##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2004
 oro
    
    Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from __________ to __________Commission file number 000-30586
 IVANHOE ENERGY INC. (Exact name of registrant as specified in its charter)
 Yukon, Canada(State or other jurisdiction of
incorporation or organization)
    
    98-0372413(I.R.S. Employer
Identification No.)
 Suite 654  999 Canada Place
Vancouver, British Columbia, Canada
V6C 3E1 (Address of principal executive office)
 (604) 688-8323 (registrants telephone number, including area code)
 Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report: Not Applicable Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes    
x                     No     o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act) Yes    
x                     No     o The number of shares of the registrants capital stock outstanding as of
September 30, 2004 was 169,604,911 Common Shares, no par value.




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TABLE OF CONTENTS PagePART I
    
    Financial InformationItem 1
    
    Financial StatementsUnaudited Consolidated Balance Sheets as at
September 30, 2004 and December 31, 2003 (restated)
    
    
    3Unaudited Consolidated Statements of Loss and Deficit
for the Three-Month and Nine-Month Periods Ended
September 30, 2004 and 2003 (restated)
    
    
    4Unaudited Consolidated Statements of Cash Flow for the
Three-Month and Nine-Month Periods Ended September 30,
2004 and 2003 (restated)
    
    
    5Notes to the
Unaudited Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risks
    
    
    22Item 4.
    
    Controls and Procedures
    
    
    22PART II
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    23Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    23Item 3.
    
    Defaults Upon Senior Securities
    
    
    23Item 4.
    
    Submission of Matters To a Vote of Securityholders
    
    
    23Item 5.
    
    Other Information
    
    
    23Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    23
 2




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##### 



Part I  Financial Information Item 1 Financial Statements IVANHOE ENERGY INC.
Unaudited Consolidated Balance Sheets
(stated in thousands of U.S. Dollars except share amounts) September 30, 2004
    
    December 31, 2003(restatedNotes 2 and 7)AssetsCurrent AssetsCash and cash equivalents
    
    $
    18,571
    
    
    $
    14,491Accounts receivable
    
    
    4,923
    
    
    
    2,720Other
    
    
    338
    
    
    
    40923,832
    
    
    
    17,620Long term assets
    
    
    4,222
    
    
    
    998Oil and gas properties, equipment and investments, net
    
    
    102,821
    
    
    
    87,956$
    130,875
    
    
    $
    106,574Liabilities and Shareholders EquityCurrent LiabilitiesAccounts payable and accrued liabilities
    
    $
    5,148
    
    
    $
    4,516Note payable  current portion
    
    
    1,667
    
    
    
    1676,815
    
    
    
    4,683Note payable
    
    
    3,056
    
    
    
    833Asset retirement obligations
    
    
    659
    
    
    
    521Commitments and contingenciesShareholders EquityShare capital, issued 169,604,911 common shares;
December 31, 2003 161,359,339 common shares
    
    
    183,528
    
    
    
    161,075Contributed surplus
    
    
    1,412
    
    
    
    516Deficit
    
    
    (64,595
    )
    
    
    (61,054
    )120,345
    
    
    
    100,537$
    130,875
    
    
    $
    106,574
 (See accompanying notes) 3




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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Loss and Deficit
(stated in thousands of U.S. Dollars except per share amounts) Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(restated
    
    
    
    (restatedNotes 2 and 7)
    
    
    
    Notes 2 and 7)RevenueOil and gas revenue
    
    $
    4,874
    
    
    $
    2,405
    
    
    $
    11,638
    
    
    $
    7,269Interest income
    
    
    58
    
    
    
    18
    
    
    
    147
    
    
    
    604,932
    
    
    
    2,423
    
    
    
    11,785
    
    
    
    7,329ExpensesOperating costs
    
    
    1,257
    
    
    
    1,148
    
    
    
    3,688
    
    
    
    2,993General and administrative
    
    
    2,336
    
    
    
    1,689
    
    
    
    6,149
    
    
    
    5,453Depletion and depreciation
    
    
    2,290
    
    
    
    915
    
    
    
    5,239
    
    
    
    2,586Write down of GTL investments
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    3,3215,883
    
    
    
    3,752
    
    
    
    15,326
    
    
    
    14,353Net Loss
    
    
    951
    
    
    
    1,329
    
    
    
    3,541
    
    
    
    7,024Deficit, beginning of period, as previously reported
    
    
    63,644
    
    
    
    36,027
    
    
    
    60,267
    
    
    
    30,564Retroactive application of change in accounting policy for
stock based compensation
    
    
    
    
    
    
    543
    
    
    
    787
    
    
    
    311Deficit, beginning of the period, as restated
    
    
    63,644
    
    
    
    36,570
    
    
    
    61,054
    
    
    
    30,875Deficit, end of period
    
    $
    64,595
    
    
    $
    37,899
    
    
    $
    64,595
    
    
    $
    37,899Net Loss per share  Basic and Diluted
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.05Weighted Average Number of Shares (in thousands)
    
    
    169,534
    
    
    
    151,088
    
    
    
    166,935
    
    
    
    146,940
 (See accompanying notes) 4




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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Cash Flow
(stated in thousands of U.S. Dollars) Three Months
    
    Nine MonthsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003(restated
    
    
    
    
    
    (restatedNotes 2 and 7)
    
    
    
    
    
    Notes 2 and 7)Operating ActivitiesNet loss
    
    $
    (951
    )
    
    $
    (1,329
    )
    
    $
    (3,541
    )
    
    $
    (7,024
    )Items not requiring use of cashDepletion and depreciation
    
    
    2,290
    
    
    
    915
    
    
    
    5,239
    
    
    
    2,586Write down of GTL investments
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    3,321Stock based compensation
    
    
    430
    
    
    
    123
    
    
    
    911
    
    
    
    355Changes in non-cash working capital items
    
    
    (1,969
    )
    
    
    (468
    )
    
    
    (1,725
    )
    
    
    1,182(200
    )
    
    
    (759
    )
    
    
    1,134
    
    
    
    420Investing ActivitiesCapital spending
    
    
    (8,389
    )
    
    
    (4,097
    )
    
    
    (33,745
    )
    
    
    (8,870
    )Equity investment and other related costs
    
    
    (653
    )
    
    
    
    
    
    
    (3,153
    )
    
    
    Proceeds from sale of assets
    
    
    
    
    
    
    
    
    
    
    13,458
    
    
    
    Changes in non-cash working capital items
    
    
    (4,559
    )
    
    
    (790
    )
    
    
    572
    
    
    
    (81
    )(13,601
    )
    
    
    (4,887
    )
    
    
    (22,868
    )
    
    
    (8,951
    )Financing ActivitiesShares issued on private placements, net of share issue
costs
    
    
    
    
    
    
    11,603
    
    
    
    20,428
    
    
    
    11,603Shares issued on exercise of options
    
    
    289
    
    
    
    134
    
    
    
    1,664
    
    
    
    134Proceeds from notes and advances
    
    
    2,000
    
    
    
    
    
    
    
    14,000
    
    
    
    1,750Payments of notes
    
    
    (278
    )
    
    
    (1,250
    )
    
    
    (278
    )
    
    
    (1,250
    )Redemption of advance payable
    
    
    
    
    
    
    
    
    
    
    (10,000
    )
    
    
    2,011
    
    
    
    10,487
    
    
    
    25,814
    
    
    
    12,237Increase (decrease) in cash and cash equivalents, for the
period
    
    
    (11,790
    )
    
    
    4,841
    
    
    
    4,080
    
    
    
    3,706Cash and cash equivalents, beginning of period
    
    
    30,361
    
    
    
    2,845
    
    
    
    14,491
    
    
    
    3,980Cash and cash equivalents, end of period
    
    $
    18,571
    
    
    $
    7,686
    
    
    $
    18,571
    
    
    $
    7,686Included in the above are the following:Taxes paid
    
    $
    
    
    
    $
    
    
    
    $
    3
    
    
    $
    6Interest paid
    
    $
    52
    
    
    $
    43
    
    
    $
    80
    
    
    $
    85Changes in non-cash working capital items
Operating Activities:Accounts receivable
    
    $
    (849
    )
    
    $
    (423
    )
    
    $
    (1,705
    )
    
    $
    (43
    )Other current assets
    
    
    40
    
    
    
    51
    
    
    
    71
    
    
    
    563Accounts payable and accrued liabilities
    
    
    (1,160
    )
    
    
    (96
    )
    
    
    (91
    )
    
    
    662(1,969
    )
    
    
    (468
    )
    
    
    (1,725
    )
    
    
    1,182Investing ActivitiesAccounts receivable
    
    
    655
    
    
    
