10-K

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the fiscal year ended December 31, 2007
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from          to

Commission file number: 000-30586

IVANHOE ENERGY INC.

(Exact name of registrant as specified in its charter)

Yukon, Canada	98-0372413
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
654-999 Canada Place Vancouver, British Columbia, Canada (Address of principal executive offices)	V6C 3E1 (Zip Code)

(604) 688-8323

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Shares, no par value	Toronto Stock Exchange NASDAQ Capital Market

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes     þ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.  o Yes     þ No

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.  þ  Yes     o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

As of June 30, 2007, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $468,246,525 based on the average bid and asked price as reported on the National Association of Securities Dealers Automated Quotation System National Market System.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at March 10, 2008
Common Shares, no par value	244,873,349 shares

DOCUMENTS INCORPORATED BY REFERENCE
None

TABLE OF CONTENTS

			Page
PART I
	Items 1 and 2	Business and Properties
		General		4
		Corporate Strategy		4
		Heavy to Light Oil Upgrading Technology		7
		Gas-to-Liquids Technology		8
		Oil and Gas Properties		9
		Employees		13
		Production, Wells and Related Information		13
	Item 1A	Risk Factors		15
	Item 1B	Unresolved Staff Comments		20
	Item 3	Legal Proceedings		20
	Item 4	Submission of Matters to a Vote of Security Holders		20
PART II
	Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20
	Item 6	Selected Financial Data		25
	Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
	Item 7A	Quantitative and Qualitative Disclosures About Market Risk		48
	Item 8	Financial Statements and Supplementary Data		51
	Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		101
	Item 9A	Controls and Procedures		101
	Item 9B	Other Information		103
PART III
	Item 10	Directors, Executive Officers and Corporate Governance		103
	Item 11	Executive Compensation		106
	Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		115
	Item 13	Certain Relationships and Related Transactions, and Director Independence		117
	Item 14	Principal Accountant’s Fees and Services		118
PART IV
	Item 15	Exhibits and Financial Statement Schedules		120

2

CURRENCY AND EXCHANGE RATES

Unless otherwise specified, all reference to “dollars” or to “$” are to U.S. dollars and all references to “Cdn.$” are to Canadian dollars. The closing, low, high and average noon buying rates in New York for cable transfers for the conversion of Canadian dollars into U.S. dollars for each of the five years ended December 31 as reported by the Federal Reserve Bank of New York were as follows:

	2007		2006		2005		2004		2003
Closing	$	1.01	$	0.86	$	0.86	$	0.83	$	0.77
Low	$	0.84	$	0.85	$	0.79	$	0.72	$	0.63
High	$	1.09	$	0.91	$	0.87	$	0.85	$	0.77
Average Noon	$	0.94	$	0.88	$	0.83	$	0.77	$	0.71

The average noon rate of exchange reported by the Federal Reserve Bank of New York for conversion of U.S. dollars into Canadian dollars on February 29, 2008 was $1.02 ($1.00 = Cdn.$0.98).

ABBREVIATIONS

As generally used in the oil and gas business and in this Annual Report on Form 10-K, the following terms have the following meanings:

Boe	= barrel of oil equivalent
Bbl	= barrel
MBbl	= thousand barrels
MMBbl	= million barrels
Mboe	= thousands of barrels of oil equivalent
Bopd	= barrels of oil per day
Bbls/d	= barrels per day
Boe/d	= barrels of oil equivalent per day
Mboe/d	= thousands of barrels of oil equivalent per day
MBbls/d	= thousand barrels per day
MMBls/d	= million barrels per day
MMBtu	= million British thermal units
Mcf	= thousand cubic feet
MMcf	= million cubic feet
Mcf/d	= thousand cubic feet per day
MMcf/d	= million cubic feet per day

When we refer to oil in “equivalents”, we are doing so to compare quantities of oil with quantities of gas or to express these different commodities in a common unit. In calculating Bbl equivalents, we use a generally recognized industry standard in which one Bbl is equal to six Mcf. Boes may be misleading, particularly if used in isolation. The conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this document are “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995, Section 21E of the United States Securities Exchange Act of 1934, as amended, and Section 27A of the United States Securities Act of 1933, as amended. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements, or other future events, to be materially different from any future results, performance or achievements or other events expressly or implicitly predicted by such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, our short history of limited revenue, losses and

3

negative cash flow from our current exploration and development activities in the U.S. and China; our limited cash resources and consequent need for additional financing; our ability to raise additional financing; uncertainties regarding the potential success of heavy-to-light oil upgrading and gas-to-liquids technologies; uncertainties regarding the potential success of our oil and gas exploration and development properties in the U.S. and China; oil price volatility; oil and gas industry operational hazards and environmental concerns; government regulation and requirements for permits and licenses, particularly in the foreign jurisdictions in which we carry on business; title matters; risks associated with carrying on business in foreign jurisdictions; conflicts of interests; competition for a limited number of what appear to be promising oil and gas exploration properties from larger more well financed oil and gas companies; and other statements contained herein regarding matters that are not historical facts. Forward-looking statements can often be identified by the use of forward-looking terminology such as “may”, “expect”, “intend”, “estimate”, “anticipate”, “believe” or “continue” or the negative thereof or variations thereon or similar terminology. We believe that any forward-looking statements made are reasonable based on information available to us on the date such statements were made. However, no assurance can be given as to future results, levels of activity and achievements. We undertake no obligation to update publicly or revise any forward-looking statements contained in this report. All subsequent forward-looking statements, whether written or oral, attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by these cautionary statements.

AVAILABLE INFORMATION

Copies of our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on or through our website at http://www.ivanhoe-energy.com/ or through the United States Securities and Exchange Commission’s website at http://www.sec.gov/.

ITEMS 1 AND 2   BUSINESS AND PROPERTIES

GENERAL

Ivanhoe Energy Inc. (“Ivanhoe Energy” or “Ivanhoe”) is an independent international heavy oil development and production company focused on pursuing long-term growth in its reserve base and production.

Our authorized capital consists of an unlimited number of common shares without par value and an unlimited number of preferred shares without par value.

We were incorporated pursuant to the laws of the Yukon Territory of Canada, on February 21, 1995 under the name 888 China Holdings Limited. On June 3, 1996, we changed our name to Black Sea Energy Ltd., and on June 24, 1999, we changed our name to Ivanhoe Energy Inc.

Our principal executive office is located at Suite 654 — 999 Canada Place, Vancouver, British Columbia, V6C 3E1, and our registered and records office is located at 300-204 Black Street, Whitehorse, Yukon, Y1A 2M9. Our headquarters for operations are located at Suite 400 — 5060 California Avenue, Bakersfield, California, 93309.

CORPORATE STRATEGY

Importance of the Heavy Oil Segment of the Oil and Gas Industry

The global oil and gas industry is operating near capacity, driven by sharp increases in demand from developing economies and the declining availability of replacement low cost reserves. This has resulted in a significant increase in the relative price of oil and marked shifts in the demand and supply landscape. These shifts include demand moving toward China and India, while supply has shifted towards the need to develop higher cost/lower value resources, including heavy oil.

Heavy oil developments can be segregated into two types: conventional heavy oil that flows to the surface without steam enhancement and non-conventional heavy oil and bitumen. While we focus on the non-conventional heavy oil, both play an important role in Ivanhoe’s corporate strategy.

Production of conventional heavy oil has been steadily increasing worldwide, led by Canada and Latin America but with significant contributions from most oil basins, including the Middle East and the Far East, as

4

producers struggle to replace declines in light oil reserves. Even without the impact of the large non-conventional heavy oil projects in Canada and Venezuela, world oil production has been getting heavier. Refineries, on the other hand, have not been able to keep up with the need for deep conversion capacity, and heavy-light price differentials have widened significantly.

With regard to non-conventional heavy oil and bitumen, the dramatic increase in interest and activity has been fueled by higher prices, in addition to various key advances in technology, including improved remote sensing, horizontal drilling, and new thermal techniques. This has enabled producers to much more effectively access the extensive, heavy oil resources around the world.

These newer technologies, together with firm oil prices, have generated increased access to heavy oil resources, although for profitable exploitation, key challenges remain, with varied weightings, project by project: 1) the requirement for steam and electricity to help extract heavy oil, 2) the need for diluent to move the oil once it is at the surface, 3) the wide heavy-light price differentials that the producer is faced with when the product gets to market, and 4) conventional upgrading technologies limited to very large scale, high capital cost facilities. These challenges can lead to “distressed” assets, where economics are poor, or to “stranded” assets, where the resource cannot be economically produced and lies fallow.

Ivanhoe’s Value Proposition

Ivanhoe’s application of its patented rapid thermal processing process (“RTP^tm Process”) for heavy oil upgrading (“HTL^tm Technology” or “HTL^tm”) seeks to address the four key heavy oil development challenges outlined above, and can do so at a relatively small minimum economic scale.

Ivanhoe’s HTL^tm upgrading is a partial upgrading process that is designed to operate in facilities as small as 10,000-30,000 barrels per day. This is substantially smaller than the minimum economic scale for conventional stand-alone upgraders such as delayed cokers, which typically operate at scales of well over 100,000 barrels per day. Ivanhoe’s HTL^tm Technology is based on carbon rejection, a tried and tested concept in heavy oil processing. The key advantage of HTL^tm is that it is a very fast process — processing times are typically under a few seconds. This results in smaller, less costly facilities, and in addition eliminates the need for hydrogen addition, an expensive, large minimum scale step typically required in conventional upgrading. In addition, Ivanhoe’s HTL^tm Technology has the added advantage of converting upgrading byproducts into onsite energy, as opposed to the generation of large volumes of low value coke.

The HTL^tm process therefore offers significant advantages as a field-located upgrading alternative, integrated with the upstream heavy oil production operation. HTL^tm provides four key benefits to the producer:

1. Virtual elimination of external energy requirements for steam generation and/or power for upstream operations.

2. Elimination of the need for diluent or blend oils for transport.

3. Capture of the majority of the heavy-light oil value differential.

4. Relatively small minimum economic scale of operations suited for field upgrading and for smaller field developments.

The business opportunities available to Ivanhoe correspond to the challenges each potential heavy oil project faces. In Canada, Ecuador, California, Iraq, and Oman all four of the HTL^tm advantages identified above come into play. In others, including certain identified opportunities in Colombia and Libya, the heavy oil naturally flows to the surface, but transport is the key problem.

The economics of a project are effectively dictated by the advantages that HTL^tm can bring to a particular opportunity. The more stranded the resource and the fewer monetization alternatives that the resource owner has, the greater the opportunity the Company will have to establish the Ivanhoe value proposition.

5

Implementation Strategy

We are an oil and gas company with a unique technology which addresses several major problems confronting the oil and gas industry today. Because we have a unique resource in our patented technology and because we have experienced people who have developed oil fields in the past and are involved in acquiring new resources, we are in a position to work with partners on stranded heavy oil resources around the world to add value to these resources.

In 2007 Ivanhoe completed the HTL^tm equipment and process testing associated with the Commercial Demonstration Facility in California. Following this work, Ivanhoe’s principal focus has shifted to full scale commercial deployment of HTL^tm facilities. This effort includes the pursuit of opportunities in Canada and elsewhere related to the deployment of full-scale commercial HTL^tm facilities in business arrangements that would provide Ivanhoe with a share of reserves and production of heavy oil. In addition, in certain industrial and geographic markets, Ivanhoe is pursuing opportunities where shareholder value can be generated through commercial deployment of HTL^tm in business arrangements that may not include the generation of reserves and production for Ivanhoe.

The Company’s implementation strategy includes the following:

1. Build a portfolio of major HTL^tm projects.  We will continue to deploy our personnel and our financial resources in support of our goal to capture opportunities for development projects utilizing our HTL^tm Technology.

2. Advance the technology.  Additional development work will continue as we advance the technology through the first commercial application and beyond.

3. Enhance our financial position in anticipation of major projects.  Implementation of large projects requires significant capital outlays. We are refining our financing plans and establishing the relationships required for the development activities that we see ahead.

4. Build internal capabilities in advance of major projects.  The HTL^tm technical team, which includes our own staff, specialized consultants including the inventors of the technology, and our enhanced oil recovery (“EOR”) team will be supplemented and expanded to add additional expertise in areas such as project management.

5. Build the relationships that we will need for the future.  Commercialization of our technologies demands close alignment with partners, suppliers, host governments and financiers.

In order to facilitate the implementation of our business strategy, we plan to undertake a reorganization of our corporate, business and governance structures. We will create two new geographically focused business units that will pursue project opportunities in Latin America and the Middle East/North Africa (“MENA”), respectively. These new business units will operate through separate subsidiary companies in much the same way as our China business unit is operated through Sunwing Energy Ltd (“Sunwing”) our wholly owned subsidiary. Like Sunwing, our new Latin America and MENA business units will each have its own board of directors and senior management team. Initially, the Latin America and MENA subsidiaries and Sunwing will remain wholly-owned, and will be funded, by Ivanhoe Energy. It is intended that each subsidiary will eventually become financially independent and, as their respective geographically focused business strategies unfold, that each subsidiary will seek and obtain external sources of capital from third parties that will effectively reduce Ivanhoe Energy’s ownership interest.

Ivanhoe Energy itself will retain ownership of the HTL^tm Technology and will concentrate its business development efforts on project opportunities in North America, with a particular focus on Canada. Our Latin America business unit will continue the pursuit of opportunities to apply the HTL^tm Technology to heavy oil projects in Ecuador, Mexico and elsewhere in Latin America. Our MENA business unit will focus on heavy oil project opportunities in the Middle East/North Africa region, with a particular focus on Iraq, Egypt and Libya. It will also be responsible for advancing our GTL project opportunity in Egypt. Sunwing will continue to operate our existing EOR and exploration projects in China and to pursue business development initiatives in the East Asia region. Each of our Latin America, MENA and East Asia business units will have the exclusive right within its own defined geographical region to obtain from Ivanhoe Energy a project-specific site license of the HTL^tm Technology as and when the decision is made to develop an HTL^tm project.

6

In order to more effectively utilize the extensive geographically specific experience and expertise of our existing senior management personnel and board of directors, certain Ivanhoe Energy executive officers will be re-assigned to senior management positions within the Latin America and MENA business units and a number of incumbent directors will leave the Ivanhoe Energy board of directors and become directors of one or more of our Latin America, MENA and Sunwing subsidiaries. Our Deputy Chairman, Robert M. Friedland will serve as Executive Chairman and Chief Executive Officer. Our current President and Chief Executive Officer, Joseph I. Gasca has elected not to stand for re-election as a board member, and will step down as President and Chief Executive Officer as of May 29, 2008. Until then, he will continue to serve as President and Chief Executive Officer. It is expected that these changes to the Ivanhoe Energy board of directors and senior management will take effect immediately following our annual general meeting of shareholders which is scheduled to be held on May 29, 2008. See Item 10 “Directors, Executive Officers and Corporate Governance”. In anticipation of his appointment as our Chief Executive Officer, Mr. Friedland was awarded 2.5 million incentive stock options and we agreed to share part of the costs of operating an aircraft owned by Mr. Friedland. See “ITEM 11. EXECUTIVE COMPENSATION” AND “ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.”

HEAVY TO LIGHT OIL UPGRADING TECHNOLOGY

RTP^tm License and Patents

In April 2005, we acquired all the issued and outstanding common shares of Ensyn Group, Inc. (“Ensyn”) whereby we acquired an exclusive, irrevocable license to Ensyn’s RTP^tm Process for all applications other than biomass. In January 2007 the Company received a Notice of Allowance from the U.S. Patent Office for the first of a family of additional petroleum upgrading patent applications. Since Ivanhoe acquired the patented heavy oil upgrading technology it has been working to expand patent coverage to protect innovations to the HTL^tm Technology as they are developed. This allowance is the first patent protection that has been granted directly to Ivanhoe Energy, and significantly broadens the Company’s portfolio of HTL^tm intellectual property for petroleum upgrading and opens up additional HTL^tm patenting opportunities for Ivanhoe Energy. In addition, Ivanhoe Energy currently has several additional HTL^tm patents in various stages of prosecution.

Commercial Demonstration Facility

In 2004, Ensyn constructed a Commercial Demonstration Facility (“CDF”) to confirm earlier pilot test results on a larger scale and to test certain processing options. This facility, that the Company acquired as part of the Ensyn merger was built in the Belridge field, a large heavy oil field owned by Aera Energy LLC (“Aera”), a company owned by affiliates of ExxonMobil and Shell. In March 2005, initial performance testing of the CDF was completed successfully and the results of the test were verified by two large independent engineering consulting firms. The CDF demonstrated an overall processing capacity of approximately 1,000 barrels-per-day of raw, heavy oil from the Belridge California heavy oil fields and a hot section capacity of 300 barrels-per-day.

During 2007, technical developments were led by two important test runs at the CDF: a High Quality configuration was demonstrated on California vacuum tower bottoms (“VTBs”) and a key test was successfully completed processing Athabasca bitumen pursuant to a longstanding technology development agreement with ConocoPhillips Canada Resources Corp. These two key tests are the capstones of the CDF test program and we have now fulfilled the primary technical objectives of the CDF. The goals of the test program were: (1) to confirm the key processing results generated in the over 90 pilot plant runs of heavy oil and bitumen from Athabasca and the U.S. in a large facility, and (2) to provide sufficient data for the design and construction of full-scale, commercial HTL^tm plants.

The Athabasca bitumen test provided important technical information related to the design of full-scale HTL^tm facilities. This test, and other test run data, correlated the performance of the CDF with earlier runs on the smaller scale pilot facility, and validated the assumptions in Ivanhoe Energy’s economic models.

Feedstock Test Facility

The Company has initiated the construction of an additional HTL^tm facility, the Feedstock Test Facility (“FTF”). The FTF is a small (15-20 Bbls/d), highly flexible state-of-the-art HTL^tm facility which will permit more

7

cost-effective screening of feedstock crudes for current and potential partners in smaller volumes and at lower costs than required at the CDF. As we continue to advance our technology, this unit will form an integral part of the ongoing post-commercialization optimization of our products and processes. The FTF will provide additional data and will support the detailed engineering process once the first commercial target location and crude has been established.

This facility, costing approximately $7.9 million, is expected to be completed in mid 2008, and be commissioned soon thereafter. The FTF will be located in San Antonio, Texas.

HTL^tm Business Development

We are pursuing HTL^tm business development opportunities around the world, primarily Western Canada, Latin America and the Middle East/North Africa region. Integrated HTL^tm/Steam Assisted Gravity Drainage (“SAGD”) financial models for Athabasca have been updated and refined, incorporating newly revised capital costs from AMEC, and revised price assumptions and currency exchange rate changes. These updated models show that HTL^tm integration represents robust value-add for thermal bitumen projects in Western Canada.

We also made significant progress in developing an execution plan with AMEC, our Tier One engineering contractor, for the design and construction of full-scale commercial HTL^tm facilities. The Company is proceeding with preliminary, non site-specific engineering related to the first fully commercial HTL^tm facility, supported by the recent successful CDF runs.

In October 2004, we signed an MOU with the Ministry of Oil of Iraq to study and evaluate the shallow Qaiyarah oil field in Iraq. The field’s reservoirs contain a large proven accumulation of 17.1° API heavy oil at a depth of about 1,000 feet. We have completed the reservoir assessment and have evaluated various recovery methods. Facility design work as well as an economic evaluation are complete. Based on this evaluation we submitted a technical proposal to the Iraq Ministry of Oil who have accepted and approved the study and its conclusions.

In the first half of 2007, the Company and INPEX Corporation (“INPEX”), Japan’s largest oil and gas exploration and production company, signed an agreement to jointly pursue the opportunity to develop the above noted heavy oil field in Iraq. During the second quarter of 2007, INPEX paid $9.0 million to the Company as a contribution towards the Company’s past costs related to the project and certain costs related to the development of its HTL^tm upgrading technology.

The agreement provides INPEX with a significant minority interest in the venture, with Ivanhoe Energy retaining a majority interest. Both parties will participate in the pursuit of the opportunity but Ivanhoe will lead the discussions with the Iraqi Ministry of Oil. Should the Company and INPEX proceed with the development and deploy Ivanhoe Energy’s HTL^tm Technology, certain technology fees would be payable to the Company by INPEX.

In September 2007, the Ministry of Oil requested that we submit a commercial proposal for a 30,000 Bopd Pilot Project to test the reservoir response to thermal recovery methods, optimize the development plan and build/operate the first HTL^tm unit for the field. We expect to be negotiating an agreement during the first half of 2008.

GAS-TO-LIQUIDS TECHNOLOGY

Syntroleum License

We own a non-exclusive master license entitling us to use Syntroleum Corporation’s (“Syntroleum”) proprietary technology (“GTL Technology” or “GTL”) to convert natural gas into ultra clean transportation fuels and other synthetic petroleum products in an unlimited number of projects with no limit on production volume. Syntroleum’s proprietary GTL process is designed to catalytically convert natural gas into synthetic liquid hydrocarbons. This patented process uses compressed air, steam and natural gas as initial components to the catalyst process. As a result, this process (the “Syntroleum Process^tm”) substantially reduces the capital and operating costs and the minimum economic size of a GTL plant as compared to the other oxygen-based GTL technologies. Competitor GTL processes use either steam reforming or a combination of steam reforming and partial oxidation with pure oxygen. A steam reformer and an air separation plant necessary for oxidation are expensive and considered hazardous and increase operating costs.

8

The attraction of the GTL Technology lies in the commercialization of stranded natural gas. Such gas exists in discovered and known reservoirs, but is considered to be stranded based on the relative size of the fields and their remoteness from comparable sized markets. We have performed detailed project feasibility studies for the construction, operation and cost of plants from 47,000 to 185,000 Bbls/d. Additionally, we have conducted marketing and transportation feasibility studies for both European and Asia Pacific regions in which we identified potential markets and estimated premiums for GTL diesel and GTL naphtha.

GTL Business Development

At the present time, the only GTL project we are pursuing is the Egyptian GTL project described herein. In 2005, we signed a memorandum of understanding with Egyptian Natural Gas Holding Company (“EGAS”), the state organization responsible for managing Egypt’s natural gas resources, to prepare a feasibility study to construct and operate a GTL plant that would convert natural gas to ultra-clean liquid fuels in Egypt. We completed an engineering design of a GTL plant to incorporate the latest advances in Syntroleum GTL technology and have completed market and pricing analysis for GTL products to reflect changes since the original evaluation was completed several years ago. Plant capacity options of 47,000 and 94,000 Bbls/d were evaluated and in May 2006, we presented the feasibility study report to EGAS along with three commercial proposals. Based on EGAS’ review, and response to the proposals, we submitted a revised proposal in October 2006. In November 2006 the Company signed a Participation Agreement with H.K. Renewable Energy Ltd. (“HKRE”). In August 2007, we signed a Term Sheet with EGAS (a 24% project participant) and HKRE (a 15% project participant) which set out the commercial terms for a 47,000 Bbls/d project to be run on a tolling basis. EGAS agreed to commit, at no cost to the project, up to 4.2 trillion cubic feet of natural gas, or approximately 600 MMcf/d for the anticipated 20-year operating life of the project, subject to satisfactory conclusion of pre-front end engineering and design (“FEED”) confirming commercial viability and financing ability, the negotiation and signature of a definitive agreement and approval by the Company’s Board of Directors and the appropriate authorities in Egypt.

OIL AND GAS PROPERTIES

Our principal oil and gas properties are located in California’s San Joaquin Basin and Sacramento Basin, the Permian Basin in Texas and the Hebei and Sichuan Provinces in China. Set forth below is a description of these properties.

The following table sets forth the estimated quantities of proved reserves and production attributable to our properties:

							12/31/2007		Percentage of
		2007		Percentage of			Proved		Total Estimated
		Production		Total 2007			Reserves		Proved
Property	Location	(In MBoe)		Production			(In MBoe)		Reserves
South Midway	Kern County, California		178		26	%		982		40	%
West Texas	Midland County, Texas		20		3	%		208		8	%
Other	California		2		0	%		—		0	%
Total U.S.			199		29	%		1,191		48	%
Dagang	Hebei Province, China		464		68	%		1,195		48	%
Other	China		19		3	%		85		4	%
Total China			483		71	%		1,280		52	%
Total			682		100	%		2,471		100	%

Note:  See the “Supplementary Disclosures About Oil and Gas Production Activities”, which follow the notes to our consolidated financial statements set forth in Item 8 in this Annual Report on Form 10-K, for certain details regarding the Company’s oil and gas proved reserves, the estimation process and production by country. Estimates for our U.S. and China operations were prepared by independent petroleum consultants Netherland, Sewell & Associates Inc. and GLJ Petroleum Consultants Ltd., respectively. We have not filed with nor included in reports to

9

any other U.S. federal authority or agency, any estimates of total proved crude oil or natural gas reserves since the beginning of the last fiscal year.

Special Note to Canadian Investors

Ivanhoe is a United States Securities and Exchange Commission (“SEC”) registrant and files annual reports on Form 10-K. Accordingly, our reserves estimates and securities regulatory disclosures are prepared based on SEC disclosure requirements. In 2003, certain Canadian securities regulatory authorities adopted National Instrument 51-101 — Standards of Disclosure for Oil and Gas Activities (“NI 51-101”) which prescribes certain standards that Canadian companies are required to follow in the preparation and disclosure of reserves and related information. We applied for, and have been granted, exemptions from certain NI 51-101 disclosure requirements. These exemptions permit us to substitute disclosures based on SEC requirements for much of the annual disclosure required by NI 51-101 and to prepare our reserves estimates and related disclosures in accordance with SEC requirements, generally accepted industry practices in the U.S. as promulgated by the Society of Petroleum Engineers, and the standards of the Canadian Oil and Gas Evaluation Handbook (the “COGE Handbook”) modified to reflect SEC requirements.

The reserves quantities disclosed in this Annual Report on Form 10-K represent net proved reserves calculated on a constant price basis using the standards contained in SEC Regulation S-X and Statement of Financial Accounting Standards No. 69, “Disclosures About Oil and Gas Producing Activities”. Such information differs from the corresponding information prepared in accordance with Canadian disclosure standards under NI 51-101. The primary differences between the SEC requirements and the NI 51-101 requirements are as follows:

•  SEC registrants apply SEC reserves definitions and prepare their reserves estimates in accordance with SEC requirements and generally accepted industry practices in the U.S. whereas NI 51-101 requires adherence to the definitions and standards promulgated by the COGE Handbook;

•  the SEC mandates disclosure of proved reserves the Standardized Measure of Discounted Future Net Cash Flows and Changes Therein calculated using year-end constant prices and costs only; whereas NI 51-101 requires disclosure of reserves and related future net revenues using forecasted prices, with additional constant pricing disclosure being optional;

•  the SEC mandates disclosure of proved and proved developed reserves by country only whereas NI 51-101 requires disclosure of more reserve categories and product types;

•  the SEC does not require separate disclosure of proved undeveloped reserves or related future development costs whereas NI 51-101 requires disclosure of more information regarding proved undeveloped reserves, related development plans and future development costs; and

•  the SEC leaves the engagement of independent qualified reserves evaluators to the discretion of a company’s board of directors whereas NI 51-101 requires issuers to engage such evaluators and to file their reports.

The foregoing is a general and non-exhaustive description of the principal differences between SEC disclosure requirements and NI 51-101 requirements. Please note that the differences between SEC requirements and NI 51-101 may be material.

United States

• Production and Development

South Midway

We currently have 60 producing wells in South Midway and are the operator, with a working interest of 100% and a 93% net revenue interest. In 2006, we drilled ten new wells on the South Midway properties compared to 2005 when we drilled one development well, two temperature observation wells and one exploratory well. Three wells in this program were drilled to test for pool extensions or new pool discoveries. Two extensions were found which have led to more development work and potential reserves. The Company purchased an additional steam generator in 2007 and during the interim while this generator was being retro fitted we had lower than predicted steam injection

10

rates. Downtime during the second quarter to repair our existing steam generator further hindered the steam operations. The Company delayed the drilling of new wells in 2007 until the new generator was available. The new generator was put in full time service in September 2007 and we began the preparation for drilling new wells in the fourth quarter of 2007. In 2007 we produced an average 487 net Bopd (534 gross Bopd), with current production approximately 496 net Bopd (517 gross Bopd) compared to 543 net Bopd (590 gross Bopd) at December 31, 2006. An eight well drilling program is currently underway. The production results from this program will begin to be realized in the first quarter of 2008.

West Texas

In 2000, we farmed into the Spraberry property, which is a producing property located on 2,500 gross acres in the Spraberry Trend of the Permian Basin in West Texas. We retain working interests ranging from 31% to 48% in 25 wells, which are currently producing approximately 53 net Boe/d compared to 80 net Boe/d at December 31, 2006. The future decline of the oil and gas production rates are expected to be moderate and should lead to consistent performance and long life reserves.

Other

In mid-2004, we farmed into the McCloud River prospect near the Cymric field in the San Joaquin Basin. We have a 24% working interest in this 880 gross-acre prospect. The initial well resulted in a dry hole. In 2005, a second prospect, North Salt Creek #1, was drilled to 2,500 feet on the acreage and was a discovery, encountering multiple oil and gas bearing horizons. North Salt Creek #1 commenced natural gas sales in September 2005 at a rate of 1,000 Mcf/day. Production was subsequently suspended as the natural gas was intended to be used as fuel in a steam operation. Drilling of two follow-up wells was completed in the fourth quarter of 2005. Multiple targets were encountered in both of these wells. One of the intervals is in a diatomite formation which has large oil storage capacity, but contains heavy oil that requires steam stimulation for extraction. Each of these wells was steamed in 2006, the results of which were sub economic. A fourth well was drilled in 2007. More steam stimulation of this diatomite interval occurred in the fourth quarter of 2007, the evaluation of these tests is underway and should lead to more development.

In the first quarter of 2006, we sold our working interest in our three producing wells in the Citrus prospect for $5.4 million. We still hold 2,316 net acreage in this prospect, all of which has been farmed out. As part of this farm out the Company retained a carried 35% working interest in the property. The operator drilled one well to 9,500 feet, abandoned the well and then withdrew from the farm out agreement. The Company has since farmed out the Citrus leases to another company under which we will get a 5% royalty before payout and a 10% royalty after payout on any wells drilled in the prospect leases.

• Exploration

The Company is focusing its exploration efforts on the lower risk opportunities noted below.

Knights Landing

In 2004, we farmed in to the Knights Landing project, which is a 15,700 gross-acre block located in the Sacramento Gas Basin in northern California. We drilled nine new exploratory wells which resulted in three successful completions and six dry holes. Subsequent to this drilling program we increased our working interests in the project and 11 existing producing natural gas wells. By the end of 2005, production from the Knights Landing wells had been fully depleted in all but one well, which was producing at minimal levels. This well was full depleted by the end of 2006.

In late 2005, we acquired a 3-D seismic data program over 25 square miles covering our Knights Landing acreage block. We completed our seismic acquisition program in December 2005 and completed processing and interpretation of the seismic data in 2006. In the first quarter of 2008, negotiations were underway with a third party to farm out a 50% working interest in the Knights landing properties in return for a 10 well drilling obligation to be drilled in the second quarter of 2008. The primary objective of this development and exploration program is the

11

Starkey Sand formation, which is an established producing reservoir in the region that lies between depths of 2,000 to 3,500 feet.

Aera Exploration Agreement

The Aera exploration agreement, originally covering an area of more than 250,000 acres in the San Joaquin Basin, gave us access to all of Aera’s exploration, seismic and technical data in the region for the purpose of identifying drillable exploration prospects. We identified 13 prospects within 11 areas of mutual interest (“AMI”) covering approximately 46,800 gross acres owned by Aera and an additional 24,200 acres of leased mineral rights. Of the 13 prospects submitted, Aera has elected to take a working interest in 10 prospects, resulting in our retention of working interests ranging from 12.5% to 50%. We have a 100% working interest in three prospects in which Aera elected not to participate — South Midway, Citrus and North Yowlumne. We will continue to hold exploration rights to the lands within each previously designated and accepted prospect until an exploration well is drilled on that prospect. There is no time deadline for drilling to occur if Aera elects to participate in the drilling of a prospect. If Aera elects not to participate we have an additional two years to drill the prospect on our own or with other parties. This two-year period will be extended as long as we continue to drill or have established production.

Other

In December 2005, drilling commenced on the North Yowlumne prospect with a planned total depth of 13,000 feet to test the Stevens sands that have produced over 100 million barrels of oil at the nearby Yowlumne field. The well did not produce commercial quantities of hydrocarbons during several tests and has been suspended indefinitely by the operator. In March 2007, the Company assigned its rights to this property for $1.0 million and retained a carried 15% working interest in future drilling of the prospect. A second well was drilled on the prospect in late 2007 which is now being tested.

China

• Production and Development

Our producing property in China is a 30-year production-sharing contract with China National Petroleum Corporation (“CNPC”), covering an area of 10,255 gross acres divided into three blocks in the Kongnan oilfield in Dagang, Hebei Province, China (the “Dagang field”). Under the contract, as operator, we fund 100% of the development costs to earn 82% of the net revenue from oil production until cost recovery, at which time our entitlement reverts to 49%. Our entire interest in the Dagang field will revert to CNPC at the end of the 20-year production phase of the contract or if we abandon the field earlier.

In January 2004, we negotiated farm-out and joint operating agreements with Richfirst Holdings Limited (“Richfirst”) a subsidiary of China International Trust and Investment Corporation (“CITIC”) whereby Richfirst paid $20.0 million to acquire a 40% working interest in the field after Chinese regulatory approvals, which were obtained in June 2004. The farm-out agreement provided Richfirst with the right to convert its working interest in the Dagang field into common shares in the Company at any time prior to eighteen months after closing the farm-out agreement. Richfirst elected to convert its 40% working interest in the Dagang field and in February 2006 we re-acquired Richfirst’s 40% working interest.

