##### 



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 September 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
    
    98-0372413(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)Suite 654  999 Canada PlaceVancouver, British Columbia, Canada
    
    V6C 3E1(Address of principal executive office)
    
    (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




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##### 



TABLE OF CONTENTS
 PagePART I
    
    Financial InformationItem 1
    
    Financial StatementsUnaudited Condensed Consolidated Balance Sheets as at September 30, 2006 and December 31, 2005
    
    
    3Unaudited Condensed Consolidated Statements of Operations and Accumulated Deficit for the Three-Month and Nine-Month Periods Ended September 30, 2006 and 2005
    
    
    4Unaudited Condensed Consolidated Statements of Cash Flow for the Three-Month and Nine-Month Periods Ended September 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 Security Holders
    
    
    42Item 5.
    
    Other Information
    
    
    42Item 6.
    
    Exhibits
    
    
    42
 2




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##### 



Part I  Financial Information
 Item 1 Financial Statements
 IVANHOE ENERGY INC.
Unaudited Condensed Consolidated Balance Sheets
 September 30, 2006
    
    
    December 31, 2005AssetsCurrent AssetsCash and cash equivalents
    
    $
    19,535
    
    
    $
    6,724Accounts receivable (net of allowance for
doubtful accounts of $116 and $83 as at September
30, 2006 and December 31, 2005, respectively)
    
    
    9,071
    
    
    
    9,994Prepaid and other current assets
    
    
    381
    
    
    
    33828,987
    
    
    
    17,056Oil and gas properties and investments, net
    
    
    130,878
    
    
    
    119,654Intangible assets  technology
    
    
    102,153
    
    
    
    102,068Long term assets
    
    
    2,224
    
    
    
    2,099$
    264,242
    
    
    $
    240,877Liabilities and Shareholders EquityCurrent LiabilitiesAccounts payable and accrued liabilities
    
    $
    12,385
    
    
    $
    25,791Project advance from partner
    
    
    2,186
    
    
    
    Notes payable  current portion
    
    
    3,493
    
    
    
    1,667Asset retirement obligations  current portion
    
    
    
    
    
    
    95018,064
    
    
    
    28,408Long term debt
    
    
    3,290
    
    
    
    4,972Asset retirement obligations
    
    
    2,046
    
    
    
    830Long term obligation
    
    
    1,900
    
    
    
    1,900Commitments and contingenciesShareholders EquityShare capital, issued 241,195,798 common shares;
December 31, 2005 220,779,335 common shares
    
    
    318,692
    
    
    
    291,088Purchase warrants
    
    
    23,955
    
    
    
    5,150Contributed surplus
    
    
    5,755
    
    
    
    3,820Accumulated deficit
    
    
    (109,460
    )
    
    
    (95,291
    )238,942
    
    
    
    204,767$
    264,242
    
    
    $
    240,877
  3




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##### 



IVANHOE ENERGY INC.
Unaudited Condensed Consolidated Statements of Operations and Accumulated Deficit
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005RevenueOil and gas revenue
    
    $
    13,745
    
    
    $
    8,883
    
    
    $
    36,385
    
    
    $
    21,193Interest income
    
    
    270
    
    
    
    24
    
    
    
    578
    
    
    
    9514,015
    
    
    
    8,907
    
    
    
    36,963
    
    
    
    21,288ExpensesOperating costs
    
    
    4,724
    
    
    
    1,731
    
    
    
    11,298
    
    
    
    5,264General and administrative
    
    
    2,921
    
    
    
    2,411
    
    
    
    7,648
    
    
    
    6,328Business and product development
    
    
    2,043
    
    
    
    1,504
    
    
    
    5,159
    
    
    
    3,401Depletion and depreciation
    
    
    7,772
    
    
    
    4,476
    
    
    
    24,808
    
    
    
    9,250Interest expense and financing costs
    
    
    211
    
    
    
    541
    
    
    
    737
    
    
    
    1,036Write off of deferred acquisition costs
    
    
    732
    
    
    
    
    
    
    
    732
    
    
    
    Write-downs and provision for impairment
    
    
    
    
    
    
    357
    
    
    
    750
    
    
    
    63618,403
    
    
    
    11,020
    
    
    
    51,132
    
    
    
    25,915Net Loss
    
    
    (4,388
    )
    
    
    (2,113
    )
    
    
    (14,169
    )
    
    
    (4,627
    )Accumulated Deficit, beginning of period
    
    
    (105,072
    )
    
    
    (84,293
    )
    
    
    (95,291
    )
    
    
    (81,779
    )Accumulated Deficit, end of period
    
    $
    (109,460
    )
    
    $
    (86,406
    )
    
    $
    (109,460
    )
    
    $
    (86,406
    )Net Loss per share  Basic and Diluted
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.02
    )Weighted Average Number of Shares (in
thousands)
    
    
    241,181
    
    
    
    206,629
    
    
    
    233,766
    
    
    
    191,374
  4




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##### 



IVANHOE ENERGY INC.
Unaudited Condensed Consolidated Statements of Cash Flow
 Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Operating ActivitiesNet loss
    
    $
    (4,388
    )
    
    $
    (2,113
    )
    
    $
    (14,169
    )
    
    $
    (4,627
    )Items not requiring use of cash:Depletion and depreciation
    
    
    7,772
    
    
    
    4,476
    
    
    
    24,808
    
    
    
    9,250Write-down and provision for impairment
    
    
    
    
    
    
    357
    
    
    
    750
    
    
    
    636Stock based compensation
    
    
    1,105
    
    
    
    594
    
    
    
    2,174
    
    
    
    1,424Write off of deferred acquisition costs
    
    
    732
    
    
    
    
    
    
    
    732
    
    
    
    Write off of debt financing costs
    
    
    
    
    
    
    857
    
    
    
    
    
    
    
    857Other
    
    
    143
    
    
    
    24
    
    
    
    650
    
    
    
    64Changes in non-cash working capital items
    
    
    279
    
    
    
    (1,671
    )
    
    
    (3,600
    )
    
    
    (2,415
    )5,643
    
    
    
    2,524
    
    
    
    11,345
    
    
    
    5,189Investing ActivitiesCapital investments
    
    
    (5,019
    )
    
    
    (9,789
    )
    
    
    (13,622
    )
    
    
    (34,144
    )Merger, net of cash acquired
    
    
    
    
    
    
    (117
    )
    
    
    
    
    
    
    (10,096
    )Merger and acquisition related costs
    
    
    (230
    )
    
    
    
    
    
    
    (732
    )
    
    
    (1,687
    )Proceeds from sale of assets
    
    
    
    
    
    
    
    
    
    
    5,350
    
    
    
    Advance payments
    
    
    
    
    
    
    (300
    )
    
    
    (125
    )
    
    
    (900
    )Other
    
    
    (335
    )
    
    
    (10
    )
    
    
    (404
    )
    
    
    (86
    )Changes in non-cash working capital items
    
    
    (5,306
    )
    