    
    
    
    
    (498
    )
    
    
    Accounts payable and accrued liabilities
    
    
    (5,214
    )
    
    
    (790
    )
    
    
    1,070
    
    
    
    (81
    )(4,559
    )
    
    
    (790
    )
    
    
    572
    
    
    
    (81
    )$
    (6,528
    )
    
    $
    (1,258
    )
    
    $
    (1,153
    )
    
    $
    1,101
 (See accompanying notes) 5




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Notes to the Consolidated Financial Statements
September 30, 2004
(all tabular amounts are expressed in thousands of U.S. dollars except per share data)
(Unaudited) 1. BASIS OF PRESENTATION The Companys accounting policies are in accordance with accounting principles
generally accepted in Canada. These policies are consistent with accounting
principles generally accepted in the U.S., except as outlined in Note 13. The
unaudited consolidated financial statements have been prepared on a basis
consistent with the accounting principles and policies reflected in the
December 31, 2003 consolidated financial statements, except for a change in the
policy of accounting for stock based compensation which has been implemented
retroactively with a restatement of prior period financial statements, and
should be read in conjunction therewith. These interim consolidated financial
statements do not include all disclosures normally provided in annual
consolidated financial statements and should be read in conjunction with the
most recent annual consolidated financial statements. The December 31, 2003
consolidated balance sheet, as restated, was derived from the audited
consolidated financial statements, but does not include all disclosures
required by generally accepted accounting principles (GAAP) in Canada and the
U.S. In the opinion of management, all adjustments (which included normal
recurring adjustments) necessary for the fair presentation for the interim
periods have been made. The results of operations and cash flows are not
necessarily indicative of the results for a full year. The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts and other disclosures in these
consolidated financial statements. Actual results may differ from those
estimates. 2. CHANGE IN ACCOUNTING POLICY Prior to January 1, 2004, the Company accounted for options granted to
employees and directors using the intrinsic-value of the options. Under this
method, compensation costs were not recognized in the financial statements for
share options granted at market value but rather disclosure was required, on a
pro forma basis, of the impact on net income of using the fair value at the
option grant date. The Company does, however, recognize compensation costs in
its financial statements for options granted to non-employees after January 1,
2002 based on the fair value of the options at the date granted. The Company
uses the Black-Scholes option pricing model for determining the fair value of
options issued at grant date. For fiscal years beginning on or after January 1, 2004, Canadian GAAP requires
compensation costs to be recognized in the financial statements using the fair
value based method of accounting for all stock options granted after January 1,
2002. Implementation of this change in accounting policy requires retroactive
application with the option of restating financial statements of prior periods. Accordingly, effective January 1, 2004, the Company changed its accounting
policy, for Canadian GAAP purposes, to recognize compensation costs using the
fair value based method of accounting for stock options granted to employees
and directors after January 1, 2002. This change has been adopted retroactively
and the Company has elected to restate the financial statements of prior
periods (See Note 7). 6




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3. OIL AND GAS PROPERTIES, EQUIPMENT AND INVESTMENTS Capital assets categorized by geographical location are as follows: As at September 30, 2004
    
    As at December 31, 2003U.S.
    
    China
    
    Total
    
    U.S.
    
    China
    
    TotalOil and Gas Properties
and Equipment:
    
    $
    98,472
    
    
    $
    38,016
    
    
    $
    136,488
    
    
    $
    85,079
    
    
    $
    32,840
    
    
    $
    117,919Accumulated depletion
    
    
    (9,812
    )
    
    
    (5,564
    )
    
    
    (15,376
    )
    
    
    (6,442
    )
    
    
    (3,804
    )
    
    
    (10,246
    )Provision for impairment
    
    
    (34,000
    )
    
    
    
    
    
    
    (34,000
    )
    
    
    (34,000
    )
    
    
    
    
    
    
    (34,000
    )54,660
    
    
    
    32,452
    
    
    
    87,112
    
    
    
    44,637
    
    
    
    29,036
    
    
    
    73,673GTL Investments:Master License
    
    
    10,000
    
    
    
    
    
    
    
    10,000
    
    
    
    10,000
    
    
    
    
    
    
    
    10,000Feasibility studies and
other deferred
costs
    
    
    3,765
    
    
    
    
    
    
    
    3,765
    
    
    
    3,947
    
    
    
    
    
    
    
    3,94713,765
    
    
    
    
    
    
    
    13,765
    
    
    
    13,947
    
    
    
    
    
    
    
    13,947EOR Investments:Feasibility studies and
other deferred
costs
    
    
    1,748
    
    
    
    
    
    
    
    1,748
    
    
    
    125
    
    
    
    
    
    
    
    125Support Equipment
    
    
    459
    
    
    
    35
    
    
    
    494
    
    
    
    433
    
    
    
    31
    
    
    
    464Accumulated depreciation
    
    
    (298
    )
    
    
    
    
    
    
    (298
    )
    
    
    (253
    )
    
    
    
    
    
    
    (253
    )161
    
    
    
    35
    
    
    
    196
    
    
    
    180
    
    
    
    31
    
    
    
    211$
    70,334
    
    
    $
    32,487
    
    
    $
    102,821
    
    
    $
    58,889
    
    
    $
    29,067
    
    
    $
    87,956
 In January 2004, the Company signed farm-out and joint operating agreements
with Richfirst Holdings Limited (Richfirst), a wholly owned subsidiary of
China International Trust & Investment Company to jointly develop the Dagang
oil project. Richfirst acquired a 40% working interest in the project for $20.0
million following Chinese regulatory approvals, which were finalized in June
2004 (See Note 9). The carrying value of the Companys oil and gas assets was
reduced by $13.5 million for the amount of the proceeds associated with the
sale of the working interest. The reduction in the carrying value does not
significantly alter the depletion rate of the China oil and gas assets. The
$6.5 million balance of the proceeds will fund a portion of Richfirsts share
of future Dagang oil project costs and the unspent balance was $0.8 million as
at September 30, 2004. As a result of the Companys on-going evaluation of its GTL investments, $0.3
million of its investments were written down for the three-month period ended
June 30, 2004 as the opportunity to build a 45,000-barrels per day GTL fuels
plant in Oman failed to materialize due to a lack of sufficient uncommitted gas
volumes to support a plant of that size. 4. LONG TERM ASSETS In January 2004, the Company signed a Stock Purchase and Shareholders
Agreement with Ensyn Group Inc. (Ensyn Group) and its subsidiary, Ensyn
Petroleum International Ltd. (Ensyn), pursuant to which the Company acquired
a 10% equity interest in Ensyn and exclusive rights to deploy the proprietary
Ensyn RTPTM Process in several key international markets. The Company paid $2.0
million and will grant Ensyn rights to acquire equity interests in the
Companys international oil development projects that use the Ensyn RTPTM
Process. In August 2004, the Company acquired an additional 5% equity interest in Ensyn
for $1.0 million. As at September 30, 2004, the 15% investment in Ensyn and
related costs of $0.7 million are included in long-term assets (See Note 12). 7




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5. SEGMENT INFORMATION The following tables present the Companys interim segment information for the
three-month and nine-month periods ended September 30, 2004 and 2003 and
identifiable assets as at September 30, 2004 and December 31, 2003: Three Month Periods Ended September 30,2004
    
    2003(restated Notes 2 and 7)U.S.
    
    China
    
    Total
    
    U.S.
    
    China
    
    TotalOil and gas revenue
    
    $
    2,628
    
    
    $
    2,246
    
    
    $
    4,874
    
    
    $
    1,385
    
    
    $
    1,020
    
    
    $
    2,405Interest income
    
    
    46
    
    
    
    12
    
    
    
    58
    
    
    
    18
    
    
    
    
    
    
    
    182,674
    
    
    
    2,258
    
    
    
    4,932
    
    
    
    1,403
    
    
    
    1,020
    
    
    
    2,423Operating costs
    
    
    863
    
    
    
    394
    
    
    
    1,257
    
    
    
    630
    
    
    
    518
    
    
    
    1,148Depletion and depreciation
    
    
    1,605
    
    
    
    685
    
    
    
    2,290
    
    
    
    588
    
    
    
    327
    
    
    
    9152,468
    
    
    
    1,079
    
    
    
    3,547
    
    
    
    1,218
    
    
    
    845
    
    
    
    2,063Segment income before the following
    
    $
    206
    
    
    $
    1,179
    
    
    
    1,385
    
    
    $
    185
    
    
    $
    175
    
    
    
    360General and administrative
    
    
    
    
    
    
    
    
    
    
    2,336
    
    
    
    
    
    
    
    
    
    
    
    1,689Net loss
    
    
    
    
    
    
    
    
    
    $
    951
    
    
    
    
    
    
    
    
    
    
    $
    1,329Capital Expenditures:Oil and gas
    
    $
    3,400
    
    
    $
    4,480
    
    
    $
    7,880
    
    
    $
    2,831
    
    
    $
    1,144
    
    
    $
    3,975Gas-to-liquids and EOR Investments
    
    
    509
    
    
    
    
    
    
    
    509
    
    
    
    122
    
    
    
    
    
    
    
    122$
    3,909
    
    
    $
    4,480
    
    
    $
    8,389
    
    
    $
    2,953
    
    
    $
    1,144
    
    
    $
    4,097
 Nine Month Periods Ended September 30,2004
    
    2003(restated Notes 2 and 7)U.S.
    