During 2001, we completed the pilot phase and in 2002 submitted the final draft of our Overall Development Plan (“ODP”) to the Chinese regulatory authorities for approval. Final government approval was obtained in April 2003, after which the development phase commenced in late 2003. We suspended drilling in late 2005 to allow for detailed evaluation of well productivity and production decline performance. By the end of 2006, we had drilled a total of 39 development wells, as compared to the estimated 115 wells set out in the approved ODP, and in the fourth quarter of 2006, we reached agreement with CNPC to reduce the overall scope of the ODP to approximately 44 wells through a modified ODP. This program included a further five development wells to be drilled in 2007. This program has been finalized and all five wells have been completed and placed on production. It is expected that commercial production will be declared in the fourth quarter of 2008 following conversion of an additional two wells to water injection for pressure maintenance.

12

We drilled the five new development wells in 2007 as compared to 2006 when we completed one well drilled in 2005, fracture stimulated 12 wells and re-completed 13 wells. Only a third of the net pay in each of the new five wells was completed and fracture stimulated in 2007. The remaining pay will be completed later. Due to the net pay being spread over hundreds of meters vertical depth, it is more effective to complete and fracture the productive intervals in stages. In addition, we have now relinquished three of the six blocks that were part of the ODP. The year-end 2007 gross production rate was 1,900 Bopd (290 Bopd resulting from the five new wells) compared to 1,877 Bopd at the end of 2006 and 2,310 Bopd at the end of 2005. We currently sell our crude oil at a three-month rolling average price of Cinta crude which historically averages approximately $3.00 per barrel less than West Texas Intermediate (“WTI”) price.

• Exploration

In November 2002, we received final Chinese regulatory approval for a 30-year production-sharing contract (the “Zitong Contract”), with CNPC for the Zitong block, which covers an area of approximately 900,000 acres in the Sichuan basin. Under the Zitong Contract, we agreed to conduct an exploration program on the Zitong block consisting of two phases, each three years in length. The first three-year period was ultimately extended to December 31, 2007. The parties will jointly participate in the development and production of any commercially viable deposits, with production rights limited to a maximum of the lesser of 30 years following the date of the Zitong Contract or 20 years of continuous production. In 2006, we farmed-out 10% of our working interest in the Zitong block to Mitsubishi Gas Chemical Company Inc. of Japan (“Mitsubishi”) for $4.0 million.

The Company now has completed the first phase under the Zitong Contract (“Phase 1”). This included reprocessing approximately 1,649 miles of existing 2D seismic data and acquiring approximately 705 miles of new 2D seismic data, and interpreting this data. This was followed by drilling two wells, totaling an aggregate of 22,293 feet. Both wells encountered expected reservoirs and gas was tested on the second well, but neither well demonstrated commercially viable flow rates and both have been suspended. The Company may elect to reenter these wells to stimulate or drill directionally in the future. In December 2007, the Company and Mitsubishi (the “Zitong Partners”) made a decision to enter into the next three-year exploration phase (“Phase 2”).

By electing to participate in Phase 2 the Zitong Partners must relinquish 30%, plus or minus 5%, of the Zitong block acreage and complete a minimum work program involving approximately 23,700 feet of drilling (including a Phase 1 shortfall), with estimated minimum expenditures for this program of $25.0 million. The Phase 2 seismic line acquisition commitment was fulfilled in the Phase 1 exploration program. The Zitong Partners plan to acquire additional seismic data in Phase 2. The partners have applied to CNPC to offset this additional seismic against the drilling commitment, reducing the required Phase 2 drilling footage requirement. The Zitong Partners plan to acquire the new seismic lines in 2008, commence drilling late in 2009 and complete drilling, completion and evaluation of this prospect in late 2010. The Zitong Partners must complete the minimum work program or will be obligated to pay to CNPC the cash equivalent of the deficiency in the work program for that exploration phase. Following the completion of Phase 2, the Zitong Partners must relinquish all of the remaining property except any areas identified for development and production. In the event of a discovery, the Zitong Partners believe it would be possible to negotiate to enter a Phase III and reduce the amount of land relinquishment to allow further exploration activities.

EMPLOYEES

As at December 31, 2007, we had 145 employees and consultants actively engaged in the business. None of our employees are unionized.

PRODUCTION, WELLS AND RELATED INFORMATION

See the “Supplementary Disclosures About Oil and Gas Production Activities”, which follows the notes to our consolidated financial statements set forth in Item 8 in this Annual Report on Form 10-K, for information with respect to our oil and gas producing activities.

13

The following tables set forth, for each of the last three fiscal years, our average sales prices and average operating costs per unit of production based on our net interest after royalties. Average operating costs are for lifting costs only and exclude depletion and depreciation, income taxes, interest, selling and administrative expenses.

	Average Sales Price						Average Operating Costs
	2007		2006		2005		2007		2006		2005
Crude Oil and Natural Gas ($/Boe)
U.S.	$	61.71	$	54.86	$	44.01	$	21.72	$	19.54	$	15.64
China	$	64.86	$	62.04	$	49.97	$	26.88	$	20.58	$	8.27

The following table sets forth the number of commercially productive wells (both producing wells and wells capable of production) in which we held a working interest at the end of each of the last three fiscal years. Gross wells are the total number of wells in which a working interest is owned and net wells are the sum of fractional working interests owned in gross wells.

	2007								2006									2005
	Oil Wells				Gas Wells				Oil Wells					Gas Wells				Oil Wells				Gas Wells
	Gross		Net		Gross		Net		Gross		Net			Gross		Net		Gross		Net		Gross		Net
U.S.		92		74.9		1		0.2		89		73.5			2		1.0		87		69.3		3		1.5
China		44		36.1		—		—		42		34.4	(1)		—		—		43		21.2		—		—

(1) After giving effect to the 40% farm-in/out of Richfirst to the Dagang field.

The following two tables set forth, for each of the last three fiscal years, our participation in the completed drilling of net oil and gas wells:

Exploratory

	Productive Wells												Dry Wells
	2007				2006				2005				2007				2006					2005
	Oil		Gas		Oil		Gas		Oil		Gas		Oil		Gas		Oil			Gas		Oil		Gas
U.S.		—		—		—		—		1.5		0.2		—		—		0.6	(1)		—		—		1.8	(2)
China		—		—		—		—		—		—		—		0.9		—			—		—		1.0
Total		—		—		—		—		1.5		0.2		—		0.9		0.6			—		—		2.8

(1)	Includes 0.6 (1 gross) net exploratory wells drilled during 2005 which were determined to be dry in 2006.
(2)	Includes 0.8 net (2 gross) exploratory wells drilled during 2001, which were determined to be dry in 2005.

Development

	Productive Wells												Dry Wells
	2007				2006				2005				2007				2006				2005
	Oil		Gas		Oil		Gas		Oil		Gas		Oil		Gas		Oil		Gas		Oil		Gas
U.S.		1.2		—		9.0		—		1.0		—		—		—		—		—		—		—
China		4.1		—		—		—		10.8		—		—		—		—		—		—		—
Total		5.3		—		9.0		—		11.8		—		—		—		—		—		—		—

Wells in Progress

At the end of 2007, 2006 and 2005 we had 4.3 (5 gross), 5.3 (6 gross) and 1.1 (3 gross) net wells, respectively, which were either in the process of drilling or suspended.

14

Acreage

The following table sets forth our holdings of developed and undeveloped oil and gas acreage as at December 31, 2007. Gross acres include the interest of others and net acres exclude the interests of others:

	Developed Acres				Undeveloped Acres
	Gross		Net		Gross		Net
U.S.		8,051		3,826		81,010		20,318
China(1)		3,169		2,599		886,869		794,252

(1) The number of developed acres disclosed in respect of our China properties relates only to those portions of the field covered by our producing operations and does not include the remaining portions of the field previously developed by CNPC.

ITEM 1A.   RISK FACTORS

We are subject to a number of risks due to the nature of the industry in which we operate, our reliance on strategies which include technologies that have not been proved on a commercial scale, the present state of development of our business and the foreign jurisdictions in which we carry on business. The following factors contain certain forward-looking statements involving risks and uncertainties. Our actual results may differ materially from the results anticipated in these forward-looking statements.

We may not be able to meet our substantial capital requirements.

Our business is capital intensive and the advancement of either our HTL^tm or GTL project development initiatives will require significant investments in property acquisitions and development activities. Since our revenues from existing operations are insufficient to fund the capital expenditures that will be required to implement our HTL^tm and GTL project development initiatives, we will need to rely on external sources of financing to meet our capital requirements. We have, in the past, relied upon equity capital as our principal source of funding. We may seek to obtain the future funding we will need through debt and equity markets, through project participation arrangements with third parties or from the sale of existing assets, but we cannot assure you that we will be able to obtain additional funding when it is required and whether it will be available on commercially acceptable terms. If we fail to obtain the funding that we need when it is required, we may have to forego or delay potentially valuable project acquisition and development opportunities or default on existing funding commitments to third parties and forfeit or dilute our rights in existing oil and gas property interests. Our limited operating history may make it difficult to obtain future financing.

We might not successfully commercialize our technology, and commercial-scale HTL^tm and GTL plants based on our technology may never be successfully constructed or operated.

No commercial-scale HTL^tm or GTL plant based on our technology has been constructed to date and we may never succeed in doing so. Other developers of competing heavy oil upgrading and gas-to-liquids technologies may have significantly more financial resources than we do and may be able to use this to obtain a competitive advantage. Success in commercializing our HTL^tm and GTL technologies depends on our ability to economically design, construct and operate commercial-scale plants and a variety of factors, many of which are outside our control. We currently have insufficient resources to manage the financing, design, construction or operation of commercial-scale HTL^tm or GTL plants, and we may not be successful in doing so.

Our efforts to commercialize our HTL^tm Technology may give rise to claims of infringement upon the patents or proprietary rights of others.

We own a license to use the HTL^tm Technology that we are seeking to commercialize but we may not become aware of claims of infringement upon the patents or rights of others in this technology until after we have made a substantial investment in the development and commercialization of projects utilizing it. Third parties may claim that the technology infringes upon past, present or future patented technologies. Legal actions could be brought against the licensor and us claiming damages and seeking an injunction that would prevent us from testing or

15

commercializing the technology. If an infringement action were successful, in addition to potential liability for damages, we and our licensors could be required to obtain a claiming party’s license in order to continue to test or commercialize the technology. Any required license might not be made available or, if available, might not be available on acceptable terms, and we could be prevented entirely from testing or commercializing the technology. We may have to expend substantial resources in litigation defending against the infringement claims of others. Many possible claimants, such as the major energy companies that have or may be developing proprietary heavy oil upgrading technologies competitive with our technology, may have significantly more resources to spend on litigation.

Technological advances could significantly decrease the cost of upgrading heavy oil and, if we are unable to adopt or incorporate technological advances into our operations, our HTL^tm Technology could become uncompetitive or obsolete.

We expect that technological advances in the processes and procedures for upgrading heavy oil and bitumen into lighter, less viscous products will continue to occur. It is possible that those advances could make the processes and procedures, which are integral to the HTL^tm Technology that we are seeking to commercialize, less efficient or cause the upgraded product being produced to be of a lesser quality. These advances could also allow competitors to produce upgraded products at a lower cost than that at which our HTL^tm Technology is able to produce such products. If we are unable to adopt or incorporate technological advances, our production methods and processes could be less efficient than those of our competitors, which could cause our HTL^tm Technology facilities to become uncompetitive.

The development of alternate sources of energy could lower the demand for our HTL^tm Technology.

In addition, alternative sources of energy are continually under development. Alternative energy sources that can reduce reliance on oil and bitumen may be developed, which may decrease the demand for our HTL^tm Technology upgraded product. It is also possible that technological advances in engine design and performance could reduce the use of oil and bitumen, which would lower the demand for such products.

The volatility of oil prices may affect our financial results.

Our revenues, operating results, profitability and future rate of growth are highly dependent on the price of, and demand for, oil. Prices also affect the amount of cash flow available for capital expenditures and our ability to borrow money or raise additional capital. Even relatively modest changes in oil prices may significantly change our revenues, results of operations, cash flows and proved reserves. Historically, the market for oil has been volatile and is likely to continue to be volatile in the future.

The price of oil may fluctuate widely in response to relatively minor changes in the supply of and demand for oil, market uncertainty and a variety of additional factors that are beyond our control, such as weather conditions, overall global economic conditions, terrorist attacks or military conflicts, political and economic conditions in oil producing countries, the ability of members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls, the level of demand and the price and availability of alternative fuels, speculation in the commodity futures markets, technological advances affecting energy consumption, governmental regulations and approvals, proximity and capacity of oil pipelines and other transportation facilities.

These factors and the volatility of the energy markets make it extremely difficult to predict future oil price movements with any certainty. Declines in oil prices would not only reduce our revenues, but could reduce the amount of oil we can economically produce. This may result in our having to make substantial downward adjustments to our estimated proved reserves and could have a material adverse effect on our financial condition and results of operations. In addition, a substantial long-term decline in oil prices would severely impact our ability to execute a heavy oil development program

Lower oil prices could negatively impact our ability to borrow.

The amount of borrowings available to us under our bank credit facilities are determined by reference to borrowing bases. The amounts of our borrowing bases are established by our lenders and are primarily functions of

16

the quantity and value of our reserves. Our borrowing bases are re-determined at least twice a year to take into account changes in our reserve base and prevailing commodity prices. Commodity prices can affect both the value as well as the quantity of our reserves for borrowing base purposes as certain reserves may not be economic at lower price levels. Consequently, the amounts of borrowings available to us under our bank credit facilities could be adversely affected by extended periods of low commodity prices.

Our ability to sell assets and replace revenues generated from any sale of our existing properties depends upon market conditions and numerous uncertainties.

During 2006, we were involved in negotiations for a business combination transaction involving our China assets that, if completed, would have resulted in our China assets being owned and operated by a separate publicly traded company. Although the transaction was not completed, we continue to explore opportunities to generate capital for the ongoing development of our core HTL^tm business, which may involve the sale of some or all of our exploration, development and production assets in China and the U.S. There can be no assurance that we will sell any such assets nor that any such sale, if and when made, will generate sufficient capital for the ongoing development of our core HTL^tm business, which will require the acquisition of one or more properties hosting deposits of heavy oil. Our operating revenues and cash flows would likely decrease significantly following the sale of any material portion of our existing producing assets and would likely remain at lower levels until we were able to replace the lost production with production from new properties.

We may be required to take write-downs if oil prices decline, our estimated development costs increase or our exploration results deteriorate.

We may be required under generally accepted accounting principles in Canada and the U.S. to write down the carrying value of our properties if oil prices decline or if we have substantial downward adjustments to our estimated proved reserves, increases in our estimates of development costs or deterioration in our exploration results. See “Critical Accounting Principles and Estimates — Impairment of Proved Oil and Gas Properties” in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report.

Government regulations in foreign countries may limit our activities and harm our business operations.

We carry on business in China and we may, in the future, carry on business in other foreign jurisdictions with governments, governmental agencies or government-owned entities. The foreign legal framework for the agreements through which we carry on business now or in the future, particularly in developing countries, is often based on recent political and economic reforms and newly enacted legislation, which may not be consistent with long-standing local conventions and customs. As a result, there may be ambiguities, inconsistencies and anomalies in the agreements or the legislation upon which they are based which are atypical of more developed legal systems and which may affect the interpretation and enforcement of our rights and obligations and those of our foreign partners. Local institutions and bureaucracies responsible for administering foreign laws may lack a proper understanding of the laws or the experience necessary to apply them in a modern business context. Foreign laws may be applied in an inconsistent, arbitrary and unfair manner and legal remedies may be uncertain, delayed or unavailable.

Estimates of proved reserves and future net revenue may change if the assumptions on which such estimates are based prove to be inaccurate.

Our estimated reserves are based on many assumptions that may turn out to be inaccurate. Any material inaccuracies in these reserve estimates or underlying assumptions will materially affect the quantities and present value of our reserves. The accuracy of any reserve estimate is a function of the quality of available data, engineering and geological interpretation and judgment and the assumptions used regarding prices for oil and natural gas, production volumes, required levels of operating and capital expenditures, and quantities of recoverable oil reserves. Oil prices have fluctuated widely in recent years. Volatility is expected to continue and price fluctuations directly affect estimated quantities of proved reserves and future net revenues. Actual prices, production, development expenditures, operating expenses and quantities of recoverable oil reserves will vary from those assumed in our estimates, and these variances may be significant. Also, we make certain assumptions regarding future oil

17

prices, production levels, and operating and development costs that may prove incorrect. Any significant variance from the assumptions used could result in the actual quantity of our reserves and future net cash flow being materially different from the estimates we report. In addition, actual results of drilling, testing and production and changes in natural gas and oil prices after the date of the estimate may result in revisions to our reserve estimates. Revisions to prior estimates may be material.

Information in this document regarding our future plans reflects our current intent and is subject to change.

We describe our current exploration and development plans in this Annual Report. Whether we ultimately implement our plans will depend on availability and cost of capital; receipt of HTL^tm Technology process test results, additional seismic data or reprocessed existing data; current and projected oil or gas prices; costs and availability of drilling rigs and other equipment, supplies and personnel; success or failure of activities in similar areas; changes in estimates of project completion costs; our ability to attract other industry partners to acquire a portion of the working interest to reduce costs and exposure to risks and decisions of our joint working interest owners.

We will continue to gather data about our projects and it is possible that additional information will cause us to alter our schedule or determine that a project should not be pursued at all. You should understand that our plans regarding our projects might change.

Our business may be harmed if we are unable to retain our interests in licenses, leases and production sharing contracts.

Some of our properties are held under licenses and leases, working interests in licenses and leases or production sharing contracts. If we fail to meet the specific requirements of the instrument through which we hold our interest, it may terminate or expire. We cannot assure you that any or all of the obligations required to maintain our interest in each such license, lease or production sharing contract will be met. Some of our property interests will terminate unless we fulfill such obligations. If we are unable to satisfy these obligations on a timely basis, we may lose our rights in these properties. The termination of our interests in these properties may harm our business.

We may incur significant costs on exploration or development efforts which may prove unsuccessful or unprofitable.

There can be no assurance that the costs we incur on exploration or development will result in an economic return. We may misinterpret geologic or engineering data, which may result in significant losses on unsuccessful exploration or development drilling efforts. We bear the risks of project delays and cost overruns due to unexpected geologic conditions, equipment failures, equipment delivery delays, accidents, adverse weather, government and joint venture partner approval delays, construction or start-up delays and other associated risks. Such risks may delay expected production and/or increase costs of production or otherwise adversely affect our ability to realize an acceptable level of economic return on a particular project in a timely manner or at all.

Our business involves many operating risks that can cause substantial losses; insurance may not protect us against all these risks.

There are hazards and risks inherent in drilling for, producing and transporting oil. These hazards and risks may result in loss of hydrocarbons, environmental pollution, personal injury claims, and other damage to our properties and third parties and include fires, natural disasters, adverse weather conditions, explosions, encountering formations with abnormal pressures, encountering unusual or unexpected geological formations, blowouts, cratering, unexpected operational events, equipment malfunctions, pipeline ruptures, spills, compliance with environmental and government regulations and title problems.

We are insured against some, but not all, of the hazards associated with our business, so we may sustain losses that could be substantial due to events that are not insured or are underinsured. The occurrence of an event that is not covered or not fully covered by insurance could have a material adverse impact on our financial condition and

18

results of operations. We do not carry business interruption insurance and, therefore, the loss and delay of revenues resulting from curtailed production are not insured.

Complying with environmental and other government regulations could be costly and could negatively impact our production.

Our operations are governed by numerous laws and regulations at various levels of government in the countries in which we operate. These laws and regulations govern the operation and maintenance of our facilities, the discharge of materials into the environment and other environmental protection issues and may, among other potential consequences, require that we acquire permits before commencing drilling; restrict the substances that can be released into the environment with drilling and production activities; limit or prohibit drilling activities on protected areas such as wetlands or wilderness areas; require that reclamation measures be taken to prevent pollution from former operations; require remedial measures to mitigate pollution from former operations, such as plugging abandoned wells and remediating contaminated soil and groundwater and require remedial measures be taken with respect to property designated as a contaminated site.

Under these laws and regulations, we could be liable for personal injury, clean-up costs and other environmental and property damages, as well as administrative, civil and criminal penalties. We maintain limited insurance coverage for sudden and accidental environmental damages as well as environmental damage that occurs over time. However, we do not believe that insurance coverage for the full potential liability of environmental damages is available at a reasonable cost. Accordingly, we could be liable, or could be required to cease production on properties, if environmental damage occurs.

The costs of complying with environmental laws and regulations in the future may harm our business. Furthermore, future changes in environmental laws and regulations could occur that result in stricter standards and enforcement, larger fines and liability, and increased capital expenditures and operating costs, any of which could have a material adverse effect on our financial condition or results of operations.

We compete for oil and gas properties with many other exploration and development companies throughout the world who have access to greater resources.

We operate in a highly competitive environment in which we compete with other exploration and development companies to acquire a limited number of prospective oil and gas properties. Many of our competitors are much larger than we are and, as a result, may enjoy a competitive advantage in accessing financial, technical and human resources. They may be able to pay more for productive oil and gas properties and exploratory prospects and to define, evaluate, bid for and purchase a greater number of properties and prospects than our financial, technical and human resources permit.

Our share ownership is highly concentrated and, as a result, our principal shareholder significantly influences our business.

As at the date of this Annual Report, our largest shareholder, Robert M. Friedland, owned approximately 20% of our common shares. As a result, he has the voting power to significantly influence our policies, business and affairs and the outcome of any corporate transaction or other matter, including mergers, consolidations and the sale of all, or substantially all, of our assets.

In addition, the concentration of our ownership may have the effect of delaying, deterring or preventing a change in control that otherwise could result in a premium in the price of our common shares.

If we lose our key management and technical personnel, our business may suffer.

We rely upon a relatively small group of key management personnel. Given the technological nature of our business, we also rely heavily upon our scientific and technical personnel. Our ability to implement our business strategy may be constrained and the timing of implementation may be impacted if we are unable to attract and retain sufficient personnel. We do not maintain any key man insurance. We do not have employment agreements with

19

certain of our key management and technical personnel and we cannot assure you that these individuals will remain with us in the future. An unexpected partial or total loss of their services would harm our business.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

We have no unresolved staff comments from the SEC staff regarding our periodic or current reports filed under the Act.

ITEM 3.   LEGAL PROCEEDINGS

We are not currently a party to any material legal proceedings.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common shares trade on the NASDAQ Capital Market and the Toronto Stock Exchange. The high and low sale prices of our common shares as reported on the NASDAQ and Toronto Stock Exchange for each quarter during the past two years are as follows:

NASDAQ CAPITAL MARKET (IVAN)
(U.S.$)

	2007								2006
	4th Qtr		3rd Qtr		2nd Qtr		1st Qtr		4th Qtr		3rd Qtr		2nd Qtr		1st Qtr
High		2.45		2.25		2.65		2.16		1.65		2.43		2.96		3.27
Low		1.43		1.77		1.67		1.19		1.18		1.40		2.26		1.25

TORONTO STOCK EXCHANGE (IE)
(CDN$)

	2007								2006
	4th Qtr		3rd Qtr		2nd Qtr		1st Qtr		4th Qtr		3rd Qtr		2nd Qtr		1st Qtr
High		2.33		2.36		2.99		2.53		1.89		2.72		3.31		3.75
Low		1.43		1.88		1.84		1.40		1.36		1.59		2.50		1.44

On December 31, 2007, the closing prices for our common shares were $1.56 on the NASDAQ Capital Market and Cdn.$1.55 on the Toronto Stock Exchange.

Exemptions from Certain NASDAQ Marketplace Rules

NASDAQ’s Marketplace Rules permit foreign private issuers to follow home country practices in lieu of the requirements of certain Marketplace Rules, including the requirement that a majority of an issuer’s board of directors be comprised of independent directors determined on the basis of prescribed independence criteria and the requirement that an issuer’s independent directors have regularly scheduled meetings at which only independent directors are present.

Applicable Canadian rules pertaining to corporate governance require us to disclose in our management proxy circular, on an annual basis, our corporate governance practices, including whether or not a majority of our board of

20

directors is comprised of independent directors, based on prescribed independence criteria, which differ slightly from the criteria prescribed in the NASDAQ Marketplace Rules and whether or not our independent directors hold regularly scheduled meetings at which only independent directors are present. Although applicable Canadian rules pertaining to corporate governance make reference, as part of a series of non-prescriptive corporate governance guidelines based on what are perceived to be “best practices”, to the desirability of:

•  a board comprised of a majority of independent directors, and

•  independent directors holding regularly scheduled meetings at which only independent directors are present,

there is no legal requirement in Canada that mandates a board comprised of a majority of independent directors or that independent directors hold regularly scheduled meetings at which only independent directors are present.

As of the date of this Annual Report on Form 10-K, our board of directors consists of 6 individuals who are independent and 6 individuals who are not independent, applying the criteria prescribed by applicable Canadian rules pertaining to corporate governance and the criteria prescribed by the NASDAQ Marketplace Rules. Our independent directors are A. Robert Abboud, Howard R. Balloch, J. Steven Rhodes, Robert A. Pirraglia, Brian Downey and Peter G. Meredith.

Effective as of the date of our next annual general meeting of shareholders (“AGM”) scheduled to be held on May 29, 2008, we plan to reduce the size of our board of directors from 12 directors to 7 directors by nominating only 7 individuals for election as directors at the AGM. See Item 10 “Directors, Executive Officers and Corporate Governance”. If all of the individuals we plan to nominate for election at the AGM are elected as directors, our board of directors will then consist of 5 individuals who are independent and 2 individuals who are not independent, applying the criteria prescribed by applicable Canadian rules pertaining to corporate governance and the criteria prescribed by the NASDAQ Marketplace Rules.

Our non-management directors hold regularly scheduled meetings at which only non-management directors are present but 3 of our non-management directors are not independent, applying the criteria prescribed by applicable Canadian rules pertaining to corporate governance and the criteria prescribed by the NASDAQ Marketplace Rules. If all of the individuals we plan to nominate for election at the AGM are elected as directors, one of our non-management directors will not be independent

Enforceability of Civil Liabilities

We are a company incorporated under the laws of the Yukon Territory of Canada and our executive offices are located in British Columbia, Canada. Some of our directors, controlling shareholders, officers and representatives of the experts named in this Annual Report on Form 10-K reside outside the U.S. and a substantial portion of their assets and our assets are located outside the U.S. As a result, it may be difficult for you to effect service of process within the U.S. upon the directors, controlling shareholders, officers and representatives of experts who are not residents of the U.S. or to enforce against them judgments obtained in the courts of the U.S. based upon the civil liability provisions of the federal securities laws or other laws of the U.S. There is doubt as to the enforceability in Canada against us or against any of our directors, controlling shareholders, officers or experts who are not residents of the U.S., in original actions or in actions for enforcement of judgments of U.S. courts, of liabilities based solely upon civil liability provisions of the U.S. federal securities laws. Therefore, it may not be possible to enforce those actions against us, our directors, officers, controlling shareholders or experts named in this Annual Report on Form 10-K.

Holders of Common Shares

As at December 31, 2007, a total of 244,873,349 of our common shares were issued and outstanding and held by 227 holders of record with an estimated 36,130 additional shareholders whose shares were held for them in street name or nominee accounts.

21

Dividends

We have not paid any dividends on our outstanding common shares since we were incorporated and we do not anticipate that we will do so in the foreseeable future. The declaration of dividends on our common shares is, subject to certain statutory restrictions described below, within the discretion of our Board of Directors based on their assessment of, among other factors, our earnings or lack thereof, our capital and operating expenditure requirements and our overall financial condition. Under the Yukon Business Corporations Act, our Board of Directors has no discretion to declare or pay a dividend on our common shares if they have reasonable grounds for believing that we are, or after payment of the dividend would be, unable to pay our liabilities as they become due or that the realizable value of our assets would, as a result of the dividend, be less than the aggregate sum of our liabilities and the stated capital of our common shares.

Exchange Controls and Taxation

There is no law or governmental decree or regulation in Canada that restricts the export or import of capital, or affects the remittance of dividends, interest or other payments to a non-resident holder of our common shares, other than withholding tax requirements.

There is no limitation imposed by the laws of Canada, the laws of the Yukon Territory, or our constating documents on the right of a non-resident to hold or vote our common shares, other than as provided in the Investment Canada Act (Canada) (the “Investment Act”), which generally prohibits a reviewable investment by an entity that is not a “Canadian”, as defined, unless after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be of net benefit to Canada. An investment in our common shares by a non-Canadian who is not a “WTO investor” (which includes governments of, or individuals who are nationals of, member states of the World Trade Organization and corporations and other entities which are controlled by them), at a time when we were not already controlled by a WTO investor, would be reviewable under the Investment Act under two circumstances. First, if it was an investment to acquire control (within the meaning of the Investment Act) and the value of our assets, as determined under Investment Act regulations, was Cdn.$5 million or more. Second, the investment would also be reviewable if an order for review was made by the federal cabinet of the Canadian government on the grounds that the investment related to Canada’s cultural heritage or national identity (as prescribed under the Investment Act), regardless of asset value. An investment in our common shares by a WTO investor, or by a non-Canadian at a time when we were already controlled by a WTO investor, would be reviewable under the Investment Act if it was an investment to acquire control and the value of our assets, as determined under Investment Act regulations, was not less than a specified amount, which for 2008 is Cdn.$295 million. The Investment Act provides detailed rules to determine if there has been an acquisition of control. For example, a non-Canadian would acquire control of us for the purposes of the Investment Act if the non-Canadian acquired a majority of our outstanding common shares. The acquisition of less than a majority, but one-third or more, of our common shares would be presumed to be an acquisition of control of us unless it could be established that, on the acquisition, we were not controlled in fact by the acquirer. An acquisition of control for the purposes of the Investment Act could also occur as a result of the acquisition by a non-Canadian of all or substantially all of our assets.

Amounts that we may, in the future, pay or credit, or be deemed to have paid or credited, to you as dividends in respect of the common shares you hold at a time when you are not a resident of Canada within the meaning of the Income Tax Act (Canada) will generally be subject to Canadian non-resident withholding tax of 25% of the amount paid or credited, which may be reduced under the Canada-U.S. Income Tax Convention (1980), as amended, (the “Convention”). Currently, under the Convention, the rate of Canadian non-resident withholding tax on the gross amount of dividends paid or credited to a U.S. resident is generally 15%. However, if the beneficial owner of such dividends is a U.S. resident corporation, which owns 10% or more of our voting stock, the withholding rate is reduced to 5%. In the case of certain tax-exempt entities, which are residents of the U.S. for the purpose of the Convention, the withholding tax on dividends may be reduced to 0%.

22

Securities Authorized for Issuance under Equity Compensation Plans

See table under “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” set forth in Item 12 in this Annual Report on Form 10-K.

Performance Graph

See table under “Executive Compensation” set forth in Item 11 in this Annual Report on Form 10-K.

Sales of Unregistered Securities

During the year ended December 31, 2007, we issued securities, which were not registered under the Securities Act of 1933 (the “Act”), as follows:

•  in November 2007, we issued 2,000,000 common shares at a price of U.S.$2.00 to an institutional investor pursuant to the exercise of previously issued share purchase warrants in a transaction exempt from registration under Rule 903 of the Act.

During the year ended December 31, 2006, we issued securities, which were not registered under the Act, as follows:

•  in February 2006, we issued 8,591,434 shares in exchange for an additional 40% working interest in the Dagang field to CITIC in a transaction exempt from registration under Rule 903 of the Act;

•  in March 2006, we issued 100 common shares at a price of U.S.$3.20 to an institutional investor pursuant to the exercise of previously issued share purchase warrants in a transaction exempt from registration under Rule 903 of the Act;

•  in April 2006, we issued 11,400,000 special warrants at U.S.$2.23 per special warrant to institutional and individual investors in a transaction exempt from registration under Rule 903 of the Act. Each special warrant was exercised to acquire, for no additional consideration, one common share and one share purchase warrant following the issuance of a receipt for a prospectus by applicable Canadian securities regulatory authorities, which occurred in May 2006. Originally, one common share purchase warrant would entitle the holder to purchase one common share at a price of U.S.$2.63 exercisable until the fifth anniversary date of the special warrant date of issue. In September 2006 these warrants were listed on the Toronto Stock Exchange and the exercise price was changed to Cdn.$2.93.