    
    1,364
    
    
    
    (8,085
    )
    
    
    11,276(10,890
    )
    
    
    (8,852
    )
    
    
    (17,618
    )
    
    
    (35,637
    )Financing ActivitiesShares issued on private placements, net of share issue costs
    
    
    
    
    
    
    2,399
    
    
    
    25,298
    
    
    
    12,552Proceeds from exercise of options and warrants
    
    
    22
    
    
    
    4,504
    
    
    
    471
    
    
    
    6,229Share issue costs on shares issued for Merger
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (93
    )Proceeds from debt obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,000Payments of debt obligations
    
    
    (1,031
    )
    
    
    (417
    )
    
    
    (6,685
    )
    
    
    (1,250
    )Other
    
    
    (17
    )
    
    
    (86
    )
    
    
    
    
    
    
    (512
    )(1,026
    )
    
    
    6,400
    
    
    
    19,084
    
    
    
    24,926Increase (decrease) in cash and cash equivalents, for the
period
    
    
    (6,273
    )
    
    
    72
    
    
    
    12,811
    
    
    
    (5,522
    )Cash and cash equivalents, beginning of period
    
    
    25,808
    
    
    
    3,728
    
    
    
    6,724
    
    
    
    9,322Cash and cash equivalents, end of period
    
    $
    19,535
    
    
    $
    3,800
    
    
    $
    19,535
    
    
    $
    3,800
  5




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##### 



Notes to the Condensed Consolidated Financial Statements
September 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




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##### 



As at September 30, 2006Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    TotalOil and Gas Properties:Proved
    
    $
    97,528
    
    
    $
    106,026
    
    
    $
    
    
    
    $
    
    
    
    $
    203,554Unproved
    
    
    11,249
    
    
    
    5,634
    
    
    
    
    
    
    
    
    
    
    
    16,883108,777
    
    
    
    111,660
    
    
    
    
    
    
    
    
    
    
    
    220,437Accumulated depletion
    
    
    (19,789
    )
    
    
    (33,604
    )
    
    
    
    
    
    
    
    
    
    
    (53,393
    )Accumulated provision for impairment
    
    
    (50,350
    )
    
    
    (5,750
    )
    
    
    
    
    
    
    
    
    
    
    (56,100
    )38,638
    
    
    
    72,306
    
    
    
    
    
    
    
    
    
    
    
    110,944HTL and GTL Investments:Feasibility studies and other
deferred costs
    
    
    
    
    
    
    
    
    
    
    6,630
    
    
    
    5,009
    
    
    
    11,639Commercial demonstration facility
    
    
    
    
    
    
    
    
    
    
    11,392
    
    
    
    
    
    
    
    11,392Accumulated depreciation
    
    
    
    
    
    
    
    
    
    
    (3,300
    )
    
    
    
    
    
    
    (3,300
    )
    
    
    
    
    
    
    
    14,722
    
    
    
    5,009
    
    
    
    19,731Furniture and equipment
    
    
    508
    
    
    
    109
    
    
    
    73
    
    
    
    
    
    
    
    690Accumulated depreciation
    
    
    (412
    )
    
    
    (51
    )
    
    
    (24
    )
    
    
    
    
    
    
    (487
    )96
    
    
    
    58
    
    
    
    49
    
    
    
    
    
    
    
    203$
    38,734
    
    
    $
    72,364
    
    
    $
    14,771
    
    
    $
    5,009
    
    
    $
    130,878
 As at December 31, 2005Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    99,171HTL and GTL Investments:Feasibility studies and other
deferred costs
    
    
    
    
    
    
    
    
    
    
    6,142
    
    
    
    4,570
    
    
    
    10,712Commercial demonstration facility
    
    
    
    
    
    
    
    
    
    
    9,599
    
    
    
    
    
    
    
    9,599
    
    
    
    
    
    
    
    15,741
    
    
    
    4,570
    
    
    
    20,311Furniture and equipment
    
    
    485
    
    
    
    95
    
    
    
    15
    
    
    
    
    
    
    
    595Accumulated depreciation
    
    
    (380
    )
    
    
    (37
    )
    
    
    (6
    )
    
    
    
    
    
    
    (423
    )105
    
    
    
    58
    
    
    
    9
    
    
    
    
    
    
    
    172$
    43,232
    
    
    $
    56,102
    
    
    $
    15,750
    
    
    $
    4,570
    
    
    $
    119,654
  RTP TM Technology HTL GTL
   7




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##### 



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




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##### 



September 30,
    
    
    December 31,2006
    
    
    2005Non-interest
bearing promissory note, due 2006 through 2009
    
    $
    5,951

    
    
    $
    Variable rate bank note, 8.375% as at September 30, 2006 and 7.375%
as at December 31, 2005, due
2006 though 2007
    
    
    1,389
    
    
    
    2,6398% promissory note, due 2007
    
    
    
    
    
    
    4,0007,340
    
    
    
    6,639Less:Unamortized discount
    
    
    (557
    )
    
    
    Current maturities
    
    
    (3,493
    )
    
    
    (1,667
    )(4,050
    )
    
    
    (1,667
    )$
    3,290
    
    
    $
    4,972
 Promissory Notes
    Bank Note
   2006
    
    $
    1,0322007
    
    
    3,4322008
    
    
    2,4602009
    
    
    416$
    7,340
 9




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##### 



6. ASSET RETIREMENT OBLIGATIONS
 TM
 Balance as at December 31, 2005
    
    $
    1,780Liabilities incurred
    
    
    136Liabilities transferred
    
    
    (42
    )Accretion expense
    
    
    60Revisions in estimated cash flows
    
    
    112Balance as at September 30, 2006
    
    $
    2,046
 7. COMMITMENTS AND CONTINGENCIES
 Zitong Block Exploration Commitment
 Phase 1
 Mitsubishi CNPC Zitong Partners Phase 2
 10




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##### 



Long Term Obligation
 TM
 Other Commitments
 Former Ensyn Affiliate
  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
    
    
    
    6,493
    
    
    
    
    
    
    
    
    
    
    
    Services
    
    
    148
    
    
    
    401
    
    
    
    
    
    
    
    
    
    
    
    Exercise of options
    
    
    277
    
    
    
    710
    
    
    
    (239
    )
    
    
    (277
    )
    
    $
    2.09Options:Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,200
    
    
    $
    3.12Expired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (592
    )
    
    $
    3.42Stock based compensation
    
    
    
    
    
    
    
    
    
    
    2,174
    
    
    
    
    
    
    
    Balance September 30, 2006
    
    
    241,196
    
    
    $
    318,692
    
    
    $
    5,755
    
    
    
    12,609
    
    
    $
    2.39
 Purchase Warrants
 11




---



##### 



CommonPurchase
    
    SharesWarrants
    
    Issuable(thousands)Balance December 31, 2005
    
    
    25,469
    
    
    
    21,883Purchase warrants expired
    
    
    (7,173
    )
    
