President's Message

2017 was a turning point for Questerre. We were pleased to make progress on all our projects during the year.

We participated in seven gross wells on our Kakwa joint venture acreage. Exit production from the area doubled in 2017 and, with similar investment, growth should continue for the next few years.
Coupled with a light oil acquisition in Saskatchewan, we saw a material improvement in our proved and probable reserves. We also brought in a partner to develop our operated acreage at Kakwa, substantially reducing the capital required to create additional value.

In Quebec, we stayed focused on the regulations and social acceptability. We were pleased to see the government publish the draft oil and gas regulations last fall. We are looking forward to the final regulations this spring. Our clean gas pilot is gaining support among industry and stakeholders. Along with our local revenue sharing initiative, this will be vital to secure the acceptability we need.

We made headway on the engineering for our multi-billion barrel oil shale resource in Jordan. The last three of nine independent studies were completed. We have engaged an engineering firm to review and integrate this work. We also made a strategic investment in Red Leaf as their EcoShale process could be essential to developing this project at current oil prices.

We strengthened our balance sheet through equity placements for gross proceeds of approximately $56 million.

Highlights
- Kakwa development resumes with drilling of 7 (1.60 net) wells in 2017
- Quebec Government publishes draft hydrocarbon and environmental regulations for future development
- Internal feasibility study completed and supports concession application for Jordan oil shale project
- Total proved and probable reserves increased 20% to 27.11 MMboe with a before income tax NPV-10% of $174.69 million

Kakwa-Resthaven, Alberta

Our 2017 wells benefitted from the improvements made in prior years.

These include drilling longer laterals and using more sand per metre in the fracs. This contributed to an increase in our type curve last year to 1.01 MMboe on a proved and probable basis. We are incrementally drilling longer wells and using higher sand tonnage where possible. Our most recent well pairs are targeting adjacent intervals in the Montney to see if inter-well spacing can be reduced to less than 200m. This could increase the number of wells on our acreage.

Based on lateral lengths of approximately 1.5 miles and spacing of 200m between wells, there are over 50 (12.5 net) wells to be drilled on our joint venture block. Though we see some cost inflation in coming years, mainly for completions, we expect capital and operating costs will benefit from our $11 million investment in infrastructure over the last two years. These included the first phase of a central water storage facility, gas lift facilities and a regenerative amine system. We anticipate a further investment of approximately $15 million over the next two years that will include the next phase of the central water storage facility and a staged expansion of the central processing facility to 60 MMcf/d plus associated liquids.

We plan to use our share of these expanded facilities to process any volumes from our adjacent seven section block where we have recently brought in a partner. We are looking forward to the first results from this block later this year. Based on similar spacing and well length, success here could more than double the number of Questerre's net locations at Kakwa.

St. Lawrence Lowlands, Quebec

Final regulations and local acceptability are the remaining two hurdles to resuming drilling in Quebec.

The draft regulations introduced last fall appear workable but could be improved to be more efficient and competitive. We have provided our feedback to the ministries of energy and the environment on both the oil and gas and environmental regulations. We are looking forward to the final oil and gas regulations later this spring and the final environmental regulations this fall. Most importantly, the regulations allow us to drill and complete wells in Quebec subject to securing social acceptability.

Just as our step by step approach with the government was successful in introducing the new law, we think our clean gas pilot and local revenue sharing could do the same for social acceptability. We expect this will meet with opposition from some municipalities. However, in municipalities that are open to development, we are hopeful it can be done over the next twelve months.

We are designing our clean gas pilot to reduce emissions, fresh water usage and noise. This would use Quebec's abundant hydroelectricity to power compressors and eventually drilling rigs. It is similar to the North Sea where production platforms are now being electrified. We plan to store and recycle water used for completions, similar to our operations at Kakwa. We are also discussing with local communities how they could share financially in local development.

Oil Shale Mining

Our project in Jordan is at an earlier stage but still similar in scale to Quebec.

Jordan has well established regulations for oil shale development and is a premium market for oil because it imports over 100,000 bbl/d to meet its energy needs. The country is focused on the development of its natural resources, particularly its oil shale deposits, which rank among the largest in the world. The challenge is how to develop our multi-billion barrel oil shale deposit in the current price environment.

Our oil shale in Jordan is unique. It is primarily a marlstone or chalk with approximately 25% water by weight and relatively high in sulphur. Efficiently heating the shale and capturing the large volumes of water for future use in the process is critical. We are evaluating three different retorting processes with this goal in mind.

We acquired additional common shares and now hold approximately 30% of the common share capital of Red Leaf. We continue to work with them to further optimize their process for our shale.

Our goal for 2018 is to have a third party engineering firm validate and integrate our internal assessment and cost estimates based on the nine studies completed to date. We are targeting an initial project size of 50,000 bbl/d to benefit from the economies of scale, particularly those related to upgrading the produced oil to diesel and gasoline. Concurrently, we plan to begin negotiations with the Jordanian government for a concession agreement.

Operational & Financial

While our exit production from Kakwa doubled over the year to 1,358 boe/d and contributed to corporate volumes of 1,714 boe/d in the fourth quarter, our average daily production over the year remained relatively unchanged at 1,373 boe/d from the prior year. Higher oil prices in 2017 were offset by increased operating costs, particularly at Kakwa and Antler, resulting in adjusted funds flow from operations of $6.78 million.

In addition to a $27.75 million investment primarily in our producing assets at Kakwa and Antler, we also made a $10.33 million investment to increase our equity interest in Red Leaf.

Outlook

We will make a similar investment in Kakwa this year based on well performance and current prices. Subject to the operator's plans, this should again grow our production and reserves next year. Success on our Kakwa North acreage could add further incremental reserves.

Despite the outlook for natural gas prices, we are still bullish on our Quebec Utica gas discovery because the analogous Ohio Utica is exceeding expectations and the province remains a premium natural gas market. We have been designing our clean gas pilot to address stakeholder concerns and it fully aligns with the province's goals of reducing energy imports and emissions.

While the outlook for oil prices is improving, we are focused on making our project in Jordan economic at current prices. We expect the engineering work completed in 2018 will give us more refined estimates of the costs to develop this multi-billion barrel oil shale resource.

Michael Binnion, President and Chief Executive Officer