During the year ended December 31, 2005, we issued securities, which were not registered under the Act, as follows:

•  in February 2005, we issued a convertible promissory note in the principal amount of $6.0 million to an arm’s length lender in a transaction exempt from registration under Rule 903 of the Act. The principal amount and all accrued and unpaid interest was convertible into common shares of the Company at a price of U.S.$2.25 per common share. The conversion rights were not exercised and expired in November 2005;

•  in April 2005, we issued 4,100,000 special warrants at a price of Cdn.$3.10 per special warrant to institutional and individual investors in a transaction exempt from registration under Rule 903 of the Act. Each special warrant was exercised to acquire, for no additional consideration, one common share and one share purchase warrant following the issuance of a receipt for a prospectus by applicable Canadian securities regulatory authorities, which occurred in July 2005. One common-share purchase warrant will entitle the holder to purchase one common share at a price of Cdn.$3.50 exercisable until the second anniversary date of the special warrant date of issue;

•  in April 2005, we issued 29,999,886 common shares in exchange for all of the issued and outstanding common shares of Ensyn in a transaction exempt from registration under Section 3(a)(10) of the Act;

•  in May 2005, we issued a convertible promissory note in the principal amount of $2.0 million to an arm’s length lender in a transaction exempt from registration under Rule 903 of the Act. The principal amount and

23

all accrued and unpaid interest was convertible into common shares of the Company at a price of U.S.$2.15 per common share. The conversion rights were not exercised and expired in November 2005;

•  in June 2005, we issued 1,500,000 common shares at a price of U.S.$1.10 to a Canadian institutional investor pursuant to the exercise of previously issued share purchase warrants in a transaction exempt from registration under Rule 903 of the Act;

•  in July 2005, we issued 1,000,000 special warrants at a price of Cdn.$3.10 per special warrant to an institutional investor in a transaction exempt from registration under Rule 903 of the Act. Each special warrant was exercised in November 2005 to acquire, for no additional consideration, one common share and one share purchase warrant. One common share purchase warrant will entitle the holder to purchase one common share at a price of Cdn.$3.50 exercisable until the second anniversary date of the special warrant date of issue;

•  in August 2005, we issued 1,500,000 common shares at a price of U.S.$1.10 to a Bahamian institutional investor pursuant to the exercise of previously issued share purchase warrants in a transaction exempt from registration under Rule 903 of the Act;

•  in September 2005, we issued 1,514,706 common shares at a price of U.S.$1.87 to a Bahamian institutional investor pursuant to the exercise of previously issued share purchase warrants in a transaction exempt from registration under Rule 903 of the Act;

•  in November 2005, we issued 2,000,000 common share purchase warrants to an arm’s length lender in a transaction exempt from registration under Rule 903 of the Act. Each common share purchase warrant is exercisable to purchase one common share of the Company at a price of U.S.$2.00 per common share at any time until November 2007; and

•  in November 2005, we issued 11,196,330 special warrants at U.S.$1.63 per special warrant to four individual investors in a transaction exempt from registration under Rule 903 of the Act. Each special warrant was exercised to acquire, for no additional consideration, one common share and one share purchase warrant following the issuance of a receipt for a prospectus by applicable Canadian securities regulatory authorities, which occurred in December 2005. One common share purchase warrant will entitle the holder to purchase one common share at a price of U.S.$2.50 exercisable until the second anniversary date of the special warrant date of issue.

24

ITEM 6.   SELECTED FINANCIAL DATA

The selected financial data set forth below are derived from the accompanying financial statements, which form part of this Annual Report on Form 10-K. The financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) applicable in Canada, which are not materially different from GAAP in the U.S. except as noted immediately below in “Reconciliation to U.S. GAAP”. See also Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 19 to our financial statements in this Annual Report on Form 10-K.

The following table shows selected financial information for the years indicated:

	December 31
	2007			2006			2005			2004			2003
	(Stated in thousands of US dollars, except per share amounts)
Results of Operations
Revenues		33,517			48,100			29,939			17,997			9,659
Net loss		(39,207	)(1)		(25,492	)(1)		(13,512	)(1)		(20,725	)(1)		(30,179	)(1)
Net loss per share — basic and diluted		(0.16	)		(0.11	)		(0.07	)		(0.12	)		(0.20	)
Financial Position
Total assets		236,916			248,544			240,877			118,486			106,574
Long-term debt		9,812			4,237			4,972			2,639			833
Shareholders’ equity		197,287			228,386			204,767			103,586			100,537
Common shares outstanding (in thousands)		244,873			241,216			220,779			169,665			161,359
Cash Flow
Cash provided (used) by operating activities		5,489			14,352			9,870			4,032			(1,522	)
Capital investments		(31,638	)		(17,842	)		(43,282	)		(46,454	)		(15,391	)

(1) Includes asset write-downs and provisions for impairment of $6.1 million, $5.4 million, $5.6 million, $16.6 million and $23.3 million for 2007, 2006, 2005, 2004 and 2003, respectively. See Note 4 to our financial statements under Item 8 in this Annual Report on Form 10-K.

Reconciliation to U.S. GAAP

Our financial statements have been prepared in accordance with GAAP applicable in Canada, which differ in certain respects from those principles that we would have followed had our financial statements been prepared in accordance with GAAP in the U.S. The material differences between Canadian and U.S. GAAP, which affect our financial statements, are described in detail in Note 19 to our financial statements in this Annual Report on Form 10-K.

Had we followed U.S. GAAP certain selected financial information reported above, in accordance with Canadian GAAP, would have been reported as follows:

	December 31
	2007			2006			2005			2004			2003
	(Stated in thousands of US dollars, except per share amounts)
Results of Operations
Net loss		(27,392	)		(42,422	)		(12,106	)		(19,696	)		(27,086	)
Net loss per share — basic and diluted		(0.11	)		(0.18	)		(0.06	)		(0.12	)		(0.18	)
Financial Position
Total assets		216,655			216,365			224,935			105,791			94,024
Long-term debt		10,412			4,237			4,972			2,639			833
Shareholders’ equity		170,545			188,829			188,745			90,892			87,987
Cash Flow
Cash provided (used) by operating activities		11,501			13,340			5,042			2,222			(4,051	)
Capital investments		(31,371	)		(16,830	)		(38,454	)		(44,644	)		(12,862	)

(1) Includes asset write-downs and provisions for impairment of $5.9 million, $23.5 million, $4.5 million, $15.0 million and $nil for 2007, 2006, 2005, 2004 and 2003, respectively. See Note 19 to our financial statements under Item 8 in this Annual Report on Form 10-K.

25

ITEM 7.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE OF CONTENTS

	Page
Ivanhoe Energy’s Business		26
Executive Overview of 2007 Results		27
Financial Results — Year to Year Change in Net Loss		28
Revenues and Operating Costs		29
General and Administrative		32
Business and Technology Development		34
Write-off of Deferred Acquisition Costs		34
Net Interest		35
Unrealized Loss on Derivative Instruments		35
Depletion and Depreciation		35
Write-Down of HTLtm and GTL Development Costs		37
Impairment of Oil and Gas Properties		37
Financial Condition, Liquidity and Capital Resources		38
Sources and Uses of Cash		38
Outlook for 2008		39
Contractual Obligations and Commitments		39
Critical Accounting Principles and Estimates		40
2007 Accounting Changes		44
Impact of New and Pending Canadian GAAP Accounting Standards		46
Convergence of Canadian GAAP with International Financial Reporting Standards		46
Impact of New and Pending U.S. GAAP Accounting Standards		46
Off Balance Sheet Arrangements		47
Related Party Transactions		47
Certain Factors Affecting the Business		47

THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2007. THE CONSOLIDATED FINANCIAL STATEMENTS HAVE BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN CANADA (“GAAP”). THE IMPACT OF SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S. GAAP ON THE FINANCIAL STATEMENTS IS DISCLOSED IN NOTE 19 TO THE CONSOLIDATED FINANCIAL STATEMENTS.

OUR DISCUSSION AND ANALYSIS OF OUR OIL AND GAS ACTIVITIES WITH RESPECT TO OIL AND GAS VOLUMES, RESERVES AND RELATED PERFORMANCE MEASURES IS PRESENTED ON OUR WORKING INTEREST BASIS AFTER ROYALTIES. ALL TABULAR AMOUNTS ARE EXPRESSED IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AND PRODUCTION DATA INCLUDING REVENUES AND COSTS PER BOE.

Ivanhoe Energy’s Business

Ivanhoe Energy is an independent international heavy oil development and production company focused on pursuing long-term growth in its reserve base and production. Ivanhoe Energy plans to utilize technologically innovative methods designed to significantly improve recovery of heavy oil resources, including the application of the patented rapid thermal processing process (“RTP^tm Process”) for heavy oil upgrading (“HTL^tm Technology”

26

or “HTL^tm”) and enhanced oil recovery (“EOR”) techniques. In addition, the Company seeks to expand its reserve base and production through conventional exploration and production (“E&P”) of oil and gas. Finally, the Company is exploring an opportunity to monetize stranded gas reserves through the application of the conversion of natural gas-to-liquids using a technology (“GTL Technology” or “GTL”) licensed from Syntroleum Corporation. Our core operations are in the United States and China, with business development opportunities worldwide.

Ivanhoe Energy’s proprietary, patented heavy oil upgrading technology upgrades the quality of heavy oil and bitumen by producing lighter, more valuable crude oil, along with by-product energy which can be used to generate steam or electricity. The HTL^tm Technology has the potential to substantially improve the economics and transportation of heavy oil. There are significant quantities of heavy oil throughout the world that have not been developed, much of it stranded due to the lack of on-site energy, transportation issues, or poor heavy-light price differentials. In remote parts of the world, the considerable reduction in viscosity of the heavy oil through the HTL^tm process will allow the oil to be transported economically over long distances. In addition to a dramatic improvement in oil quality, an HTL^tm facility can yield large amounts of surplus energy for production of the steam and electricity used in heavy oil production. The thermal energy from the HTL^tm process would provide heavy oil producers with an alternative to increasingly volatile prices for natural gas that now is widely used to generate steam. Yields of the low-viscosity, upgraded product are greater than 85% by volume, and high conversion of the heavy residual fraction is achieved. In addition to the liquid upgraded oil product, a small amount of valuable by-product gas is produced, and usable excess heat is generated from the by-product coke.

HTL^tm can virtually eliminate cost exposure to natural gas and diluent, solve the transport challenge, and capture the majority of the heavy to light oil price differential for oil producers. HTL^tm accomplishes this at a much smaller scale and at lower per barrel capital costs compared with established competing technologies, using readily available plant and process components. As HTL^tm facilities are designed for installation near the wellhead, they eliminate the need for diluent and make large, dedicated upgrading facilities unnecessary.

Executive Overview of 2007 Results

During the year, the value attributed to our reserves of oil and gas based on a standardized measure of discounted future cash flows increased by 43% to $92.9 million of which $49.6 million is in China and $43.3 million in the U.S. Although these values increased principally as a result of significant year-over-year increases in oil prices, several other factors affected the Company’s oil and gas activities for the year. Higher oil prices were offset by reduced production volumes, principally as a result of down-hole equipment issues in China and a lack of steaming equipment in the U.S. Both of these equipment issues have been resolved with a change in the supplier for certain equipment in China and the addition of a second steaming unit and the retrofit of an existing steaming unit in our California operation. In addition, total revenues decreased as a result of a $10.2 million increase in losses on derivative instruments that were required by the Company’s bank loan agreements. General and administrative costs and business and technology expenses increased as the Company continued to invest significant resources in the development and commercial deployment of its patented HTL^tm heavy oil upgrading technology.

The following table sets forth certain selected consolidated data for the past three years:

	Year Ended December 31,
	2007			2006			2005
Oil and gas revenue	$	43,635		$	47,748		$	29,800
Net loss	$	(39,207	)	$	(25,492	)	$	(13,512	)
Net loss per share	$	(0.16	)	$	(0.11	)	$	(0.07	)
Average production (Boe/d)		1,870			2,178			1,738
Net operating revenue per Boe	$	38.56		$	39.77		$	34.99
Cash flow from operating activities	$	5,489		$	14,352		$	9,870
Capital investments	$	(31,638	)	$	(17,842	)	$	(43,282	)

27

Financial Results — Year to Year Change in Net Loss

The following provides a summary analysis of our net loss for each of the three years ended December 31, 2007 and a summary of year-over-year variances for the year ended December 31, 2007 compared to 2006 and for the year ended December 31, 2006 compared to 2005:

				Favorable						Favorable
				(Unfavorable)						(Unfavorable)
	2007			Variances			2006			Variances			2005
Summary of Net Loss by Significant Components:
Oil and Gas Revenues:	$	43,635					$	47,748					$	29,800
Production volumes				$	(6,732	)				$	8,888
Oil and gas prices					2,619						9,060
Realized gain (loss) on derivative instruments		(1,647	)		(1,716	)		69			69			—
Operating costs		(17,319	)		(1,186	)		(16,133	)		(8,530	)		(7,603	)
General and administrative, less stock based compensation		(9,372	)		(1,724	)		(7,648	)		(60	)		(7,588	)
Business and technology development, less stock based compensation		(8,600	)		(1,379	)		(7,221	)		(2,416	)		(4,805	)
Acquisition costs		—			736			(736	)		(736	)		—
Net interest		(312	)		(283	)		(29	)		982			(1,011	)
Unrealized loss on derivative instruments		(8,939	)		(8,446	)		(493	)		(493	)		—
Depletion and depreciation		(26,524	)		6,026			(32,550	)		(18,103	)		(14,447	)
Stock based compensation		(3,729	)		(808	)		(2,921	)		(808	)		(2,113	)
Write-downs of HTLtm and GTL development costs		—			—			—			636			(636	)
Impairment of oil and gas properties		(6,130	)		(710	)		(5,420	)		(420	)		(5,000	)
Other		(270	)		(112	)		(158	)		(49	)		(109	)
Net Loss	$	(39,207	)	$	(13,715	)	$	(25,492	)	$	(11,980	)	$	(13,512	)

Our net loss for 2007 was $39.2 million ($0.16 per share) compared to our net loss in 2006 of $25.5 million ($0.11 per share). The increase in our net loss from 2006 to 2007 of $13.7 million was due to decrease of $5.8 million in combined oil and gas revenues and realized loss on derivative instruments, an increase in operating costs of $1.2 million, a $3.1 million increase in general and administrative and business and technology development expenses excluding stock based compensation and an $8.4 million increase in unrealized loss on derivative instruments. These increases were partially offset by a $6.0 million decrease for depletion and depreciation.

Our net loss for 2006 was $25.5 million ($0.11 per share) compared to our net loss in 2005 of $13.5 million ($0.07 per share). The increase in our net loss from 2005 to 2006 of $12.0 million was due mainly to an $18.1 million increase in depletion and depreciation offset by an increase of $17.9 million in oil and gas revenues offset by an $8.5 million increase in operating costs and a $2.5 million increase in general and administrative and business and technology development expenses excluding stock based compensation.

Significant variances in our net losses are explained in the sections that follow.

28

Revenues and Operating Costs

The following is a comparison of changes in production volumes for the year ended December 31, 2007 when compared to the same period in 2006 and for the year ended December 31, 2006 when compared to the same period for 2005:

	Years Ended December 31,							Years Ended December 31,
	Net Boe’s				Percentage			Net Boe’s				Percentage
	2007		2006		Change			2006		2005		Change
China:
Dagang		464,206		554,185		(16	)%		554,185		282,582		96	%
Daqing		19,379		20,946		(7	)%		20,946		32,236		(35	)%
		483,585		575,131		(16	)%		575,131		314,818		83	%
U.S.:
South Midway		177,745		188,379		(6	)%		188,379		196,428		(4	)%
Spraberry		19,587		23,242		(16	)%		23,242		27,940		(17	)%
Others		1,513		8,309		(82	)%		8,309		95,306		(91	)%
		198,844		219,930		(10	)%		219,930		319,674		(31	)%
		682,429		795,061		(14	)%		795,061		634,492		25	%

Net production volumes in 2007 decreased 14% from 2006 due to a 16% decrease in production volumes in our China properties and a 10% decrease in our U.S. properties, resulting in decreased revenues of $6.7 million.

Net production volumes in 2006 increased 25% from 2005 due to an 83% increase in production volumes in our China properties offset by a 31% decrease in our U.S. properties, resulting in increased revenues of $8.9 million.

Oil and gas prices increased 6% per Boe in 2007 generating $2.6 million in additional revenue as compared to 2006. We realized an average of $64.86 per Boe from operations in China during 2007, which was an increase of $2.82 per Boe from 2006 prices and accounted for $1.3 million of our increase in revenues. From the U.S. operations, we realized an average of $61.71 per Boe during 2007, which was an increase of $6.85 per Boe and accounted for $1.3 million of our increased revenues. We expect crude oil prices and natural gas prices to remain volatile in 2008.

Oil and gas prices increased 28% per Boe in 2006 generating $9.1 million in additional revenue as compared to 2005. We realized an average of $62.04 per Boe from operations in China during 2006, which was an increase of $12.07 per Boe from 2005 prices and accounted for $7.1 million of our increase in revenues. From the U.S. operations, we realized an average of $54.86 per Boe during 2006, which was an increase of $10.85 per Boe and accounted for $2.0 million of our increased revenues.

The increased revenues from oil and gas price increases in 2007 were offset by settlements from our costless collar derivative instruments. As benchmark prices rise above the ceiling price established in the contract the Company is required to settle monthly (see further details on these contracts below under “Unrealized Loss on Derivative Instruments”). The Company realized a net loss on these settlements in 2007 of $1.6 million, $1.3 million of which was from the U.S. segment, the balance from the China segment. This compares to a net gain in 2006 of $0.1 million on U.S. contracts.

Operating costs, including production taxes and engineering and support costs, for 2007 increased $5.09, or 25%, per Boe, when compared to 2006. These costs increased $8.29, or 69%, per Boe, for 2006 when compared to 2005. Operating costs in absolute terms for 2007 increased $1.2 million when compared to 2006 and these costs increased $8.5 million in 2006 when compared to 2005.

29

China

• Production Volumes 2007 vs. 2006

The December 31, 2007 exit production rate at Dagang was 1,900 Gross Bopd, compared to 1,877 Gross Bopd at the end of 2006. Normal field decline was offset by the production of 290 Gross Bopd from five new development wells completed and put on production in the second half of 2007. Overall, net production volumes decreased 16% at the Dagang field for 2007 as in addition to normal declines within the field, we incurred abnormal downtimes due to problems encountered with sub-surface equipment. We expect that these equipment issues have been resolved with a change in equipment suppliers. We expect that additional perforations, fracture stimulations and water flooding will help offset declines due to increasing water production in 2008. The expected production rates for 2008 will be similar to those averaged in 2007, but may be lower than the exit rate at December 31, 2007.

• Production Volumes 2006 vs. 2005

Net production volumes increased 96% at the Dagang field for 2006. As a result of the 2005 development program, oil production volume increased by 22% or by 61.7 Mboe in 2006 when compared to 2005. During 2005 we placed 22 new wells on production and fracture stimulated 13 wells in the northern block of this project and in 2006 we completed one well, fracture stimulated 12 wells and re-completed 13 wells. Additionally, volumes at the Dagang field increased in 2006 when compared to 2005 by 74% or 209.9 Mboe due to the re-acquisition of Richfirst’s 40% working interest in this project in February 2006. As at December 31, 2005, 39 wells were on production and producing 2,310 gross Bopd (1,080 net Bopd).

Our royalty percentage from the Daqing field was reduced from 4% to 2% in May 2005 when the operator of the properties reached payout of its investment. As a result, our share of production volumes decreased 35% for 2006 compared to the same period in 2005. In addition, production from the field is declining.

• Operating Costs 2007 vs. 2006

Operating costs in China, including engineering and support costs and Windfall Levy, increased 31% or $6.30 per Boe for 2007 when compared to 2006. Field operating costs increased $4.01 per Boe. In addition to the excessive down hole maintenance problems mentioned above, which resulted in increased workover and maintenance costs, increased power costs, additional operator salaries and higher supervision charges in relation to reduced volumes contributed to the increase. As more fully described below, beginning March 26, 2006 the China oil operations became subject to the Windfall Levy. This resulted in a $1.94 per Boe increase for 2007 partially as a result of the 2007 being the first full year of the Levy and partially due to higher oil prices. Engineering and support costs for 2007 increased by $0.35 per Boe or 46% as we continue to reduce the number of capital projects. We expect costs in 2008 to remain consistent on a per barrel basis as compared to 2007. Decreases resulting from one-time maintenance projects in 2007 and the ability to charge CNPC for its share of operating costs, expected to be mid-way through 2008 once we reach “commercial production”, will be offset by an increase in office costs allocated to operations as we continue to reduce the number of capital projects.

• Operating Costs 2006 vs. 2005

Operating costs in China, including engineering and support costs and Windfall Levy, increased 149% or $12.31 per Boe for 2006 when compared to 2005. Field operating costs increased due to high power costs, increased workover and maintenance costs, related supervision and increased treatment and processing fees attributable to higher water production rates. With the suspension of our drilling activity at our Dagang field in December 2005, a major portion of our Dagang field office costs, which were previously being capitalized, were expensed as part of our operating activities. Engineering and support costs increased due to a higher allocation of support to production as we reduced our capital activity in the Dagang field in 2006 when compared to 2005. The increase in production volume in 2006 due to the 2005 drilling program at the Dagang field, in relation to the level of support required to operate the field, results in the per Boe decrease for 2006 when compared to 2005.

In March 2006, the Ministry of Finance of the Peoples Republic of China (“PRC”) issued the “Administrative Measures on Collection of Windfall Gain Levy on Oil Exploitation Business” (the “Windfall Levy Measures”).

30

According to the Windfall Levy Measures, effective as of March 26, 2006, enterprises exploiting and selling crude oil in the PRC are subject to a windfall gain levy (the “Windfall Levy”) if the monthly weighted average price of crude oil is above $40 per barrel. The Windfall Levy is imposed at progressive rates from 20% to 40% on the portion of the weighted average sales price exceeding $40 per barrel. For financial statement presentation the Windfall Levy is included in operating costs. The Windfall Levy resulted in $5.74 per Boe of the overall increase in 2006 when compared to 2005.

U.S.

• Production Volumes 2007 vs. 2006

As at December 31, 2007, we were producing 517 gross Boe/d (496 net Boe/d) at South Midway compared to 590 gross Boe/d (543 net Boe/d) as at December 31, 2006. U.S. production volumes decreased 10% in 2007 when compared to 2006 mainly due to a decline in production at South Midway resulting from steam generator downtime during the second and third quarters, along with certain wells taken offline to be soaked and steamed once that steaming operation came back on line. The purchase of a second steam generator and the retrofit of an existing generator should allow for a full steaming program for 2008. As well, we expect the current drilling program at South Midway to offset natural declines within this field and to provide additional future drilling locations. In addition to the natural declines in production within our Spraberry field in West Texas, production was also hampered by a key producer being down for repairs in the third quarter. We expect that production at our Spraberry field will continue its modest declines.

• Production Volumes 2006 vs. 2005

U.S. production volumes decreased 31% in 2006 when compared to 2005 mainly as a result of the decline in production from the Knights Landing field which had been depleted to minimal levels at the end of 2005 and the sale of our Citrus property effective February 1, 2006.

In addition, our production at South Midway decreased 4% for 2006 primarily as a result of several wells in the southern expansion of South Midway being down while we made repairs to our steam facilities. Contributions from the two in-fill wells in the southern expansion and seven in-fill wells in the primary area of South Midway drilled and completed in the second half of 2006 were not a major impact until 2007. As at December 31, 2006, we were producing 590 gross Boe/d (543 net Boe/d) at South Midway compared to 536 gross Boe/d (499 net Boe/d) as at December 31, 2005.

• Operating Costs 2007 vs. 2006

Operating costs in the U.S., including engineering and support costs and production taxes, increased 11% or $2.18 per Boe for 2007 when compared to 2006. Field operating costs increased $0.97 per Boe due to increases to maintenance costs and workovers at Spraberry and steaming projects in the diatomite formation at North Salt Creek. These increases were somewhat offset due to a reduction in our South Midway steaming operations as we were in the process of replacing a steam generator, including purchasing and subsequent retro fit, which was completed and put on line in the third quarter. We also had our other steam generator down for repairs during the second quarter. In addition to this overall increase, engineering and support costs for 2007 increased by $1.11 per Boe mainly due to a higher allocation of support to production as capital activity decreased. We anticipate operating expense to increase in 2008 mainly as a result of the steaming operations at South Midway operating at full capacity versus a reduced capacity in 2007 due to the reasons described above. We expect the 2008 operating costs at Spraberry to be consistent with 2007. We are uncertain about the expected operating expenses at North Salt Creek as we are currently evaluating recent steam stimulation tests.

• Operating Costs 2006 vs. 2005

Operating costs in the U.S., including engineering and support costs and production taxes, in 2006 decreased $0.7 million in absolute terms from 2005. However, on a per Boe basis operating costs increased 25% or $3.90 per Boe in 2006 when compared to 2005. Field operating costs increased $3.00 per Boe for 2006 when compared to 2005, primarily resulting from increases in primary operating costs at South Midway due to several maintenance

31

projects related to the processing facilities. Although costs in the South Midway steaming operations did not fluctuate significantly in absolute terms, they did make up a larger portion of the overall cost per Boe as production in other fields declined. Engineering support increased $0.58 per Boe for 2006, when compared to 2005 as the same level of support was required to operate the fields even though there was a decline in production. Production taxes were up $0.32 per Boe for 2006 when compared to 2005, largely as the result of an increase in ad valorem taxes at South Midway and our Spraberry field in West Texas.

* * *

Production and operating information including oil and gas revenue, operating costs and depletion, on a per Boe basis, from 2005 to 2007 are detailed below:

	Year Ended December 31,
	2007						2006						2005
	China		U.S.		Total		China		U.S.		Total		China		U.S.		Total
Net Production:
Boe		483,585		198,844		682,429		575,131		219,930		795,061		314,818		319,674		634,492
Boe/day for the year		1,325		545		1,870		1,576		603		2,178		863		876		1,738

	Per Boe							Per Boe						Per Boe
Oil and gas revenue	$	64.86		$	61.71	$	63.94	$	62.04	$	54.86	$	60.06	$	49.97	$	44.01	$	46.97
Field operating costs		18.08			15.41		17.30		14.07		14.44		14.17		7.49		11.44		9.48
Production tax (U.S.) and Windfall Levy (China)		7.68			1.25		5.81		5.74		1.15		4.47		—		0.83		0.42
Engineering and support costs		1.12			5.06		2.27		0.77		3.95		1.65		0.78		3.37		2.08
		26.88			21.72		25.38		20.58		19.54		20.29		8.27		15.64		12.00
Net operating revenue		37.98			39.99		38.56		41.46		35.32		39.77		41.70		28.37		34.99
Depletion		39.73			29.38		36.71		40.57		24.23		36.05		29.77		15.53		22.60
Net revenue (loss) from operations	$	(1.75	)	$	10.61	$	1.85	$	0.89	$	11.09	$	3.72	$	11.93	$	12.84	$	12.39

General and Administrative

Our changes in general and administrative expenses, before and after considering increases in non-cash stock based compensation, for the year ended December 31, 2007 when compared to the same period for 2006 and for the year ended December 31, 2006 when compared to the same period for 2005 were as follows:

	2007 vs			2006 vs
	2006			2005
Favorable (unfavorable) variances:
Oil and Gas Activities:
China	$	(705	)	$	739
U.S.		(342	)		(498	)
Corporate		(849	)		(892	)
		(1,896	)		(651	)
Less: stock based compensation		172			591
	$	(1,724	)	$	(60	)

• General and Administrative 2007 vs. 2006

China

General and administrative expenses related to the China operations increased $0.7 million for 2007 mainly due to a decrease in allocations to capital investments as a result of fewer capital projects in 2007 when compared to 2006.

32

U.S.

General and administrative expenses related to U.S. operations increased $0.3 million in 2007. Allocations to capital investments and operations decreased $0.9 million as a result of less capital activity for 2007 when compared to 2006 and discretionary bonuses paid in 2007. This increase in expense was offset by a decrease of $0.5 million for salaries and benefits, which was a result of reallocation of resources to HTL^tm activities beginning in the second half of 2006 and continuing through all of 2007.

Corporate

General and administrative costs related to Corporate activities increased $0.8 million for 2007 when compared to 2006. The increase for 2007 was due to a $1.4 million increase in salaries and benefits partially resulting from discretionary bonuses paid in 2007, the addition of new executives mid way through 2006, and other key personnel added in 2007. This increase was offset by a decrease in outside legal costs of $0.2 million, a decrease in professional fees incurred to comply with the provisions of Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) in the amount of $0.1 million and a $0.3 million decrease for a one time charge in 2006 for the write off of the deferred loan costs on the convertible loan that was paid by way of the issuance of common shares in the April 2006 private placement.

• General and Administrative 2006 vs. 2005

China

General and administrative expenses related to the China operations decreased $0.7 million for 2006 due to a $1.1 million one time charge in 2005 for the write off of deferred costs incurred associated with financing discussions for our Dagang field development project. This decrease was primarily offset by an increase of $0.3 million in foreign currency losses.

U.S.

General and administrative expenses related to U.S. operations increased $0.5 million in 2006. Allocations to capital investments decreased $1.5 million as a result of less capital activity for 2006 when compared to 2005. This increase in expense was offset by a decrease of $0.7 million for bonuses accrued in 2005 compared to nil in 2006, a $0.2 million decrease in stock based compensation and a decrease of $0.2 million for a reduction in contract labor.

Corporate

General and administrative costs related to Corporate activities increased $0.9 million for 2006 when compared to 2005. The increase for 2006 was due to a $0.4 million increase in salaries and benefits (a $0.8 million increase in stock based compensation offset by a decrease of $0.3 million for bonuses accrued in 2005), a $0.2 million increase in outside legal costs, a $0.3 million increase in financial consulting, a $0.5 million increase in corporate governance costs and a $0.3 million increase for a one time charge in 2006 for the write off of the deferred loan costs on the convertible loan that was paid by way of the issuance of common shares in the April 2006 private placement. These increases were offset by a $0.7 million decrease in reduced professional fees incurred to comply with the provisions of Section 404 of SOX as a portion of the 2004 SOX review was performed in the first quarter of 2005. In addition, 2006 costs for SOX were lower as there were no start up costs that we experienced in 2005.

33

Business and Technology Development

Our changes in business and technology development, before and after considering increases in non-cash stock based compensation, for the year ended December 31, 2007 when compared to the same period for 2006 and for the year ended December 31, 2006 when compared to the same period for 2005 were as follows:

	2007 vs			2006 vs
	2006			2005
Favorable (unfavorable) variances:
HTLtm	$	(2,630	)	$	(2,506	)
GTL		615			(127	)
		(2,015	)		(2,633	)
Less: stock based compensation		636			217
	$	(1,379	)	$	(2,416	)

• Business and Technology Development 2007 vs. 2006

Business and technology development expenses increased $2.0 million in 2007 compared to 2006 as we continued to focus on business and technology development activities related to HTL^tm opportunities. The overall increase in HTL^tm related to salaries and benefits was $1.4 million. In addition to a reallocation of resources (see G&A explanations above) to HTL^tm, and 2007 discretionary bonuses, key personnel were added to this segment throughout 2007 as the Company develops its commercialization program for its technology. This increase was partially offset by an increased $0.5 million allocation to capital investments. This segment also increased as a result of $0.3 million higher operating costs at the CDF. Operating expenses of the CDF to develop and identify improvements in the application of the HTL^tm Technology are a part of our business and technology development activities. This increase was in part the result of several heavy oil upgrading runs in the first and second quarters of 2007, including a key Athabasca bitumen test run. The Company will use the information derived from the Athabasca bitumen test run for the design and development of full-scale commercial projects in Western Canada. In addition, the HTL^tm segment increased $0.4 million as a result of higher outside engineering fees and legal fees related to patents and $0.6 million due to a shift in resources from GTL. The remainder of the increase is related to consulting fees and travel costs to develop opportunities for our HTL^tm Technology. We expect a decrease in CDF operating expenses in 2008 when compared to 2007 as we have now fulfilled the primary technical objectives of the CDF.

• Business and Technology Development 2006 vs. 2005

As in 2005 most of the focus of our business and technology development activities was on HTL^tm opportunities. Operating expenses of the CDF to develop and identify improvements in the application of the HTL^tm Technology are expensed as part of our business and technology development activities and contributed $1.1 million to the increase in business and technology development for HTL^tm activities in 2006. Part of this increase was due to the CDF operating for a full year in 2006 versus a partial year in 2005. In addition contract services, including engineering work related to CDF processing runs and legal fees related to patents, increased $0.7 million in 2006. The remainder of the increase is related to consulting fees and travel costs to develop opportunities for our HTL^tm Technology.

Write-off of Deferred Acquisition Costs

In February 2006, the Company signed a non-binding memorandum of understanding regarding a proposed merger of Sunwing with China Mineral Acquisition Corporation (“CMA”), a U.S. public corporation. In May 2006 the parties entered a definitive agreement for the transaction. CMA’s bylaws stipulated that if the transaction was not completed by August 31, 2006 CMA would be required to dissolve and distribute its assets (substantially all of which was cash) to its shareholders. CMA requested, but was unable to obtain, an extension of this deadline from its shareholders. Since the transaction could not be completed by the August 31 deadline, the definitive agreement was

34

terminated and the Company wrote off deferred acquisition costs previously capitalized in the amount of $0.7 million. There were no such costs in 2007 or 2005.

Net Interest

• Net Interest 2007 vs. 2006

Interest expense was higher in 2007 when compared to 2006 partially due to an additional draw down on our U.S. loan and the funding of a new loan for China. These higher amounts were offset by a decrease related to the early pay off of the term note (see 2006 vs. 2005 analysis below). In addition, interest income decreased by $0.3 million as average cash balances were lower throughout 2007 when compared to 2006.

• Net Interest 2006 vs. 2005

In 2005, we borrowed the full amount of a $6.0 million stand-by loan facility, which we arranged in 2004, and amended the loan agreement to provide the lender the right to convert unpaid principal and interest during the loan term to the Company’s common shares. We finalized a second 8% convertible loan agreement with the same lender for $2.0 million. In the fourth quarter of 2005, these two convertible loans totaling $8.0 million were exchanged for a $4.0 million term note. This term note was paid off early in the second quarter of 2006. The reduction in interest and financing costs resulting from the reduction in these loans from year to year was $0.8 million. In addition, interest income increased by $0.6 million as average cash balances were significantly higher throughout 2006 when compared to 2005. These favorable increases were offset by a $0.4 million increase in interest and financing costs related to the note with CITIC. This note was part of the consideration for the re-acquisition of the 40% interest in the Dagang field.