    
    (3,587
    )Private placements
    
    
    11,400
    
    
    
    11,400Balance September 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
    
    
    May 2011
    
    
    U.S. $2.6329,696
    
    
    
    29,696
    
    
    
    29,696
    
    
    
    23,955
  B-S
 9. STOCK BASED COMPENSATION
   12




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##### 



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




---



##### 



Three-Month Period Ended September 30, 2006Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    3,396
    
    
    $
    10,349
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,745Interest income
    
    
    46
    
    
    
    27
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    2703,442
    
    
    
    10,376
    
    
    
    
    
    
    
    
    
    
    
    197
    
    
    
    14,015Operating costs
    
    
    976
    
    
    
    3,748
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,724General and administrative
    
    
    431
    
    
    
    359
    
    
    
    
    
    
    
    
    
    
    
    2,131
    
    
    
    2,921Business and product development
    
    
    
    
    
    
    
    
    
    
    1,657
    
    
    
    382
    
    
    
    4
    
    
    
    2,043Depletion and depreciation
    
    
    1,445
    
    
    
    5,910
    
    
    
    413
    
    
    
    3
    
    
    
    1
    
    
    
    7,772Interest expense and financing costs
    
    
    60
    
    
    
    35
    
    
    
    
    
    
    
    
    
    
    
    116
    
    
    
    211Write off of deferred acquisition
costs
    
    
    
    
    
    
    732
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7322,912
    
    
    
    10,784
    
    
    
    2,070
    
    
    
    385
    
    
    
    2,252
    
    
    
    18,403Net Income (Loss)
    
    $
    530
    
    
    $
    (408
    )
    
    $
    (2,070
    )
    
    $
    (385
    )
    
    $
    (2,055
    )
    
    $
    (4,388
    )Capital Investments
    
    $
    2,929
    
    
    $
    1,630
    
    
    $
    393
    
    
    $
    67
    
    
    $
    
    
    
    $
    5,019
 Nine-Month Period Ended September 30, 2006Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    9,455
    
    
    $
    26,930
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    36,385Interest income
    
    
    112
    
    
    
    42
    
    
    
    
    
    
    
    
    
    
    
    424
    
    
    
    5789,567
    
    
    
    26,972
    
    
    
    
    
    
    
    
    
    
    
    424
    
    
    
    36,963Operating costs
    
    
    3,092
    
    
    
    8,206
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,298General and administrative
    
    
    1,353
    
    
    
    1,038
    
    
    
    
    
    
    
    
    
    
    
    5,257
    
    
    
    7,648Business and product development
    
    
    
    
    
    
    
    
    
    
    4,004
    
    
    
    1,151
    
    
    
    4
    
    
    
    5,159Depletion and depreciation
    
    
    3,906
    
    
    
    17,573
    
    
    
    3,317
    
    
    
    8
    
    
    
    4
    
    
    
    24,808Interest expense and financing costs
    
    
    189
    
    
    
    141
    
    
    
    3
    
    
    
    
    
    
    
    404
    
    
    
    737Write off of deferred acquisition costs
    
    
    
    
    
    
    732
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    732Write-downs and provision for
impairment
    
    
    
    
    
    
    750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7508,540
    
    
    
    28,440
    
    
    
    7,324
    
    
    
    1,159
    
    
    
    5,669
    
    
    
    51,132Net Income (Loss)
    
    $
    1,027
    
    
    $
    (1,468
    )
    
    $
    (7,324
    )
    
    $
    (1,159
    )
    
    $
    (5,245
    )
    
    $
    (14,169
    )Capital Investments
    
    $
    4,982
    
    
    $
    6,292
    
    
    $
    1,909
    
    
    $
    439
    
    
    $
    
    
    
    $
    13,622Identifiable Assets (As at September
30, 2006)
    
    $
    43,296
    
    
    $
    84,036
    
    
    $
    106,997
    
    
    $
    15,038
    
    
    $
    14,875
    
    
    $
    264,242Identifiable Assets (As at December
31, 2005)
    
    $
    48,070
    
    
    $
    65,020
    
    
    $
    107,869
    
    
    $
    14,609
    
    
    $
    5,309
    
    
    $
    240,877
 14




---



##### 



Three-Month Period Ended September 30, 2005Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    4,336
    
    
    $
    4,547
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    8,883Interest income
    
    
    8
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    244,344
    
    
    
    4,550
    
    
    
    
    
    
    
    
    
    
    
    13
    
    
    
    8,907Operating costs
    
    
    1,180
    
    
    
    551
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,731General and administrative
    
    
    210
    
    
    
    1,050
    
    
    
    
    
    
    
    
    
    
    
    1,151
    
    
    
    2,411Business and product development
    
    
    
    
    
    
    
    
    
    
    1,208
    
    
    
    296
    
    
    
    
    
    
    
    1,504Depletion and depreciation
    
    
    1,286
    
    
    
    3,185
    
    
    
    1
    
    
    
    3
    
    
    
    1
    
    
    
    4,476Interest expense and financing costs
    
    
    79
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    460
    
    
    
    541Write down and provision for
impairment
    
    
    
    
    
    
    
    
    
    
    357
    
    
    
    
    
    
    
    
    
    
    
    3572,755
    
    
    
    4,786
    
    
    
    1,568
    
    
    
    299
    
    
    
    1,612
    
    
    
    11,020Net Income (Loss)
    
    $
    1,589
    
    
    $
    (236
    )
    
    $
    (1,568
    )
    
    $
    (299
    )
    
    $
    (1,599
    )
    
    $
    (2,113
    )Capital Investments
    
    $
    2,789
    
    
    $
    5,860
    
    
    $
    894
    
    
    $
    246
    
    
    $
    
    
    
    $
    9,789
 Nine-Month Period Ended September 30, 2005Oil and GasU.S.
    
    
    China
    
    
    HTL
    
    
    GTL
    
    
    Corporate
    
    
    TotalOil and gas revenue
    
    $
    10,500
    
    
    $
    10,693
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    21,193Interest income
    
    
    18
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    9510,518
    
    
    
    10,699
    
    
    
    
    
    
    
    
    
    
    
    71
    
    
    
    21,288Operating costs
    
    
    3,448
    
    
    
    1,816
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,264General and administrative
    
    
    624
    
    
    
    1,412
    
    
    
    
    
    
    
    
    
    
    
    4,292
    
    
    
    6,328Business and product development
    
    
    
    
    
    
    
    
    
    
    2,382
    
    
    
    1,019
    
    
    
    
    
    
    
    3,401Depletion and depreciation
    
    
    3,768
    
    
    
    5,457
    
    
    
    12
    
    
    
    8
    
    
    
    5
    
    
    
    9,250Interest expense and financing costs
    
    
    233
    
    
    
    
    
    
    
    2
    
    
    
    
    
    
    
    801
    
    
    
    1,036Write down and provision for
impairment
    
    
    
    
    
    
    
