Questerre Energy : Q1 2023 Financial Report

2023 FIRST QUARTER REPORT

QUESTERRE ENERGY CORPORATION

CONTENTS

President's Message	Page	1
Management's Discussion & Analysis	Page	4
Condensed Consolidated Interim Financial Statements	Page	25
Notes to the Condensed Consolidated Interim
Financial Statements	Page	30

QUESTERRE ENERGY CORPORATION is an energy technology and innovation company. It is leveraging its expertise gained through early exposure to low permeability reservoirs to acquire significant high-quality resources. We believe we can successfully transition our energy portfolio. With new clean technologies and innovation to responsibly produce and use energy, we can sustain both human progress and our natural environment.

Questerre is a believer that the future success of the oil and gas industry depends on a balance of economics, environment and society. We are committed to being transparent and are respectful that the public must be part of making the important choices for our energy future. Questerre's common shares are traded on the Toronto Stock Exchange and Oslo Stock Exchange under the symbol QEC.

President's Message

We are taking a more active role at Red Leaf, our 40% owned investee company, as they develop their core assets: a wax processing facility in the Uintah Basin with environmental permits in place and their patented technology to produce oil from shale that incorporates carbon capture.

We have been leading discussions with stakeholders including producers in the basin, prospective purchasers, and financial advisors. These have been very encouraging and support the business case for the wax project. Red Leaf has also been working closely with us and a potential licensee for a small-scale project using their technology in the Kingdom of Jordan.

We are following the legal process for our claim against the Quebec Government including the preparation of our damage assessment. As our Clean Gas remains a viable option to resolve the impending electricity energy shortage in the province, we are still seeking a business and political solution. During the quarter, the Quebec Ministry of Energy sent us a request for a proposal for pilot projects that would 'foster carbon neutrality and help attain targets in the fight against climate change.' This was followed by the announcement of a consultation process ahead of new legislation this fall on a new clean energy strategy for the province.

Highlights

• Red Leaf commissions pre-FEED engineering study for 40,000 bbl/d wax processing facility
• Government of Quebec seeks proposals for carbon sequestration pilot projects
• Average daily production of 1,790 boe/d and adjusted funds flow from operations of $4.3 million

Energy transition policies are responsible for projected power shortages in Canada. This issue is not limited to Canada. At a recent investor presentation in Oslo, we heard a report from Statnett, the Norwegian transmission system operator, that increased demand could cause a power shortage as early as 2027. Canada's largest bank published a report last fall that noted that Ontario, Canada's largest province, could face shortages as early as 2026.

In Quebec, the province lost a $13 billion Volkswagen battery manufacturing project to Ontario due to a lack of energy resources, according to Minister Fitzgibbon.

Both in the near and long term, our Clean Gas and hydrogen project is, in our view, a very viable solution. It frees up hydroelectricity immediately and can provide near zero-emissions hydrogen as the market develops in the future. This is aligned with the bank report referenced above that recommended 'existing natural gas plants will need to keep operating in provinces facing major energy shortages until at least 2035.' Despite the drop in natural gas prices this year, economics for the project remain strong with gas in Quebec continuing to trade at a premium to the benchmark Henry Hub price.

Red Leaf's wax processing facility could have robust economics too. It would capture the margin between the price for wax that is exported for processing and the price of the finished products such as ultra low sulphur diesel and naphtha. The remainder of the barrel will be shipped to the refineries on the US Gulf

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Coast. It would receive a premium to WTI as it is used to make feedstock for the base oil used to manufacture high-value lubricants.

The next steps in this project are the completion of a pre-FEED study to validate the design and costs estimates. Later this year, discussions for potential supply and off-take agreements should commence. In conjunction with securing financing for the project our goal is to facilitate the start of field work as required by our permit from the Utah Department of Air Quality.

Operating & Financial

Year over year, our production volumes increased with the conversion of our royalty interest to a working interest at Kakwa North in the fourth quarter last year. With only one (0.25 net) well expected on-stream in the second quarter, we expect our volumes will decline nominally over the second half of the year.

Crude oil prices were lower in the first quarter of this year compared to last year. With over 80% of our revenue from light oil and liquids, these mostly offset the impact of the increased production volumes. As a result, we generated adjusted funds flow from operations of $4.3 million this year, virtually unchanged from last year.

Net of capital spending of $3.2 million largely for completing the one well at Kakwa, we increased our working capital surplus to $25.5 million at the end of the quarter.

Outlook

With over $30 million in cash and our unutilized credit facility we are well positioned to fund our share of a proposed 50/50 program at Kakwa North for up to three (1.5 net) wells assuming oil prices stay strong. This could start as soon as the fourth quarter of 2023 with initial production in the second quarter of 2024. We expect the operator will confirm their final plans late this summer.

We plan to participate in the public hearings in Quebec for a new clean energy strategy. We are hopeful that they consider the economic and environmental benefits of our project as well as its ability to meet their energy needs on a timely basis. Concurrently, we are protecting our legal position while we seek a political and commercial solution with the next hearing date scheduled for early this summer.

The initial feedback on Red Leaf's wax processing project has been quite positive. We believe the combination of zero-emissions, strong margins and participation by key stakeholders including Indigenous people, make this an attractive opportunity for the investment community.

Michael Binnion

President and Chief Executive Officer

2	Questerre Energy Corporation

Environmental, Social and Governance

Questerre believes the oil and gas industry can go from laggards to leaders on the global environment.

From today to 2050, the world's population is estimated to grow from 7.5 billion to almost 9.5 billion people who will expect a better standard of living. We believe providing the increased energy needed tomorrow, with lower environmental impacts than today, is the challenge of our times. Transforming our energy diet to lower emissions is essential to meet this challenge and we believe the oil and gas industry has the biggest improvements to make.

Our Clean Tech Energy project was designed to deliver the world's first zero emissions natural gas production and consumption. It is an example of meeting this global challenge. It will have a dramatic impact on emissions in addition to other environmental criteria.

It requires a new way of thinking to become leaders on environmental issues. Our industry runs most of today's energy systems. We have the experience, expertise, capital and technology to meet the world's energy and environmental challenges. Delivering on projects like our zero emissions natural gas project is just one example of how our industry can be leaders on transforming our global energy systems.

Questerre has also taken leadership in working with communities and First Nations for local benefits. We have committed to share our profits with them. We have also engaged with local First Nations to include them in our contracting and benefits program.

We unilaterally made the decision not to work in communities where the plurality of the community does not want development. Our approach of consulting first and applying for permits second is consistent with this approach.

People know they need energy to maintain progress for their families and communities. They want to know the providers of that energy are being responsible and sustainable in the way it is produced. Questerre is an entrepreneurial leader in making the seemingly impossible task of producing more with less impact, possible.

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