Unrealized Loss on Derivative Instruments

As a result of a requirement of the Company’s lenders, the Company entered into costless collar derivatives to minimize variability in its cash flow from the sale of approximately 75% of the Company’s estimated production from its South Midway Property in California and Spraberry Property in West Texas over a two-year period starting November 2006 and a six-month period starting November 2008. The derivatives have a ceiling price of $65.20, and $70.08, per barrel and a floor price of $63.20, and $65.00, per barrel, respectively, using WTI as the index traded on the NYMEX. Also as a result of a requirement of the Company’s lenders, the Company entered into a costless collar derivative to minimize variability in its cash flow from the sale of approximately 50% of the Company’s estimated production from its Dagang field in China over a three-year period starting September 2007. This derivative has a ceiling price of $84.50 per barrel and a floor price of $55.00 per barrel using the WTI as the index traded on the NYMEX.

The Company is required to account for these contracts using mark-to-market accounting. As forecasted benchmark prices exceed the ceiling prices set in the contract, the contracts have negative value or a liability. These benchmark prices reached record highs in 2007. For the year ended December 31, 2007, the Company had $4.2 million unrealized losses in its U.S. segment and $4.6 million unrealized losses in its China segment on these derivative transactions. The $0.5 million unrealized loss for 2006 was related to the U.S. segment.

Depletion and Depreciation

The primary expense in this classification is depletion of the carrying values of our oil and gas properties in our U.S. and China cost centers over the life of their proved oil and gas reserves as determined by independent reserve evaluators. For more information on how we calculate depletion and determine our proved reserves see “Critical Accounting Principles and Estimates — Oil and Gas Reserves and Depletion” in this Item 7.

• Depletion and Depreciation 2007 vs. 2006

Depletion and depreciation decreased $6.0 million in 2007, partially due to reduced depletion of $3.6 million. The overall reduction in depletion was mainly the result of lower production rates which resulted in a decrease in depletion of $4.2 million for 2007. This decrease was somewhat offset by a higher depletion rate of $36.71 per Boe

35

which resulted in additional depletion expense of $0.6 million. Reduced depreciation of the CDF as a result of a longer depreciation period also contributed to the overall decrease in depletion and depreciation in the amount of $2.4 million for 2007.

China

Decreases in production volumes in China resulted in a decrease in depletion expense of $3.7 million for 2007 when compared to 2006.

China’s depletion rate decreased $0.86 per Boe to $39.73 for 2007 when compared to 2006, resulting in a $0.4 million decrease in depletion expense. The decrease in the rates from year to year was mainly due to a $5.4 million ceiling test write down in the fourth quarter of 2006. This decrease was somewhat offset by an increase to the depletable pool in the fourth quarter of 2007 for the impairment of the drilling costs associated with the second exploration well in the Zitong Block.

U.S.

The U.S. depletion rate for 2007 was $29.38 per Boe compared to $24.23 per Boe for 2006, an increase of $5.15 per Boe resulting in a $1.0 million increase in depletion expense. This increase was mainly due to the 2006 fourth quarter impairment of certain properties, including North Yowlumne, LAK Ranch and Catfish Creek, resulting in $4.8 million of those costs being included with our proved properties and therefore subject to depletion. In addition, the capital spending we incurred in 2007 was related to facilities, versus drilling, and therefore did not correspondingly increase our reserve base.

Additionally, decreases in production volumes in the U.S. accounted for $0.5 million of the decrease in depletion expense for 2007.

HTL^tm

Depreciation of the CDF is calculated using the straight-line method over its current useful life which is based on the existing term of the agreement with Aera Energy LLC to use their property to test the CDF. The end term of this agreement was extended in August 2006 from December 31, 2006 to December 31, 2008 and the useful life was extended to coincide with the new term of the agreement. In addition to the change in life, depreciation expense also decreased as a result of a reduction in the depreciable base during the second quarter of 2007 due to a portion of the payment from INPEX being applied against those costs.

• Depletion and Depreciation 2006 vs. 2005

Depletion and depreciation increased $18.1 million in 2006, due to an increase in depletion rates of $13.45 per Boe resulting in additional depletion expense of $8.1 million for 2006. Additionally, higher production rates resulted in increase in depletion of $6.2 million for 2006. We began depreciating the CDF in 2006 which also contributed to the overall increase in depletion and depreciation in the amount of $3.8 million for 2006.

China

China’s depletion rate for 2006 was $40.57 per Boe compared to $29.77 per Boe for 2005. The increase of $10.80 per Boe resulted in $6.2 million increase in depletion expense for 2006. This increase was due mainly to two factors:

•  We suspended new drilling activity in December 2005 at our Dagang field in order to assess production decline performances on recently drilled wells, as well as maximizing cash flow from these operations. As a result, we reduced our estimate of the overall development program and our independent engineering evaluators, GLJ Petroleum Consultants Ltd., revised downward their estimate of our proved reserves at December 31, 2005.

36

•  In the second quarter of 2005, we impaired the cost of our first Zitong block exploration well resulting in $12.5 million of those and other associated costs being included with our proved properties and therefore subject to depletion.

Additionally, increases in production volumes in China accounted for $7.8 million of the increase in depletion expense for 2006.

U.S.

The U.S. depletion rate for 2006 was $24.23 per Boe compared to $15.53 per Boe for 2005, an increase of $8.70 per Boe resulting in a $1.9 million increase in depletion expense. This increase was mainly due to the impairment of the remaining cost of our Northwest Lost Hills #1-22 exploration well as at December 31, 2005, resulting in $8.9 million of those costs being included with our proved properties and therefore subject to depletion commencing in the first quarter of 2006. In addition, the impairment of other properties in December 2006, including Yowlumne, LAK Ranch and Catfish Creek, resulted in $4.8 million of those costs being included with our proved properties and therefore subject to depletion commencing in the fourth quarter of 2006. Increases in revisions to reserve estimates at December 31, 2006, mainly at South Midway, slightly offset the additional costs being added to the pool. Production volume decreases in the U.S. resulted in a $1.6 million decrease in our depletion expense for 2006.

HTL^tm

The CDF was in a commissioning phase as at December 31, 2005 and, as such, had not been depreciated as at December 31, 2005. The commissioning phase ended in January 2006 and the CDF was placed into service. In 2006 $3.8 million of depreciation was recorded for the CDF.

Write-Down of HTL^tm and GTL Development Costs

As discussed below in this Item 7 in “Critical Accounting Principles and Estimates — Research and Development”, for Canadian GAAP we capitalize technical and commercial feasibility costs incurred for HTL^tm or GTL projects, including studies for the marketability of the projects’ products, subsequent to executing an MOU. If no definitive agreement is reached, then the capitalized costs, which are deemed to have no future value, are written down to our results of operations with a corresponding reduction in our investments in HTL^tm and GTL assets. For U.S. GAAP, all such costs are expensed as incurred.

In 2007 and 2006, we had no write downs for our HTL^tm and GTL projects. This compares to the write down of $0.3 million related to our GTL project in Bolivia and $0.3 million related to our MOU with Ecopetrol for a heavy crude project in Colombia in 2005.

Impairment of Oil and Gas Properties

As discussed below in this Item 7 in “Critical Accounting Principles and Estimates — Impairment of Proved Oil and Gas Properties”, we evaluate each of our cost center’s proved oil and gas properties for impairment on a quarterly basis. If as a result of this evaluation, a cost center’s carrying value exceeds its expected future net cash flows from its proved and probable reserves then a provision for impairment must be recognized in the results of operations.

• Impairment of Oil and Gas Properties 2007 vs. 2006

We impaired our China oil and gas properties by $6.1 million in 2007, compared to $5.4 million in 2006. The 2007 impairment was mainly the result of impairing our costs incurred in the Zitong block due to an unsuccessful second exploration well resulting in those costs of $17.6 million being included with the carrying value of proved properties for the ceiling test calculation.

37

• Impairment of Oil and Gas Properties 2006 vs. 2005

We impaired our China oil and gas properties by $5.4 million in 2006, compared to $5.0 million in 2005. The 2006 impairment was mainly the result of increased operating costs of the Dagang field, including costs of the Windfall Levy established in March 2006.

Financial Condition, Liquidity and Capital Resources

Sources and Uses of Cash

Our net cash and cash equivalents decreased by $2.5 million for the year ended December 31, 2007 compared to an increase of $7.2 million for 2006 and a decrease of $2.6 million for 2005.

• Operating Activities

Our operating activities provided $5.5 million in cash for the year ended December 31, 2007 compared to $14.4 million and $9.9 million for the same periods in 2006 and 2005. The decrease in cash from operating activities for the year ended December 31, 2007 was mainly due to a decrease in net production volumes of 14% offset by an increase in oil and gas prices of 6%, net of realized loss on derivative instruments associated with oil and gas operations. In addition, increases to operating costs, general and administrative and business and technology development expenses also reduced operating cash flows. The increases in cash from operating activities for the year ended December 31, 2006 was mainly due to an increase in net production volumes of 25% and an increase in oil and gas prices of 28%. The increase in net revenues for the year ended December 31, 2006 was partially offset by an increase of $2.5 million in general and administrative and business and technology development expenses, excluding stock based compensation for the year ended December 31, 2006 when compared to the same period in 2005.

• Investing Activities

Our investing activities used $22.3 million in cash for the year ended December 31, 2007 compared to $25.6 million for the same period in 2006. For 2007 we increased our capital asset expenditures by $13.8 million mainly the result of increased exploration expenditures at our Zitong project of $9.1 million and increased development expenditures for new drilling at our Dagang project of $5.3 million. Capital spending related to HTL^tm increased by $2.7 million as expenditures for the FTF increased by $3.9 million but were offset by decreased expenditures of $1.2 million for the CDF. An offset to the increase in capital expenditures was the receipt of a payment of $9.0 million received from INPEX as payment for the Company’s past costs related to its Iraq project and HTL^tm Technology development costs. This amount was offset by a decrease in cash inflows from asset sales of $1.0 million in the U.S. in 2007, compared to $6.0 million for the same period in 2006. In addition in 2006 we used $11.5 million more cash for investing activities related to changes in working capital items as we significantly reduced capital program accounts payable in our China operation.

Our investing activities used $25.6 million in cash for the year ended December 31, 2006 compared to $51.1 million used in investing activities for the same period in 2005. For 2006, we reduced our capital asset expenditures by $25.4 million principally as a result of reduced expenditures for new drilling at our Dagang project of $17.3 million, reduced exploration expenditures of $4.5 million at our Zitong project and reduced expenditures of $2.6 million on projects in Iraq. In 2006, we generated $6.0 million of cash from asset sales in the U.S. compared to nil for the year ended December 31, 2005. In addition, during 2005, we spent $18.6 million on the Ensyn merger, which was completed in April 2005, including $6.8 million on the acquisition of the remaining joint venture interest in the CDF, and we advanced $1.2 million under a consultancy agreement. These decreases in our investing activities for the year ended December 31, 2006 were partially offset by a $24.7 million increase in our non-cash working capital associated with our investing activities.

• Financing Activities

Financing activities for the year ended December 31, 2007 consisted of three draws totaling $13.0 million ($12.4 million net of financing costs) on two separate loan facilities. This increase in borrowings was offset by

38

scheduled debt payments of $2.5 million. In 2006 we repaid notes in the amount of $5.5 million prior to maturity, made scheduled repayments of long-term debt of $3.2 million offset by an initial draw on a bank loan facility of $1.5 million ($1.3 million net of financing costs). Financing activities in 2007 also consisted of $4.0 million received from the exercise of warrants compared to 2006 when there were no warrants exercised but there was a $25.3 million private placement of common shares.

Our financing activities provided $18.4 million in cash for year ended December 31, 2006 compared to $38.6 million of cash provided by financing activities for the year ended December 31, 2005. The $20.2 million decrease in cash from financing activities is mainly due to a $7.1 million decrease in cash from private placements and exercises of warrants and options in addition to a $13.7 million decrease in net debt financing.

In April 2006 the Company closed a private placement of 11.4 million special warrants at $2.23 per special warrant for a total of $25.4 million. Each special warrant entitles the holder to receive, at no additional cost, one common share and one common share purchase warrant. All of the special warrants were subsequently exercised for common shares and common share purchase warrants. Each common share purchase warrant originally entitled the holder to purchase one common share at a price of $2.63 per share until the fifth anniversary date of the closing. In September 2007, these warrants were listed on the Toronto Stock Exchange and the exercise price was changed to Cdn.$2.93. Of the proceeds, $4.0 million has been used to pay down long-term debt and the balance will be used to pursue opportunities for the commercial deployment of the Company’s heavy oil upgrading technology, to advance its oil and gas operations and for general corporate purposes.

Outlook for 2008

Our 2007 capital program budget ranges from approximately $15 million to $20 million and will encompass both continuing development of our existing producing oil and gas properties to maximize near-term cash flow and to further the development and deployment of our proprietary HTL^tm oil upgrading technology. Management’s plans include alliances or other arrangements with entities with the resources to support the Company’s projects as well as project financing, debt and mezzanine financing or the sale of equity securities in order to generate sufficient resources to meet its capital investment and operating objectives. The Company intends to utilize revenue from existing operations to fund the continuing transition of the Company to a heavy oil exploration, production and upgrading company and non-heavy oil related investments in our portfolio will be leveraged or monetized to capture value and provide maximum return for the Company. No assurances can be given that we will be able to enter into one or more alternative business alliances with other parties or raise additional capital. If we are unable to enter into such business alliances or obtain adequate additional financing, we will be required to curtail our operations, which may include the sale of assets.

Contractual Obligations and Commitments

The table below summarizes and cross-references the contractual obligations and commitments that are reflected in our consolidated balance sheets and/or disclosed in the accompanying Notes:

	Payments Due by Year
	Total		2008		2009		2010		2011		After 2011
	(Stated in thousands of U.S. dollars)
Consolidated Balance Sheets:
Long term debt — current portion	$	6,729	$	6,729	$	—	$	—	$	—	$	—
Long term debt		9,812		—		412		9,400		—		—
Asset retirement obligation		2,218		—		754		—		—		1,464
Long term obligation		1,900		—		1,900		—		—		—
Other Commitments:
Interest payable(1)		3,517		1,511		1,129		877		—		—
Lease commitments		3,536		1,136		907		788		565		140
Zitong exploration commitment		22,500		4,500		9,000		9,000		—		—
Total	$	50,212	$	13,876	$	14,102	$	20,065	$	565	$	1,604

39

(1) This is the estimated future interest payments on our long term debt using the rates of interest in effect as at December 31, 2007, including accretion of discount.

We have excluded our normal purchase arrangements as they are discretionary and/or being performed under contracts which are cancelable immediately or with a 30-day notification period.

Critical Accounting Principles and Estimates

Our accounting principles are described in Note 2 to Notes to the Consolidated Financial Statements. We prepare our Consolidated Financial Statements in conformity with GAAP in Canada, which conform in all material respects to U.S. GAAP except for those items disclosed in Note 19 to the Consolidated Financial Statements. For U.S. readers, we have detailed the differences and have also provided a reconciliation of the differences between Canadian and U.S. GAAP in Note 19 to the Consolidated Financial Statements.

The preparation of our financial statements requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses. On an ongoing basis we evaluate our estimates, including those related to asset impairment, revenue recognition, allowance for doubtful accounts and contingencies and litigation. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could vary from those estimates under different assumptions and conditions.

We have identified the following critical accounting policies that affect the more significant judgments and estimates used in preparation of our consolidated financial statements.

Full Cost Accounting — We follow Accounting Guideline 16 “Oil and Gas Accounting — Full Cost” (“AcG 16”) in accounting for our oil and gas properties. Under the full cost method of accounting, all exploration and development costs associated with lease and royalty interest acquisition, geological and geophysical activities, carrying charges for unproved properties, drilling both successful and unsuccessful wells, gathering and production facilities and equipment, financing, administrative costs directly related to capital projects and asset retirement costs are capitalized on a country-by-country cost center basis. As at December 31, 2007, the carrying values of our U.S. and China cost centers were $34.0 million and $62.8 million, respectively.

The other generally accepted method of accounting for costs incurred for oil and gas properties is the successful efforts method. Under this method, costs associated with land acquisition and geological and geophysical activities are expensed in the year incurred and the costs of drilling unsuccessful wells are expensed upon abandonment.

As a consequence of following the full cost method of accounting, we may be more exposed to potential impairments if the carrying value of a cost center’s oil and gas properties exceeds its estimated future net cash flows than if we followed the successful efforts method of accounting. An impairment may occur if a cost center’s recoverable reserve estimates decrease, oil and natural gas prices decline or capital, operating and income taxes increase to levels that would significantly affect its estimated future net cash flows. See “Impairment of Proved Oil and Gas Properties” below.

Oil and Gas Reserves — The process of estimating quantities of reserves is inherently uncertain and complex. It requires significant judgments and decisions based on available geological, geophysical, engineering and economic data. These estimates may change substantially as additional data from ongoing development activities and production performance becomes available and as economic conditions impacting oil and gas prices and costs change. Our reserve estimates are based on current production forecasts, prices and economic conditions. Reserve numbers and values are only estimates and you should not assume that the present value of our future net cash flows from these estimates is the current market value of our estimated proved oil and gas reserves.

Reserve estimates are critical to many accounting estimates and financial decisions including:

•  determining whether or not an exploratory well has found economically recoverable reserves. Such determinations involve the commitment of additional capital to develop the field based on current estimates of production forecasts, prices and other economic conditions.

40

•  calculating our unit-of-production depletion rates. Proved reserves are used to determine rates that are applied to each unit-of-production in calculating our depletion expense. In 2007, oil and gas depletion of $25.1 million was recorded in depletion and depreciation expense. If our reserve estimates changed by 10%, our depletion and depreciation expense for 2007 would have changed by approximately $2.6 million assuming no other changes to our reserve profile. See “Depletion” below.

•  assessing our proved oil and gas properties for impairment on a quarterly basis. Estimated future net cash flows used to assess impairment of our oil and gas properties are determined using proved and probable reserves¹ See “Impairment of Proved Oil and Gas Properties” below.

Management is responsible for estimating the quantities of proved oil and natural gas reserves and preparing related disclosures. Estimates and related disclosures are prepared in accordance with SEC requirements, generally accepted industry practices in the U.S. as promulgated by the Society of Petroleum Engineers, and the standards of the COGE Handbook modified to reflect SEC requirements.

Independent qualified reserves evaluators prepare reserve estimates for each property at least annually and issue a report thereon. The reserve estimates are reviewed by our engineers familiar with the property and by our operational management. Our CEO and CFO meet with our operational personnel to review the current reserve estimates and related disclosures and upon their review and approval present the independent qualified reserves evaluators’ reserve reports to our Board of Directors with a recommendation for approval. Our Board of Directors has approved the reserve estimates and related disclosures.

The estimated discounted future net cash flows from estimated proved reserves included in the Supplementary Financial Information are based on prices and costs as of the date of the estimate. Actual future prices and costs may be materially higher or lower. Actual future net cash flows will also be affected by factors such as actual production levels and timing, and changes in governmental regulation or taxation, and may differ materially from estimated cash flows.

Depletion — As indicated previously, our estimate of proved reserves are critical to calculating our unit-of-production depletion rates.

Another critical factor affecting our depletion rate is our determination that an impairment of unproved oil and gas properties has occurred. Costs incurred on an unproved oil and gas property are excluded from the depletion rate calculation until it is determined whether proved reserves are attributable to an unproved oil and gas property or upon determination that an unproved oil and gas property has been impaired. An unproved oil and gas property would likely be impaired if, for example, a dry hole has been drilled and there are no firm plans to continue drilling on the property. Also, the likelihood of partial or total impairment of a property increases as the expiration of the lease term approaches and there are no plans to drill on the property or to extend the term of the lease. We assess each of our unproved oil and gas properties for impairment on a quarterly basis. If we determine that an unproved oil and gas property has been totally or partially impaired we include all or a portion of the accumulated costs incurred for that unproved oil and gas property in the calculation of our unit-of — production depletion rate. As at December 31, 2007, we had $4.4 million and $3.3 million of costs incurred on unproved oil and gas properties in the U.S. and China, respectively.

Our depletion rate is also affected by our estimates of future costs to develop the proved reserves. We estimate future development costs using quoted prices, historical costs and trends. It is difficult to predict prices for materials and services required to develop a field particularly over a period of years with rising oil and gas prices during which

¹ “Proved” oil and gas reserves are the estimated quantities of natural gas, crude oil, condensate and natural gas liquids that geological and engineering data demonstrate with reasonable certainty can be recoverable in future years from known reservoirs under existing economic and operating conditions. Reservoirs are considered proved if economic recoverability is supported by either actual production or a conclusive formation test. “Probable” reserves are those additional reserves that are less likely to be recovered than proved reserves. It is equally likely that the actual remaining quantities recovered will be greater or less than the sum of estimated proved plus probable reserves.

41

there is generally increased competition for a limited number of suppliers. We update our estimates of future costs to develop our proved reserves on a quarterly basis.

Impairment of Proved Oil and Gas Properties — We evaluate each of our cost centers’ proved oil and gas properties for impairment on a quarterly basis. The basis for calculating the amount of impairment is different for Canadian and U.S. GAAP purposes.

For Canadian GAAP, AcG 16 requires recognition and measurement processes to assess impairment of oil and gas properties (“ceiling test”). In the recognition of an impairment, the carrying value(1) of a cost center is compared to the undiscounted future net cash flows of that cost center’s proved reserves using estimates of future oil and gas prices and costs plus the cost of unproved properties that have been excluded from the depletion calculation. If the carrying value is greater than the value of the undiscounted future net cash flows of the proved reserves plus the cost of unproved properties excluded from the depletion calculation, then the amount of the cost center’s potential impairment must be measured. A cost center’s impairment loss is measured by the amount its carrying value exceeds the discounted future net cash flows of its proved and probable reserves using estimates of future oil and gas prices and costs plus the cost of unproved properties that have been excluded from the depletion calculation and which contain no probable reserves. The net cash flows of a cost center’s proved and probable reserves are discounted using a risk-free interest rate adjusted for political and economic risk on a country-by-country basis. The amount of the impairment loss is recognized as a charge to the results of operations and a reduction in the net carrying amount of a cost center’s oil and gas properties. We provided for $6.1 million, $5.4 million and $5.0 million in a ceiling test impairment for our China cost center for the years ended December 31, 2007, 2006 and 2005, respectively.

For U.S. GAAP, we follow the requirements of the SEC’s Regulation S-X Article 4-10(c)4 for determining the limitation of capitalized costs. Accordingly, the carrying value² of a cost center’s oil and gas properties cannot exceed the future net cash flows, discounted at 10%, of its proved reserves using period-end oil and gas prices and costs plus (i) the cost of properties that have been excluded from the depletion calculation and (ii) the lower of cost or estimated fair value of unproved properties included in the depletion calculation less (iii) income tax effects related to differences between the book and tax basis of the properties. The amount of the impairment loss is recognized as a charge to the results of operations and a reduction in the net carrying amount of a cost center’s oil and gas properties. We provided for nil, $7.6 million and $2.8 million in ceiling test impairments for our U.S. cost center for the years ended December 31, 2007, 2006 and 2005, respectively, and $5.9 million, $15.9 million and $1.7 million for the years ended December 31, 2007, 2006 and 2005 for our China cost center.

Asset Retirement — For Canadian GAAP, we follow Canadian Institute of Chartered Accountants (“CICA”) Section 3110, “Asset Retirement Obligations” which requires asset retirement costs and liabilities associated with site restoration and abandonment of tangible long-lived assets be initially measured at a fair value which approximates the cost a third party would incur in performing the tasks necessary to retire such assets. The fair value is recognized in the financial statements at the present value of expected future cash outflows to satisfy the obligation. Subsequent to the initial measurement, the effect of the passage of time on the liability for the asset retirement obligation (accretion expense) and the amortization of the asset retirement cost are recognized in the results of operations. We measure the expected costs required to retire our producing U.S. oil and gas properties at a fair value, which approximates the cost a third party would incur in performing the tasks necessary to abandon the field and restore the site. We do not make such a provision for our oil and gas operations in China as there is no obligation on our part to contribute to the future cost to abandon the field and restore the site. Asset retirement costs are depleted using the unit of production method based on estimated proved reserves and are included with depletion and depreciation expense. The accretion of the liability for the asset retirement obligation is included with interest expense.

² For Canadian GAAP, the carrying value includes all capitalized costs for each cost center, including costs associated with asset retirement net of estimated salvage values, unproved properties and major development projects, less accumulated depletion and ceiling test impairments. This is essentially the same definition according to U.S. GAAP, under Regulation S-X, except that the carrying value of assets should be net of deferred income taxes and costs of major development projects are to be considered separately for purposes of the ceiling test calculation.

42

For U.S. GAAP, we follow SFAS No. 143, “Accounting for Asset Retirement Obligations” which conforms in all material respects with Canadian GAAP.

Research and Development — We incur various expenses in the pursuit of HTLTM and GTL projects, including HTL^tm Technology for heavy oil processing, throughout the world. For Canadian GAAP, such expenses incurred prior to signing an MOU, or similar agreements, are considered to be business and technology development expenses and are charged to the results of operations as incurred. Upon executing an MOU to determine the technical and commercial feasibility of a project, including studies for the marketability of the projects’ products, we assess that the feasibility and related costs incurred have potential future value, are probable of leading to a definitive agreement for the exploitation of proved reserves and should be capitalized. If no definitive agreement is reached, then the capitalized costs, which are deemed to have no future value, are written down to our results of operations with a corresponding reduction in our investments in HTL^tm or GTL assets. For the years ended December 31, 2007, 2006 and 2005, we wrote down nil, nil and $0.6 million, respectively, of capitalized negotiation and feasibility costs associated with our HTL^tm and GTL projects which did not result in definitive agreements.

Additionally, we incur costs to develop, enhance and identify improvements in the application of the HTL^tm and GTL technologies we license or own. We follow CICA Section 3450 “Research and Development Costs” in accounting for the development costs of equipment and facilities acquired or constructed for such purposes. Development costs are capitalized and amortized over the expected economic life of the equipment or facilities commencing with the start up of commercial operations for which the equipment or facilities are intended. We review the recoverability of such capitalized development costs annually, or as changes in circumstances indicate the development costs might be impaired, through an evaluation of the expected future discounted cash flows from the associated projects. If the carrying value of such capitalized development costs exceeds the expected future discounted cash flows, the excess is written down to the results of operations with a corresponding reduction in the investments in HTL^tm and GTL assets.

Costs incurred in the operation of equipment and facilities used to develop or enhance HTL^tm and GTL technologies prior to commencing commercial operations are business and technology development expenses and are charged to the results of operations in the period incurred.

For U.S. GAAP, we follow SFAS No. 2, “Research and Development”. As with Canadian GAAP, costs of equipment or facilities that are acquired or constructed for research and development activities are capitalized as tangible assets and amortized over the expected economic life of the equipment or facilities commencing with the start up of commercial operations for which the equipment or facilities are intended. However, for U.S. GAAP such facilities must have alternative future uses to be capitalized. As with Canadian GAAP, expenses incurred in the operation of research and development equipment or facilities prior to commencing commercial operations are business and technology development expenses and are charged to the results of operations in the period incurred. The major difference for U.S. GAAP purposes is that feasibility, marketing and related costs incurred prior to executing a definitive agreement are considered to be research and development costs and are expensed as incurred. For the years ended December 31, 2007, 2006 and 2005, we expensed $0.3 million, $1.0 million and $4.8 million, respectively, of feasibility, marketing and related costs incurred prior to executing definitive agreements.

Intangible Assets — Our intangible assets consists of the underlying value of an exclusive, irrevocable license to deploy, worldwide, the RTP^tm Process for petroleum applications (HTL^tm Technology) as well as the exclusive right to deploy the RTP^tm Process in all applications other than biomass and a master license from Syntroleum permitting us to use the Syntroleum Process in an unlimited number of projects around the world. For Canadian GAAP, we follow CICA Section 3062 “Goodwill and Other Intangible Assets” whereby intangible assets, acquired individually or with a group of other assets, are initially recognized and measured at cost. Intangible assets with finite lives are amortized over their useful lives whereas intangible assets with indefinite useful lives are not amortized unless it is subsequently determined to have a finite useful life. Intangible assets are reviewed annually for impairment, or when events or changes in circumstances indicate that the carrying value of an intangible asset may not be recoverable. If the carrying value of an intangible asset exceeds its fair value or expected future discounted cash flows, the excess is written down to the results of operations with a corresponding reduction in the carrying value of the intangible asset. The HTL^tm Technology and the Syntroleum GTL master license have finite lives, which correlate with the useful lives of the facilities we expect to develop that will use the technologies. The

43

amount of the carrying value of the technologies we assign to each facility will be amortized to earnings on a basis related to the operations of the facility from the date on which the facility is placed into service. We evaluate the carrying values of the HTLTM Technology and the Syntroleum GTL master license annually, or as changes in circumstances indicate the intangible assets might be impaired, based on an assessment of its fair market value.

For U.S. GAAP, we follow SFAS No. 142, “Goodwill and Other Intangible Assets” which conforms in all material respects with Canadian GAAP.

2007 Accounting Changes

On January 1, 2007 we adopted six new accounting standards that were issued by the Canadian Institute of Chartered Accountants (“CICA”): Handbook Section 1506 “Accounting Changes” (“S.1506”), Handbook Section 1530 “Comprehensive Income” (“S.1530”), Handbook Section 3251 “Equity” (“S.3251”), Handbook Section 3855 “Financial Instruments — Recognition and Measurement” (“S.3855”), Handbook Section 3861 “Financial Instruments — Disclosure and Presentation” (“S.3861”) and Handbook Section 3865 “Hedges” (“S.3865”). The Company has adopted the new standards on January 1, 2007 in accordance with the transitional provision in each respective section. Comparative figures have not been restated.

The objective of S.1506 is to prescribe the criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. This Section is intended to enhance the relevance and reliability of an entity’s financial statements and the comparability of those financial statements over time and with the financial statements of other entities. There was no material impact on adoption of this Section.

S.1530 introduces Comprehensive Income, which consists of Net Income and Other Comprehensive Income (“OCI”). OCI represents changes in Shareholder’s Equity during a period arising from transactions and other events with non-owner sources. There was no material impact on adoption of this Section; there is no difference between the Net Loss presented in the accompanying statement of operations.

S.3251 establishes standards for the presentation of equity and changes in equity during a reporting period. There was no material impact on adoption of this Section.

S.3855 establishes standards for recognizing and measuring financial assets and financial liabilities and non-financial derivatives as required to be disclosed under S.3861. It requires that financial assets and financial liabilities, including derivatives, be recognized on the balance sheet when the Company becomes a party to the contractual provisions of the financial instrument or non-financial derivative contract. Under this standard, all financial instruments are required to be measured at fair value on initial recognition except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held for trading, available for sale, held to maturity, loans and receivables, or other financial liabilities.

Financial assets

The Company’s financial assets are comprised of cash and cash equivalents, accounts receivable, advances and other long-term assets. These financial assets are classified as loans and receivables or held for trading financial assets as appropriate. The classification of financial assets is determined at initial recognition. When financial assets are recognized initially, they are measured at fair value, normally being the transaction price. Transaction costs for all financial assets are expensed as incurred.

Financial assets are classified as held for trading if they are acquired for sale in the short term. Cash and cash equivalents and derivatives in a positive fair value position are also classified as held for trading. Held for trading assets are carried on the balance sheet at fair value with gains or losses recognized in the income statement. The estimated fair value of held for trading assets is determined by reference to quoted market prices and, if not available, on estimates from third-party brokers or dealers.

Loans and receivables are non-derivative financial assets with fixed or determinable payments. Accounts receivable, advances and certain other assets have been classified as loans and receivables. Such assets are carried at

44

amortized cost, as the time value of money is not significant. Gains and losses are recognized in income when the loans and receivables are derecognized or impaired.

The Company assesses at each balance sheet date whether a financial asset carried at cost is impaired. If there is objective evidence that an impairment loss exists, the amount of the loss is measured as the difference between the carrying amount of the asset and its fair value. The carrying amount of the asset is reduced with the amount of the loss recognized in earnings.

Financial liabilities

Financial liabilities are classified as held for trading financial liabilities or other financial liabilities as appropriate. Financial liabilities include accounts payable and accrued liabilities, derivative financial instruments, credit facilities and long term debt. The classification of financial liabilities is determined at initial recognition.

Held for trading financial liabilities represent financial contracts that were acquired for sale in the short term or derivatives that are in a negative fair market value position.

The estimated fair value of held for trading liabilities is determined by reference to quoted market prices and, if not available, on estimates from third-party brokers or dealers.

Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments.

Short term other financial liabilities are carried at cost as the time value of money is not significant. Accounts payable and accrued liabilities, notes payable and credit facilities have been classified as short term other financial liabilities. Gains and losses are recognized in income when the short term other financial liability is derecognized or impaired. Transaction costs for short term other financial liabilities are expensed as incurred.

Long term other financial liabilities are measured at amortized cost. Long-term debt has been classified as long term other financial liabilities. Transaction costs for long term other financial liabilities are deducted from the related liability and accounted for using the effective interest rate method.

Derivative Financial Instruments

The Company may periodically use different types of derivative instruments to manage its exposure to price volatility, thus mitigating fluctuations in commodity-related cash flows. The Company currently uses costless collar derivative instruments to manage this exposure.

Derivative financial instruments are classified as held for trading and recorded on the consolidated balance sheet at fair value, either as an asset or as a liability under other current financial assets or other current financial liabilities, respectively. Changes in the fair value of these financial instruments, or unrealized gains and losses, are recognized in the statement of operations as revenues in the period in which they occur.