    
    
    
    357
    
    
    
    279
    
    
    
    
    
    
    
    6368,073
    
    
    
    8,685
    
    
    
    2,753
    
    
    
    1,306
    
    
    
    5,098
    
    
    
    25,915Net Income (Loss)
    
    $
    2,445
    
    
    $
    2,014
    
    
    $
    (2,753
    )
    
    $
    (1,306
    )
    
    $
    (5,027
    )
    
    $
    (4,627
    )Capital Investments
    
    $
    5,309
    
    
    $
    24,120
    
    
    $
    3,738
    
    
    $
    977
    
    
    $
    
    
    
    $
    34,144
 15




---



##### 



12. SUPPLEMENTAL CASH FLOW INFORMATION
  Three Months
    
    
    Nine MonthsEnded September 30,
    
    
    Ended September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Cash paid during the period for:Income taxes
    
    $
    
    
    
    $
    13
    
    
    $
    6
    
    
    $
    17Interest
    
    $
    73
    
    
    $
    107
    
    
    $
    371
    
    
    $
    372Investing and Financing activities, non-cash:Acquisition of oil and gas assets (see
note 13)Shares issued
    
    $
    
    
    
    $
    
    
    
    $
    20,000
    
    
    $
    Debt issued
    
    
    
    
    
    
    
    
    
    
    6,547
    
    
    
    Receivable applied to acquisition
    
    
    
    
    
    
    
    
    
    
    1,746
    
    
    
    $
    
    
    
    $
    
    
    
    $
    28,293
    
    
    $
    Shares issued for Merger (see note 13)
    
    $
    
    
    
    $
    75,000
    
    
    $
    
    
    
    $
    75,000Changes in non-cash working capital itemsOperating Activities:Accounts receivable
    
    $
    (1,130
    )
    
    $
    (2,830
    )
    
    $
    (2,986
    )
    
    $
    (3,144
    )Prepaid and other current assets
    
    
    26
    
    
    
    101
    
    
    
    (71
    )
    
    
    56Accounts payable and accrued liabilities
    
    
    1,383
    
    
    
    1,058
    
    
    
    (543
    )
    
    
    673279
    
    
    
    (1,671
    )
    
    
    (3,600
    )
    
    
    (2,415
    )Investing ActivitiesAccounts receivable
    
    
    (49
    )
    
    
    804
    
    
    
    2,163
    
    
    
    999Prepaid and other current assets
    
    
    (16
    )
    
    
    158
    
    
    
    28
    
    
    
    508Accounts payable and accrued liabilities
    
    
    (4,177
    )
    
    
    402
    
    
    
    (12,462
    )
    
    
    9,769Project advance from partner
    
    
    (1,064
    )
    
    
    
    
    
    
    2,186
    
    
    
    (5,306
    )
    
    
    1,364
    
    
    
    (8,085
    )
    
    
    11,276$
    (5,027
    )
    
    $
    (307
    )
    
    $
    (11,685
    )
    
    $
    8,861
 13. MERGER AND ACQUISITIONS
 Merger Shares TM RTP TM Plant TM TM
 Richfirst
 16




---



##### 



Sunwing
 CMA
 14. SUBSEQUENT EVENTS
   15. ADDITIONAL DISCLOSURE REQUIRED UNDER U.S. GAAP
  Condensed Consolidated Balance Sheets
 Shareholders Equity and Oil and Gas Properties and Investments
 17




---



##### 



As at September 30, 2006Oil and Gas
    
    

Shareholders EquityProperties and
    
    
    Share Capital
    
    
    Contributed
    
    
    AccumulatedInvestments
    
    
    and Warrants
    
    
    Surplus
    
    
    Deficit
    
    
    TotalCanadian GAAP
    
    $
    130,878
    
    
    $
    342,647
    
    
    $
    5,755
    
    
    $
    (109,460
    )
    
    $
    238,942Adjustments for:Reduction in stated capital (i)
    
    
    
    
    
    
    74,455
    
    
    
    
    
    
    
    (74,455
    )
    
    
    Accounting for stock based
compensation (ii)
    
    
    
    
    
    
    (373
    )
    
    
    (3,375
    )
    
    
    3,748
    
    
    
    Ascribed value of shares
issued for U.S.
royalty interests, net (iii)
    
    
    1,358
    
    
    
    1,358
    
    
    
    
    
    
    
    
    
    
    
    1,358Provision for impairment (iv)
    
    
    (18,170
    )
    
    
    
    
    
    
    
    
    
    
    (18,170
    )
    
    
    (18,170
    )Depletion adjustments due to
differences in
provision for impairment (v)
    
    
    3,471
    
    
    
    
    
    
    
    
    
    
    
    3,471
    
    
    
    3,471HTL and GTL development costs
expensed (vi)
    
    
    (11,643
    )
    
    
    
    
    
    
    
    
    
    
    (11,643
    )
    
    
    (11,643
    )U.S. GAAP
    
    $
    105,894
    
    
    $
    418,087
    
    
    $
    2,380
    
    
    $
    (206,509
    )
    
    $
    213,958
 As at December 31, 2005Oil and Gas
    
    

Shareholders EquityProperties and
    
    
    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 (i)
    
    
    
    
    
    
    74,455
    
    
    
    
    
    
    
    (74,455
    )
    
    
    Accounting for stock based
compensation (ii)
    
    
    
    
    
    
    (316
    )
    
    
    (3,432
    )
    
    
    3,748
    
    
    
    Ascribed value of shares
issued for U.S.
royalty interests, net (iii)
    
    
    1,358
    
    
    
    1,358
    
    
    
    
    
    
    
    
    
    
    
    1,358Provision for impairment (iv)
    
    
    (8,150
    )
    
    
    
    
    
    
    
    
    
    
    (8,150
    )
    
    
    (8,150
    )Depletion adjustments due to
differences in
provision for impairment (v)
    
    
    1,562
    
    
    
    
    
    
    
    
    
    
    
    1,562
    
    
    
    1,562HTL and GTL development costs
expensed (vi)
    
    
    (10,712
    )
    
    
    
    
    
    
    
    
    
    
    (10,712
    )
    
    
    (10,712
    )U.S. GAAP
    
    $
    103,712
    
    
    $
    371,735
    
    
    $
    388
    
    
    $
    (183,298
    )
    
    $
    188,825
 Shareholders Equity
   18




---



##### 



FASB SFAS No. 123(R)
 Oil and Gas Properties and Investments
   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
    
    
    3,100
    
    
    
    
    
    
    
    (3,100
    )54,900
    
    
    
    50,350
    
    
    
    (4,550
    )China PropertiesPrior to 2004
    
    
    10,000
    
    
    
    
    
    
    
    (10,000
    )2004
    
    
    
    
    
    
    
    
    
    
    2005
    
    
    1,700
    
    
    
    5,000
    
    
    
    3,3002006
    
    
    7,670
    
    
    
    750
    
    
    