    China
    
    Total
    
    U.S.
    
    China
    
    TotalOil and gas revenue
    
    $
    6,428
    
    
    $
    5,210
    
    
    $
    11,638
    
    
    $
    4,074
    
    
    $
    3,195
    
    
    $
    7,269Interest income
    
    
    135
    
    
    
    12
    
    
    
    147
    
    
    
    60
    
    
    
    
    
    
    
    606,563
    
    
    
    5,222
    
    
    
    11,785
    
    
    
    4,134
    
    
    
    3,195
    
    
    
    7,329Operating costs
    
    
    2,294
    
    
    
    1,394
    
    
    
    3,688
    
    
    
    1,643
    
    
    
    1,350
    
    
    
    2,993Depletion and depreciation
    
    
    3,479
    
    
    
    1,760
    
    
    
    5,239
    
    
    
    1,576
    
    
    
    1,010
    
    
    
    2,5865,773
    
    
    
    3,154
    
    
    
    8,927
    
    
    
    3,219
    
    
    
    2,360
    
    
    
    5,579Segment income before the following
    
    $
    790
    
    
    $
    2,068
    
    
    
    2,858
    
    
    $
    915
    
    
    $
    835
    
    
    
    1,750Write down of GTL investments
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    3,321General and administrative
    
    
    
    
    
    
    
    
    
    
    6,149
    
    
    
    
    
    
    
    
    
    
    
    5,453Net loss
    
    
    
    
    
    
    
    
    
    $
    3,541
    
    
    
    
    
    
    
    
    
    
    $
    7,024Capital expenditures:Oil and gas
    
    $
    13,423
    
    
    $
    18,632
    
    
    $
    32,055
    
    
    $
    5,500
    
    
    $
    2,835
    
    
    $
    8,335Gas-to-liquids and EOR Investments
    
    
    1,690
    
    
    
    
    
    
    
    1,690
    
    
    
    535
    
    
    
    
    
    
    
    535$
    15,113
    
    
    $
    18,632
    
    
    $
    33,745
    
    
    $
    6,035
    
    
    $
    2,835
    
    
    $
    8,870
 As at September 30, 2004
    
    As at December 31, 2003U.S.
    
    China
    
    Total
    
    U.S.
    
    China
    
    TotalIdentifiable Assets:Oil & gas
    
    $
    79,441
    
    
    $
    35,526
    
    
    $
    114,967
    
    
    $
    61,379
    
    
    $
    30,766
    
    
    $
    92,145Gas-to-liquids and EOR Investments
    
    
    15,908
    
    
    
    
    
    
    
    15,908
    
    
    
    14,429
    
    
    
    
    
    
    
    14,429$
    95,349
    
    
    $
    35,526
    
    
    $
    130,875
    
    
    $
    75,808
    
    
    $
    30,766
    
    
    $
    106,574
 8




---



##### 



6. SHARE CAPITAL Following is a summary of the changes in share capital and stock options
outstanding for the nine-month period ended September 30, 2004: Common Shares
    
    Stock OptionsWeightedAverageExerciseNumber
    
    
    
    
    
    Number
    
    Price(thousands)
    
    Amount
    
    (thousands)
    
    Cdn.$(restated Notes 2and 7)Balance December 31, 2003, as previously reported
    
    
    161,359
    
    
    $
    160,804
    
    
    
    8,949
    
    
    $
    2.64Retroactive application of change in accounting
policy for stock based compensation
    
    
    
    
    
    
    271Balance December 31, 2003, as restated
    
    
    161,359
    
    
    
    161,075
    
    
    
    8,949
    
    
    $
    2.64Shares issued on private placements, net of share
issue costs
    
    
    7,173
    
    
    
    20,428
    
    
    
    Shares issued for services
    
    
    158
    
    
    
    347
    
    
    
    Shares issued on exercise of options
    
    
    915
    
    
    
    1,678
    
    
    
    (915
    )
    
    $
    2.49Options granted
    
    
    
    
    
    
    
    
    
    
    458
    
    
    $
    2.38Options expired
    
    
    
    
    
    
    
    
    
    
    (240
    )
    
    $
    2.35Balance September 30, 2004
    
    
    169,605
    
    
    $
    183,528
    
    
    
    8,252
    
    
    $
    2.65
 In the first quarter of 2004, the Company closed two special warrant financings
to advance its international and North American oil and gas operations and for
general corporate purposes. The financings consisted of 7,172,414 special
warrants at $2.90 per special warrant. Each special warrant entitles the holder
to acquire one common share and one common-share purchase warrant at no
additional cost. Two common-share purchase warrants are exercisable to purchase
an additional common share at $3.00 at any time on or prior to the first
anniversary date following the special warrant date of issue and at $3.20
thereafter until the second anniversary date of the special warrant date of
issue. The net proceeds from the special warrant financings have been
apportioned to the common shares. No amounts have been apportioned to the
purchase warrants. The following common-share purchase warrants are outstanding and exercisable as
at September 30, 2004: Remaining
    
    Number of
    
    First Anniversary
    
    Second AnniversaryNumber of
    
    Equivalent
    
    
    
    
    
    Price per
    
    
    
    
    
    Price perPurchase
    
    Common
    
    
    
    
    
    Share
    
    
    
    
    
    ShareWarrants
    
    Shares
    
    Date
    
    (US$)
    
    Date
    
    (US$)(thousands)3,000
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    July 3, 2005
    
    
    $1.103,000
    
    
    1,500
    
    
    
    
    
    
    
    
    
    
    August 18, 2005
    
    
    $1.103,029
    
    
    1,515
    
    
    
    
    
    
    
    
    
    
    August 21, 2005
    
    
    $1.871,250
    
    
    1,250
    
    
    October 31, 2004
    
    
    $4.00
    
    
    October 31, 2005
    
    
    $4.305,448
    
    
    2,724
    
    
    February 18, 2005
    
    
    $3.00
    
    
    February 18, 2006
    
    
    $3.201,724
    
    
    862
    
    
    March 5, 2005
    
    
    $3.00
    
    
    March 5, 2006
    
    
    $3.2017,451
    
    
    9,351
 7. STOCK BASED COMPENSATION The Company accounts for all stock options granted using the fair value based
method of accounting. This method was adopted retroactively effective January
1, 2004 for stock options granted to employees and directors after January 1,
2002. Under this method, compensation costs are recognized in the financial
statements over the options vesting period using an option-pricing model for
determining the fair value of the options at the grant date. 9