Gains and losses related to the settlement of derivative contracts, or realized gains and losses, are recognized as revenues in the statement of operations.

Contracts to buy or sell non-financial items that are not in accordance with the Company’s expected purchase, sale or usage requirements are accounted for as derivative financial instruments.

There was no material impact on adoption of Section 3855.

S.3861 establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them. The presentation aspect of this standard deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. The disclosure aspect of this standard deals with information about factors that affect the amount, timing and certainty of an entity’s future cash flows relating to financial instruments. This Section also deals with disclosure of information about the nature and extent of an entity’s use of financial instruments, the business purposes they serve, the risks associated with them and management’s policies for controlling those risks. There was no material impact on adoption of this Section.

45

S. 3865 specifies the criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies: fair value hedges, cash flow hedges and hedges of foreign currency exposure of net investment in self-sustaining foreign operations. The Company has not elected to designate any financial derivatives as accounting hedges at this time.

For U.S. GAAP, we follow SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) which conforms in all material respects with Canadian GAAP with respect to the treatment of costless collars.

Impact of New and Pending Canadian GAAP Accounting Standards

In February 2008, the Canadian Institute of Chartered Accountants (“CICA”) issued Section 3064, “Goodwill and Intangible assets,” replacing Section 3062, Goodwill and Other Intangible Assets and Section 3450, Research and Development Costs. Various changes have been made to other sections of the CICA Handbook for consistency purposes. The new Section will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for its fiscal year beginning January 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous Section 3062. The Company is currently evaluating the impact of the adoption of this new Section on its consolidated financial statements.

In December 2006, the CICA approved Handbook Section 1535 “Capital Disclosures” (“S.1535”), Handbook Section 3862 “Financial Instruments — Disclosures” (“S.3862”), and Handbook Section 3863 “Financial Instruments — Presentation” (“S.3863”). S.1535 establishes standards for disclosing information about an entity’s capital and how it is managed. The objective of S.3862 is to require entities to provide disclosures in their financial statements that enable users to evaluate both the significance of financial instruments for the entity’s financial position and performance; and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. The purpose of S.3863 is to enhance financial statement users’ understanding of the significance of financial instruments to an entity’s financial position, performance and cash flows. These Sections apply to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007 and the latter two will replace S.3861. Management will adopt these new disclosure requirements in the first quarter of 2008.

Convergence of Canadian GAAP with International Financial Reporting Standards

In 2006, Canada’s Accounting Standards Board (AcSB) ratified a strategic plan that will result in Canadian GAAP, as used by public companies, being converged with International Financial Reporting Standards over a transitional period. The AcSB has developed and published a detailed implementation plan, with a changeover date for fiscal years beginning on or after January 1, 2011. This convergence initiative is in its early stages as of the date of these annual financial statements. Management has commenced a program of analyzing the Company’s historical financial information in order to assess the impact of the convergence on its financial statements.

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

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”) and Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). Effective for fiscal years beginning after December 15, 2008, the standards will improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. SFAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 160 requires all entities to report noncontrolling (minority)

46

interests in subsidiaries in the same way — as equity in the consolidated financial statements. Management is currently evaluating the impact of the adoption of these new standards on its financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities (including an amendment of FASB Statement No. 115)” (“SFAS No. 159”). The statement would create a fair value option under which an entity may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings as those changes occur. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Management has concluded that the requirements of this recent statement will not have a material impact on its financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; however, for some entities the application of this statement will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, although early adoption is permitted. Management has concluded that the requirements of this recent statement will not have a material impact on its financial statements.

Off Balance Sheet Arrangements

At December 31, 2007 and 2006, 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.

Related Party Transactions

The Company has entered into agreements with a number of entities, which are related through common directors or shareholders, to provide administrative or technical personnel, office space or facilities. The Company is billed on a cost recovery basis. The costs incurred in the normal course of business with respect to the above arrangements amounted to $3.3 million, $3.0 million and $3.0 million for the years ended December 31, 2007, 2006 and 2005, respectively. As at December 31, 2007 and 2006, amounts included in accounts payable under these arrangements were $0.2 million and $0.3 million, respectively.

Certain Factors Affecting the Business

Competition

The oil and gas industry is highly competitive. Our position in the oil and gas industry, which includes the search for and development of new sources of supply, is particularly competitive. Our competitors include major, intermediate and junior oil and natural gas companies and other individual producers and operators, many of which have substantially greater financial and human resources and more developed and extensive infrastructure than we do. Our larger competitors, by reason of their size and relative financial strength, can more easily access capital markets than we can and may enjoy a competitive advantage in the recruitment of qualified personnel. They may be able to absorb the burden of any changes in laws and regulations in the jurisdictions in which we do business more easily than we can, adversely affecting our competitive position. Our competitors may be able to pay more for producing oil and natural gas properties and may be able to define, evaluate, bid for, and purchase a greater number of properties and prospects than we can. Further, these companies may enjoy technological advantages and may be able to implement new technologies more rapidly than we can. Our ability to acquire additional properties in the future will depend upon our ability to conduct efficient operations, to evaluate and select suitable properties,

47

implement advanced technologies, and to consummate transactions in a highly competitive environment. The oil and gas industry also competes with other industries in supplying energy, fuel and other needs of consumers.

Environmental Regulations

Our conventional oil and gas and HTL^tm operations are subject to various levels of government laws and regulations relating to the protection of the environment in the countries in which they operate. We believe that our operations comply in all material respects with applicable environmental laws.

In the U.S., environmental laws and regulations, implemented principally by the Environmental Protection Agency, Department of Transportation and the Department of the Interior and comparable state agencies, govern the management of hazardous waste, the discharge of pollutants into the air and into surface and underground waters and the construction of new discharge sources, the manufacture, sale and disposal of chemical substances, and surface and underground mining. These laws and regulations generally provide for civil and criminal penalties and fines, as well as injunctive and remedial relief.

China continues to develop and implement more stringent national environmental protection regulations and standards for different industries. Projects are currently monitored by provincial and local governments based on the approved standards specified in the environmental impact statement prepared for individual projects.

Environmental Provisions

As at December 31, 2007, a $1.5 million provision has been made for future site restoration and plugging and abandonment of wells in the U.S. and $0.7 million for the removal of the CDF and restoration of the Aera site occupied by the CDF. The future cost of these obligations is estimated at $3.9 million and $0.7 million for the U.S. wells and CDF, respectively. We do not make such a provision for our oil and gas operations in China, as there is no obligation on our part to contribute to the future cost to abandon the field and restore the site. During 2007, our provision for future site restoration and plugging and abandonment of U.S. wells stayed constant and we increased our provision for the CDF by $0.2 million.

Government Regulations

Our business is subject to certain U.S. and Chinese federal, state and local laws and regulations relating to the exploration for, and development, production and marketing of, crude oil and natural gas, as well as environmental and safety matters. In addition, the Chinese government regulates various aspects of foreign company operations in China. Such laws and regulations have generally become more stringent in recent years both in the U.S. and China, often imposing greater liability on a larger number of potentially responsible parties. Because the requirements imposed by such laws and regulations are frequently changed, we are not able to predict the ultimate cost of compliance.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to normal market risks inherent in the oil and gas business, including equity market risk, commodity price risk, foreign-currency rate risk, interest rate risk and credit risk. We recognize these risks and manage our operations to minimize our exposures to the extent practicable.

NON-TRADING

Equity Market Risks

We currently have limited production in the U.S. and China, which have not generated sufficient cash from operations to fund our exploration and development activities. Historically, we have relied on the equity markets as the primary source of capital to fund our expansion and growth opportunities. Based on our current plans, we estimate that we will need approximately $15.0 to $20.0 million to fund our capital investment programs for 2008.

We can give no assurance that we will be successful in obtaining financing as and when needed. Factors beyond our control may make it difficult or impossible for us to obtain financing on favorable terms or at all. Failure

48

to obtain any required financing on a timely basis may cause us to postpone our development plans, forfeit rights in some or all of our projects or reduce or terminate some or all of our operations.

Commodity Price Risk

Commodity price risk related to crude oil prices is one of our most significant market risk exposures. Crude oil prices and quality differentials are influenced by worldwide factors such as OPEC actions, political events and supply and demand fundamentals. To a lesser extent we are also exposed to natural gas price movements. Natural gas prices are generally influenced by oil prices, North American supply and demand and local market conditions. Based on the Company’s 2008 estimated worldwide crude oil production levels, a $1.00/Bbl change in the price of oil, would increase or decrease net income and cash from operations for 2008 by $0.3 million. Based on the Company’s 2008 estimated natural gas production levels and consumption levels in its oil operations, a $0.50/Mcf increase in the price of natural gas would decrease our net income and cash from operations for 2008 by $0.1 million and a $0.50/Mcf decrease in the price would have the opposite effect on our net income and cash from operations.

We periodically engage in the use of derivatives to minimize variability in our cash flow from operations and currently have costless collar contracts put in place as part of our bank loan facilities. The Company entered into costless collar derivatives to minimize variability in its cash flow from the sale of approximately 75% of the Company’s estimated production from its South Midway Property in California and Spraberry Property in West Texas over a two-year period starting November 2006 and a six-month period starting November 2008. The derivatives had a ceiling price of $65.20, and $70.08, per barrel and a floor price of $63.20, and $65.00, per barrel, respectively, using WTI as the index traded on the NYMEX. The Company also entered into a costless collar derivative to minimize variability in its cash flow from the sale of approximately 50% of the Company’s estimated production from its Dagang field in China over a three-year period starting September 2007. This derivative had a ceiling price of $84.50 per barrel and a floor price of $55.00 per barrel using WTI as the index traded on the NYMEX. See Note 13 to the Consolidated Financial Statements.

On December 31, 2007, the Company’s open positions on the derivatives mentioned above had a fair value of $9.4 million. A 10% increase in oil prices would increase the fair value by approximately $4.9 million, while a 10% decrease in prices would reduce the fair value by approximately $4.0 million. The fair value change assumes volatility based on prevailing market parameters at December 31, 2007.

Decreases in oil and natural gas prices would negatively impact our results of operations as a direct result of a reduction in revenues but may also do so in the ceiling test calculation for the impairment of our oil and gas properties. On a quarterly basis, we compare the value of our proved and probable reserves, using estimated future oil and gas prices³, to the carrying value of our oil and gas properties. The ceiling test calculation is sensitive to oil and gas prices and in a period of declining prices could result in a charge to our results of operations as we experienced in 2001 when we recorded a $14.0 million provision for impairment for Canadian GAAP and an additional $10.0 million for U.S. GAAP mainly due to a decline in oil and gas prices. Decreases in oil and gas prices from those used in our ceiling test calculation as at December 31, 2007 as discussed above in “Critical Accounting Principles and Estimates — Impairment of Proved Oil and Gas Properties” may result in additional impairment provisions of our oil and gas properties.

Foreign Currency Rate Risk

In the international petroleum industry, most production is bought and sold in U.S. dollars or with reference to the U.S. dollar. Accordingly, we do not expect to face foreign exchange risks associated with our production revenues.

³ The recoverable value of probable reserves is included only for the measurement of the impairment of the carrying value of oil and gas properties as required under Canadian GAAP but not for U.S. GAAP. Additionally, U.S. GAAP requires the use of period end oil and gas prices to measure the amount of the impairment rather than estimated future oil and gas prices as required by Canadian GAAP. See ’Critical Accounting Principles and Estimates’ for the difference between Canadian and U.S. GAAP in calculating the impairment provision for oil and gas properties.

49

The Company’s cash flow stream relating to certain international operations is based on the U.S. dollar equivalent of cash flows measured in foreign currencies. The majority of the operating costs incurred in our Chinese operations are paid in Chinese renminbi. The majority of costs incurred in our administrative offices in Vancouver and Calgary, as well as some business development costs, are paid in Canadian dollars. Disbursement transactions denominated in Chinese renminbi and Canadian dollars are converted to U.S. dollar equivalents based on the exchange rate as of the transaction date. Foreign currency gains and losses also come about when monetary assets and liabilities denominated in foreign currencies are translated at the end of each month. The expected impact of a 5% strengthening or weakening of the Chinese renminbi, and Canadian dollar, as of December 31, 2007 on our 2008 net loss and cash flow is $1.2 million, and $0.4 million, respectively.

Interest Rate Risk

We currently have two separate bank loan facilities with fluctuating interest rates. We estimate that our net loss and cash from operations for 2008 would change $0.1 million for every 1% change in interest rates.

Credit Risk

The Company is exposed to credit risk with respect to its accounts receivable. Most of the Company’s accounts receivable relate to oil and natural gas sales and are exposed to typical industry credit risks. The Company manages this credit risk by entering into sales contracts with only established entities and reviewing its exposure to individual entities on a regular basis. Losses associated with credit risk have been immaterial for all years presented.

TRADING

We do not enter into contracts for trading or speculative purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had entered into such contracts.

50

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Financial Statements and Related Information

	Page
Report of Independent Registered Chartered Accountants		52
Comments By Independent Registered Chartered Accountants on Canada-United States of America Reporting Differences		52
Consolidated Financial Statements
Consolidated Balance Sheets		53
Consolidated Statements of Operations and Comprehensive loss		54
Consolidated Statements of Shareholders’ Equity		55
Consolidated Statements of Cash Flow		56
Notes to the Consolidated Financial Statements		57
Quarterly Financial Data in Accordance with Canadian and U.S. GAAP (Unaudited)		94
Supplementary Disclosures About Oil and Gas Production Activities (Unaudited)		94

51

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Board of Directors and Shareholders
of Ivanhoe Energy Inc.:

We have audited the accompanying consolidated balance sheets of Ivanhoe Energy Inc. (the “Company”) as at December 31, 2007 and 2006, and the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flow for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). These standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Ivanhoe Energy Inc. as at December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007 in accordance with Canadian generally accepted accounting principles.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 11, 2008 expressed an unqualified opinion on the Company’s internal control over financial reporting.

(signed) “Deloitte & Touche LLP”

Independent Registered Chartered Accountants

Calgary, Canada

February 11, 2008

COMMENTS BY INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS ON CANADA-UNITED STATES OF AMERICA REPORTING DIFFERENCES

The standards of the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph (following the opinion paragraph) when there are changes in accounting principles that have a material effect on the comparability of the Company’s consolidated financial statements, such as the changes described in Note 2 to the financial statements. The standards of the Public Company Accounting Oversight Board (United States) also require the addition of an explanatory paragraph when the financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in Note 2 to the consolidated financial statements. Although we conducted our audits in accordance with both Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), our report to the Board of Directors and Shareholders dated February 11, 2008, is expressed in accordance with Canadian reporting standards which do not require a reference to such changes in accounting principles or permit a reference to such conditions and events in the auditors’ report when the changes are properly accounted for and are adequately disclosed in the financial statements.

(signed) “Deloitte & Touche LLP”

Independent Registered Chartered Accountants

Calgary, Canada

February 11, 2008

52

IVANHOE ENERGY INC.

Consolidated Balance Sheets

	As at December 31,
	2007			2006
	(Stated in thousands of U.S. dollars, except share amounts)
ASSETS
Current Assets
Cash and cash equivalents	$	11,356		$	13,879
Accounts receivable (Note 3)		9,376			7,435
Advance		825			—
Prepaid and other current assets		602			773
		22,159			22,087
Oil and gas properties and development costs, net (Note 4)		111,853			121,918
Intangible assets — technology (Note 5)		102,153			102,153
Long term assets		751			2,386
	$	236,916		$	248,544
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued liabilities	$	9,538		$	9,428
Debt — current portion (Note 6)		6,729			2,147
Derivative instruments (Note 13)		9,432			493
		25,699			12,068
Long term debt (Note 6)		9,812			4,237
Asset retirement obligations (Note 7)		2,218			1,953
Long term obligation (Note 8)		1,900			1,900
Commitments and contingencies (Note 8)
Going concern and basis of presentation (Note 2)
Shareholders’ Equity
Share capital, issued and outstanding 244,873,349 common shares; December 31, 2006 241,215,798 common shares		324,262			318,725
Purchase warrants (Note 9)		23,078			23,955
Contributed surplus		9,937			6,489
Accumulated deficit		(159,990	)		(120,783	)
		197,287			228,386
	$	236,916		$	248,544

(See accompanying Notes to the Consolidated Financial Statements)

Approved by the Board:

(signed) “David R. Martin”	(signed) “Brian Downey”
Director	Director

53

IVANHOE ENERGY INC.

Consolidated Statements of Operations and Comprehensive Loss

	Year Ended December 31,
	2007			2006			2005
	(Stated in thousands of U.S. dollars, except share amounts)
Revenue
Oil and gas revenue (Note 3)	$	43,635		$	47,748		$	29,800
Loss on derivative instruments (Note 13)		(10,587	)		(424	)		—
Interest income		469			776			139
		33,517			48,100			29,939
Expenses
Operating costs		17,319			16,133			7,603
General and administrative		12,076			10,180			9,529
Business and technology development		9,625			7,610			4,978
Depletion and depreciation		26,524			32,550			14,447
Interest expense and financing costs		1,050			963			1,258
Write off of deferred acquisition costs (Note 18)		—			736			—
Write-downs and provision for impairment (Note 4)		6,130			5,420			5,636
		72,724			73,592			43,451
Net Loss and Comprehensive Loss	$	(39,207	)	$	(25,492	)	$	(13,512	)
Net Loss per share — Basic and Diluted (Note 15)	$	(0.16	)	$	(0.11	)	$	(0.07	)
Weighted Average Number of Shares (in thousands)		242,362			235,640			195,803

(See accompanying Notes to the Consolidated Financial Statements)

54

IVANHOE ENERGY INC.

Consolidated Statements of Shareholders’ Equity

	Share Capital				Purchase			Contributed			Accumulated
	Shares		Amount		Warrants			Surplus			Deficit			Total
	(Thousands)
	(Stated in thousands of U.S. dollars, except share amounts)
Balance December 31, 2004		169,665	$	183,617	$	—		$	1,748		$	(81,779	)	$	103,586
Net loss and comprehensive loss		—		—		—			—			(13,512	)		(13,512	)
Shares and purchase warrants issued for:
Merger, net of share issue costs (Note 18)		30,000		74,907		—			—			—			74,907
Private placements, net of share issue costs (Note 9)		13,842		21,834		4,837			—			—			26,671
Refinance of convertible debt (Notes 6 and 9)		2,454		4,000		313			—			—			4,313
Exercise of purchase warrants (Note 9)		4,515		6,133		—			—			—			6,133
Exercise of options (Note 10)		111		156		—			(41	)		—			115
Services		192		441		—			—			—			441
Compensation for stock option grants (Note 10)		—		—		—			2,113			—			2,113
Balance December 31, 2005		220,779		291,088		5,150			3,820			(95,291	)		204,767
Net loss and comprehensive loss		—		—		—			—			(25,492	)		(25,492	)
Shares and purchase warrants issued for:
Acquisition of oil and gas assets (Note 18)		8,591		20,000		—			—			—			20,000
Private placements, net of share issue costs (Note 9)		11,400		6,493		18,805			—			—			25,298
Exercise of options (Note 10)		297		743		—			(252	)		—			491
Services		149		401		—			—			—			401
Compensation for stock option grants (Note 10)		—		—		—			2,921			—			2,921
Balance December 31, 2006		241,216		318,725		23,955			6,489			(120,783	)		228,386
Net loss and comprehensive loss												(39,207	)		(39,207	)
Shares issued for:
Exercise of purchase warrants (Note 9)		2,000		4,313		(313	)		—			—			4,000
Exercise of options (Note 10)		1,231		431		—			(52	)		—			379
Services		427		793		—			—			—			793
Expiry of purchase warrants (Note 9)		—		—		(564	)		564			—			—
Compensation for stock option grants (Note 10)		—		—		—			2,936			—			2,936
Balance December 31, 2007		244,874	$	324,262	$	23,078		$	9,937		$	(159,990	)	$	197,287

(See accompanying Notes to the Consolidated Financial Statements)

55

IVANHOE ENERGY INC.

Consolidated Statements of Cash Flow

	Year Ended December 31,
	2007			2006			2005
	(Stated in thousands of U.S. Dollars)
Operating Activities
Net loss and comprehensive loss	$	(39,207	)	$	(25,492	)	$	(13,512	)
Items not requiring use of cash:
Depletion and depreciation		26,524			32,550			14,447
Write-downs and provision for impairment (Note 4)		6,130			5,420			5,636
Stock based compensation (Note 10)		3,729			2,921			2,113
Write off of deferred acquisition costs (Note 18)		—			736			—
Unrealized loss on derivative instruments (Note 13)		8,939			493			—
Write off of debt financing costs		—			—			857
Other		649			600			108
Abandonment costs settled (Note 7)		(792	)		—			—
Changes in non-cash working capital items (Note 16)		(483	)		(2,876	)		221
		5,489			14,352			9,870
Investing Activities
Capital investments		(31,638	)		(17,842	)		(43,282	)
Merger, net of working capital (Note 18)		—			—			(10,096	)
Merger and acquisition related costs (Note 18)		—			(736	)		(1,712	)
Acquisition of joint venture interest (Note 18)		—			—			(6,750	)
Proceeds from sale of assets (Note 4)		1,000			5,950			—
Recovery of HTLtm investments (Note 4)		9,000			—			—
Advance repayments (payments)		500			(125	)		(1,200	)
Other		28			(116	)		(97	)
Changes in non-cash working capital items (Note 16)		(1,177	)		(12,708	)		12,022
		(22,287	)		(25,577	)		(51,115	)
Financing Activities
Shares issued on private placements, net of share issue costs (Note 9)		—			25,298			26,671
Proceeds from exercise of options and warrants (Notes 9 and 10)		4,379			491			6,248
Share issue costs on shares issued for Merger		—			—			(93	)
Proceeds from debt obligations, net of financing costs (Note 6)		12,356			1,280			8,000
Repayments of debt obligations (Note 6)		(2,460	)		(8,689	)		(1,667	)
Other		—			—			(512	)
		14,275			18,380			38,647
Increase (decrease) in cash and cash equivalents, for the period		(2,523	)		7,155			(2,598	)
Cash and cash equivalents, beginning of year		13,879			6,724			9,322
Cash and cash equivalents, end of year	$	11,356		$	13,879		$	6,724

(See accompanying Notes to the Consolidated Financial Statements)

56

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements

(all tabular amounts are expressed in thousands of U.S. Dollars, except share amounts)

1.   NATURE OF OPERATIONS

Ivanhoe Energy Inc. (the “Company” or “Ivanhoe Energy”), a Canadian company, is an independent international heavy oil development and production company focused on pursuing long-term growth in its reserves and production. Ivanhoe Energy plans to utilize technologically innovative methods designed to significantly improve recovery of heavy oil resources, including the anticipated commercial application of the patented rapid thermal processing process (“RTP^tm Process”) for heavy oil upgrading (“HTL^tm Technology” or “HTL^tm”) and enhanced oil recovery (“EOR”) techniques. In addition, the Company seeks to expand its reserve base and production through conventional exploration and production (“E&P”) of oil and gas. Finally, the Company is exploring an opportunity to monetize stranded gas reserves through the application of the conversion of natural gas-to-liquids using a technology (“GTL Technology” or “GTL”) licensed from Syntroleum Corporation (“Syntroleum”). Our core operations are currently carried out in the United States and China.

2.   SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in Canada. The impact of material differences between Canadian and U.S. GAAP on the consolidated financial statements is disclosed in Note 19.

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.

In particular, the amounts recorded for depletion and depreciation of the oil and gas properties and accretion for asset retirement obligations are based on estimates of reserves and future costs. By their nature, these estimates, and those related to future cash flows used to assess impairment of oil and gas properties and development costs as well as intangible assets, are subject to measurement uncertainty and the impact on the financial statements of future periods could be material.

Going Concern and Basis of Presentation

The Company’s financial statements as at and for the year ended December 31, 2007 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The Company incurred a net loss of $39.2 million for the year ended December 31, 2007, and as at December 31, 2007, had an accumulated deficit of $160.0 million and negative working capital of $3.5 million. The Company currently anticipates incurring substantial expenditures to further its capital investment programs and the Company’s cash flow from operating activities will not be sufficient to both satisfy its current obligations and meet the requirements of these capital investment programs. Recovery of capitalized costs related to potential HTLTM and GTL projects is dependent upon finalizing definitive agreements for, and successful completion of, the various projects. Management’s plans include alliances or other arrangements with entities with the resources to support the Company’s projects as well as project financing, debt and mezzanine financing or the sale of equity securities in order to generate sufficient resources to assure continuation of the Company’s operations and achieve its capital investment objectives. The Company intends to utilize revenue from existing operations to fund the transition of the Company to a heavy oil exploration, production and upgrading company and non-heavy oil related investments in our portfolio will be leveraged or monetized to capture value and provide maximum return for the Company. The outcome of these matters cannot be predicted with certainty at this time and therefore the Company may not be able to continue as a going concern. These consolidated financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should the Company be unable to continue as a going concern.

57

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Principles of Consolidation

These consolidated financial statements include the accounts of Ivanhoe Energy and its subsidiaries, all of which are wholly owned.

The Company conducts most exploration, development and production activities in its oil and gas business jointly with others. The Company’s accounts reflect only its proportionate interest in the assets and liabilities of these joint ventures.

All inter-company transactions and balances have been eliminated for the purposes of these consolidated financial statements.

Foreign Currency Translation

The functional currency of the Company is the U.S. Dollar since it is the currency in which the worldwide petroleum business is denominated and the majority of our transactions occur in this currency. Monetary assets and liabilities denominated in foreign currencies are converted to the U.S. Dollar at the exchange rate in effect at the balance sheet date and non-monetary assets and liabilities at the exchange rates in effect at the time of acquisition or issue. Revenues and expenses are converted to the U.S. Dollar at rates approximating exchange rates in effect at the time of the transactions. Exchange gains or losses resulting from the period-end translation of monetary assets and liabilities denominated in foreign currencies are reflected in the results of operations.

Cash and Cash Equivalents

Cash and cash equivalents include short-term money market instruments with terms to maturity, at the date of issue, not exceeding 90 days.

Oil and Gas Properties

Full Cost Accounting

The Company follows the full cost method of accounting for oil and gas operations whereby all exploration and development expenditures are capitalized on a country-by-country (cost center) basis. Such expenditures include lease and royalty interest acquisition costs, geological and geophysical expenses, carrying charges for unproved properties, costs of drilling both successful and unsuccessful wells, gathering and production facilities and equipment, financing, administrative costs related to capital projects and asset retirement costs. Proceeds from sales of oil and gas properties are recorded as reductions in the carrying value of proved oil and gas properties, unless such amounts would significantly alter the rate of depreciation and depletion, whereupon gains or losses would be recognized in income. Maintenance and repair costs are expensed as incurred, while improvements and major renovations are capitalized.

Depletion

The Company’s share of costs for proved oil and gas properties accumulated within each cost center, including a provision for future development costs, are depleted using the unit-of-production method over the life of the Company’s share of estimated remaining proved oil and gas reserves net of royalties. Costs incurred on an unproved oil and gas property are excluded from the depletion rate calculation until it is determined whether proved reserves are attributable to an unproved oil and gas property or upon determination that an unproved oil and gas property has been impaired. Natural gas reserves and production are converted to a barrels of oil equivalent using a generally recognized industry standard in which six thousand cubic feet of gas is equal to one barrel of oil. The conversion ratio is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead.

58

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Impairment of Proved Oil and Gas Properties

In the recognition of an impairment, the carrying value of a cost center is compared to the undiscounted future net cash flows of that cost center’s proved reserves using estimates of future oil and gas prices and costs plus the cost of unproved properties that have been excluded from the depletion calculation. If the carrying value is greater than the value of the undiscounted future net cash flows of the proved reserves plus the cost of unproved properties excluded from the depletion calculation, then the amount of the cost center’s potential impairment must be measured. A cost center’s impairment loss is measured by the amount its carrying value exceeds the discounted future net cash flows of its proved and probable reserves using estimates of future oil and gas prices and costs plus the cost of unproved properties that have been excluded from the depletion calculation and which contain no probable reserves. The net cash flows of a cost center’s proved and probable reserves are discounted using a risk-free interest rate adjusted for political and economic risk on a country-by-country basis. The amount of the impairment loss is recognized as a charge to the results of operations and a reduction in the net carrying amount of a cost center’s oil and gas properties. Unproved properties and major development projects are assessed on a quarterly basis for possible impairments or reductions in value. If a reduction in value has occurred, the impairment is transferred to the carrying value of proved oil and gas properties.

Asset Retirement Costs

The Company measures the expected costs required to abandon its producing U.S. oil and gas properties and the HTL^tm commercial demonstration facility (“CDF”) at a fair value which approximates the cost a third party would incur in performing the tasks necessary to abandon the field and restore the site. The fair value is recognized in the financial statements at the present value of expected future cash outflows to satisfy the obligation as a liability with a corresponding increase in the related asset. Subsequent to the initial measurement, the effect of the passage of time on the liability for the asset retirement obligation (accretion expense) is recognized in the results of operations and included with interest expense. Actual costs incurred upon settlement of the obligation are charged against the obligation to the extent of the liability recorded. Any difference between the actual costs incurred upon settlement of the obligation and the recorded liability is recognized as a gain or loss in the carrying balance of the related capital asset in the period in which the settlement occurs.

Asset retirement costs associated with the producing U.S. oil and gas properties are being depleted using the unit of production method based on estimated proved reserves and are included with depletion and depreciation expense. Asset retirement costs associated with the CDF are depreciated over the life of the CDF which commenced when the facility was placed into service.

The Company does not make such a provision for its oil and gas operations in China as there is no obligation on the Company’s part to contribute to the future cost to abandon the field and restore the site.

Development Costs

The Company incurs various costs in the pursuit of HTL^tm and GTL projects throughout the world. Such costs incurred prior to signing a memorandum of understanding (“MOU”), or similar agreements, are considered to be business and technology development and are expensed as incurred. Upon executing an MOU to determine the technical and commercial feasibility of a project, including studies for the marketability for the projects products, the Company assesses that the feasibility and related costs incurred have potential future value, are probable of leading to a definitive agreement for the exploitation of proved reserves and should be capitalized. If no definitive agreement is reached, then the project’s capitalized costs, which are deemed to have no future value, are written down in the results of operations with a corresponding reduction in the carrying balance of the HTL^tm and GTL development costs.

Additionally, the Company incurs costs to develop, enhance and identify improvements in the application of the HTL^tm and GTL technologies it owns or licenses. The cost of equipment and facilities acquired, such as the

59

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

CDF, or construction costs for such purposes, are capitalized as development costs and amortized over the expected economic life of the equipment or facilities, commencing with the start up of commercial operations for which the equipment or facilities are intended. The CDF will be used to develop and identify improvements in the application of the HTL^tm Technology by processing and testing heavy crude feedstock of prospective partners until such time as the CDF is sold, dismantled or redeployed.

The Company reviews the recoverability of such capitalized development costs annually, or as changes in circumstances indicate the development costs might be impaired, through an evaluation of the expected future discounted cash flows from the associated projects. If the carrying value of such capitalized development costs exceeds the expected future discounted cash flows, the excess is written down in the results of operations with a corresponding reduction in the carrying balance of the HTL^tm and GTL development costs.

Costs incurred in the operation of equipment and facilities used to develop or enhance HTL^tm and GTL technologies prior to commencing commercial operations are business and technology development expenses and are charged to the results of operations in the period incurred.

Furniture and Equipment

Furniture and fixtures are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of the respective assets, at rates ranging from three to five years.

Intangible Assets

Intangible assets are initially recognized and measured at cost. Intangible assets with finite lives are amortized over their estimated useful lives. Intangible assets are reviewed at least annually for impairment, or when events or changes in circumstances indicate that the carrying value of an intangible asset may not be recoverable. If the carrying value of an intangible asset exceeds its fair value or expected future discounted cash flows, the excess is written down to the results of operations with a corresponding reduction in the carrying value of the intangible asset.

The Company owns intangible assets in the form of an exclusive, irrevocable license to employ the RTP^tm Process for all applications other than biomass and a GTL master license from Syntroleum. The Company will assign the carrying value of the HTL^tm Technology and the Syntroleum GTL master license to the number of facilities it expects to develop that will use the HTL^tm Technology and the Syntroleum GTL process respectively. The amount of the carrying value of the technologies assigned to each HTL^tm or GTL facility will be amortized to earnings on a basis related to the operations of the HTL^tm or GTL facility from the date on which the facility is placed into service. The carrying value of the HTL^tm Technology and the Syntroleum GTL master license are evaluated for impairment annually, or as changes in circumstances indicate the intangible assets might be impaired, based on an assessment of their fair market values.

Oil and Gas Revenue

Sales of crude oil and natural gas are recognized in the period in which the product is delivered to the customer. Oil and gas revenue represents the Company’s share and is recorded net of royalty payments to governments and other mineral interest owners.

In China, the Company conducts operations jointly with the government of China in accordance with a production-sharing contract. Under this contract, the Company pays both its share and the government’s share of operating and capital costs. The Company recovers the government’s share of these costs from future revenues or production over the life of the production-sharing contract. The government’s share of operating costs is recorded in operating expense when incurred and capital costs are recorded in oil and gas properties when incurred and expensed to depletion and depreciation in the year recovered.

60

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Earnings or Loss Per Share

Basic earnings or loss per share is calculated by dividing the net earnings or loss to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that would occur if stock options, convertible debentures and purchase warrants were exercised. The treasury stock method is used in calculating diluted earnings per share, which assumes that any proceeds received from the exercise of in-the-money stock options and purchase warrants would be used to purchase common shares at the average market price for the period (See Note 15). The Company does not report diluted loss per share amounts, as the effect would be anti-dilutive to the common shareholders.