    (6,920
    )19,370
    
    
    
    5,750
    
    
    
    (13,620
    )$
    74,270
    
    
    $
    56,100
    
    
    $
    (18,170
    )
   19




---



##### 



Condensed Consolidated Statements of Operations
  Three-Month Periods Ended September 30,2006
    
    
    2005Net
    
    
    Net Loss
    
    
    Net
    
    
    Net LossLoss
    
    
    Per Share
    
    
    Loss
    
    
    Per ShareCanadian GAAP
    
    $
    (4,388
    )
    
    $
    (0.02
    )
    
    $
    (2,113
    )
    
    $
    (0.01
    )Stock based compensation expense (vii)
    
    
    
    
    
    
    
    
    
    
    540
    
    
    
    Provision for impairment (iv and viii)
    
    
    (3,570
    )
    
    
    (0.01
    )
    
    
    
    
    
    
    Depletion adjustments due to differences in
provision for impairment (viii)
    
    
    887
    
    
    
    
    
    
    
    418
    
    
    
    HTL and GTL development costs expensed, net (ix)
    
    
    (46
    )
    
    
    
    
    
    
    (688
    )
    
    
    U.S. GAAP
    
    $
    (7,117
    )
    
    $
    (0.03
    )
    
    $
    (1,843
    )
    
    $
    (0.01
    )Weighted Average Number of Shares under U.S. GAAP
(in thousands)
    
    
    
    
    
    
    241,181
    
    
    
    
    
    
    
    206,629
 Nine Month Periods Ended September 30,2006
    
    
    2005Net
    
    
    Net Loss
    
    
    Net
    
    
    Net LossLoss
    
    
    Per Share
    
    
    Loss
    
    
    Per ShareCanadian GAAP
    
    $
    (14,169
    )
    
    $
    (0.06
    )
    
    $
    (4,627
    )
    
    $
    (0.02
    )Stock based compensation expense (vii)
    
    
    
    
    
    
    
    
    
    
    1,338
    
    
    
    0.01Provision for impairment (iv and viii)
    
    
    (10,020
    )
    
    
    (0.04
    )
    
    
    
    
    
    
    Depletion adjustments due to differences in
provision for impairment (viii)
    
    
    1,909
    
    
    
    
    
    
    
    846
    
    
    
    HTL and GTL development costs expensed, net (ix)
    
    
    (931
    )
    
    
    
    
    
    
    (3,972
    )
    
    
    (0.02
    )U.S. GAAP
    
    $
    (23,211
    )
    
    $
    (0.10
    )
    
    $
    (6,415
    )
    
    $
    (0.03
    )Weighted Average Number of Shares under U.S. GAAP
(in thousands)
    
    
    
    
    
    
    233,766
    
    
    
    
    
    
    
    191,374
   20




---



##### 



Stock Based Compensation
    Expected term (in years)
    
    
    4.00Volatility
    
    
    81.96
    %Dividend Yield
    
    
    0.00
    %Risk-free rate
    
    
    4.21
    %
   21




---



##### 



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
    
    
    3,200
    
    
    $
    3.12Exercised
    
    
    (277
    )
    
    $
    2.09Cancelled/forfeited
    
    
    (592
    )
    
    $
    3.42Outstanding at September 30, 2006
    
    
    12,609
    
    
    $
    2.39
    
    
    
    3.4
    
    
    $
    4,277Options exercisable at September
30, 2006
    
    
    7,792
    
    
    $
    1.91
    
    
    
    2.5
    
    
    $
    4,277
   Weighted-Number
    
    
    Averageof Stock
    
    
    Grant DateOptions
    
    
    Fair Value(thousands)
    
    
    (Cdn.$)Outstanding at December 31, 2005
    
    
    3,731
    
    
    $
    1.47Granted
    
    
    3,200
    
    
    $
    1.44Vested
    
    
    (1,835
    )
    
    $
    1.12Cancelled/forfeited
    
    
    (279
    )
    
    $
    1.22Outstanding at September 30, 2006
    
    
    4,817
    
    
    $
    1.53
   For the three-month period ended September 30, 2005:Net loss under U.S. GAAP
    
    $
    (1,843
    )Stock-based compensation expense determined under the fair value based method for employee and director awards
    
    
    (570
    )Pro forma net loss under U.S. GAAP
    
    $
    (2,413
    )Basic loss per common share under U.S. GAAP:As reported
    
    $
    (0.01
    )Pro forma
    
    $
    (0.01
    )Weighted Average Number of Shares under U.S. GAAP (in thousands)
    
    
    (206,629
    )
 22




---



##### 



For the nine-month period ended September 30, 2005:Net loss under U.S. GAAP
    
    $
    (6,415
    )Stock-based compensation expense determined under the fair value based method for employee and director awards
    
    
    (1,430
    )Pro forma net loss under U.S. GAAP
    
    $
    (7,845
    )Basic loss per common share under U.S. GAAP:As reported
    
    $
    (0.03
    )Pro forma
    
    $
    (0.04
    )Weighted Average Number of Shares under U.S. GAAP (in thousands)
    
    
    (191,374
    )
  Pro Forma Effect of Merger and Acquisition
  Three-Month Period EndedSeptember 30, 2005Net
    
    
    Net LossRevenue
    
    
    Loss
    
    
    Per ShareAs reported
    
    $
    8,907
    
    
    $
    (1,843
    )
    
    $
    (0.01
    )Pro forma adjustments
    
    
    
    
    
    
    
    
    
    
    $
    8,907
    
    
    $
    (1,843
    )
    
    $
    (0.01
    )Weighted Average
Number of Shares
(in thousands)
    
    
    
    
    
    
    
    
    
    
    206,629
 Nine-Month Period EndedSeptember 30, 2005Net
    
    
    Net LossRevenue
    
    
    Loss
    
    
    Per ShareAs reported
    
    $
    21,288
    
    
    $
    (6,415
    )
    
    $
    (0.03
    )Pro forma adjustments
    
    
    736
    
    
    
    (730
    )
    
    
    $
    22,024
    
    
    $
    (7,145
    )
    
    $
    (0.03
    )Weighted Average
Number of Shares
(in thousands)
    
    
    
    
    
    
    
    
    
    
    202,583
  23




---



##### 



Three Months Ended September 30,2006
    
    
    2005Net Income
    
    
    Net Income
    
    
    
    
    
    
    Net Income
    
    
    Net IncomeRevenue
    
    
    (Loss)
    
    
    (Loss) Per Share
    
    
    Revenue
    
    
    (Loss)
    
    
    (Loss) Per ShareAs reported
    
    $
    14,015
    
    
    $
    (7,117
    )
    
    $
    (0.03
    )
    
    $
    8,907
    
    
    $
    (1,843
    )
    
    $
    (0.01
    )Pro forma
adjustments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,786
    
    
    
    539
    
    
    
    $
    14,015
    
    
    $
    (7,117
    )
    
    $
    (0.03
    )
    