---



##### 



The effect of the accounting change on the net loss for the three-month and
nine-month periods ended September 30, 2004 was an increase of $0.4 million and
$0.9 million, respectively, and on the net loss for the three-month and
nine-month periods ended September 30, 2003, as previously reported, was an
increase of $0.1 million and $0.4 million, respectively. There is negligible
effect on the net loss per share for the periods presented. The deficit as at
the beginning of the nine-month periods ended September 30, 2004 and 2003 has
increased $0.8 million and $0.3 million, respectively, to reflect the
retroactive adoption of the fair value based method of accounting for stock
options granted to employees and directors after January 1, 2002. Additionally,
0.3 million options granted to employees and directors after January 1, 2002
were exercised during the third and fourth quarters of 2003 resulting in a $0.3
million increase in share capital as at December 31, 2003 with a corresponding
reduction in contributed surplus. The fair values were calculated in accordance with the Black-Scholes option
pricing model, using the following data and assumptions: 72% to 110% expected
price volatility, using the prior two years weekly average prices of the
Companys common shares; expected dividend yield of 0%; option terms to expiry
of 5 years, as defined by the option agreements; risk-free rate of return as of
the date of the grant of 3.5% to 5.6%, based on five year Canada Bond yields. 8. NOTE PAYABLE In February 2003, the Company obtained a bank facility for up to $5.0 million
to drill 30 new oil wells and upgrade surface transmission and steam injection
facilities in the southern expansion of South Midway. The loan is repayable
over three years plus interest at 0.50% above the banks prime rate or 3.0%
over LIBOR, at the option of the Company. The loan is secured by all the
Companys rights and interests in the South Midway properties. The loan balance
as at September 30, 2004 is $4.7 million with a six month LIBOR interest rate
of 5.25%. 9. ADVANCE PAYABLE In March 2004, the Company received a $10.0 million advance as part of the
$20.0 million up-front payment due from Richfirst for their farm-in to the
Dagang oil project (See Note 3). Upon
finalization of the farm-in agreement in June 2004, Richfirst elected to apply
$10.0 million of the up-front payment due to the Company against the advance. 10. ASSET RETIREMENT OBLIGATION The undiscounted amount of expected cash flows required to settle the Companys
asset retirement obligations is estimated at $1.2 million to be settled over a
twelve-year period starting in 2010. The liability for the expected cash flows,
as reflected in the financial statements, has been discounted at 5% to 7%. 11. COMMITMENTS AND CONTINGENCIES With the signing of the production-sharing contract in September 2002 for the
Zitong block, the Company is obligated to conduct a minimum exploration program
during the first three years, which will include acquiring seismic data,
reprocessing existing seismic and drilling two exploration wells. At the end of
the three-year period, if the Company does not complete the minimum exploration
program, and elects not to continue, it will be obligated to pay, to PetroChina
within 30 days, a cash equivalent of the deficiency in the work program. The
remaining cost of the minimum exploration program is estimated to be at least
$10.7 million as at September 30, 2004. 10




---



##### 



The Company has temporarily abandoned the Northwest Lost Hills #1-22 well
pending the identification of one or more partners to share the costs of the
testing program. If the well were permanently abandoned, the Company would be
obligated for its share of the costs to plug and abandon the well, which is
estimated to be $1.1 million. There is no provision in the balance sheet for
this contingent obligation. 12. SUBSEQUENT EVENT In October 2004, the Company signed an agreement with Ensyn Group and Ensyn
pursuant to which the Company will pay $1.0 million as consideration for an
option to acquire an additional 5% equity interest in Ensyn for $4.0 million.
The option expires 15 business days after December 31, 2004. 13. ADDITIONAL DISCLOSURE REQUIRED UNDER U.S. GAAP The consolidated financial statements have been prepared in accordance with
Canadian GAAP, which conforms to U.S. GAAP except as below: Consolidated Balance Sheets As discussed under Stock Based Compensation in Note 7, the Company changed
its accounting policy, for Canadian GAAP, to recognize compensation costs using
the fair value based method of accounting for stock options granted to
employees and directors after January 1, 2002. For U.S. GAAP, the Company
continues to apply APB Opinion No. 25, as interpreted by FASB Interpretation
No. 44, in accounting for its stock option plan and does not recognize
compensation costs in its financial statements for stock options issued to
employees and directors. Accordingly, for U.S. GAAP purposes, share capital
would be reduced by $0.3 million as at September 30, 2004 and December 31, 2003
related to the employees and directors exercise of options in 2003;
contributed surplus would be reduced by $1.4 million and $0.5 million as at
September 30, 2004 and December 31, 2003, respectively, for stock options
issued to employees and directors, but not yet exercised; and the deficit as at
September 30, 2004 and December 31, 2003 would be reduced by $1.7 million and
$0.8 million, respectively, for the amount of stock based compensation expense
recognized for Canadian GAAP. The application of U.S. GAAP has the following effect on oil and gas properties
and shareholders equity: As at September 30, 2004
    
    As at December 31, 2003Oil and Gas
    
    Shareholders
    
    Oil and Gas
    
    ShareholdersProperties
    
    Equity
    
    Properties
    
    EquityCanadian GAAP
    
    $
    102,821
    
    
    $
    120,345
    
    
    $
    87,956
    
    
    $
    100,537Adjustment to ascribed value of shares
issued for royalty interests
    
    
    1,358
    
    
    
    1,358
    
    
    
    1,358
    
    
    
    1,358Impairment provision for China properties, net
of depletion
    
    
    (9,690
    )
    
    
    (9,690
    )
    
    
    (9,834
    )
    
    
    (9,834
    )GTL and EOR development costs written off
    
    
    (5,513
    )
    
    
    (5,513
    )
    
    
    (4,074
    )
    
    
    (4,074
    )Adjustment for change in accounting for
stock based compensation:Share capital
    
    
    
    
    
    
    (271
    )
    
    
    
    
    
    
    (271
    )Contributed surplus
    
    
    
    
    
    
    (1,393
    )
    
    
    
    
    
    
    (516
    )Deficit
    
    
    
    
    
    
    1,664
    
    
    
    
    
    
    
    787U.S. GAAP
    
    $
    88,976
    
    
    $
    106,500
    
    
    $
    75,406
    
    
    $
    87,987
 11




---



##### 



Under U.S. GAAP, the transfer of deficit to share capital, which occurred in
1999, would not be recognized and shareholders equity would be presented as
follows: September 30,
    
    December 31,2004
    
    2003Share capital (including adjustments above)
    
    $
    259,071
    
    
    $
    236,617Contributed surplus (non-employee stock based compensation)
    
    
    19
    
    
    
    Deficit (Including adjustments above)
    
    
    (152,590
    )
    
    
    (148,630
    )$
    106,500
    
    
    $
    87,987
 Consolidated Statements of Loss and Deficit As discussed under Oil and Gas Properties in Note 20 of the Companys
December 31, 2003 consolidated financial statements, there is a difference in
performing the ceiling test evaluation under full cost accounting between U.S.
and Canadian GAAP. Application of the ceiling test evaluation under U.S. GAAP
as at December 31, 2001 required an additional $10.0 million provision for
impairment with respect to the Companys China properties. This difference
results in a lower depletion rate for U.S. GAAP. The capitalization of development costs permitted under Canadian GAAP in
connection with our GTL and EOR prospects is not permitted under U.S. GAAP. The application of U.S. GAAP has the following effect on net loss and net loss
per share: Three Month Periods Ended September 30,2004
    
    2003Net
    
    Net Loss
    
    Net
    
    Net LossLoss
    
    Per Share
    
    Loss
    
    Per ShareCanadian GAAP
    
    $
    951
    
    
    $
    0.01
    
    
    $
    1,329
    
    
    $
    0.01Stock based compensation expense
    
    
    (416
    )
    
    
    
    
    
    
    (123
    )
    
    
    Depletion adjustment  China
    
    
    (64
    )
    
    
    
    
    
    
    (22
    )
    
    
    GTL and EOR development costs written off, net
    
    
    509
    
    
    
    
    
    
    
    122
    
    
    
    U.S. GAAP
    
    $
    980
    
    
    $
    0.01
    
    
    $
    1,306
    
    
    $
    0.01Weighted Average Number of Shares under U.S.
GAAP (in thousands)
    
    
    
    
    
    
    169,534
    
    
    
    
    
    
    
    151,088
 Nine Month Periods Ended September 30,2004
    
    2003Net
    
    Net Loss
    
    Net
    
    Net LossLoss
    
    Per Share
    
    Loss
    
    Per ShareCanadian GAAP
    
    $
    3,541
    
    
    $
    0.02
    
    
    $
    7,024
    
    
    $
    0.05Stock based compensation expense
    
    
    (877
    )
    
    
    
    
    
    
    (355
    )
    
    
    Depletion adjustment  China
    
    
    (144
    )
    
    
    
    
    
    
    (66
    )
    
    
    GTL and EOR development costs written off, net
    
    
    1,440
    
    
    
    
    
    
    
    (2,786
    )
    
    
    (0.02
    )U.S. GAAP
    
    $
    3,960
    
    
    $
    0.02
    
    
    $
    3,817
    
    
    $
    0.03Weighted Average Number of Shares under U.S.
GAAP (in thousands)
    
    
    
    
    
    
    166,935
    
    
    
    
    
    
    
    146,940
 Stock Based Compensation Had compensation expense been determined based on the fair value of options
issued to employees and directors at the stock option grant date, including
those granted prior to January 1, 2002, consistent with the method of SFAS No.
123, Accounting for Stock-Based Compensation, the Companys net loss and net
loss per share would have been as follows: 12




---



##### 



Three Month Periods
    
    Nine Month PeriodsEnded September 30,
    
    Ended September 30,2004
    
    2003
    
    2004
    
    2003Net loss under U.S. GAAP
    
    $
    980
    
    
    $
    1,306
    
    
    $
    3,960
    
    
    $
    3,817Stock-based compensation expense determined under the
fair value based method for employee and director awards
    