Income Taxes

The Company follows the liability method of accounting for future income taxes. Under the liability method, future income taxes are recognized to reflect the expected future tax consequences arising from tax loss carry-forwards and temporary differences between the carrying value and the tax basis of the Company’s assets and liabilities. A valuation allowance is recorded against any future income tax asset if the Company is not “more likely than not” to be able to utilize the tax deductions associated with the future income tax asset.

Stock Based Compensation

The Company has an Employees’ and Directors’ Equity Incentive Plan consisting of a stock option plan (See Note 10), a bonus plan and an employee share purchase plan. The Company accounts for equity-based compensation under this plan using the fair value based method of accounting for all stock options granted after January 1, 2002. Compensation costs are recognized in the results of operations over the periods in which the stock options vest for all stock options granted based on the fair value of the stock options at the date granted. The Company uses the Black-Scholes option-pricing model for determining the fair value of stock options issued at grant date. As of the date stock options are granted, the Company estimates a percentage of stock options issued to employees and directors it expects to be forfeited. Compensation costs are not recognized for stock option awards forfeited due to a failure to satisfy the service requirement for vesting. Compensation costs are adjusted for the actual amount of forfeitures in the period in which the stock options expire.

Upon the exercise of stock options, share capital is credited for the fair value of the stock options at the date granted with a charge to contributed surplus. Consideration paid upon the exercise of the stock options is also credited to share capital.

Compensation expenses are recognized when shares are issued from the stock bonus plan. The employee share purchase portion of the plan has not yet been activated.

Derivative Activities

From time to time, the Company enters into derivative financial instruments to reduce price volatility and establish minimum prices for a portion of its oil and natural gas production and as well as a result of a requirement of the Company’s lenders. No contracts are entered into for trading or speculative purposes and the Company accounts for all financial derivative contacts based on the fair value method. Fair values are determined based on third-party statements for the amounts that would be paid or received to settle these instruments prior to maturity and recorded on the balance sheet with changes in the fair value recorded in the statement of operations as a gain or loss (See Note 13).

2007 Accounting Changes

On January 1, 2007 we adopted six new accounting standards that were issued by the Canadian Institute of Chartered Accountants (“CICA”): Handbook Section 1506 “Accounting Changes” (“S.1506”), Handbook Section 1530 “Comprehensive Income” (“S.1530”), Handbook Section 3251 “Equity” (“S.3251”), Handbook

61

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Section 3855 “Financial Instruments — Recognition and Measurement” (“S.3855”), Handbook Section 3861 “Financial Instruments — Disclosure and Presentation” (“S.3861”) and Handbook Section 3865 “Hedges” (“S.3865”). The Company has adopted the new standards on January 1, 2007 in accordance with the transitional provision in each respective section. Comparative figures have not been restated.

The objective of S.1506 is to prescribe the criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates and corrections of errors. This Section is intended to enhance the relevance and reliability of an entity’s financial statements and the comparability of those financial statements over time and with the financial statements of other entities. There was no material impact on adoption of this Section.

S.1530 introduces Comprehensive Income, which consists of Net Income and Other Comprehensive Income (“OCI”). OCI represents changes in Shareholder’s Equity during a period arising from transactions and other events with non-owner sources. There was no material impact on adoption of this Section; there is no difference between the Net Loss presented in the accompanying statement of operations.

S.3251 establishes standards for the presentation of equity and changes in equity during a reporting period. There was no material impact on adoption of this Section.

S.3855 establishes standards for recognizing and measuring financial assets and financial liabilities and non-financial derivatives as required to be disclosed under S.3861. It requires that financial assets and financial liabilities, including derivatives, be recognized on the balance sheet when the Company becomes a party to the contractual provisions of the financial instrument or non-financial derivative contract. Under this standard, all financial instruments are required to be measured at fair value on initial recognition except for certain related party transactions. Measurement in subsequent periods depends on whether the financial instrument has been classified as held for trading, available for sale, held to maturity, loans and receivables, or other financial liabilities.

Financial assets

The Company’s financial assets are comprised of cash and cash equivalents, accounts receivable, advances and other long-term assets. These financial assets are classified as loans and receivables or held for trading financial assets as appropriate. The classification of financial assets is determined at initial recognition. When financial assets are recognized initially, they are measured at fair value, normally being the transaction price. Transaction costs for all financial assets are expensed as incurred.

Financial assets are classified as held for trading if they are acquired for sale in the short term. Cash and cash equivalents and derivatives in a positive fair value position are also classified as held for trading. Held for trading assets are carried on the balance sheet at fair value with gains or losses recognized in the income statement. The estimated fair value of held for trading assets is determined by reference to quoted market prices and, if not available, on estimates from third-party brokers or dealers.

Loans and receivables are non-derivative financial assets with fixed or determinable payments. Accounts receivable, advances and certain other assets have been classified as loans and receivables. Such assets are carried at amortized cost, as the time value of money is not significant. Gains and losses are recognized in income when the loans and receivables are derecognized or impaired.

The Company assesses at each balance sheet date whether a financial asset carried at cost is impaired. If there is objective evidence that an impairment loss exists, the amount of the loss is measured as the difference between the carrying amount of the asset and its fair value. The carrying amount of the asset is reduced with the amount of the loss recognized in earnings.

62

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Financial liabilities

Financial liabilities are classified as held for trading financial liabilities or other financial liabilities as appropriate. Financial liabilities include accounts payable and accrued liabilities, derivative financial instruments, credit facilities and long term debt. The classification of financial liabilities is determined at initial recognition.

Held for trading financial liabilities represent financial contracts that were acquired for sale in the short term or derivatives that are in a negative fair market value position.

The estimated fair value of held for trading liabilities is determined by reference to quoted market prices and, if not available, on estimates from third-party brokers or dealers.

Other financial liabilities are non-derivative financial liabilities with fixed or determinable payments.

Short term other financial liabilities are carried at cost as the time value of money is not significant. Accounts payable and accrued liabilities and credit facilities have been classified as short term other financial liabilities. Gains and losses are recognized in income when the short term other financial liability is derecognized or impaired. Transaction costs for short term other financial liabilities are expensed as incurred.

Long term other financial liabilities are measured at amortized cost. Long-term debt has been classified as long term other financial liabilities. Transaction costs for long term other financial liabilities are deducted from the related liability and accounted for using the effective interest rate method.

Derivative Financial Instruments

The Company may periodically use different types of derivative instruments to manage its exposure to price volatility, thus mitigating fluctuations in commodity-related cash flows. The Company currently uses costless collar derivative instruments to manage this exposure.

Derivative financial instruments are classified as held for trading and recorded on the consolidated balance sheet at fair value, either as an asset or as a liability under other current financial assets or other current financial liabilities, respectively. Changes in the fair value of these financial instruments, or unrealized gains and losses, are recognized in the statement of operations as revenues in the period in which they occur.

Gains and losses related to the settlement of derivative contracts, or realized gains and losses, are recognized as revenues in the statement of operations.

Contracts to buy or sell non-financial items that are not in accordance with the Company’s expected purchase, sale or usage requirements are accounted for as derivative financial instruments.

There was no material impact on adoption of Section 3855.

S.3861 establishes standards for presentation of financial instruments and non-financial derivatives, and identifies the information that should be disclosed about them. The presentation aspect of this standard deals with the classification of financial instruments, from the perspective of the issuer, between liabilities and equity, the classification of related interest, dividends, losses and gains, and the circumstances in which financial assets and financial liabilities are offset. The disclosure aspect of this standard deals with information about factors that affect the amount, timing and certainty of an entity’s future cash flows relating to financial instruments. This Section also deals with disclosure of information about the nature and extent of an entity’s use of financial instruments, the business purposes they serve, the risks associated with them and management’s policies for controlling those risks. There was no material impact on adoption of this Section.

S. 3865 specifies the criteria that must be satisfied in order for hedge accounting to be applied and the accounting for each of the permitted hedging strategies: fair value hedges, cash flow hedges and hedges of foreign currency exposure of net investment in self-sustaining foreign operations. The Company has not elected to designate any financial derivatives as accounting hedges at this time.

63

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Impact of New and Pending Canadian GAAP Accounting Standards

In February 2008, the CICA issued Handbook Section 3064, “Goodwill and Intangible assets,” (“S.3064”) replacing Handbook Section 3062, “Goodwill and Other Intangible Assets” (“S.3062”) and Handbook Section 3450, “Research and Development Costs”. Various changes have been made to other sections of the CICA Handbook for consistency purposes. S.3064 will be applicable to financial statements relating to fiscal years beginning on or after October 1, 2008. Accordingly, the Company will adopt the new standards for its fiscal year beginning January 1, 2009. It establishes standards for the recognition, measurement, presentation and disclosure of goodwill subsequent to its initial recognition and of intangible assets by profit-oriented enterprises. Standards concerning goodwill are unchanged from the standards included in the previous S.3062. The Company is currently evaluating the impact of the adoption of this new Section on its consolidated financial statements.

In December 2006, the CICA approved Handbook Section 1535 “Capital Disclosures” (“S.1535”), Handbook Section 3862 “Financial Instruments — Disclosures” (“S.3862”), and Handbook Section 3863 “Financial Instruments — Presentation” (“S.3863”). S.1535 establishes standards for disclosing information about an entity’s capital and how it is managed. The objective of S.3862 is to require entities to provide disclosures in their financial statements that enable users to evaluate both the significance of financial instruments for the entity’s financial position and performance; and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the balance sheet date, and how the entity manages those risks. The purpose of S.3863 is to enhance financial statement users’ understanding of the significance of financial instruments to an entity’s financial position, performance and cash flows. These Sections apply to interim and annual financial statements relating to fiscal years beginning on or after October 1, 2007 and the latter two will replace S.3861. Management will adopt these new disclosure requirements in the first quarter of 2008.

Convergence of Canadian GAAP with International Financial Reporting Standards

In 2006, Canada’s Accounting Standards Board (“AcSB”) ratified a strategic plan that will result in Canadian GAAP, as used by public companies, being converged with International Financial Reporting Standards over a transitional period. The AcSB has developed and published a detailed implementation plan, with a changeover date for fiscal years beginning on or after January 1, 2011. This convergence initiative is in its early stages as of the date of these annual financial statements. Management has commenced a program of analyzing the Company’s historical financial information in order to assess the impact of the convergence on its financial statements.

3.   CONCENTRATION OF CREDIT RISKS

The Company sells oil and natural gas products to pipelines, refineries, major oil companies and foreign national petroleum companies and is exposed to normal industry credit risks. Where possible, credit is extended based on an evaluation of the customer’s financial condition and historical payment record.

64

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

The following summarizes the accounts receivable balances and revenues from significant customers:

	Accounts Receivable				Oil and Gas Revenue for the Year
	as at December 31,				Ended December 31,
	2007		2006		2007		2006		2005
U.S. Customers
A	$	1,138	$	776	$	10,903	$	10,351	$	8,812
B		207		142		1,011		1,094		1,166
C		72		57		271		277		351
D		—		—		74		236		1,607
All others		27		17		11		107		2,133
		1,444		992		12,270		12,065		14,069
China Customer
A		6,564		5,572		31,365		35,683		15,731
		8,008		6,564		43,635		47,748		29,800
Receivables from partners		815		592		—		—		—
Other receivables		553		279		—		—		—
	$	9,376	$	7,435	$	43,635	$	47,748	$	29,800

Accounts receivable as at December 31, 2007 and 2006 in the table above include $0.8 million and $0.6 million, respectively, of costs billed to joint venture partners where the Company is the operator and advances to partners for joint operations where the Company is not the operator.

65

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

4.   OIL AND GAS PROPERTIES AND DEVELOPMENT COSTS

Capital assets categorized by segment are as follows:

	As at December 31, 2007
	Oil and Gas
	U.S.			China			HTLtm			GTL		Total
Oil and Gas Properties:
Proved	$	107,040		$	134,648		$	—		$	—	$	241,688
Unproved		4,373			3,297			—			—		7,670
		111,413			137,945			—			—		249,358
Accumulated depletion		(27,091	)		(58,583	)		—			—		(85,674	)
Accumulated provision for impairment		(50,350	)		(16,550	)		—			—		(66,900	)
		33,972			62,812			—			—		96,784
HTLtm and GTL Development Costs:
Feasibility studies and other deferred costs		—			—			389			5,054		5,443
Feedstock test facility		—			—			4,724			—		4,724
Commercial demonstration facility		—			—			9,903			—		9,903
Accumulated depreciation		—			—			(5,159	)		—		(5,159	)
		—			—			9,857			5,054		14,911
Furniture and equipment		529			119			107			—		755
Accumulated depreciation		(449	)		(77	)		(71	)		—		(597	)
		80			42			36			—		158
	$	34,052		$	62,854		$	9,893		$	5,054	$	111,853

66

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

	As at December 31, 2006
	Oil and Gas
	U.S.			China			HTLtm			GTL		Total
Oil and Gas Properties:
Proved	$	102,884		$	106,171		$	—		$	—	$	209,055
Unproved		5,765			8,279			—			—		14,044
		108,649			114,450			—			—		223,099
Accumulated depletion		(21,249	)		(39,372	)		—			—		(60,621	)
Accumulated provision for impairment		(50,350	)		(10,420	)		—			—		(60,770	)
		37,050			64,658			—			—		101,708
HTLtm and GTL Development Costs:
Feasibility studies and other deferred costs		—			—			6,615			5,054		11,669
Feedstock test facility		—			—			405			—		405
Commercial demonstration facility		—			—			11,700			—		11,700
Accumulated depreciation		—			—			(3,789	)		—		(3,789	)
		—			—			14,931			5,054		19,985
Furniture and equipment Accumulated depreciation		530			115			80			—		725
		(414	)		(56	)		(30	)		—		(500	)
		116			59			50			—		225
	$	37,166		$	64,717		$	14,981		$	5,054	$	121,918

Oil and Gas Properties

In 2007 the Company disposed of U.S. Oil and Gas Properties interests with proceeds totaling $1.0 million ($6.0 million in 2006). The sale proceeds were credited to the carrying value of its U.S. oil and gas properties as the sales did not significantly alter the depletion rate for the U.S. cost center.

Costs as at December 31, 2007 of $7.7 million ($14.0 million at December 31, 2006), related to unproved oil and gas properties have been excluded from costs subject to depletion and depreciation. Included in that same depletion calculation were $8.9 million for future development costs associated with proven undeveloped reserves as at December 31, 2007 ($11.0 million at December 31, 2006).

The Company performed a ceiling test calculation at December 31, 2007, 2006 and 2005 to assess the recoverable value of its U.S. Oil and Gas Properties. Based on this calculation, the present value of future net revenue from the Company’s proved plus probable reserves exceeded the carrying value of the Company’s U.S. Oil and Gas Properties. The Company performed this same calculation for its China Oil and Gas Properties at December 31, 2007, 2006 and 2005 resulting in an impairment of $6.1 million, $5.4 million and $5.0 million in each of those respective years.

67

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Prices used in calculating the expected future cash flows were based on the following benchmark prices adjusted for gravity, transportation and other factors as required by sales agreements:

	As at December 31, 2007		As at December 31, 2006		As at December 31, 2005
	West Texas		West Texas		West Texas
	Intermediate	Henry Hub	Intermediate	Henry Hub	Intermediate	Henry Hub
	(per Bbl)	(per Mcf)	(per Bbl)	(per Mcf)	(per Bbl)	(per Mcf)
2006	NA	NA	NA	NA	$57.00	$10.50
2007	NA	NA	$62.00	$7.25	$55.00	$8.75
2008	$92.00	$7.50	$60.00	$7.50	$51.00	$7.50
2009	$88.00	$8.25	$58.00	$7.50	$48.00	$7.00
2010	$84.00	$8.25	$57.00	$7.50	$46.50	$6.75
2011	$82.00	$8.25	$57.00	$7.50	$45.00	$6.50
2012	$82.00	$8.25	$57.50	$7.75	$45.00	$6.50
2013	$82.00	$8.25	$58.50	$7.90	$46.00	$6.65
2014	$82.00	$8.45	$59.75	$8.05	$46.75	$6.75
2015	$82.00	$8.62	$61.00	$8.20	$47.75	$6.90
2016	$82.02	$8.79	$62.25	$8.40	$48.75	$7.05
2017	$83.66	$8.96	$63.50	$8.55	2% per year	2% per year
2018	2% per year	$9.14	2% per year	2% per year	2% per year	2% per year
Thereafter	2% per year	2% per year	2% per year	2% per year	2% per year	2% per year

Heavy- to-Light

In late 2004, the Company signed a memorandum of understanding with the Iraqi Ministry of Oil to evaluate a specific, large heavy oil field and its commercial development potential using Ivanhoe Energy’s HTL^tm Technology. Since that time, the Company has carried out a detailed analysis and has generated data regarding the applicability of its HTL^tm Technology for the development of the field.

In the first half of 2007, the Company and INPEX Corporation (“INPEX”), a Japanese oil and gas exploration and production company, signed an agreement to jointly pursue the opportunity to develop the above noted heavy oil field in Iraq. During the second quarter of 2007, INPEX paid $9.0 million to the Company as a contribution towards the Company’s past costs related to the project and certain costs related to the development of its HTL^tm Technology. The payment was credited to the carrying value of its Iraq and CDF HTL^tm Development Costs related to this project.

The agreement provides INPEX with a significant minority interest in the venture, with Ivanhoe Energy a majority interest. Both parties will participate in the pursuit of the opportunity but Ivanhoe will lead the discussions with the Iraqi Ministry of Oil. Should the Company and INPEX proceed with the development and deploy Ivanhoe Energy’s HTL^tm Technology, certain technology fees would be payable to the Company by INPEX.

The CDF was in a commissioning phase as at December 31, 2005 and, as such, was not depreciated, nor impaired, for the year ended December 31, 2005. The commissioning phase ended in January 2006 and the CDF was placed into service and depreciated straight-line over its current useful life based on the existing term of an agreement with a third party oil and gas producer to use their property for the CDF site location. The end term of this agreement was extended in August 2006 from December 31, 2006 to December 31, 2008 and the useful life was prospectively extended to coincide with the new term of the agreement. There was no revenue associated with the CDF operations for the years ended December 31, 2007, 2006 and 2005.

For the year ended December 31, 2005, the Company wrote down $0.3 million (nil in 2007 and 2006) related to its HTL^tm Development Costs which did not result in definitive agreements.

68

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Gas-to-Liquids

For the years ended December 31, 2005, the Company wrote down $0.3 million (nil in 2007 and 2006), of capitalized costs associated with its GTL projects which did not result in definitive agreements.

5.   INTANGIBLE ASSETS — TECHNOLOGY

The Company’s intangible assets consist of the following:

HTL^tm Technology

In the merger with the Ensyn Group, Inc. (“Ensyn”), (see Note 18) the Company acquired an exclusive, irrevocable license to deploy, worldwide, the RTP^tm Process for petroleum applications as well as the exclusive right to deploy the RTP^tm Process in all applications other than biomass. The Company’s carrying value of the HTL^tm Technology as at December 31, 2007 and 2006 was $92.2 million.

Syntroleum GTL Master License

The Company owns a master license from Syntroleum permitting the Company to use Syntroleum’s proprietary GTL process in an unlimited number of projects around the world. The Company’s master license expires on the later of April 2015 or five years from the effective date of the last site license issued to the Company by Syntroleum. In respect of GTL projects in which both the Company and Syntroleum participate no additional license fees or royalties will be payable by the Company and Syntroleum will contribute, to any such project, the right to manufacture specialty and lubricant products. Both companies have the right to pursue GTL projects independently, but the Company would be required to pay the normal license fees and royalties in such projects. The Company’s carrying value of the Syntroleum GTL master license as at December 31, 2007 and 2006 was $10.0 million.

Recovery of capitalized costs related to potential HTL^tm and GTL projects is dependent upon finalizing definitive agreements for, and successful completion of, the various projects. These intangible assets were not amortized and their carrying values were not impaired for the years ended December 31, 2007, 2006 and 2005.

6.   LONG TERM DEBT

Notes payable consisted of the following as at:

	December 31,			December 31,
	2007			2006
Variable rate bank note, (7.83% — 8.48% at December 31, 2007), due 2008	$	4,500		$	1,500
Variable rate bank note (9.338% at December 31, 2007) due 2010		10,000			—
Non-interest bearing promissory note, due 2006 through 2009		2,876			5,336
		17,376			6,836
Less:
Unamortized discount		(139	)		(452	)
Unamortized deferred financing costs		(696	)		—
Current maturities		(6,729	)		(2,147	)
		(7,564	)		(2,599	)
	$	9,812		$	4,237

69

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Bank Notes

In October 2006 the Company obtained a bank loan for a $15 million Senior Secured Revolving/Term Credit Facility with an initial borrowing base of $8 million. The facility is for two years, the first 18 months in the form of a revolver and at the end of 18 months, the then outstanding amount will convert into a six-month amortizing loan. Depending on the drawn amount, interest, at the Company’s option, will be either at 1.75% to 2.25%, above the bank’s base rate or 2.75% to 3.25% over the London Inter-Bank Offered Rate (“LIBOR”). The loan terms include the requirement for the Company to enter into two-year commodity derivative contracts (See Note 13) covering up to 14,700 Bbls per month of the Company’s production from its South Midway Property in California and Spraberry Property in West Texas. As part of reestablishing the borrowing base amount, the Company was required to enter into an additional commodity derivative contract (see Note 13). The facility is secured by a mortgage on both of these properties. The Company made an initial $1.5 million draw of this facility in October 2006 and a subsequent draw of $3.0 million in September 2007.

In September 2007 the Company obtained a bank loan for a $30 million Revolving/Term Credit Facility with an initial borrowing base of $10 million. The facility is a revolving facility with a three-year term with interest payable only during the term. Interest will be three-month LIBOR plus 3.75%. The loan terms include the requirement for the Company to enter into three-year commodity derivative contracts (See Note 13) covering up to 18,000 Bbls per month of the Company’s production from its Dagang field in China. The facility is secured by a pledge of collections from the Company’s monthly oil sales in China and by a pledge of shares of the Company’s Chinese subsidiaries. The Company made an initial $7.0 million draw of this facility in September 2007 and a subsequent draw of $3.0 million in December of 2007.

Promissory Notes

In February 2006, the Company re-acquired the 40% working interest in the Dagang oil project not already owned by the Company. Part of the consideration was the issuance by the Company of a non-interest bearing, unsecured promissory note in the principal amount of approximately $7.4 million ($6.5 million after being discounted to net present value). The note is payable in 36 equal monthly installments commencing March 31, 2006 (See Note 18).

During 2005 the Company borrowed a total of $8.0 million under two separate convertible loan agreements with the same lender. In November 2005, the Company entered into an agreement with the lender of these two convertible loans to repay $4.0 million of the loans by issuing 2,453,988 common shares of the Company at $1.63 per share and to refinance the residual $4.0 million outstanding with a new $4.0 million promissory note due November 23, 2007 and bearing interest, payable monthly, at a rate of 8% per annum. The previously granted conversion rights attached to the two previously outstanding convertible loans were cancelled and the Company issued to the lender 2,000,000 purchase warrants, each of which entitled the holder to purchase one common share at a price of $2.00 per share until November 2007 (See Note 9). This note was repaid in April 2006.

Revolving Line of Credit

The Company has a revolving credit facility for up to $1.25 million from a related party, repayable with interest at U.S. prime plus 3%. The Company did not draw down any funds from this credit facility for the years ended December 31, 2007, 2006 and 2005.

70

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

The scheduled maturities of the Company’s long term debt, excluding unamortized discount and unamortized deferred financing costs, as at December 31, 2007 were as follows:

2008		6,960
2009		416
2010		10,000
	$	17,376

Interest expense included in Interest Expense and Financing Costs in the statement of operations was $0.9 million for the year ended December 31, 2007 ($0.9 million for 2006 and $0.7 million for 2005).

7.   ASSET RETIREMENT OBLIGATIONS

The Company provides for the expected costs required to abandon its producing U.S. oil and gas properties and the CDF. The undiscounted amount of expected future cash flows required to settle the Company’s asset retirement obligations for these assets as at December 31, 2007 was estimated at $4.6 million. These payments are expected to be made over the next 30 years; with over half of the payments during 2020 to 2040. To calculate the present value of these obligations, the Company used an inflation rate of 3% and the expected future cash flows have been discounted using a credit-adjusted risk-free rate of 6%. The changes in the Company’s liability for the two-year period ended December 31, 2007 were as follows:

	2007			2006
Carrying balance, beginning of year	$	1,953		$	1,780
Liabilities incurred		20			139
Liabilities settled		(792	)		—
Accretion expense		119			86
Revisions in estimated cash flows		918			(52	)
Carrying balance, end of year	$	2,218		$	1,953

8.   COMMITMENTS AND CONTINGENCIES

Zitong Block Exploration Commitment

At December 31, 2005, the Company held a 100% working interest in a thirty-year production-sharing contract with China National Petroleum Corporation (“CNPC”) in a contract area, known as the Zitong Block located in the northwestern portion of the Sichuan Basin. In January 2006, the Company farmed-out 10% of its working interest in the Zitong block to Mitsubishi Gas Chemical Company Inc. of Japan (“Mitsubishi”) for $4.0 million.

Under this production-sharing contract, the Company was obligated to conduct a minimum exploration program during the first three years ending December 1, 2005 (“Phase 1”). The Company was granted multiple extensions from PetroChina Company Ltd. (a subsidiary of CNPC who has been authorized by CNPC to act on their behalf in administering this contract) (“PetroChina”) extending Phase 1 to a final deadline of December 31, 2007. The Phase 1 work program included acquiring approximately 300 miles of new seismic lines, reprocessing approximately 1,250 miles of existing seismic lines and drilling a minimum of approximately 23,000 feet. The Company completed Phase 1 with a drilling shortfall of approximately 700 feet. The first Phase 1 exploration well drilled in 2005 was suspended, having found no commercial quantities of hydrocarbons. The second Phase 1 exploration well, which was completed and tested in the fourth quarter of 2007, was also suspended having found no commercial quantities of hydrocarbons. In December 2007, the Company and Mitsubishi (the “Zitong Partners”) made a decision to enter into the next three-year exploration phase (“Phase 2”). The shortfall in Phase I drilling will be carried over into Phase 2.

71

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

By electing to participate in Phase 2 the Zitong Partners must relinquish 30%, plus or minus 5%, of the Zitong block acreage and complete a minimum work program involving the acquisition of approximately 200 miles of new seismic lines and approximately 23,700 feet of drilling (including the Phase 1 shortfall), with total estimated minimum expenditures for this program of $25.0 million. The Phase 2 seismic line acquisition commitment was fulfilled in the Phase 1 exploration program. The Zitong Partners plan to acquire additional seismic data in Phase 2. The partners have applied to CNPC to offset this additional seismic against the drilling commitment, reducing the required Phase 2 drilling footage requirement. The Zitong Partners plan to acquire the new seismic lines in 2008, commence drilling in 2009 and complete drilling, completion and evaluation of this prospect in 2010. The Zitong Partners must complete the minimum work program by the end of the Phase 2 period, December 31, 2010, or will be obligated to pay to CNPC the cash equivalent of the deficiency in the work program for that exploration phase. Following the completion of Phase 2, the Zitong Partners must relinquish all of the remaining property except any areas identified for development and production.

Long Term Obligation

As part of the Ensyn merger, the Company assumed an obligation to pay $1.9 million in the event, and at such time that, the sale of units incorporating the HTL^tm Technology for petroleum applications reach a total of $100.0 million. This obligation was recorded in the Company’s consolidated balance sheet.

Income Taxes

The Company’s income tax filings are subject to audit by taxation authorities, which may result in the payment of income taxes and/or a decrease its net operating losses available for carry-forward in the various jurisdictions in which the Company operates. While the Company believes it tax filings do not include uncertain tax positions, the results of potential audits or the effect of changes in tax law cannot be ascertained at this time. In 2007, the Company received a preliminary indication from local Chinese tax authorities as to a potential change in the rule under which development costs are deducted from taxable income effective for the 2006 tax year. The Company discussed this matter with the Chinese tax authorities and subsequently submitted its 2006 tax return under a new filing position for development costs. The Company has received no formal notification of any rule changes, however it will continue to file tax returns under this new rule, and await any tax audit rulings.

Other Commitments

The Company has recently contracted with Zeton Inc. (“Zeton”) to construct a Feedstock Test Facility (“FTF”). The FTF is a small (15-20 Bbls/d), highly flexible state-of-the-art HTL^tm facility which will permit more cost-effective screening of feedstock crudes for current and potential partners in smaller volumes and at lower costs than required at the CDF. The contract is considered a lump-sum turn-key contract with scheduled payments tied to milestones. Should Zeton meet all of the remaining milestones the Company will be obligated to pay $2.2 million in addition to what has been paid to date.

From time to time the Company enters into consulting agreements whereby a success fee may be payable if and when either a definitive agreement is signed or certain other contractual milestones are met. Under the agreements, the consultant may receive cash, Company shares, stock options or some combination thereof. These fees are not considered to be material in relation to the overall capital costs and funding requirements of the individual projects.

The Company may provide indemnifications, in the course of normal operations, that are often standard contractual terms to counterparties in certain transactions such as purchase and sale agreements. The terms of these indemnifications will vary based upon the contract, the nature of which prevents the Company from making a reasonable estimate of the maximum potential amounts that may be required to be paid. The Company’s management is of the opinion that any resulting settlements relating to potential litigation matters or indemnifications would not materially affect the financial position of the Company.

72

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Lease Commitments

For the year ended December 31, 2007 the Company expended $1.1 million ($0.8 million in 2006 and $0.6 million in 2005) on operating leases relating to the rental of office space, which expire between June 2008 and March 2012. Such leases frequently provide for renewal options and require the Company to pay for utilities, taxes, insurance and maintenance expenses.

As at December 31, 2007, future net minimum payments for operating leases (excluding oil and gas and other mineral leases) were the following:

2008	$	1,136
2009		907
2010		788
2011		565
2012		140
	$	3,536

9.   SHARE CAPITAL AND WARRANTS

The authorized capital of the Company consists of an unlimited number of common shares without par value and an unlimited number of preferred shares without par value.

Private Placements

On April 7, 2006, the Company closed a special warrant financing by way of private placement for $25.3 million. A special warrant is a security sold for cash which may be exercised to acquire, for no additional consideration, a common share or, in certain circumstances, a common share and a common share purchase warrant. The financing consisted of 11,400,000 special warrants issued for cash at $2.23 per special warrant. Each special warrant entitled the holder to receive, at no additional cost, one common share and one common share purchase warrant. All of the special warrants were subsequently exercised for common shares and common share purchase warrants. Each common share purchase warrant originally entitled the holder to purchase one common share at a price of $2.63 per share until the fifth anniversary date of the closing. In September 2007, these warrants were listed on the Toronto Stock Exchange and the exercise price was changed to Cdn.$2.93.

During 2005, the Company closed three special warrant financings by way of private placement for net cash proceeds of $26.7 million in 2005. As part of these special warrant financings, the Company issued 13,842,342 common shares for cash, 2,453,988 common shares for the repayment of $4.0 million of convertible debt (See Note 6) and 16,296,330 purchase warrants. Each purchase warrant entitles the holder to purchase additional common shares of the Company at various exercise prices per share.

73

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Purchase Warrants

The following reflects the changes in the Company’s purchase warrants and common shares issuable upon the exercise of the purchase warrants for the three-year period ended December 31, 2007:

				Common
	Purchase			Shares
	Warrants			Issuable
	(Thousands)
Balance December 31, 2004		17,452			9,352
Purchase warrants issued for:
Private placements		16,296			16,296
Refinance of convertible debt		2,000			2,000
Purchase warrants exercised		(9,029	)		(4,515	)
Purchase warrants expired		(1,250	)		(1,250	)
Balance December 31, 2005		25,469			21,883
Purchase warrants expired		(7,173	)		(3,587	)
Private placements		11,400			11,400
Balance December 31, 2006		29,696			29,696
Purchase warrants exercised		(2,000	)		(2,000	)
Purchase warrants expired		(1,200	)		(1,200	)
Balance December 31, 2007		26,496			26,496

For the year ended December 31, 2007, 2,000,000 purchase warrants (nil in 2006 and 9,029,412 in 2005) were exercised for the purchase of 2,000,000 common shares (nil in 2006 and 4,514,706 in 2005) at an average exercise price of U.S. $2.00 per share (U.S. $1.36 for 2005) for a total of $4.0 million ($6.1 million for 2005).

The expiration of 1,200 purchase warrants in 2007 resulted in the carrying value of $0.6 million associated with these warrants being reclassified from Purchase Warrants to Contributed Surplus at the time of expiration.