    $
    11,693
    
    
    $
    (1,304
    )
    
    $
    (0.01
    )Weighted Average
Number of Shares
(in thousands)
    
    
    
    
    
    
    
    
    
    
    241,181
    
    
    
    
    
    
    
    
    
    
    
    215,220
 Nine Months Ended September 30,2006
    
    
    2005Net Income
    
    
    Net Income
    
    
    
    
    
    
    Net Income
    
    
    Net IncomeRevenue
    
    
    (Loss)
    
    
    (Loss) Per Share
    
    
    Revenue
    
    
    (Loss)
    
    
    (Loss) Per ShareAs reported
    
    $
    36,963
    
    
    $
    (23,211
    )
    
    $
    (0.10
    )
    
    $
    21,288
    
    
    $
    (6,415
    )
    
    $
    (0.03
    )Pro forma
adjustments
    
    
    1,051
    
    
    
    809
    
    
    
    
    
    
    
    6,239
    
    
    
    1,364
    
    
    
    $
    38,014
    
    
    $
    (22,402
    )
    
    $
    (0.10
    )
    
    $
    27,527
    
    
    $
    (5,051
    )
    
    $
    (0.03
    )Weighted Average
Number of Shares
(in thousands)
    
    
    
    
    
    
    
    
    
    
    235,371
    
    
    
    
    
    
    
    
    
    
    
    199,965
 Condensed Consolidated Statements of Cash Flow
  Impact of New and Pending Canadian GAAP Accounting Standards
    24




---



##### 



Impact of New and Pending U.S. GAAP Accounting Standards
      25




---



##### 



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Forward-Looking Statements
 TM
   SPECIAL NOTE TO CANADIAN INVESTORS
 SEC CSA 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, after-royalties
basis.
 26




---



##### 



Boe
    
    = barrel of oil equivalentBbl
    
    = barrelMBbl
    
    = thousand barrelsMMBbl
    
    = million barrelsMboe
    
    = thousands of barrels of oil equivalentBopd
    
    = barrels of oil per dayBbls/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
 www.ivanhoeenergy.com www.sec.gov www.sedar.com
 Executive Overview of 2006 Results
  TM
  1.
    
    Increased focus of the companys resources on building an HTL business. We will
continue to shift our people and our financial resources in support of our goal, and we
will continue to take corporate actions that demonstrate an ever-increasing focus on the
commercialization and implementation of the HTL technology. For example, the sale of LAK
Ranch in Wyoming was pursued in part because the field was determined to not be of
sufficient size to support an HTL plant.2.
    
    Advancing the technology. The RTPTM CDF has been an area of significant
focus for us over the past few quarters, but is only one tool in the HTL development
program. We have a number of tools available as we move towards the commercial
implementation of HTL. Considerable data has also been derived from the operation of the
20-barrel-per-day petroleum pilot plant that was used to complete the original
 27




---



##### 



petroleum
development work, as well as the extensive experience that exists within Ensyn as a result
of operating the core technology commercially for over 15 years in the biomass business.Additional development work will continue as we advance the technology through the first
commercial application and beyond.3.
    
    Advancing our business development to find and reach agreements where our
technologies can be used.Although we are focusing more of our resources on our HTL
opportunities, we continue our effort around a GTL project. To accelerate the pace of
reaching commercial agreements, we have solicited the expertise of our outstanding Board of
Directors to support our business development activities.4.
    
    Enhancing our financial position in anticipation of major projects. Implementation
of large projects requires significant capital outlays. We are refining our financing plans
and establishing the relationships required for the development activities ahead. Some of
our initial activities have included the $15 million LaSalle facility and revisions to our
capital budget for the remainder of 2006 and the development of our 2007 budget.5.
    
    Building the relationships that we will need for the future.Implementation of
our technologies demands close alignment with partners, suppliers, host governments and
financiers. The initiatives that we have just announced with AMEC and LaSalle are solid
steps in establishing those relationships we need for future success.6.
    
    Building internal capabilities in advance of major projects.The HTL technical
team, which includes our own staff, specialized consultants including the inventors of the
technology from Ensyn, and our EOR team will be supplemented and expanded to add additional
expertise in areas such as project management. During the third quarter, we added process
engineering expertise to our HTL team and have pending agreements with other engineering
talent.
   28




---



##### 



Three-Month Periods Ended
    
    Nine-Month Periods EndedSeptember 30,
    
    September 30,(stated in thousands of U.S. dollars, except per share and production amounts)
    
    2006
    
    2005
    
    2006
    
    2005Oil and gas revenue
    
    $
    13,745
    
    
    $
    8,883
    
    
    $
    36,385
    
    
    $
    21,193Net loss
    
    $
    (4,388
    )
    
    $
    (2,113
    )
    
    $
    (14,169
    )
    
    $
    (4,627
    )Net loss per share
    
    $
    (0.02
    )
    
    $
    (0.01
    )
    
    $
    (0.06
    )
    
    $
    (0.02
    )Average production (Boe/d)
    
    
    2,306
    
    
    
    1,902
    
    
    
    2,192
    
    
    
    1,741Net operating revenue per Boe
    
    $
    42.99
    
    
    $
    40.87
    
    
    $
    41.91
    
    
    $
    33.51Capital investments
    
    $
    5,019
    
    
    $
    9,789
    
    
    $
    13,622
    
    
    $
    34,144Cash flow from operating activities
    
    $
    5,643
    
    
    $
    2,524
    
    
    $
    11,345
    
    
    $
    5,189
 Financial Results  Change in Net Loss
  Three-Months
    
    
    Nine-MonthsEnded
    
    
    Ended(stated in thousands of U.S. Dollars)
    
    September 30,
    
    
    September 30,Net Losses for 2005
    
    $
    (2,113
    )
    
    $
    (4,627
    ),Favorable (unfavorable) variances:Cash Items:Net Operating Revenues:Production volumes
    
    
    2,144
    
    
    
    6,527Oil and gas prices
    
    
    2,718
    
    
    
    8,665Less: Operating costs
    
    
    (2,993
    )
    
    
    (6,034
    )1,869
    
    
    
    9,158General and administrative
    
    
    (20
    )
    
    
    (703
    )Business and product development
    
    
    (518
    )
    
    
    (1,625
    )Acquisition costs
    
    
    (230
    )
    
    
    (732
    )Net interest
    
    
    690
    
    
    
    1,099Total Cash Variances
    
    
    1,791
    
    
    
    7,197Non-Cash Items:Depletion and depreciation
    
    
    (3,296
    )
    
    
    (15,558
    )Stock based compensation
    
    
    (511
    )
    
    
    (750
    )Write off of deferred acquisition costs
    
    
    (502
    )
    
    
    Write-downs of HTL and
GTL investments
    
    
    357
    
    
    
    636Impairment of China oil
and gas properties
    
    
    
    
    
    
    (750
    )Other
    
    
    (114
    )
    