    
    507
    
    
    
    428
    
    
    
    1,499
    
    
    
    1,235Pro forma net loss under U.S. GAAP
    
    $
    1,487
    
    
    $
    1,734
    
    
    $
    5,459
    
    
    $
    5,052Basic and diluted loss per common share under U.S. GAAP:As reported
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.02
    
    
    $
    0.03Pro forma
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.03Weighted Average Number of Shares under U.S. GAAP (in
thousands)
    
    
    169,534
    
    
    
    151,088
    
    
    
    166,935
    
    
    
    146,940
 Impact of New and Pending U.S. GAAP Accounting Standards In March 2004, the FASB issued an exposure draft Share-Based Payment. This
exposure draft proposes to revoke the alternative of accounting for employee
stock based compensation under the intrinsic value method. As the Company is
currently using the provision under SFAS 123 that allow the use of the
intrinsic method of accounting for share-based payments, it is anticipated that
the adoption of this exposure draft may have a material impact on the Companys
results of operations or financial position. However, at this time the exposure
draft has neither been accepted nor rejected by the FASB. If adopted, the
application of this policy is expected to be for interim or annual periods
beginning after June 15, 2005. In June 2004, the FASB issued an exposure draft of a proposed statement, Fair
Value Measurements to provide guidance on how to measure the fair value of
financial and non-financial assets and liabilities when required by other
authoritative accounting pronouncements. The proposed statement attempts to
address concerns about the ability to develop reliable estimates of fair value
and inconsistencies in fair value guidance provided by current U.S. GAAP, by
creating a framework that clarifies the fair value objective and its
application in GAAP. In addition, the proposal expands disclosures required
about the use of fair value to re-measure assets and liabilities. The standard
would be effective for financial statements issued for fiscal years beginning
after June 15, 2005. In September of 2004, the SEC released Staff Accounting Bulletin No. 106, which
provides guidance regarding the interaction of Statement of Financial
Accounting Standard No. 143, Accounting for Asset Retirement Obligations (SFAS
143) with the full cost accounting rules in Article 4-10 of Regulation S-X.
This bulletin clarifies the treatment of assets and liabilities resulting from
the implementation of SFAS 143 on the full cost ceiling test and the
calculation of depletion, depreciation and amortization. The Company is in
compliance with the provisions of Staff Accounting Bulletin No. 106. Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements With the exception of historical information, certain matters discussed in this
Form 10-Q are forward looking statements that involve risks and uncertainties.
Certain statements contained in this Form 10-Q, including statements which may
contain words such as could, should, expect, believe, will and
similar expressions and statements relating to matters that are not historical
facts are forward-looking statements. Such statements involve known and unknown
risks and uncertainties which may cause our actual results, performances or
achievements to be materially different from any future results, performance or
achievements 13




---



##### 



expressed or implied by such forward-looking statements. Although we believe
that our expectations are based on reasonable assumptions, we can give no
assurance that our goals will be achieved. Important factors that could cause
actual results to differ materially from those in the forward-looking
statements herein include, but are not limited to, our ability to raise capital
as and when required, the timing and extent of changes in prices for oil and
gas, competition, environmental risks, drilling and operating risks,
uncertainties about the estimates of reserves and the potential success of
heavy-to-light and gas-to-liquids development technologies, the prices of goods
and services, the availability of drilling rigs and other support services,
legislative and government regulations, political and economic factors in countries in which we
operate and implementation of our capital investment program. The following should be read in conjunction with the Companys consolidated
financial statements contained herein and in the Form 10-K for the year ended
December 31, 2003, along with Managements Discussion and Analysis of Financial
Condition and Results of Operations contained in such Form 10-K. Any terms
used but not defined in the following discussion have the same meaning given to
them in the Form 10-K. Results of Operations For the three-month period ended September 30, 2004, the net loss was $1.0
million ($0.01 per share) compared to a net loss of $1.3 million ($0.01 per
share) for the same period in 2003. The net loss for the nine-month period
ended September 30, 2004 was $3.5 million ($0.02 per share) compared to a net
loss of $7.0 million ($0.05 per share) for the same period in 2003. The net
loss for the nine-month period ended September 30, 2003 includes a $3.3 million
($0.02 per share) write down of our investment in the Qatar gas-to-liquids
project as a result of the termination of contract negotiations in May 2003. Cash deficiency from operating activities for the three-month period ended
September 30, 2004 was $0.2 million compared to cash deficiency from operating
activities of $0.8 million for the same period in 2003. Our cash from
operations for the nine-month period ended September 30, 2004 was $1.1 million
compared to cash from operations of $0.4 million for the same period in 2003.
Our cash position increased $4.1 million for the first nine months of 2004
primarily due to net proceeds of $20.4 million received from private placements
in the first quarter of 2004, $20.0 million from Richfirst related to its
farm-in to the Dagang oil project development program, $3.7 million in net
proceeds from the Wells Fargo loan related to the development of our South
Midway field, $1.7 million from the exercise of stock options and $1.1 million
of cash from operating activities. This is partially offset by $33.7 million in
capital spending for the first nine months of 2004, a $5.8 million reduction in
working capital resulting from investing activities related to our China
drilling program and $3.2 million related to our investment in Ensyn. Our cash
position increased $3.7 million for the comparable period in 2003 primarily due
to net proceeds received from private placements of $11.6 million and net loan
proceeds of $0.5 million. This is partially offset by $8.9 million of capital
spending. Production and Operations Oil and gas revenues for the three-month and nine-month periods ended September
30, 2004 were $4.9 million and $11.6 million, respectively. These represent
increases of $2.5 million and $4.4 million from the comparable periods in 2003.
Half of the increase in revenue for the three-month period ended September 30,
2004 is due to a 38% or $9.92 per boe increase in oil and gas prices from the
comparable period in 2003. Increases in production volumes account for the
remaining 50% increase in revenues. The increase in production is a result of
additional development programs initiated in 2003 at the Dagang, South Midway
and Daqing fields and the start up of production in 2004 at our Citrus and
Knights Landing fields. Net production volumes from the Dagang field
development, initiated at the end of 2003, increased 49% during the three-month
period ended September 30, 2004 from the 14




---



##### 



comparable period in 2003 after giving effect to the 40% farm-in by Richfirst
in the second quarter of 2004. The Dagang field achieved two sales records
during the third quarter of 2004 by posting its first million-dollar month in gross oil sales of $1.2 million and
topping one-million-barrels of cumulative oil sales. The increase in revenues
for the nine-month period ended September 30, 2004 was mainly due to increases
in production volumes, which contributed 54% or $2.3 million to the increase in
total revenues for the period. Increases in production volume from the Dagang
and Daqing fields contributed $1.4 million to the increase in total revenues
for the period in addition to increases in production from the southern
expansion of our South Midway field and the start up of production operations
at our Citrus and Knights Landing fields in 2004. Additionally, a 24% or $6.46
per boe increase in oil and gas prices contributed to the remaining 46%
increase in revenues for the nine-month period ended September 30, 2004. Operating costs decreased 18% or $1.53 per boe for the three-month period ended
September 30, 2004 compared to the same period in 2003. Operating costs in
China decreased 43% or $3.81 per boe for the third quarter of 2004 due mainly
to an increase in production from the Dagang field in relation to the level of
fixed operating costs required to operate the field and reduced well workover
and power costs during the third quarter 2004. Operating costs in the U.S.
increased 5% or $0.38 per boe for the third quarter of 2004 as compared to the
same period in 2003 due mainly to the start up of production operations at our
Knights Landing and Sledge Hamar fields in the second quarter of 2004 as well
as increased costs to treat the hydrogen sulfide levels in the gas produced
from the South Midway field. For the nine-month period ended September 30,
2004, operating costs per boe decreased slightly compared to the same period in
2003. Operating costs in China decreased 22% or $1.81 per boe due mainly to an
increase in production from the Dagang field in relation to the level of fixed
operating costs required to operate the field and a reduction in well workovers
and decreased power costs during 2004. Operating costs in the U.S. increased
18% or $1.29 per boe for the nine-month period ended September 30, 2004 due
mainly to an increase in fuel costs incurred for the cyclic steam operations in
the southern expansion of South Midway, increased costs to treat the hydrogen
sulfide levels in the gas produced from the South Midway field and the start up
of production operations at our Citrus, Knights Landing, and Sledge Hamar
fields. This is partially offset by a reduction in workover costs at our
Spraberry field from the comparable period in 2003. Our depletion rate increased $6.97 and $5.37 per boe for the three-month and
nine-month periods ended September 30, 2004, respectively, compared to the same
periods in 2003. The depletion rate in China increased $2.34 and $2.07 per boe
for the three-month and nine-month periods ended September 30, 2004,
respectively, due mainly to anticipated increases in Dagang future development
costs. The depletion rate in the U.S. increased $11.11 and $8.11 per boe for
the three-month and nine-month periods ended September 30, 2004, respectively,
due mainly to an increase in the carrying costs of our evaluated U.S. oil and
gas assets primarily in Northwest Lost Hills, East Texas and North South Forty.
In addition, the increase in the U.S. depletion rate for the three-month and
nine month periods ended September 30, 2004 is due to an increase in Knights
Landing exploration costs and a decrease in estimated reserves for Knights
Landing as a result of reduced success in the current exploration drilling
program as six dry holes had been drilled as at September 30, 2004. 15




---



##### 



Production and operating information are detailed below: Three Month Periods Ended September 30,2004
    
    2003U.S.
    
