunwing Energy Ltd. and China Mineral Acquisition Corporation, dated as of May
12, 2006 (Incorporated by reference to Exhibit 10.1 of Form 8-K filed with the Securities
and Exchange Commission on May 12, 2006).31.1
    
    Certification by the Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification by the Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification by the Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification by the Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 43