    
    (317
    )Total Non-Cash Variances
    
    
    (4,066
    )
    
    
    (16,739
    )Net Losses for 2006
    
    $
    (4,388
    )
    
    $
    (14,169
    )
  29




---



##### 



Net Operating Revenues
  Three-Month Periods Ended
    
    
    Nine-Month Periods EndedSeptember 30,
    
    
    September 30,Net Boes
    
    
    Percentage
    
    

Net Boes
    
    
    Percentage2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeChina:Dagang
    
    
    147,571
    
    
    
    80,799
    
    
    
    83
    %
    
    
    414,660
    
    
    
    199,320
    
    
    
    108
    %Daqing
    
    
    5,196
    
    
    
    6,087
    
    
    
    -15
    %
    
    
    17,189
    
    
    
    25,935
    
    
    
    -34
    %152,767
    
    
    
    86,886
    
    
    
    76
    %
    
    
    431,849
    
    
    
    225,255
    
    
    
    92
    %U.S.:South Midway
    
    
    49,901
    
    
    
    46,994
    
    
    
    6
    %
    
    
    141,113
    
    
    
    148,314
    
    
    
    -5
    %Spraberry
    
    
    6,200
    
    
    
    7,232
    
    
    
    -14
    %
    
    
    18,167
    
    
    
    21,496
    
    
    
    -15
    %Citrus
    
    
    212
    
    
    
    8,463
    
    
    
    -97
    %
    
    
    4,631
    
    
    
    26,807
    
    
    
    -83
    %Knights Landing
    
    
    29
    
    
    
    24,559
    
    
    
    -100
    %
    
    
    175
    
    
    
    52,482
    
    
    
    -100
    %Others
    
    
    716
    
    
    
    870
    
    
    
    -18
    %
    
    
    2,570
    
    
    
    880
    
    
    
    192
    %57,058
    
    
    
    88,118
    
    
    
    -35
    %
    
    
    166,656
    
    
    
    249,979
    
    
    
    -33
    %209,825
    
    
    
    175,004
    
    
    
    20
    %
    
    
    598,505
    
    
    
    475,234
    
    
    
    26
    %
    China
  30




---



##### 



U.S.
     31




---



##### 



Three-Month Periods Ended September 30,2006
    
    
    2005U.S.
    
    
    China
    
    
    Total
    
    
    U.S.
    
    
    China
    
    
    TotalNet Production:Boe
    
    
    57,058
    
    
    
    152,767
    
    
    
    209,825
    
    
    
    88,118
    
    
    
    86,886
    
    
    
    175,004Boe/day for the period
    
    
    627
    
    
    
    1,679
    
    
    
    2,306
    
    
    
    958
    
    
    
    944
    
    
    
    1,902Per Boe
    
    Per BoeOil and gas revenue
    
    $
    59.51
    
    
    $
    67.74
    
    
    $
    65.50
    
    
    $
    49.21
    
    
    $
    52.33
    
    
    $
    50.76Field operating costs
    
    
    12.66
    
    
    
    15.02
    
    
    
    14.38
    
    
    
    9.85
    
    
    
    5.82
    
    
    
    7.85Production tax and
Windfall Levy
    
    
    0.97
    
    
    
    8.84
    
    
    
    6.70
    
    
    
    0.70
    
    
    
    
    
    
    
    0.35Engineering support
    
    
    3.47
    
    
    
    0.67
    
    
    
    1.43
    
    
    
    2.84
    
    
    
    0.52
    
    
    
    1.6917.10
    
    
    
    24.53
    
    
    
    22.51
    
    
    
    13.39
    
    
    
    6.34
    
    
    
    9.89Net operating revenue
    
    
    42.41
    
    
    
    43.21
    
    
    
    42.99
    
    
    
    35.82
    
    
    
    45.99
    
    
    
    40.87Depletion
    
    
    25.32
    
    
    
    38.68
    
    
    
    35.05
    
    
    
    14.38
    
    
    
    36.63
    
    
    
    25.43Net revenue from operations
    
    $
    17.09
    
    
    $
    4.53
    
    
    $
    7.94
    
    
    $
    21.44
    
    
    $
    9.36
    
    
    $
    15.44
 Nine-Month Periods Ended September 30,2006
    
    
    2005U.S.
    
    
    China
    
    
    Total
    
    
    U.S.
    
    
    China
    
    
    TotalNet Production:Boe
    
    
    166,656
    
    
    
    431,849
    
    
    
    598,505
    
    
    
    249,979
    
    
    
    225,255
    
    
    
    475,234Boe/day for the period
    
    
    610
    
    
    
    1,582
    
    
    
    2,192
    
    
    
    916
    
    
    
    825
    
    
    
    1,741Per Boe
    
    Per BoeOil and gas revenue
    
    $
    56.74
    
    
    $
    62.36
    
    
    $
    60.79
    
    
    $
    42.00
    
    
    $
    47.47
    
    
    $
    44.59Field operating costs
    
    
    13.63
    
    
    
    12.81
    
    
    
    13.04
    
    
    
    10.23
    
    
    
    7.13
    
    
    
    8.76Production tax and
Windfall Levy
    
    
    1.24
    
    
    
    5.49
    
    
    
    4.31
    
    
    
    0.58
    
    
    
    
    
    
    
    0.31Engineering support
    
    
    3.68
    
    
    
    0.70
    
    
    
    1.53
    
    
    
    2.98
    
    
    
    0.93
    
    
    
    2.0118.55
    
    
    
    19.00
    
    
    
    18.88
    
    
    
    13.79
    
    
    
    8.06
    
    
    
    11.08Net operating revenue
    
    
    38.19
    
    
    
    43.36
    
    
    
    41.91
    
    
    
    28.21
    
    
    
    39.41
    
    
    
    33.51Depletion
    
    
    23.21
    
    
    
    40.69
    
    
    
    35.82
    
    
    
    14.84
    
    
    
    24.21
    
    
    
    19.28Net revenue from operations
    
    $
    14.98
    
    
    $
    2.67
    
    
    $
    6.09
    
    
    $
    13.37
    
    
    $
    15.20
    
    
    $
    14.23
 General and Administrative
  Three-Months
    
    
    Nine-MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2006 vs.
    
    
    2006 vs.2005
    
    
    2005Favorable (unfavorable)
variances:Oil and Gas Activities:China
    
    $
    691
    
    
    $
    374U.S.
    
    
    (221
    )
    
    
    (729
    )Corporate
    
    
    (981
    )
    
    
    (965
    )(511
    )
    
    
    (1,320
    )Less: stock based compensation
    
    
    491
    
    
    
    617$
    (20
    )
    
    $
    (703
    )
 32




---



##### 



China
  U.S.
  Corporate
 SOX
 Business and Product Development
  Three-Months
    
    
    Nine-MonthsEnded
    
    
    EndedSeptember 30,
    
    
    September 30,2006 vs.
    