    China
    
    Total
    
    U.S.
    
    China
    
    TotalNet Production:BOE
    
    
    72,627
    
    
    
    62,289
    
    
    
    134,916
    
    
    
    53,929
    
    
    
    37,850
    
    
    
    91,779BOE/day for the year
    
    
    789
    
    
    
    677
    
    
    
    1,466
    
    
    
    586
    
    
    
    411
    
    
    
    998
 Per BOE
    
    Per BOEOil and gas revenue
    
    $
    36.19
    
    
    $
    36.05
    
    
    $
    36.13
    
    
    $
    25.69
    
    
    $
    26.96
    
    
    $
    26.21Operating costs
    
    
    8.70
    
    
    
    4.96
    
    
    
    6.98
    
    
    
    8.32
    
    
    
    8.77
    
    
    
    8.51Production taxes
    
    
    0.95
    
    
    
    
    
    
    
    0.51
    
    
    
    0.91
    
    
    
    
    
    
    
    0.53Engineering support
    
    
    2.23
    
    
    
    1.36
    
    
    
    1.83
    
    
    
    2.45
    
    
    
    4.91
    
    
    
    3.4611.88
    
    
    
    6.32
    
    
    
    9.32
    
    
    
    11.68
    
    
    
    13.68
    
    
    
    12.50Net Revenue before depletion
    
    
    24.31
    
    
    
    29.73
    
    
    
    26.81
    
    
    
    14.01
    
    
    
    13.28
    
    
    
    13.71Depletion
    
    
    21.58
    
    
    
    10.99
    
    
    
    16.69
    
    
    
    10.47
    
    
    
    8.65
    
    
    
    9.72Net Revenue from operations
    
    $
    2.73
    
    
    $
    18.74
    
    
    $
    10.13
    
    
    $
    3.54
    
    
    $
    4.63
    
    
    $
    3.99
 Nine Month Periods Ended September 30,2004
    
    2003U.S.
    
    China
    
    Total
    
    U.S.
    
    China
    
    TotalNet Production:BOE
    
    
    191,841
    
    
    
    158,153
    
    
    
    349,994
    
    
    
    159,713
    
    
    
    111,606
    
    
    
    271,319BOE/day for the year
    
    
    700
    
    
    
    577
    
    
    
    1,277
    
    
    
    585
    
    
    
    409
    
    
    
    994
 Per BOE
    
    Per BOEOil and gas revenue
    
    $
    33.51
    
    
    $
    32.94
    
    
    $
    33.25
    
    
    $
    25.51
    
    
    $
    28.63
    
    
    $
    26.79Operating costs
    
    
    8.58
    
    
    
    6.37
    
    
    
    7.58
    
    
    
    7.29
    
    
    
    8.18
    
    
    
    7.65Production taxes
    
    
    1.07
    
    
    
    
    
    
    
    0.59
    
    
    
    0.94
    
    
    
    
    
    
    
    0.55Engineering support
    
    
    2.30
    
    
    
    2.45
    
    
    
    2.37
    
    
    
    2.07
    
    
    
    3.92
    
    
    
    2.8311.95
    
    
    
    8.82
    
    
    
    10.54
    
    
    
    10.30
    
    
    
    12.10
    
    
    
    11.03Net Revenue before depletion
    
    
    21.56
    
    
    
    24.12
    
    
    
    22.71
    
    
    
    15.21
    
    
    
    16.53
    
    
    
    15.76Depletion
    
    
    17.56
    
    
    
    11.12
    
    
    
    14.66
    
    
    
    9.45
    
    
    
    9.05
    
    
    
    9.29Net Revenue from operations
    
    $
    4.00
    
    
    $
    13.00
    
    
    $
    8.06
    
    
    $
    5.76
    
    
    $
    7.48
    
    
    $
    6.47
 Changes in Non-Cash Working Capital Non-cash working capital decreased $6.5 million for the three-month period
ended September 30, 2004 compared to a decrease of $1.3 million for the
comparable period in 2003 and decreased $1.2 million compared to an increase of
$1.1 million for the nine-month periods ended September 30, 2004 and 2003,
respectively. The $4.5 million decrease in non-cash working capital for
investing activities during the three-month period ended September 30, 2004 is
mainly due to the use of advances from CITIC to fund the joint development
program at Dagang as well as the decrease in our accounts payable associated
with the completion of our current drilling programs at South Midway, Citrus
and Knights Landing during the quarter. This is partially offset by a decrease
in accounts receivable from investing activities as we have utilized advances
made to our joint venture partners to fund our U.S. development and Iraq EOR
capital expenditure activities. Additionally, non-cash working capital for
operating activities for the three-month period ended September 30, 2004
decreased $2.0 million as a result of the use of advances from CITIC to fund
the joint operating expenses at Dagang and the increase in revenue receivable
associated with the increased production levels at the Dagang and Citrus
fields. The $1.2 million decrease in non-cash working capital for the
nine-month period ended September 30, 2004 is primarily due to increased
revenue receivable associated with increased production levels at the
Dagang and Citrus fields, which is partially offset by an increase in accounts
payable associated with the development program at Dagang. 16




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##### 



General and Administrative General and administrative expenses increased $0.6 million and $0.7 million for
the three-month and nine-month periods ended September 30, 2004, respectively.
The increases are mainly due to $0.3 million of costs incurred during the
current quarter to comply with the provisions of Section 404 of the
Sarbanes-Oxley Act of 2002 in addition to smaller increases associated with
stock based compensation related to the issuance of stock options, increased
costs for directors and officers liability insurance and project identification
activities. Exploration and Development Activities Capital spending on exploration and development activities for the three-month
and nine-month periods ended September 30, 2004 was $7.9 million and $32.1
million, respectively, an increase of $3.9 million and $23.7 million from the
amounts spent during the comparable periods in 2003. These increases are due
mainly to our development programs in our Dagang, Citrus and Knights Landing
fields and our Zitong seismic acquisition program in China. Capital spending at Dagang increased $4.0 million and $11.1 million during the
three-month and nine-month periods ended September 30, 2004, respectively,
compared to the same periods in 2003. During the first nine months of 2004, we
drilled thirteen development wells at the Dagang project, with ten wells placed
on production and three wells awaiting completion. Three drilling rigs are
under contract and currently in operation. Over the three-year life of the
Dagang development program, we expect to drill 115 new wells and work over 28
existing wells. During the second quarter of 2004, we completed phases one and two of our
1,100-kilometer seismic acquisition program in the Zitong project, which had
begun in the third quarter of 2003, and commenced interpretation of the seismic
data in August 2004. This resulted in a decrease of $0.7 million in our capital
spending for the third quarter of 2004 compared to the same period in 2003.
Capital spending for the nine-month period ended September 30, 2004 increased
by $4.6 million compared to the same period in 2003 as a result of the
initiation of the seismic acquisition program in the third quarter of 2003. We
are continuing with the interpretation of the seismic data that was acquired in
the first half of 2004. We expect the drilling of our first exploration well to
commence in late 2004 or early 2005. In 2005, we anticipate completion of the
final stage of the seismic acquisition program followed by the drilling of a
second well. Development of our Citrus field increased our capital spending program $2.6
million and $5.1 million during the three-month and nine-month periods ended
September 30, 2004, respectively, compared to the same periods in 2003. We are
the operator of the Citrus field and currently have a 100% working interest
before payout in three Citrus wells, which are producing 170 gross boes per
day. A one-year extension to the end of 2005 was obtained covering the area
south of our current producing wells, which will provide us the opportunity to
observe production for the next few months prior to resuming development of
this area to determine the best drilling and completion methods. We farmed into the Knights Landing gas project in northern California in
February 2004, which resulted in increases of $0.3 million and $4.7 million in
our capital spending program for the three-month and nine-month periods ended
September 30, 2004, respectively, compared to the
same periods in 2003. We acquired a 50% non-operating interest in four gas
wells in that area and agreed to fund the cost of a gas gathering and surface
facilities system to the four wells at a combined cost of $1.6 million. We also
hold a 50% interest in 14,000 acres of leases in the surrounding area for
further exploration drilling. In May 2004, the pipeline 17