As at December 31, 2007, the following purchase warrants were exercisable to purchase common shares of the Company until the expiry date at the price per share as indicated below:

		Purchase Warrants
	Price per					Common					Exercise	Value on
Year of	Special					Shares					Price per	Exercise
Issue	Warrant	Issued		Exercisable		Issuable		Value		Expiry Date	Share	($U.S. 000)
				(Thousands)				($U.S. 000)
2005	Cdn. $3.10		4,100		4,100		4,100	$	2,412	(1)	Cdn. $3.50	$	14,566
2005	U.S. $1.63		10,996		10,996		10,996		1,861	(2)	U.S. $2.50		27,490
2006	U.S.$2.23		11,400		11,400		11,400		18,805	May 2011	Cdn. $2.93(3)		33,904
			26,496		26,496		26,496	$	23,078			$	75,959

(1)	In March 2007, the Company agreed that the warrants, which were to have expired on April 15, 2007, would be extended until the earlier of: (i) April 15, 2008; and (ii) thirty days following the date the closing trading price of the common shares of the Company on the Toronto Stock Exchange exceeds the exercise price of the warrants for a period of five consecutive trading days.
(2)	In October 2007, the Company agreed that these warrants, which were to have expired in November 2007, would be extended until the earlier of: (i) six months from their original expiry date; and (ii) thirty days

74

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

	following the date the closing trading price of the common shares of the Company on the Toronto Stock Exchange exceeds the exercise price of the warrants for a period of five consecutive trading days.
(3)	Each common share purchase warrant originally entitled the holder to purchase one common share at a price of $2.63 per share until the fifth anniversary date of the closing. In September 2006, these warrants were listed on the Toronto Stock Exchange and the exercise price was changed to Cdn.$2.93.

The weighted average exercise price of the exercisable purchase warrants as at December 31, 2007 was U.S. $2.87 per share.

The Company calculated a value of $18.8 million and $5.2 million for the purchase warrants issued in 2006 and 2005. This value was calculated in accordance with the Black-Scholes (“B-S”) pricing model using a weighted average risk-free interest rate of 4.4% and 3.1%, a dividend yield of 0.0%, a weighted average volatility factor of 75.3% and 50.9% and an expected life of 5 and 2 years for 2006 and 2005, respectively.

10.   STOCK BASED COMPENSATION

The Company has an Employees’ and Directors’ Equity Incentive Plan under which it can grant stock options to directors and eligible employees to purchase common shares, issue common shares to directors and eligible employees for bonus awards and issue shares under a share purchase plan for eligible employees. The total shares under this plan cannot exceed 24 million.

Stock options are issued at not less than the fair market value on the date of the grant and are conditional on continuing employment. Expiration and vesting periods are set at the discretion of the Board of Directors. Stock options granted prior to March 1, 1999 vested over a two-year period and expire ten years from date of issue. Stock options granted after March 1, 1999 generally vest over three to four years and expire five to ten years from the date of issue. Beginning in 2007 the Company granted share option awards whose vesting is contingent upon meeting various departmental and company-wide goals.

The fair value of each option award is estimated on the date of grant using the B-S option-pricing formula with service condition options amortized on a straight-line attribution approach and performance condition options amortized over the service period both with the following weighted-average assumptions for the years presented:

	2007			2006			2005
Expected term (in years)		3.7			5.5			4.0
Volatility		73.5	%		82.5	%		77.0	%
Dividend Yield		0.0	%		0.0	%		0.0	%
Risk-free rate		4.1	%		4.4	%		3.5	%

The Company’s expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards. The fair values of stock-based payments were valued using the B-S valuation method with an expected volatility factor based on the Company’s historical stock prices. The B-S valuation model calls for a single expected dividend yield as an input. The Company has not paid and does not anticipate paying any dividends in the near future. The Company bases the risk-free interest rate used in the B-S valuation method on the implied yield currently available on Canadian zero-coupon issue bonds with an equivalent remaining term. When estimating forfeitures, the Company considers historical voluntary termination behavior as well as future expectations of workforce reductions. The estimated forfeiture rate as at December 31, 2007 is 23.1% (23.0% at December 31 2006 and 24.2% at December 31, 2005). The Company recognizes compensation costs only for those equity awards expected to vest.

The weighted average grant-date fair value of stock options granted during 2007 was Cdn.$1.09 (Cdn.$1.92 in 2006 and Cdn$1.72 in 2005).

75

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

For the years ended December 31, 2007 the Company’s stock based compensation related to option awards was $2.9 million ($2.9 million in 2006 and $2.1 million in 2005). The Company’s stock based compensation related to share bonus awards was $0.8 million for the year ended December 31, 2007. Stock based compensation was recorded as general and administrative and business and technology development expense in the statement of operations.

The following table summarizes changes in the Company’s outstanding stock options:

	December 31, 2007					December 31, 2006					December 31, 2005
				Weighted-					Weighted-					Weighted-
	Number			Average		Number			Average		Number			Average
	of Stock			Exercise		of Stock			Exercise		of Stock			Exercise
	Options			Price		Options			Price		Options			Price
	(Thousands)			(Cdn.$)		(Thousands)			(Cdn.$)		(Thousands)			(Cdn.$)
Outstanding at beginning of year		12,370		$	2.34		10,278		$	2.21		8,246		$	2.65
Granted		3,843		$	1.05		3,419		$	3.02		3,664		$	2.84
Exercised		(1,477	)	$	0.62		(297	)	$	2.05		(111	)	$	1.52
Cancelled/forfeited		(1,791	)	$	2.75		(1,030	)	$	3.40		(1,521	)	$	6.14
Outstanding at end of year		12,945		$	2.37		12,370		$	2.34		10,278		$	2.21
Options exercisable at end of year		6,932		$	2.24		7,720		$	1.92		6,547		$	1.74

The aggregate intrinsic value of total options outstanding as well as options exercisable as at December 31, 2007 was $2.6 million. The total intrinsic value of options exercised during the year ended December 31, 2007 was $2.1 million ($0.2 million in 2006), and the cash received from exercise of options during the year ended December 31, 2007 was $0.4 million ($0.5 million in 2006).

The following table summarizes information respecting stock options outstanding and exercisable as at December 31, 2007:

	Stock Options Outstanding						Stock Options Exercisable
			Weighted-Average						Weighted-Average
Range of	Number		Remaining		Weighted-Average		Number		Remaining		Weighted-Average
Exercise Prices	Outstanding		Contractual Life		Exercise Price		Exercisable		Contractual Life		Exercise Price
(Cdn.$)	(Thousands)		(Years)		(Cdn.$)		(Thousands)		(Years)		(Cdn.$)
$0.50		2,479		0.6	$	0.50		2,479		0.6	$	0.50
$1.52 to $2.25		2,998		4.4	$	1.97		708		4.4	$	1.97
$2.29 to $3.44		6,560		3.9	$	2.90		3,017		3.7	$	2.99
$3.53 to $3.62		328		2.9	$	3.55		148		2.8	$	3.56
$5.37 to $7.00		580		0.9	$	5.78		580		0.9	$	5.78
$0.50 to $7.00		12,945		3.2	$	2.37		6,932		2.4	$	2.24

76

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

A summary of the Company’s unvested options as at December 31, 2007, and changes during the year then ended, is presented below:

				Weighted-
	Number			Average
	of Stock			Grant Date
	Options			Fair Value
	(Thousands)			(Cdn.$)
Outstanding at December 31, 2006		4,650		$	1.46
Granted		3,843		$	1.09
Vested		(2,052	)	$	1.43
Cancelled/forfeited		(428	)	$	1.29
Outstanding at December 31, 2007		6,013		$	1.12
Unvested options outstanding at December 31, 2007 by type:
Based on fulfulling service conditions		4,278
Based on fulfulling performance conditions		1,735
		6,013

As at December 31, 2007, there was $4.4 million of total unrecognized compensation costs related to unvested share-based compensation arrangements granted by the Company. That cost is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of shares vested during the year ended December 31, 2007 was $2.9 million ($3.1 million in 2006).

11.   RETIREMENT PLAN

In 2001, the Company adopted a defined contribution retirement or thrift plan (“401(k) Plan”) to assist U.S. employees in providing for retirement or other future financial needs. Employees’ contributions (up to the maximum allowed by U.S. tax laws) were matched 100% by the Company in 2007. For the year ended December 31, 2007 the Company’s matching contributions to the 401(k) Plan was $0.5 million ($0.4 million in 2006 and $0.3 million in 2005).

12.   SEGMENT INFORMATION

The Company has three reportable business segments: Oil and Gas, HTL^tm and GTL.

Oil and Gas

The Company explores for, develops and produces crude oil and natural gas in the U.S. and in China. The Company seeks projects to which it can apply innovative technology and enhanced recovery techniques in developing them. In the U.S., the Company’s exploration, development and production activities are primarily conducted in California and Texas. In China, the Company’s development and production activities are conducted at the Dagang oil field located in Hebei Province and exploration activities in the Zitong block located in Sichuan Province.

HTL^tm

The Company seeks to increase its oil reserves through the deployment of our HTL^tm Technology. The technology is intended to be used to upgrade heavy oil at facilities located in the field to produce lighter, more valuable crude. In addition, an HTL^tm facility can yield surplus energy for producing steam and electricity used in heavy-oil production. The thermal energy from the RTP^tm Process provides heavy-oil producers with an alternative to natural gas that now is widely used to generate steam.

77

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

GTL

The Company holds a master license from Syntroleum to use its proprietary GTL technology to convert natural gas into synthetic fuels. The master license allows the Company to use Syntroleum’s proprietary process in GTL projects throughout the world to convert natural gas into ultra clean transportation fuels and other synthetic petroleum.

Corporate

The Company’s corporate office is in Canada with its operational office in the U.S. Any amounts for the corporate office in Canada are included in Corporate.

The following tables present the Company’s segment information for the three years ended December 31, 2007.

	Year Ended December 31, 2007
	Oil and Gas
	U.S.			China			HTLtm			GTL			Corporate			Total
Oil and gas revenue	$	12,270		$	31,365		$	—		$	—		$	—		$	43,635
Loss on derivative instruments		(5,594	)		(4,993	)		—			—			—			(10,587	)
Interest income		152			58			—			—			259			469
		6,828			26,430			—			—			259			33,517
Operating costs		4,319			13,000			—			—			—			17,319
General and administrative		2,018			2,042			—			—			8,016			12,076
Business and technology development		—			—			8,807			818			—			9,625
Depletion and depreciation		5,884			19,222			1,402			10			6			26,524
Interest expense and financing costs		427			281			29			—			313			1,050
Write-downs and provision for impairment		—			6,130			—			—			—			6,130
		12,648			40,675			10,238			828			8,335			72,724
Net Loss	$	(5,820	)	$	(14,245	)	$	(10,238	)	$	(828	)	$	(8,076	)	$	(39,207	)
Capital Investments	$	3,052		$	23,488		$	5,098		$	—		$	—		$	31,638
Identifiable Assets (As at December 31, 2007)	$	40,726		$	73,298		$	102,456		$	15,073		$	5,363		$	236,916

78

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

	Year Ended December 31, 2006
	Oil and Gas
	U.S.			China			HTLtm			GTL			Corporate			Total
Oil and gas revenue	$	12,065		$	35,683		$	—		$	—		$	—		$	47,748
Loss on derivative instruments		(424	)		—			—			—			—			(424	)
Interest income		139			63			—			—			574			776
		11,780			35,746			—			—			574			48,100
Operating costs		4,299			11,834			—			—			—			16,133
General and administrative		1,676			1,337			—			—			7,167			10,180
Business and technology development		—			—			6,177			1,433			—			7,610
Depletion and depreciation		5,378			23,345			3,812			10			5			32,550
Interest expense and financing costs		290			156			10			—			507			963
Write off of deferred acquisition costs		—			736			—			—			—			736
Write-downs and provision for impairment		—			5,420			—			—			—			5,420
		11,643			42,828			9,999			1,443			7,679			73,592
Net Income (Loss)	$	137		$	(7,082	)	$	(9,999	)	$	(1,443	)	$	(7,105	)	$	(25,492	)
Capital Investments	$	5,550		$	9,086		$	2,722		$	484		$	—		$	17,842
Identifiable Assets (As at December 31, 2006)	$	42,158		$	72,970		$	107,186		$	15,081		$	11,149		$	248,544

	Year Ended December 31, 2005
	Oil and Gas
	U.S.		China			HTLtm			GTL			Corporate			Total
Oil and gas revenue	$	14,069	$	15,731		$	—		$	—		$	—		$	29,800
Interest income		30		7			—			—			102			139
		14,099		15,738			—			—			102			29,939
Operating costs		5,001		2,602			—			—			—			7,603
General and administrative		1,178		2,076			—			—			6,275			9,529
Business and technology development		—		—			3,671			1,307			—			4,978
Depletion and depreciation		5,039		9,378			13			11			6			14,447
Interest expense and financing costs		311		—			4			—			943			1,258
Write-downs and provision for impairment		—		5,000			357			279			—			5,636
		11,529		19,056			4,045			1,597			7,224			43,451
Net Income (Loss)	$	2,570	$	(3,318	)	$	(4,045	)	$	(1,597	)	$	(7,122	)	$	(13,512	)
Capital Investments	$	6,514	$	30,730		$	4,982		$	1,056		$	—		$	43,282
Identifiable Assets (As at December 31, 2005)	$	48,070	$	65,020		$	107,869		$	14,609		$	5,309		$	240,877

79

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

13.   FINANCIAL INSTRUMENTS

Commodity Price Risks

Commodity price risk related to crude oil prices is one of our most significant market risk exposures. Crude oil prices and quality differentials are influenced by worldwide factors such as OPEC actions, political events and supply and demand fundamentals. To a lesser extent we are also exposed to natural gas price movements. Natural gas prices are generally influenced by oil prices, North American supply and demand and local market conditions. The Company may periodically use different types of derivative instruments to manage its exposure to price volatility, thus mitigating fluctuations in commodity-related cash flows and as well as a result of a requirement of the Company’s lenders. See details of these contracts under the section “Derivative Instruments” below.

Variations in Interest Rates

The Company has variable interest debt. Changes in interest rates would have to be significant to have a material increase or decrease in the amount the Company pays to service variable interest debt.

Variations in Foreign Exchange Rates

In the international petroleum industry, most production is bought and sold in U.S. dollars or with reference to the U.S. dollar.

Most of our business transactions, in the countries in which we operate, are conducted in U.S. dollars or currencies, such as Chinese renminbi, which historically has been pegged to the U.S. dollar. During the third quarter of 2005, the Chinese central government increased the value of its renminbi and abandoned its exchange rate previously pegged to the U.S. dollar in favor of a link to a basket of world currencies. We incurred immaterial foreign currency exchange gains or losses during the three years ended December 31, 2007.

Credit Risk

The Company is exposed to credit risk with respect to its accounts receivable. Most of the Company’s accounts receivable relate to oil and natural gas sales and are exposed to typical industry credit risks. The Company manages this credit risk by entering into sales contracts with only established entities and reviewing its exposure to individual entities on a regular basis.

Derivative Instruments

The Company entered into costless collar derivatives to minimize variability in its cash flow from the sale of up to 14,700 Bbls per month of the Company’s production from its South Midway Property in California and Spraberry Property in West Texas over a two-year period starting November 2006 and a six-month period starting November 2008. The derivatives had a ceiling price of $65.20, and $70.08, per barrel and a floor price of $63.20, and $65.00, per barrel, respectively, using WTI as the index traded on the NYMEX. The Company also entered into a costless collar derivative to minimize variability in its cash flow from the sale of up to 18,000 Bbls per month of the Company’s production from its Dagang field in China over a three-year period starting September 2007. This derivative had a ceiling price of $84.50 per barrel and a floor price of $55.00 per barrel using the WTI as the index traded on the NYMEX. All of the above contacts were put in place as part of the Company’s bank loan facilities.

During the year ended December 31, 2007, the Company had $1.6 million realized losses ($0.1 million in realized gains for 2006) on these derivative transactions, and $8.9 million ($0.5 million in 2006) of unrealized losses. Both realized and unrealized gains and losses on derivatives have been recognized in the results of operations.

During the year ended December 31, 2005 the Company had no derivative activities.

80

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

14.   INCOME TAXES

The Company and its subsidiaries are required to individually file tax returns in each of the jurisdictions in which they operate. The provision for income taxes differs from the amount computed by applying the statutory income tax rate to the net losses before income taxes. The combined Canadian federal and provincial statutory rates as at December 31, 2007, 2006 and 2005 were 32.12%, 32.12% and 33.6%, respectively. The sources and tax effects for the differences were as follows:

	Year Ended December 31,
	2007			2006			2005
Tax benefit computed at the combined Canadian federal and provincial statutory income tax rates	$	(12,593	)	$	(8,188	)	$	(4,543	)
Effect of change in effective income tax rates on future tax assets		6,109			870			—
Foreign net losses affected at lower income tax rates		905			113			1,457
Expiry of tax loss carry-forwards		2,440			1,583			1,734
Effect of change in foreign exchange rates		(2,879	)		(14	)		(659	)
Stock-based compensation not deductible for income tax purposes		1,001			1,031			756
Losses on derivatives not deductible for income tax purposes		1,248			—			—
Tax credit carry-forward		607			(428	)		(362	)
Change in prior year estimate of tax loss carry-forwards		(483	)		503			(368	)
Other permanent differences		778			161			—
Other		—			(66	)		16
		(2,867	)		(4,435	)		(1,969	)
Valuation allowance		2,867			4,435			1,969
	$	—		$	—		$	—

Significant components of the Company’s future net income tax assets and liabilities were as follows:

	As at December 31,
	2007						2006
	Future Income Tax						Future Income Tax
	Assets			Liabilities			Assets			Liabilities
Oil and gas properties and investments	$	—		$	(3,330	)	$	—		$	(22,694	)
Intangibles		—			(36,976	)		—			(36,778	)
Derivative contracts		1,989			—			—			—
Tax loss carry-forwards		61,152			—			78,834			—
Tax credit carry-forward		1,278			—			1,884			—
Valuation allowance		(24,113	)		—			(21,246	)		—
	$	40,306		$	(40,306	)	$	59,472		$	(59,472	)

Due to the uncertainty of utilizing these net income tax assets, the Company has made a valuation allowance of an equal amount against the net potential recoverable amounts.

The tax loss carry-forwards in Canada are Cdn.$39.3 million and in the U.S. $97.9 million. The tax loss carry-forwards in Canada expire between 2008 and 2027 and in the U.S. between 2016 and 2027. In China, the Company has available for carry-forward against future Chinese income $42.0 million of cost basis, of which $32.8 million has no expiration period and $9.2 million expires in 2008. The loss of approximately Cdn.$55.3 million from the

81

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Russian operations in 2000, being the aggregate investment, not including accounting write-downs, less proceeds received on settlement is a capital loss for Canadian income tax purposes, available for carry-forward against future Canadian capital gains indefinitely and is not included in the future income tax assets above.

15.   NET LOSS PER SHARE

Had the Company generated net earnings during the years presented, the earnings per share calculations for the years presented would have included the following weighted average items:

	Year Ended December 31,
	2007		2006		2005
	(Thousands of shares)
Stock options		2,433		3,292		3,211
Richfirst conversion rights		—		1,104		9,631
Purchase warrants		—		121		862
		2,433		4,517		13,704

Richfirst Holdings Limited (“Richfirst”) a wholly-owned subsidiary of China International Trust and Investment Corporation, had the right to exchange its working interest in the Dagang field for common shares in the Company at any time prior to eighteen months after the closing of the January 2004 Dagang field farm-out agreement (see Note 18). For purposes of this calculation, the number of the Company’s common shares issuable to Richfirst upon conversion were based on Richfirst’s initial investment in the Dagang field of $20.0 million converted at the average of the monthly high and low trading prices of the Company’s common shares on the Toronto Stock Exchange at the average monthly U.S. dollar to Canadian dollar exchange rates during the eighteen-month period.

Additionally, the earnings per share calculations would have included the following weighted average items had the exercise prices exceeded the average market prices of the common shares:

	Year Ended December 31,
	2007		2006		2005
	(Thousands of shares)
Stock options		8,616		7,022		5,103
Purchase warrants		28,898		25,184		9,689
Convertible debt		—		—		1,161
		37,514		32,206		15,953

82

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

16.   SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information for each of the years ended December 31 was as follows:

	Year Ended December 31,
	2007			2006			2005
Cash paid during the period for:
Income taxes	$	6		$	5		$	20
Interest	$	479		$	430		$	1,138
Investing and Financing activities, non-cash:
Acquisition of oil and gas assets (see Note 18)
Shares issued	$	—		$	20,000		$	—
Debt issued		—			6,547			—
Receivable applied to acquisition		—			1,746			—
	$	—		$	28,293		$	—
Shares issued for Merger (see Note 18)	$	—		$	—		$	75,000
Refinance of convertible debt (see Note 6)	$	—		$	—		$	4,000
Changes in non-cash working capital items
Operating Activities:
Accounts receivable	$	(1,734	)	$	(1,375	)	$	(1,635	)
Prepaid and other current assets		85			(434	)		16
Accounts payable and accrued liabilities		1,166			(1,067	)		1,840
		(483	)		(2,876	)		221
Investing Activities
Accounts receivable		(207	)		2,188			(2,982	)
Prepaid and other current assets		86			(1	)		457
Accounts payable and accrued liabilities		(1,056	)		(14,895	)		14,547
		(1,177	)		(12,708	)		12,022
	$	(1,660	)	$	(15,584	)	$	12,243

17.   RELATED PARTY TRANSACTIONS

The Company has entered into agreements with a number of entities, which are related through common directors or shareholders, to provide administrative or technical personnel, office space or facilities. The Company is billed on a cost recovery basis. For the year ended December 31, 2007 the costs incurred in the normal course of business with respect to the above arrangements amounted to $3.3 million ($3.0 million for 2006 and $3.0 million for 2005), and are all recorded in general and administrative expense in the statement of operations. As at December 31, 2007 amounts included in accounts payable and accrued liabilities on the balance sheet under these arrangements were $0.2 million ($0.3 million at December 31, 2006).

18.   MERGER AND ACQUISITIONS

In February 2006, the Company signed a non-binding memorandum of understanding regarding a proposed merger of Sunwing with China Mineral Acquisition Corporation (“CMA”), a U.S. public corporation. In May 2006

83

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

the parties entered a definitive agreement for the transaction which was later terminated. As a result, the Company wrote off deferred acquisition costs previously capitalized in the amount of $0.7 million during the year ended December 31, 2006.

The Company currently holds a production-sharing contract with CNPC to develop existing oil properties in the Dagang region. In January 2004, the Company signed farm-out and joint operating agreements with Richfirst, to acquire a 40% working interest in the Dagang field for payment of $20.0 million. In February 2006, the Company re-acquired Richfirst’s 40% working interest for total consideration of $28.3 million consisting of $20.0 million paid by way of the issuance to Richfirst of 8,591,434 common shares of the Company, a non-interest bearing, unsecured promissory note in the principal amount approximately $7.4 million ($6.5 million after being discounted to net present value) and the forgiveness of $1.8 million of unpaid joint venture receivables. The promissory note is repayable in 36 equal monthly installments commencing March 31, 2006. The Company has the right, during the three-year loan repayment period, to require Richfirst to convert the remaining unpaid balance of the promissory note into common shares of Sunwing Energy Ltd (“Sunwing”), the Company’s wholly-owned subsidiary, or another company owning all of the outstanding shares of Sunwing, subject to Sunwing or the other company having obtained a listing of its common shares on a prescribed stock exchange. The number of shares issued would be determined by dividing the then outstanding principal balance under the promissory note by the issue price of shares of the newly listed company issued in the transaction that results in the listing, less a 10% discount.

On April 15, 2005, the Company acquired all the issued and outstanding common shares of Ensyn Group, Inc. (“Ensyn”) pursuant to a merger between Ensyn and a wholly owned subsidiary of the Company (“Merger”) in accordance with an Agreement and Plan of Merger dated December 11, 2004 (“Merger Agreement”). At the completion of the Merger the Company paid $10.0 million in cash and issued approximately 30 million common shares of the Company (“Merger Shares”) in exchange for all of the issued and outstanding Ensyn common shares. Ten million of the Merger Shares issued were deposited in an escrow fund and are being held to secure certain obligations on the part of the former Ensyn stockholders to indemnify the Company for damages in the event of any breaches of representations, warranties and covenants in the Merger Agreement and certain liabilities, including those arising from any failure by Ensyn to meet certain development milestones set out in the Merger Agreement. Under the escrow agreement, one-half of the Merger Shares in this escrow fund were released to the Ensyn shareholders as of April 15, 2007. The balance of the Merger Shares will be released, subject to any prior claims by the Company for indemnification, as of April 15, 2008.

As part of the Merger, the Company acquired a 50% interest in a joint venture (“CDF Joint Venture”), which owned the CDF located in California’s San Joaquin Basin, as well as certain rights to manufacture HTLTM facilities. In November 2005, the Company acquired the remaining 50% in the joint venture for $6.75 million, which effectively dissolved the joint venture. Accordingly, 100% of the net assets of the CDF Joint Venture were included in the Company’s consolidated balance sheet as at December 31, 2005.

84

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

19.   ADDITIONAL DISCLOSURES REQUIRED UNDER U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The Company’s consolidated financial statements have been prepared in accordance with GAAP as applied in Canada. In the case of the Company, Canadian GAAP conforms in all material respects with U.S. GAAP except for certain matters, the details of which are as follows:

Consolidated Balance Sheets

The application of U.S. GAAP has the following effects on consolidated balance sheet items as reported under Canadian GAAP:

Shareholders’ Equity and Oil and Gas Properties and Development Costs

	As at December 31, 2007
	Assets			Liabilities		Shareholders’ Equity
	Oil and Gas
	Properties and
	Development			Derivative		Share Capital			Contributed			Accumulated
	Costs			Instruments		and Warrants			Surplus			Deficit			Total
Canadian GAAP	$	111,853		$	9,432	$	347,340		$	9,937		$	(159,990	)	$	197,287
Adjustments for:
Reduction in stated capital(i)		—			—		74,455			—			(74,455	)		—
Accounting for stock based compensation(ii)		—			—		(396	)		(3,352	)		3,748			—
Fair value adjustment of derivative instruments (iii)		—			5,786		(7,988	)		(564	)		2,766			(5,786	)
Ascribed value of shares issued for U.S. royalty interests(iv)		1,358			—		1,358			—			—			1,358
Provision for impairment(v)		(25,990	)		—		—			—			(25,990	)		(25,990	)
Depletion adjustments due to differences in provision for impairment(vi)		9,334			—		—			—			9,334			9,334
HTLtm and GTL development costs expensed (vii)		(5,658	)		—		—			—			(5,658	)		(5,658	)
U.S. GAAP	$	90,897		$	15,218	$	414,769		$	6,021		$	(250,245	)	$	170,545

85

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

	As at December 31, 2006
	Assets			Liabilities		Shareholders’ Equity
	Oil and Gas
	Properties and					Share
	Development			Derivative		Capital and			Contributed			Accumulated
	Costs			Instruments		Warrants			Surplus			Deficit			Total
Canadian GAAP	$	121,918		$	493	$	342,680		$	6,489		$	(120,783	)	$	228,386
Adjustments for:
Reduction in stated capital(i)		—			—		74,455			—			(74,455	)		—
Accounting for stock based compensation(ii)		—			—		(387	)		(3,361	)		3,748			—
Fair value adjustment of derivative instruments (iii)		—			6,378		(8,552	)		—			2,174			(6,378	)
Ascribed value of shares issued for U.S. royalty interests(iv)		1,358			—		1,358			—			—			1,358
Provision for impairment(v)		(26,270	)		—		—			—			(26,270	)		(26,270	)
Depletion adjustments due to differences in provision for impairment(vi)		4,402			—		—			—			4,402			4,402
HTLtm and GTL development costs
expensed (vii)		(11,669	)		—		—			—			(11,669	)		(11,669	)
U.S. GAAP	$	89,739		$	6,871	$	409,554		$	3,128		$	(222,853	)	$	189,829

Shareholders’ Equity

(i) In June 1999, the shareholders approved a reduction of stated capital in respect of the common shares by an amount of $74.5 million being equal to the accumulated deficit as at December 31, 1998. Under U.S. GAAP, a reduction of the accumulated deficit such as this is not recognized except in the case of a quasi reorganization. The effect of this is that under U.S. GAAP, share capital and accumulated deficit are increased by $74.5 million as at December 31, 2007 and 2006.

(ii) For Canadian GAAP, the Company accounts for all stock options granted to employees and directors since January 1, 2002 using the fair value based method of accounting. Under this method, compensation costs are recognized in the financial statements over the stock options’ vesting period using an option-pricing model for determining the fair value of the stock options at the grant date. For U.S. GAAP, prior to January 1, 2006 the Company applied APB Opinion No. 25, as interpreted by FASB Interpretation No. 44, in accounting for its stock option plan and did not recognize compensation costs in its financial statements for stock options issued to employees and directors. This resulted in a reduction of $3.7 million in the accumulated deficit as at December 31, 2007 and 2006, equal to accumulated stock based compensation for stock options granted to employees and directors since January 1, 2002 expensed through December 31, 2005 under Canadian GAAP.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued a revision to Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” which supersedes APB No. 25, “Accounting for Stock Issued to Employees”. This statement (“SFAS No. 123(R)”) requires measurement of the cost of employee services received in exchange for an award of equity instruments based on the fair value of the award on the date of the grant and recognition of the cost in the results of operations over the period during which an employee is required to provide service in exchange for the award. No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The Company elected to implement this statement on a modified prospective basis starting in the first quarter of 2006. Under the modified prospective basis the Company began recognizing stock based compensation in its U.S. GAAP results of operations for the unvested portion of awards outstanding as at January 1, 2006 and for all awards granted after January 1, 2006. There was reduction of $1.8 million to net loss for U.S. GAAP for the year ended 2005 related to stock based compensation

86

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

expense. There were no differences in the Company’s stock based compensation expense in its financial statements for Canadian GAAP and U.S. GAAP for the years ended December 31, 2007 and 2006.

(iii) The Company accounts for purchase warrants as equity under Canadian GAAP. The accounting treatment of warrants under U.S. GAAP reflects the application of Statement of Financial Accounting Standards No. 133 “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”). Under SFAS No. 133, share purchase warrants with an exercise price denominated in a currency other than a company’s functional currency are accounted for as derivative liabilities. Changes in the fair value of the warrants are required to be recognized in the statement of operations each reporting period for U.S. GAAP purposes. At the time that the Company’s share purchase warrants are exercised, the value of the warrants will be reclassified to shareholders’ equity for U.S. GAAP purposes. Under Canadian GAAP, the fair value of the warrants on the issue date is recorded as a reduction to the proceeds from the issuance of common shares, with the offset to the warrant component of equity. The warrants are not revalued to fair value under Canadian GAAP. This GAAP difference resulted in an increase in derivative instruments of $5.8 million and $6.4 million, a decrease in share capital and warrants of $8.0 million and $8.6 million as at December 31, 2007 and December 31, 2006, and a decrease in contributed surplus of $0.6 million at December 31, 2007.

Oil and Gas Properties and Development Costs

(iv) For U.S. GAAP purposes, the aggregate value attributed to the acquisition of U.S. royalty rights during 1999 and 2000 was $1.4 million higher, due to the difference between Canadian and U.S. GAAP in the value ascribed to the shares issued, primarily resulting from differences in the recognition of effective dates of the transactions.

(v) There are certain differences between the full cost method of accounting for oil and gas properties as applied in Canada and as applied in the U.S. The principal difference is in the method of performing ceiling test evaluations under the full cost method of accounting rules. In the ceiling test evaluation for U.S. GAAP purposes, the Company limits, on a country-by-country basis, the capitalized costs of oil and gas properties, net of accumulated DD&A and deferred income taxes, to (a) the estimated future net cash flows from proved oil and gas reserves using period-end, non-escalated prices and costs, discounted to present value at 10% per annum, plus (b) the cost of properties not being amortized (e.g. major development projects) and (c) the lower of cost or fair value of unproved properties included in the costs being amortized less (c) income tax effects related to difference between the book and tax basis of the properties referred to in (b) and (c) above. If capitalized costs exceed this limit, the excess is charged as a provision for impairment. Unproved properties and major development projects are assessed on a quarterly basis for possible impairments or reductions in value. If a reduction in value has occurred, the impairment is transferred to the carrying value of proved oil and gas properties. The Company performed the ceiling test in accordance with U.S. GAAP and determined that for 2007 an impairment provision of $5.9 million was required on its China Oil and Gas Properties compared to a $6.1 million impairment provision under Canadian GAAP. For the Company’s U.S. properties, no impairment was required for 2007 on its U.S. Oil and Gas Properties

87

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

for either U.S. or Canadian GAAP. The differences in the ceiling test impairments by period for the U.S. and China Oil and Gas Properties between U.S. and Canadian GAAP as at December 31, 2007 are as follows:

	Ceiling Test Impairments				(Increase)
	U.S. GAAP		Canadian GAAP		Decrease
U.S. Properties
Prior to 2004	$	34,000	$	34,000	$	—
2004		15,000		16,350		1,350
2005		2,800		—		(2,800	)
2006		7,600		—		(7,600	)
2007		—		—		—
		59,400		50,350		(9,050	)
China Properties
Prior to 2004		10,000		—		(10,000	)
2004		—		—		—
2005		1,700		5,000		3,300
2006		15,940		5,420		(10,520	)
2007		5,850		6,130		280
		33,490		16,550		(16,940	)
	$	92,890	$	66,900	$	(25,990	)

(vi) The differences in the amount of impairment provisions between U.S. and Canadian GAAP resulted in a reduction in accumulated depletion of $9.3 million as at December 31, 2007 ($4.4 million at December 31, 2006).

(vii) As more fully described under “Development Costs” in Note 2, for Canadian GAAP the Company capitalizes certain costs incurred for HTL^tm and GTL projects subsequent to executing an MOU to determine the technical and commercial feasibility of a project, including studies for the marketability for the project’s products. If no definitive agreement is reached, then the project’s capitalized costs, which are deemed to have no future value, are written down and charged to the results of operations with a corresponding reduction in HTL^tm and GTL development costs. For U.S. GAAP, feasibility, marketing and related costs incurred prior to executing an HTL^tm or GTL definitive agreement are considered to be research and development and are expensed as incurred. As at December 31, 2007 and 2006, the Company capitalized $5.7 million and $11.7 million, respectively, for Canadian GAAP, which was expensed for U.S. GAAP purposes.