    
    2006 vs.2005
    
    
    2005Favorable (unfavorable)
variances:HTL
    
    
    (451
    )
    
    
    (1,624
    )GTL
    
    $
    (87
    )
    
    $
    (134
    )(538
    )
    
    
    (1,758
    )Less: stock based compensation
    
    
    20
    
    
    
    133$
    (518
    )
    
    $
    (1,625
    )
  33




---



##### 



TM TM TM
 Depletion and Depreciation
 TM
 China
   U.S.
  HTL
 TM TM TM TM
 34




---



##### 



TM TM TM
 Impairment of Oil and Gas Properties
   Capital Investments
  Three-Month Periods Ended
    
    
    Nine-Month Periods EndedSeptember 30,
    
    
    September 30,(Increase)
    
    
    
    
    
    
    
    
    
    
    (Increase)(stated in thousands of U.S. Dollars)
    
    2006
    
    
    2005
    
    
    Decrease
    
    
    2006
    
    
    2005
    
    
    DecreaseOil and Gas Activities:China
    
    $
    1,630
    
    
    $
    5,860
    
    
    $
    4,230
    
    
    $
    6,292
    
    
    $
    24,120
    
    
    $
    17,828U.S.
    
    
    2,929
    
    
    
    2,789
    
    
    
    (140
    )
    
    
    4,982
    
    
    
    5,309
    
    
    
    327HTL
    
    
    393
    
    
    
    894
    
    
    
    501
    
    
    
    1,909
    
    
    
    3,738
    
    
    
    1,829GTL
    
    
    67
    
    
    
    246
    
    
    
    179
    
    
    
    439
    
    
    
    977
    
    
    
    538$
    5,019
    
    
    $
    9,789
    
    
    $
    4,770
    
    
    $
    13,622
    
    
    $
    34,144
    
    
    $
    20,522
 Oil and Gas Activities  China
    35




---



##### 



Oil and Gas Activities  U.S.
  Three-Month Periods Ended
    
    
    Nine-Month Periods EndedSeptember 30,
    
    
    September 30,(Increase)
    
    
    
    
    
    
    
    
    
    
    (Increase)(stated in thousands of U.S. Dollars)
    
    2006
    
    
    2005
    
    
    Decrease
    
    
    2006
    
    
    2005
    
    
    DecreaseU.S. Oil and Gas Activities:South Midway
    
    $
    2,632
    
    
    $
    426
    
    
    $
    (2,206
    )
    
    $
    2,742
    
    
    $
    890
    
    
    $
    (1,852
    )Yowlumne
    
    
    129
    
    
    
    117
    
    
    
    (12
    )
    
    
    903
    
    
    
    308
    
    
    
    (595
    )Knights Landing
    
    
    92
    
    
    
    144
    
    
    
    52
    
    
    
    738
    
    
    
    619
    
    
    
    (119
    )Northwest Lost Hills
    
    
    
    
    
    
    935
    
    
    
    935
    
    
    
    5
    
    
    
    1,019
    
    
    
    1,014LAK Ranch
    
    
    15
    
    
    
    471
    
    
    
    456
    
    
    
    82
    
    
    
    868
    
    
    
    786Other California Exploration
    
    
    61
    
    
    
    696
    
    
    
    635
    
    
    
    512
    
    
    
    1,605
    
    
    
    1,093$
    2,929
    
    
    $
    2,789
    
    
    $
    (140
    )
    
    $
    4,982
    
    
    $
    5,309
    
    
    $
    327
 South Midway
  36




---



##### 



North Yowlumne
  LAK Ranch
 TM
 Knights Landing and Northwest Lost Hills
  Heavy-To-Light Oil Activities
  RTPTMCommercial Demonstration Facility
 TM TM
 TM TM TM
 TM TM
 37




---



##### 



TM
  Iraq
   Other
 RTP TM Plant
 Gas-To-Liquids Activities
 EGAS
 38




---



##### 



Financial Condition, Liquidity and Capital Resources
 Sources and Uses of Cash
  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
    
    $
    3,493
    
    
    $
    927
    
    
    $
    2,566
    
    
    $
    
    
    
    $
    
    
    
    $
    Long term debt
    
    
    3,290
    
    
    
    
    
    
    
    553
    
    
    
    2,325
    
    
    
    412
    
    
    
    Asset retirement obligation
    
    
    2,046
    
    
    
    
    
    
    
    
    
    
    
    831
    
    
    
    492
    
    
    
    723Long term obligation
    
    
    1,900
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,900
    
    
    
    Other Commitments:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest payable
    
    
    610
    
    
    
    131
    
    
    
    340
    
    
    
    135
    
    
    
    4
    
    
    
    Lease commitments
    
    
    1,759
    
    
    
    202
    
    
    
    622
    
    
    
    481
    
    
    
    287
    
    
    
    167Zitong exploration
commitment
    
    
    3,870
    
    
    
    3,870
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    16,968
    
    
    $
    5,130
    
    
    $
    4,081
    
    
    $
    3,772
    
    
    $
    3,095
    
    
    $
    890
 Off Balance Sheet Arrangements
  Outstanding Share Data
  40




---



##### 



Quarterly Financial Data In Accordance With Canadian and U.S. GAAP (Unaudited)
 QUARTER ENDED2006
    
    2005
    
    20043rd Qtr
    
    2nd Qtr
    
    1st Qtr
    
    4th Qtr
    
    3rd Qtr
    
    2nd Qtr
    
    1st Qtr
    
    4th QtrTotal revenue
    
    $
    14,015
    
    
    $
    13,084
    
    
    $
    9,864
    
    
    $
    8,651
    
    
    $
    8,907
    
    
    $
    6,645
    
    
    $
    5,736
    
    
    $
    6,212Net loss:Canadian GAAP
    
    $
    (4,388
    )
    
    $
    (4,405
    )
    
    $
    (5,376
    )
    
    $
    (8,885
    )
    
    $
    (2,113
    )
    
    $
    (1,031
    )
    
    $
    (1,483
    )
    
    $
    (17,184
    )U.S. GAAP
    
    $
    (7,117
    )
    
    $
    (3,982
    )
    
    $
    (12,112
    )
    
    $
    (8,557
    )
    
    $
    (1,843
    )
    
    $
    (1,564
    )
    
    $
    (3,008
    )
    
    $
    (15,736
    )Net loss per share:Canadian GAAP
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )
    
    $
    (0.04
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.09
    )U.S. GAAP
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (0.05
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.09
    )
  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 Security Holders: None
 Item 5. Other Information: None
 Item 6. Exhibits
 EXHIBITNUMBER
    
    DESCRIPTION31.1
    
    Certification by the Principal
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 Principal
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
    By:
    
    /s/ W. Gordon LancasterName:
    
    W. Gordon LancasterTitle:
    
    Chief Financial Officer
  42




---



##### 



INDEX TO EXHIBITS
 ExhibitNumber
    
    Description31.1
    
    Certification by the Principal
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 Principal
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