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##### 



gathering system and facilities were completed and the four gas wells were
placed on production. In late May 2004, the 10 well drilling program commenced.
Nine of the ten wells have been drilled resulting in three gas discoveries and
six dry holes. The final well will be drilled in the fourth quarter of 2004.
Gross production is averaging 440mcf per day. In January 2004, we farmed into the LAK Ranch Field, a thermal
recovery/horizontal well oil project in Weston County, Wyoming. Facility
modifications for the pilot phase were completed in the second quarter of 2004
increasing our capital spending program $0.8 million for the nine-month period
ended September 30, 2004 compared to the same period in 2003. Minimal capital
spending was incurred during the three-month period ended September 30, 2004.
We completed a second cycle of steam injection in September 2004. Over 13,000
barrels of steam were injected into the horizontal well. Approximately 3,500
barrels of steam water have been recovered and initial production is being
observed. The ultra-high resolution 3D seismic survey needed to better define
the optimum reservoir development locations should begin in November with
evaluation results expected during the second quarter of 2005. In addition, a
small group of vertical wells may be drilled before 2005 for data collection
purposes. Depending on the observed data, some or all of the wells could later
become permanent injectors or remain as observation wells. After completion of
the 3D seismic survey we plan to drill injection wells to prove up oil-in-place
reserves and commerciality of a full steam injection project. Following
completion of the pilot phase, the development program is scheduled to include
additional horizontal producing wells, new steam injection wells and the
extension of surface facilities. We estimate that, at the low end of the
recovery range, the initial development program could grow to more than 20
producing wells. During the pilot phase, our working interest has increased
from an initial 30% working interest to 33.4%. Should we decide to enter the
next two phases of the contract, our working interest will increase to a
maximum of 60%. Should we elect not to proceed beyond the pilot phase, our
working interest will be reduced to 15% and we would no longer be the operator. Capital spending in South Midway decreased $2.1 million and $2.7 million during
the three-month and nine-month periods ended September 30, 2004, respectively,
compared to the same periods in 2003. These decreases are due mainly to the
completion of the construction of our facilities for the first phase of the
southern expansion in the third quarter of 2003 and the drilling of nineteen
development wells in the first nine months of 2003 compared to six development
wells and one exploratory well drilled in the second quarter of 2004. Gross
production in the South Midway field area continued at 525 barrels per day. We
are continuing to add cyclic steam to the reservoirs at increasing injection
rates and volumes in order to improve production rates. We will use the
current historical data with modern computer simulation models to project rates
with the addition of permanent steam injection in the southern expansion area
of the field. Additional development and delineation wells are planned for
2005. We currently have 55 producing wells in South Midway, with a working
interest of 100%. Exploration and development of Sledge Hamar increased our capital spending
program $0.1 million and $0.5 million during the three-month and nine-month
periods ended September 30, 2004, respectively, compared to the same periods in
2003. We have one producing discovery well, the Sledge Hamar 1-7 with a working
interest of 40%. A second appraisal well, the Sledge Hamar 2-7, was drilled in
May 2004 and was unsuccessful in establishing production from the
Stevens sand that produces in the Sledge Hamar 1-7 well. We are evaluating a
test program for shallower Diatomite zones where shows were encountered in the
Sledge Hamar 2-7 well to determine if sufficient gas production will be
available to enter into a gas sales contract. The Diatomite is a producing
formation in the adjacent South Belridge field. Our capital spending program for the fourth quarter of 2004 includes an
additional North South Forty well in the San Joaquin Valley of California and
Malakoff and Catfish Creek wells in East Texas, as follows: 18




---



##### 



We hold an 80% working interest in the Peach oil and gas prospect in the North
South Forty seismic area. We have agreed in principle to a 50% farm-out of our
interest in a 4,500 foot well, which is planned for November 2004. The farm-in
partner will carry our interest in the well and will be the operator. In East Texas, we plan to farm-out the drilling of one well each in the
Malakoff and Catfish Creek prospects in which we have a 25% carried interest.
The Malakoff well is planned to be drilled to a depth of 8,700 feet and the
Catfish Creek well to a depth of 11,000 feet. Heavy-to-Light Activities (HTL) During 2004, we acquired, for $3.0 million, a 15% equity interest in Ensyn
Petroleum Ltd (Ensyn) and exclusive rights to use the proprietary Ensyn RTPTM
Process in several key international markets. Ensyn is currently installing a commercial demonstration facility in the South
Belridge field near Bakersfield, California to demonstrate the commercial
viability of the Ensyn RTPTM Process. The 1,000-barrels per day plant is
mechanically complete and is in the commissioning process. Ensyn has advised us
that it expects the facility to be processing oil by the end of November 2004. The Ensyn RTPTM Process upgrades the quality of heavy oil by producing lighter,
more valuable crude oil. Ensyn reports that this process yields up to a
three-fold economic improvement in heavy-oil projects. The heaviest hydrocarbon
fraction is consumed as fuel to generate the steam used to enhance recovery of
heavy crude. This lowers costs by reducing or eliminating the need to purchase
high-priced natural gas for steam generation and improves revenue since the
higher quality light-crude fraction can be sold at higher prices. The lighter
crude has improved viscosity that permits more efficient pumping through
pipeline networks and significantly reduces transportation costs to marketing
points. The Ensyn RTPTM Process uses readily available plant and process
components. The technology already has been successfully applied to continuous
wood/biomass processing, with several commercial plants in operation in Canada
and the U.S. An Ensyn pilot plant in Ontario, Canada, has completed more than
90 test runs on heavy oil. We have exclusive rights to deploy the Ensyn RTPTM Process in China, Mongolia,
Iraq, Oman and all countries in South America except Venezuela. In these
countries, our rights will be exclusive for an initial term of five years until
January 2009, subject to extension if and when commercial plants are
constructed. We have non-exclusive rights to the process in other countries.
For each project we develop using the Ensyn RTPTM Process in our exclusive
territories, Ensyn may elect to receive an equity participation in the project
for the same proportionate cost as paid by the Company. The participation that
may be obtained by Ensyn is no more than 10%, except for each such project that
we develop in South America, other than in Venezuela and Peru, where Ensyn may
elect to receive an equity interest equal to 25% of our
interest. Ensyns equity position will offset and eliminate the payment of
license fees for use of the Ensyn RTPTM Process in the project. Gas-to-Liquids Activities (GTL) There was no capital spending on GTL projects for the three-month period ended
September 30, 2004, representing a decrease of $0.1 million spent during the
comparable period in 2003. 19




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##### 



In the second quarter of 2004, we wrote down our $0.3 million investment in the
Oman GTL project as our opportunity to build a 45,000-barrels per day GTL fuels
plant in Oman failed to materialize due to a lack of sufficient uncommitted gas
volumes. There have been no significant changes in the status of our active GTL projects
during the three-month period ended September 30, 2004. Our proposal for a
45,000-barrels per day GTL plant in Egypt is still under consideration by the
government of Egypt, and its agencies responsible for the development and
monetization of its natural gas reserves. The government is currently
evaluating alternatives for monetization of its uncommitted gas reserves
including pipelines to neighboring countries and liquefied natural gas plants.
We will continue to work with the Ministry of Petroleum in pursuit of a
commercially viable GTL project in Egypt. We completed the initial phase of the commercialization study for the GTL plant
in Bolivia in the first quarter of 2004. The results indicate that under the
current tax regulations pertaining to the Bolivian hydrocarbon sector, a 90,000
barrels-per-day GTL plant could be commercial in the southern region of
Bolivia. New legislation affecting the hydrocarbon sector is currently being
drafted and is expected to be ratified by the end of 2004. As soon as the new
laws are enacted, we will make a further economic evaluation to test our
proposed project for commerciality. Assuming the results are positive, we plan
to complete a detailed commercialization study and consider a definitive joint
venture agreement with Syntroleum and Repsol YPF to proceed with the
construction of a plant. As new opportunities present themselves to convert hydrocarbon gases to
Fischer-Tropsch liquids and ultimately to diesel and naphtha we will respond by
undertaking feasibility studies. One such opportunity is converting coal into
liquids. We are currently studying available conversion processes to convert
coal into synthesis gas and to use the Syntroleum process to convert the
synthesis gas into Fischer-Tropsch liquids. Areas such as China are
particularly suited to coal-to-liquids (CTL) processing. Enhanced Oil Recovery (EOR) Capital spending on EOR related activities for the three-month and nine-month
periods ended September 30, 2004 was $0.5 million and $1.6 million,
respectively, primarily on Iraqi EOR projects. In October 2004, we signed a memorandum of understanding with the Ministry of
Oil of the Government of Iraq to study and evaluate the shallow Qaiyarah Oil
Field in Iraq. The fields reservoirs contain a large proven accumulation of
17.1o API heavy oil at a depth of about 1,000 feet. We will evaluate the potential response of the Qaiyarah Field to the latest in
EOR techniques, along with the potential value that could be added using the
Ensyn RTPTM Process to produce
higher quality, more valuable crude oil. The work will include an assessment of
the oil-in-place in the reservoirs, and the optimum EOR/HTL methods to
establish economically recoverable reserves at Qaiyarah. If the evaluation studies indicate development of the field is economically
viable, we will present a development plan and offer a commercial proposal to
implement an EOR program for Qaiyarah. The Iraqi Ministry of Oil is under no
obligation to execute the project or to enter into formal commercial
negotiations at the completion of our study. Liquidity and Capital Resources As at September 30, 2004, our cash position was $18.6 million as a result of
closing two special warrant financings in the first quarter of 2004, which
generated net proceeds of $20.4 20




---



##### 



million. Additionally, we received $20.0 million from Richfirst related to its
40% farm-in to the Dagang oil project development program and $4.0 million in
proceeds from the Wells Fargo loan related to the development of our South
Midway field. The budget for our capital spending program for the remainder of 2004 is
estimated to be $12.0 million and $79.0 for 2005. Our current cash position,
expected cash flows, bank credit facility and funding from third-party
agreements will enable us to complete our 2004 capital spending program. We
continue to pursue acquisitions of proven and probable reserves and
technologies that enhance the recovery of oil and gas reserves as a means of
supplementing our growth strategy. However, in order to successfully pursue
acquisition opportunities, develop our existing assets and execute our medium
and long-term growth strategies, we will require significant additional
funding. We plan to seek financing, on an as needed basis, from equity markets,
project lenders, joint ventures or other potential financing sources. The
Company and its 40% joint venture partner, Richfirst, are currently in active
discussions with European and Chinese lending banks to provide funding for the
development of the Dagang oil field in China. We cannot assure you that we will
be successful in raising the additional funds necessary or securing joint
venture partners to complete our expansion and capital spending programs. If we
are unsuccessful, we will have to prioritize our business opportunities and
objectives. As a result, we may lose some valuable business opportunities,
which may adversely affect our business and prospects. Contractual Obligations The table below summarizes the contractual obligations that are reflected in
our Unaudited Consolidated Balance Sheet as at September 30, 2004 and/or
disclosed in the accompanying Notes: Payments Due by Year(stated in thousands of U.S. dollars)AfterTotal
    
    2004
    
    2005
    
    2006
    
    2007
    
    2007Purchase Agreements:
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Consolidated Balance Sheets:Note payable  current portion ( Note 8 )
    
    
    1,667
    
    
    
    417
    
    
    
    1,250
    
    
    
    
    
    
    
    
    
    
    
    Note payable  long term portion ( Note 8 )
    
    
    3,056
    
    
    
    
    
    
    
    417
    
    
    
    1,667
    
    
    
    972
    
    
    
    Other Commitments:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest payable
    
    
    362
    
    
    
    60
    
    
    
    186
    
    
    
    99
    
    
    
    17
    
    
    
    Operating leases
    
    
    1,779
    
    
    
    146
    
    
    
    520
    
    
    
    488
    
    
    
    338
    
    
    
    287Exploration commitment (a)
    
    
    10,700
    
    
    
    1,400
    
    
    
    9,300
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    17,564
    
    
    $
    2,023
    
    
    $
    11,673
    
    
    $
    2,254
    
    
    $
    1,327
    
    
    $
    287
   a)    This represents our estimate of the remaining expenditure commitment for
the minimum work program during the first phase of Zitong. This is a total
spending commitment and not a commitment per year. The amounts per year are
based on our current estimate. Off Balance Sheet Arrangements As at September 30, 2004 and December 31, 2003, we did not have any
relationships with unconsolidated entities or financial partnerships, such as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes. In addition, we do not engage
in trading activities involving non-exchange traded contracts. As such, we are
not materially exposed to any financing, liquidity, market or credit risk that
could arise if we had engaged in such relationships. We do not have
relationships and transactions with persons or entities that derive benefits
from their non-independent relationship with us, or our related parties, except
as disclosed herein. 21




---



##### 



Outstanding Share Data As of October 29, 2004, there were 169,604,911 common shares of the Company
issued and outstanding, 17,451,826 share purchase warrants outstanding and
exercisable to purchase 9,350,913 common shares and incentive stock options
outstanding to purchase 8,252,016 common shares. Quarterly Financial Data In Accordance With Canadian and U.S. GAAP (Unaudited) QUARTER ENDED
(stated in thousands of U.S. Dollars except per share amounts)2004
    
    2003
    
    2002Q3
    
    Q2
    
    Q1
    
    Q4
    
    Q3
    
    Q2
    
    Q1
    
    Q4Total revenue
    
    $
    4,932
    
    
    $
    3,521
    
    
    $
    3,332
    
    
    $
    2,330
    
    
    $
    2,423
    
    
    $
    2,338
    
    
    $
    2,568
    
    
    $
    2,371Net loss  Canadian
GAAP
    
    $
    951
    
    
    $
    1,298
    
    
    $
    1,292
    
    
    $
    23,154
    
    
    $
    1,330
    
    
    $
    4,587
    
    
    $
    1,108
    
    
    $
    1,227Net loss  U.S. GAAP
    
    $
    980
    
    
    $
    1,510
    
    
    $
    1,470
    
    
    $
    23,270
    
    
    $
    1,306
    
    
    $
    1,325
    
    
    $
    1,185
    
    
    $
    1,287Net loss per
share 
Canadian GAAP
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.15
    
    
    $
    0.01
    
    
    $
    0.03
    
    
    $
    0.01
    
    
    $
    0.01Net loss per share 
U.S. GAAP
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.15
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.01
 The 2003 and 2002 quarterly earnings have been adjusted to give effect to the
retroactive application of the new Canadian Institute of Chartered Accountants
Handbook Section 3870  Stock Based Compensation, which is described in Note 2
to the unaudited consolidated financial statements. The net loss in the fourth
quarter of 2003 includes an impairment charge of $20.0 million for U.S. oil and
gas assets. The net loss under Canadian GAAP for the second quarter of 2003
includes a $3.3 million write down of costs associated with the unsuccessful
negotiations of a GTL contract in Qatar. For U.S. GAAP, these costs were
written off as they were incurred. Item 3. Quantitative and Qualitative Disclosures About Market Risk No material changes since December 31, 2003. Item 4. Controls and Procedures The Company carried out an evaluation, under the supervision and with the
participation of the Companys management, including the Companys CEO and CFO,
of the effectiveness of the design and operation of the Companys disclosure
controls and procedures pursuant to the Securities Exchange Act of 1934. Based
upon that evaluation, the CEO and CFO concluded that, as of September 30, 2004,
the Companys disclosure controls and procedures are effective in timely
alerting them to material information required to be included in the Companys
periodic SEC filings relating to the Company (including its consolidated
subsidiaries). There were no significant changes in the Companys internal
control over financial reporting or in other factors that could significantly
affect its internal control over financial reporting during the period ended
September 30, 2004 nor any significant deficiencies or material weaknesses in
such internal control over financial reporting requiring corrective actions. As
a result, no corrective actions were taken. 22




---



##### 



Part II  Other Information Item 1.     Legal Proceedings: None 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 and Reports on Form 8-K (a)         Exhibits EXHIBITNUMBER
    
    DESCRIPTION31.1
    
    
    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(b)
    
    
    Reports on Form 8-K: None
 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized. IVANHOE ENERGY INC. By: /s/ W. Gordon Lancaster
Name: W. Gordon Lancaster
Title: Chief Financial Officer Dated: November 2, 2004 23




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##### 



INDEX TO EXHIBITS ExhibitNumber
    
    Description31.1
    
    
    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
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