Deferred Financing Costs

As more fully described under “2007 Accounting Changes” in Note 2, for Canadian GAAP the Company accounts for deferred financing costs, or transaction costs, as a reduction from the related liability and accounted for using the effective interest method. For U.S. GAAP purposes, these costs are classified as other assets resulting in an increase of $0.7 million in long-term debt and other assets for U.S. GAAP purposes when compared to Canadian GAAP.

88

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Consolidated Statements of Operations

The application of U.S. GAAP had the following effects on net loss and net loss per share as reported under Canadian GAAP:

	Year Ended December 31,
	2007						2006						2005
	Net			Net Loss			Net			Net Loss			Net			Net Loss
	Loss			per Share			Loss			per Share			Loss			per Share
Canadian GAAP	$	(39,207	)	$	(0.16	)	$	(25,492	)	$	(0.11	)	$	(13,512	)	$	(0.07	)
Stock based compensation expense(ii)		—			—			—			—			1,788			0.01
Fair value adjustment of derivative instruments (iii)		592			—			(692	)					2,866			0.01
Provision for impairment (v and viii)		280			—			(18,120	)		(0.08	)		500			—
Depletion adjustments due to differences in
provision for impairment (viii)		4,932			0.02			2,840			0.01			1,080			0.01
HTLtm and GTL development costs expensed,
net of write downs(ix)		(268	)		—			(958	)		—			(4,828	)		(0.02	)
Recovery of HTLtm development costs(ix)		6,279			0.03			—			—			—			—
U.S. GAAP	$	(27,392	)	$	(0.11	)	$	(42,422	)	$	(0.18	)	$	(12,106	)	$	(0.06	)
Weighted Average Number of Shares under U.S. GAAP (in thousands)					242,362						235,640						195,803

(viii) As discussed under “Oil and Gas Properties and Development Costs” in this note, there is a difference in performing the ceiling test evaluation under the full cost method of accounting rules between U.S. and Canadian GAAP. Application of the ceiling test evaluation under U.S. GAAP has resulted in an accumulated net increase in impairment provisions on the Company’s U.S. and China oil and gas properties of $26.0 million, and $26.3 million, as at December 31, 2007 and 2006. This net increase in U.S. GAAP impairment provisions has resulted in lower depletion rates for U.S. GAAP purposes and a reduction of $4.9 million ($2.8 million in 2006 and $1.1 million in 2005) in the net losses for the year ended December 31, 2007.

(ix) As more fully described under “Oil and Gas Properties and Development Costs” in this note, for Canadian GAAP, feasibility, marketing and related costs incurred prior to executing a HTLTM or GTL definitive agreement are capitalized and are subsequently written down upon determination that a project’s future value has been impaired. For U.S. GAAP, such costs are considered to be research and development and are expensed as incurred. For the year ended December 31, 2007 Company expensed $0.3 million ($1.0 million in 2006 and $4.8 million in 2005) in excess of the Canadian GAAP write-downs during those corresponding years.

As more fully described under Note 4, the Company and INPEX have signed an agreement to jointly pursue the opportunity to develop a heavy oil field in Iraq that Ivanhoe believes is a suitable candidate for its patented HTLTM heavy oil upgrading technology. In the second quarter of 2007, the Company received a $9.0 million payment related to this agreement which was credited to the carrying value of its Iraq and CDF HTLTM Investments related to this project for Canadian GAAP purposes. The prior costs for Iraq projects had previously been expensed for U.S. GAAP purposes therefore that portion of the proceeds, $6.3 million, was credited to the statement of operations for U.S. GAAP purposes. For the year ended December 31, 2007 the Company recorded $6.3 million (nil in 2006 and 2005) as a reduction to net loss for U.S. GAAP when compared to Canadian GAAP due to the recovery of prior costs expensed for U.S. GAAP and capitalized for Canadian GAAP.

89

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Stock Based Compensation

Had stock based compensation expense been determined based on fair value at the stock option grant date, consistent with the method of Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation”, prior to January 1, 2006 the Company’s net loss and net loss per share for the year ended December 31, 2005 would have been increased to the pro forma amounts indicated below:

Net loss under U.S. GAAP	$	(12,106	)
Stock-based compensation expense determined under the fair value based method for employee and director awards		(1,911	)
Pro forma net loss under U.S. GAAP	$	(14,017	)
Basic loss per common share under U.S. GAAP:
As reported	$	(0.06	)
Pro forma	$	(0.07	)
Weighted Average Number of Shares under U.S. GAAP (in thousands)		195,803
Stock options granted during the period (thousands)		2,889
Weighted average exercise price	$	2.41
Weighted average fair value of options granted during the year	$	1.52

Stock based compensation for U.S. GAAP was calculated in accordance with the B-S option-pricing model using the same assumptions as used for Canadian GAAP.

Pro Forma Effect of Merger and Acquisition

The Company’s U.S. GAAP consolidated results of operations for the year ended December 31, 2005 included a net loss of $2.0 million, or $0.01 per share, associated with the operations acquired from Ensyn after the completion of the Merger on April 15, 2005. Had the Merger been completed on January 1, 2005, the U.S. GAAP pro forma revenue, net loss and net loss per share of the merged entity for the year ended December 31, 2005 would have been as follows:

	Year Ended December 31, 2005
						Net Loss
	Revenue		Net Loss			per Share
			(Unaudited)
As reported	$	29,939	$	(12,106	)	$	(0.06	)
Pro forma adjustments		736		(730	)		—
	$	30,675	$	(12,836	)	$	(0.06	)
Pro Forma Weighted Average Number of Shares (in thousands)							204,186

90

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Had the acquisition of Richfirst’s 40% working interest in the Dagang field been completed January 1, 2006 or 2005, the U.S. GAAP pro forma revenue, net loss and net loss per share of the consolidated operations for the years ended December 31, 2006 and 2005 would have been as follows:

	Year Ended December 31,
	2006								2005
			Net Income			Net Income					Net Income			Net Income
	Revenue		(Loss)			(Loss) per Share			Revenue		(Loss)			(Loss) per Share
	(Unaudited)
As reported	$	48,100	$	(42,422	)	$	(0.18	)	$	29,939	$	(12,106	)	$	(0.06	)
Pro forma adjustments		1,051		809			—			9,336		3,419			0.02
	$	49,151	$	(41,613	)	$	(0.18	)	$	39,275	$	(8,687	)	$	(0.04	)
Pro Forma Weighted Average Number of Shares (in thousands)							236,840								204,394

Income Taxes

On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), an interpretation of FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation requires that the Company recognize the impact of a tax position in the financial statements if that position is more likely than not of being sustained on audit, based on the technical merits of the position. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. In accordance with the provisions of FIN 48, any cumulative effect resulting from the change in accounting principle is to be recorded as an adjustment to the opening balance of deficit.

The implementation of FIN 48 did not result in any adjustment to the Company’s beginning tax positions. The Company continues to fully recognize its tax benefits, which are offset by a valuation allowance to the extent that it is more likely than not that the deferred tax assets will not be realized. As at December 31, 2007 and December 31, 2006, the Company did not have any unrecognized tax benefits.

The Company files federal and provincial income tax returns in Canada. The Company’s U.S. and China subsidiaries file federal, state and local income tax returns in the U.S. and China, as applicable. The Company may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of four years from the date of mailing of the original Notice of Assessment in respect of any particular taxation year. The U.S. federal statute of limitations for assessment of income tax is generally closed for the Company’s tax years ending on or prior to 2002. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S. state statutes of limitations for income tax assessment vary from state to state. There is no statute of limitations for audit of tax years in China. Tax authorities have not audited any of the Company’s, or its subsidiaries’, income tax returns or issued Notices of Assessment for any tax years.

The Company recognizes any interest accrued related to unrecognized tax benefits in interest expense and penalties in interest expense and financing costs. During the years ended December 31, 2007, 2006 and 2005, there were no charges for interest or penalties

Consolidated Statements of Cash Flow

As a result of the expensing of HTL^tm and GTL development costs as required under U.S. GAAP and the recovery of such costs, the statement of cash flow as reported would result in cash from operating activities of $11.5 million, $13.3 million and $5.0 million for the years ended December 31, 2007, 2006 and 2005. Additionally,

91

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

capital investments reported under investing activities would be $31.4 million, $16.8 million and $38.5 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Additional U.S. GAAP Disclosures

Oil and Gas Properties and Investments

The categories of costs included in “Oil and Gas Properties and Development Costs”, including the U.S. GAAP adjustments discussed in this note were as follows:

	As at December 31, 2007									As at December 31, 2006
	U.S.			China			Total			U.S.			China			Total
Property acquisition costs	$	22,196		$	31,137		$	53,333		$	21,494		$	31,137		$	52,631
Royalty rights acquired		10,582			—			10,582			10,582			—			10,582
Exploration costs		42,721			29,621			72,342			42,519			18,010			60,529
Development costs		37,272			76,895			114,167			35,412			65,014			100,426
HTLtm facilities		14,412			—			14,412			12,104			—			12,104
Support equipment and general property		637			411			1,048			685			329			1,014
		127,820			138,064			265,884			122,796			114,490			237,286
Accumulated depletion and depreciation		(30,453	)		(51,643	)		(82,096	)		(24,717	)		(35,790	)		(60,507	)
Provision for impairment		(59,400	)		(33,490	)		(92,890	)		(59,400	)		(27,640	)		(87,040	)
	$	37,967		$	52,931		$	90,898		$	38,679		$	51,060		$	89,739

As at December 31, 2007, the costs of unproved properties included in oil and gas properties, which have been excluded from the depletion and ceiling test calculations, were as follows:

			Incurred in
									Prior to
	Total		2007		2006		2005		2005
Property Acquisition	$	869	$	100	$	69	$	40	$	660
Royalty rights		659		—		—		—		659
Exploration		6,174		257		373		2,766		2,778
	$	7,702	$	357	$	442	$	2,806	$	4,097

The following is a summary of unproved oil and gas properties by prospect for the U.S. and China cost centers as at December 31, 2007:

			Incurred in
									Prior to
	Total		2007		2006		2005		2005
U.S.
Knights Landing	$	2,158	$	—	$	310	$	1,848	$	—
San Joaquin Basin prospects — other		2,247		100		75		48		2,024
		4,405		100		385		1,896		2,024
China
Zitong Block		3,297		257		57		910		2,073
	$	7,702	$	357	$	442	$	2,806	$	4,097

92

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

The Company plans to complete a multiple well drilling program by the middle of 2008 in the Knight’s Landing property and conclude its final evaluation of this property in 2008. The majority of the San Joaquin prospects are fee property with no rental payments to maintain the Company’s leases. The timing of drilling on these prospects is dependent on other working interest owners. With regards to the Zitong Block prospect, the Company plans to acquire seismic lines in 2008, commence drilling in 2009 and complete drilling, completion and conclude final evaluation in 2010.

Accounts Payable and Accrued Liabilities

The following was the breakdown of accounts payable and accrued liabilities:

	As at December 31,
	2007		2006
Trade payables	$	6,896	$	6,451
Accrued general and administrative expenses		722		926
Accrued operating expenses		561		532
Accrued capital expenditures		620		1,322
Accrued salaries and related expenses		82		76
Accrued interest		65		11
Other accruals		592		110
	$	9,538	$	9,428

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

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”) and Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”). Effective for fiscal years beginning after December 15, 2008, the standards will improve, simplify, and converge internationally the accounting for business combinations and the reporting of noncontrolling interests in consolidated financial statements. SFAS 141(R) requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way — as equity in the consolidated financial statements. Management is currently evaluating the impact of the adoption of these new standards on its financial statements.

In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities (including an amendment of FASB Statement No. 115)” (“SFAS No. 159”). The statement would create a fair value option under which an entity may irrevocably elect fair value as the initial and subsequent measurement attribute for certain financial assets and financial liabilities on a contract-by-contract basis, with changes in fair value recognized in earnings as those changes occur. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Management has concluded that the requirements of this recent statement will not have a material impact on its financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS No. 157”). This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This statement does not require any new fair value measurements; however, for some entities the application of this statement will change current practice. SFAS No. 157 is effective for financial statements issued for fiscal years

93

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

beginning after November 15, 2007, and interim periods within those fiscal years, although early adoption is permitted. Management has concluded that the requirements of this recent statement will not have a material impact on its financial statements.

QUARTERLY FINANCIAL DATA IN ACCORDANCE WITH CANADIAN AND U.S. GAAP (UNAUDITED)

	Quarter Ended
	2007												2006
	4th Qtr			3rd Qtr			2nd Qtr			1st Qtr			4th Qtr			3rd Qtr			2nd Qtr			1st Qtr
Total revenue	$	5,848		$	8,823		$	9,589		$	9,257		$	11,137		$	14,015		$	13,084		$	9,864
Net loss:
Canadian GAAP	$	(18,849	)	$	(7,232	)	$	(6,579	)	$	(6,547	)	$	(11,323	)	$	(4,388	)	$	(4,405	)	$	(5,376	)
U.S. GAAP	$	(16,094	)	$	(2,551	)	$	(1,211	)	$	(7,536	)	$	(18,255	)	$	(5,422	)	$	(2,329	)	$	(16,416	)
Net loss per share:
Canadian GAAP	$	(0.07	)	$	(0.03	)	$	(0.03	)	$	(0.03	)	$	(0.05	)	$	(0.02	)	$	(0.02	)	$	(0.02	)
U.S. GAAP	$	(0.07	)	$	(0.01	)	$	—		$	(0.03	)	$	(0.08	)	$	(0.02	)	$	(0.01	)	$	(0.07	)

The differences in the net loss and net loss per share for the first quarter of 2006 were due mainly to the impairment charged for the China Oil and Gas Properties for U.S. GAAP purposes of $7.2 million when compared to $0.8 million calculated for Canadian GAAP and a $4.3 million additional fair value adjustment of derivative instruments for U.S. GAAP. The differences in the net loss and net loss per share for the third quarter of 2006 were due mainly to the impairment charged for the U.S. Oil and Gas Properties for U.S. GAAP purposes of $3.1 million when compared to nil calculated for Canadian GAAP, offset by a $1.7 million additional fair value adjustment of derivative instruments for U.S. GAAP. The differences in the net loss and net loss per share for the fourth quarter of 2006 were due mainly to the impairment charged for U.S. GAAP purposes of $8.1 million ($4.5 million relates to the U.S. Oil and Gas Properties and $3.6 million for the China Oil and Gas Properties) when compared to nil calculated for Canadian GAAP. The differences in the net loss and net loss per share for the second quarter of 2007 were due mainly to the treatment of the payment by INPEX for past costs paid by the Company related to its Iraq project and HTLTM Technology development costs. Approximately $6.3 million of this payment was applied to capital balances for Canadian GAAP purposes and as reduction to net loss for U.S. GAAP purposes. The differences in the net loss and net loss per share for the third quarter of 2007 were mainly due to an additional $3.6 million fair value adjustment of derivative instruments for U.S. GAAP.

SUPPLEMENTARY DISCLOSURES ABOUT OIL AND GAS PRODUCTION ACTIVITIES (UNAUDITED)

The following information about the Company’s oil and gas producing activities is presented in accordance with U.S. Statement of Financial Accounting Standards No. 69, “Disclosures About Oil and Gas Producing Activities”.

Oil and Gas Reserves

Proved oil and gas reserves are the estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic conditions.

Proved developed oil and gas reserves are reserves, which can be expected to be recovered from existing wells with existing equipment and operating methods.

Estimates of oil and gas reserves are subject to uncertainty and will change as additional information regarding the producing fields and technology becomes available and as future economic conditions change.

94

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Reserves presented in this section represent the Company’s share of reserves, excluding royalty interests of others. The reserves were based on the estimates by the independent petroleum engineering firms of GLJ Petroleum Consultants Ltd. and Netherland, Sewell & Associates, Inc. for the China and U.S. reserves, respectively.

The changes in the Company’s net proved oil and gas reserves for the three-year period ended December 31, 2007 were as follows:

	Oil (MBbl)									Gas (MMcf)
	U.S.			China			Total			U.S.
Net proved reserves, December 31, 2004		1,430			7,908			9,338			2,683
Revisions of previous estimates		60			(6,293	)(1)		(6,233	)		(601	)(2)
Extensions and discoveries		19			—			19			98
Production		(237	)		(315	)		(552	)		(495	)
Net proved reserves, December 31, 2005		1,272			1,300			2,572			1,685
Revisions of previous estimates		54			179	(3)		233			(214	)
Extensions and discoveries		189	(4)		—			189			—
Purchases of reserves in place		—			881	(5)		881			—
Production		(208	)		(575	)		(783	)		(66	)
Sale of reserves in place		(87	)		—			(87	)		(988	)
Net proved reserves, December 31, 2006		1,220			1,785			3,005			417
Revisions of previous estimates		84			(22	)		62			(52	)
Extensions and discoveries		23			—			23			—
Production		(192	)		(483	)		(675	)		(31	)
Net proved reserves, December 31, 2007		1,135			1,280			2,415			334
Net proved developed reserves as at:
December 31, 2005		1,099			1,071			2,170			1,405
December 31, 2006		1,003			1,330			2,333			417
December 31, 2007		874			1,071			1,945			334

(1)

The China oil and gas reserves reported by the Company and included as part of the reserve reports as prepared by our independent reserve evaluators for the years 2003 and 2004 were based on production results for wells drilled in our pilot program on two of the six blocks contained in the Dagang project and from existing PetroChina wellbores that were re-entered, re-completed and placed on production. There were over 80 wells drilled on the Blocks, all were logged, but many were not production tested. Production and log data from the new wells drilled as part of the pilot program and production data from the re-entered wells along with the interpretation of the logs of these older wells, by analogy, indicated that there was considerable potential for a large development, and that new wells drilled offsetting older wells drilled by PetroChina would be productive. While this in general was the case, there was discovered during the initial development phase a lack of continuity in the reservoir sands in the two blocks that contained much of the potential, and also changes in the porosity and permeability of the reservoir as interpreted from the original logs. This new information that resulted from the initial development drilling resulted in a review of the potential scope of the overall project. Following this review, two of the blocks were relinquished at the end of 2005 and the number of proposed new wells in two of the three largest developable blocks was reduced. The block that contained most of the pilot wells was fully developed as originally proposed and the sixth block was relinquished in July 2007.

(2)

The initial reserve estimate for a new property was based on a short production history. The reservoir depleted faster than anticipated.

95

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

(3)	These technical revisions were due to production performance, plus ongoing production optimizations.
(4)	This adjustment was related to a new pool discovery in the Company’s South Midway prospect.
(5)	In February of 2006 the Company re-acquired its 40% working interest in the Dagang field.

Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves

The following standardized measure of discounted future net cash flows from proved oil and gas reserves was computed using period end statutory tax rates, costs and prices of $89.18, $55.33 and $55.77 per barrel of oil in 2007, 2006 and 2005, respectively, and $8.54, $5.64 and $9.80 per Mcf of gas in 2007, 2006 and 2005, respectively. A discount rate of 10% was applied in determining the standardized measure of discounted future net cash flows.

The Company does not believe that this information reflects the fair market value of its oil and gas properties. Actual future net cash flows will differ from the presented estimated future net cash flows in that:

•  future production from proved reserves will differ from estimated production;

•  future production will also include production from probable and potential reserves;

•  future, rather than year end, prices and costs will apply; and

•  existing economic, operating and regulatory conditions are subject to change.

The standardized measure of discounted future net cash flows as at December 31 in each of the three most recently completed financial years were as follows:

	2007
	U.S.		China		Total
Future cash inflows	$	99,301	$	118,911	$	218,212
Future development and restoration costs		3,490		5,190		8,680
Future production costs		38,935		52,446		91,381
Future income taxes		—		1,010		1,010
Future net cash flows		56,876		60,265		117,141
10% annual discount		13,616		10,674		24,290
Standardized measure	$	43,260	$	49,591	$	92,851

	2006
	U.S.		China		Total
Future cash inflows	$	65,101	$	103,526	$	168,627
Future development and restoration costs		2,990		11,660		14,650
Future production costs		31,691		38,369		70,060
Future net cash flows		30,420		53,497		83,917
10% annual discount		7,332		10,705		18,037
Standardized measure	$	23,088	$	42,792	$	65,880

96

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

	2005
	U.S.		China		Total
Future cash inflows	$	83,418	$	76,533	$	159,951
Future development and restoration costs		2,890		8,136		11,026
Future production costs		32,699		12,828		45,527
Future income taxes		—		1,584		1,584
Future net cash flows		47,829		53,985		101,814
10% annual discount		15,655		10,686		26,341
Standardized measure	$	32,174	$	43,299	$	75,473

Changes in standardized measure of discounted future net cash flows as at December 31 in each of the three most recently completed financial years were as follows:

	2007
	U.S.			China			Total
Sale of oil and gas, net of production costs	$	(7,951	)	$	(18,365	)	$	(26,316	)
Net changes in prices and production costs		22,823			16,322			39,145
Extensions and discoveries, net of future production and development costs		465			—			465
Net change in future development costs		—			(3,545	)		(3,545	)
Development costs incurred during the period that reduced future development costs		—			10,188			10,188
Revisions of previous quantity estimates		2,900			(898	)		2,002
Accretion of discount		2,309			4,279			6,588
Net change in income taxes		—			(925	)		(925	)
Changes in production rates (timing) and other		(374	)		(257	)		(631	)
Increase		20,172			6,799			26,971
Standardized measure, beginning of year		23,088			42,792			65,880
Standardized measure, end of year	$	43,260		$	49,591		$	92,851

97

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

	2006
	U.S.			China			Total
Sale of oil and gas, net of production costs	$	(7,766	)	$	(23,849	)	$	(31,615	)
Net changes in prices and production costs		(4,851	)		(12,907	)		(17,758	)
Extensions and discoveries, net of future production and development costs		1,355			—			1,355
Net change in future development costs		(682	)		(7,800	)		(8,482	)
Development costs incurred during the period that reduced future development costs		2,572			4,686			7,258
Revisions of previous quantity estimates		319			5,187			5,506
Accretion of discount		3,217			4,664			7,881
Net change in income taxes		—			815			815
Purchases of reserves in place		—			25,645			25,645
Sale of reserves in place		(4,405	)		—			(4,405	)
Changes in production rates (timing) and other		1,155			3,052			4,207
Decrease		(9,086	)		(507	)		(9,593	)
Standardized measure, beginning of year		32,174			43,299			75,473
Standardized measure, end of year	$	23,088		$	42,792		$	65,880

	2005
	U.S.			China			Total
Sale of oil and gas, net of production costs	$	(9,068	)	$	(13,129	)	$	(22,197	)
Net changes in prices and production costs		15,110			20,016			35,126
Extensions and discoveries		1,051			—			1,051
Net change in future development costs		(694	)		46,380			45,686
Revisions of previous quantity estimates		(1,492	)		(150,588	)		(152,080	)
Accretion of discount		5,078			26,798			31,876
Net change in income taxes		—			24,993			24,993
Increase (decrease)		9,985			(45,530	)		(35,545	)
Standardized measure, beginning of year		22,189			88,829			111,018
Standardized measure, end of year	$	32,174		$	43,299		$	75,473

98

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

Costs incurred in oil and gas property acquisition, exploration, and development activities for the Company’s U.S. and China Oil and Gas Properties were as follows:

	For the Year Ended December 31,
	2007		2006		2005
U.S.
Property acquisition
Unproved	$	702	$	881	$	(1,682	)
Exploration		202		1,230		6,169
Development		3,087		3,465		2,912
		3,991		5,576		7,399
China
Property acquisition
Proved		—		28,719		—
Exploration		11,611		2,485		6,931
Development		11,881		6,153		23,756
		23,492		37,357		30,687
Total	$	27,483	$	42,933	$	38,086

The credit in U.S. unproved property acquisition additions for the year ended December 31, 2005 included a $1.6 million commitment payment received from a subsidiary of Unocal Corp. (“Unocal”). During 2000 and 2001, the Company acquired mineral rights in several East Texas prospects under a joint venture with Unocal. Unocal, as operator of the joint venture, was to fund, over a five-year period ending in December 2005, the drilling costs for the first several exploration wells to match $10.1 million in leasehold, seismic and processing costs the Company incurred on these East Texas prospects. Through December 2005, Unocal had spent $8.5 million in exploration drilling and elected to pay the Company $1.6 million for the deficiency in their drilling commitment rather than drill additional exploration wells. The Company credited the $1.6 million payment to the carrying value of its U.S. oil and gas properties in 2005 as the payment did not significantly alter the depletion rate for the U.S. cost center.

The U.S. GAAP depletion rates, calculated on a per Boe of net production basis, were as follows:

U.S.
Year ended December 31, 2007	$	22.05
Year ended December 31, 2006	$	22.11
Year ended December 31, 2005	$	14.91
China
Year ended December 31, 2007	$	32.73
Year ended December 31, 2006	$	36.46
Year ended December 31, 2005	$	27.00

99

IVANHOE ENERGY INC.

Notes to the Consolidated Financial Statements — (Continued)

The results of operations from producing activities for the years ended December 31 were as follows:

	2007							2006									2005
	U.S.		China			Total		U.S.			China			Total			U.S.		China		Total
Oil and gas revenue	$	12,270	$	31,365		$	43,635	$	12,065		$	35,683		$	47,748		$	14,069	$	15,731	$	29,800
Operating costs		4,319		13,000			17,319		4,299			11,834			16,133			5,001		2,602		7,603
Depletion		4,381		15,832			20,213		4,858			20,967			25,824			4,756		8,507		13,263
Provision for impairment		—		5,850			5,850		7,600			15,940			23,540			2,800		1,700		4,500
Results of operations from producing activities	$	3,570	$	(3,317	)	$	253	$	(4,692	)	$	(13,058	)	$	(17,749	)	$	1,512	$	2,922	$	4,434

100

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.   CONTROLS AND PROCEDURES

The Company’s management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2007. Based upon this evaluation, management concluded that these controls and procedures were (1) designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is accumulated and communicated to the Company’s Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure and (2) effective in accomplishing those objectives, in that they provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

•  Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

•  Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

•  Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, management has concluded that, as of December 31, 2007, the Company’s internal control over financial reporting was effective based on those criteria. Management has reviewed the results of its assessment with the Audit Committee of the Board of Directors. The Company’s independent registered Chartered Accountants, Deloitte & Touche LLP, has audited the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007, as stated in their report which immediately follows.

/s/ Joseph I. Gasca	/s/ W. Gordon Lancaster
Joseph I. Gasca	W. Gordon Lancaster
President and Chief Executive Officer	Chief Financial Officer
February 11, 2008

101

REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

To the Board of Directors and Shareholders of

Ivanhoe Energy Inc.:

We have audited the internal control over financial reporting of Ivanhoe Energy Inc. and subsidiaries (the “Company”) as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2007 of the Company and our report dated February 11, 2008 expressed an unqualified opinion on those financial statements and includes a separate report titled Comments by Independent Registered Chartered Accountants on Canada — United States of America Reporting Differences referring to changes in accounting principles and conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern.

(signed) “Deloitte & Touche LLP”

Independent Registered Chartered Accountants

Calgary, Canada

February 11, 2008

102

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

ITEM 9B.   OTHER INFORMATION

None.

PART III

ITEM 10.   DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The following table provides the names of all of our directors and executive officers, their positions, terms of office and their principal occupations during the past five years. Each director is elected for a one-year term or until his successor has been duly elected or appointed. Officers serve at the pleasure of the Board of Directors.

Name, Age and	Position with	Present Occupation and
Municipality of Residence	the Registrant	Principal Occupation for the Past Five Years
DAVID R. MARTIN, age 76 Santa Barbara, California	Executive Co-Chairman of the Board (since May 2006) and Director (since August 1998)	Executive Co-Chairman of the Board, Ivanhoe Energy Inc., (May 2006 — Present); Chairman of the Board, Ivanhoe Energy Inc. (August 1998 — May 2006); President, Cathedral Mountain Corporation (1997 — present)
A. ROBERT ABBOUD, age 78 Barrington Hills, IL	Independent Co-Chairman and Lead Director (since May 2006)	President, A. Robert Abboud and Company, a private investment company (1984 — present)
ROBERT M. FRIEDLAND, age 57 Singapore	Deputy Chairman — Capital Markets (since June, 1999) and Director (since February 1995)	Chairman and President, Ivanhoe Capital Corporation, a Singapore based venture capital company principally involved in establishing and financing international mining and exploration companies (1987 — present); Chairman and Director, Ivanhoe Mines Ltd. (March 1994 — present)
E. LEON DANIEL, age 70 Park City, Utah	Deputy Chairman — Projects and Engineering, (since May 2006) and Director (since August 1998)	Deputy Chairman - Projects and Engineering, Ivanhoe Energy Inc. (May 2006 — present); President and Chief Executive Officer, Ivanhoe Energy Inc. (June, 1999 — May 2006)
JOSEPH I. GASCA, age 51 The Woodlands, Texas	President and Chief Executive Officer (since January 2007)	President and Chief Executive Officer, Ivanhoe Energy Inc. (January 2007 — present); President and Chief Operating Officer, Ivanhoe Energy Inc. (July 2006 — January 2007); Region Technical Director — Europe/Asia BG Group (January 2006 — June 2006); General Manager — Operations; BG Group (August 2004 -- December 2005); Chief Operating Officer, Mosaic Natural Resources Ltd. (January 2003 — July 2004); President, Star Insight Ltd. (May 2002- July 2004

103

Name, Age and	Position with	Present Occupation and
Municipality of Residence	the Registrant	Principal Occupation for the Past Five Years
SHUN-ICHI SHIMIZU, age 68 Tokyo, Japan	Director (since July 1999)	Managing Director of C.U.E. Management Consulting Ltd. (1994 — present)
HOWARD R. BALLOCH, age 56 Beijing, China	Director (since January 2002)	President, The Balloch Group (July 2001 — present) President, Canada China Business Council (July 2001 — 2006); Canadian Ambassador to China, Mongolia and Democratic Republic of Korea (April 1996 — July 2001)
J. STEVEN RHODES, age 56 Los Angeles, California	Director (since December 2003)	Chairman and Chief Executive Officer, Claiborne -Rhodes, Inc. (2001 — present); Senior Vice President, First Southwest Company (1999 — 2001)
ROBERT G. GRAHAM, age 54 Ottawa, Ontario	Director (since April 2005)	Chairman of the Board of Directors, Ensyn Corporation (June, 2007 — Present); President and CEO, Ensyn Corporation (April 2005 — June 2007); Chairman and CEO, Ensyn Group (October 1984-- April 2005)
ROBERT A. PIRRAGLIA, age 58 Boca Raton, Florida	Director (since April 2005)	Executive Vice President, Ensyn Corporation (October 2007 — Present); Chief Operating Officer and Vice President, Ensyn Corporation (April 2005 — October 2007); Chief Operating Officer and Vice President, Ensyn Group, Inc. (September 1998 — April 2005)
BRIAN DOWNEY, C.M.A. age 66 Lake in the Hills, Illinois	Director (since July 2005)	President, Downey & Associates Management Inc. (July 1986 — present); Financial Advisor, Lending Solutions, Inc. (January 2002 — present) Partner/Owner, Lending Solutions, Inc. (November 1995 — January 2002)
PETER G. MEREDITH C.A., age 65 Vancouver, British Columbia	Director (since December, 2007)	Deputy Chairman, Ivanhoe Mines Ltd. (May, 2006 — present): Chief Financial Officer, Ivanhoe Capital Corporation (1996 — present) Chief Executive Officer, SouthGobi Energy Resources (June, 2007 — present), Chief Financial Officer, Ivanhoe Mines Ltd. (June, 1999 — November, 2001)
W. GORDON LANCASTER, C.A., age 64 Vancouver, British Columbia	Chief Financial Officer (since January 2004)	Chief Financial Officer, Ivanhoe Energy Inc. (January 2004 — present); Vice President Finance and Chief Financial Officer, Xantrex Technology Inc. (July 2003 — December 2003); Vice President Finance and Chief Financial Officer, Power Measurement, Inc. (August 2000 — June 2003)
MICHAEL SILVERMAN, age 55 Houston, Texas	Executive Vice President, Technology and Chief Technology Officer (since September 2007)	Executive Vice President, Technology and Chief Technology Officer, Ivanhoe Energy Inc. (September, 2007 — present); Vice President, Technology, Ivanhoe Energy Inc. (May, 2007 — September, 2007); Vice President Technology, KBR, Inc. (May, 2004 — May, 2007); Director Technology Center, KBR, Inc. (May, 2000 — May, 2004)
EDWIN J. VEITH, age 49 Frazier Park, California	Executive Vice President, Upstream (since September 2007)	Executive Vice President, Upstream, Ivanhoe Energy Inc. (September, 2007 — present); Vice President, HTL Technology, Ivanhoe Energy (USA) Inc. (Nov., 2005 — present); Chief Reservoir Engineer, Ivanhoe Energy (USA) Inc. (June, 2001 — Nov., 2005)

104

Name, Age and	Position with	Present Occupation and
Municipality of Residence	the Registrant	Principal Occupation for the Past Five Years
PATRICK CHUA, age 52 Hong Kong, China	Executive Vice-President (since June 1999)	Executive Vice-President, Ivanhoe Energy Inc. (June 1999 — present); Chairman, Sunwing Energy Ltd. (Bermuda) (April 2004 — present); President, Sunwing Energy Ltd. (Bermuda) (March 2000 — April 2004)
GERALD MOENCH, age 59 Lethbridge, Alberta	Executive Vice-President (since June 1999)	Executive Vice-President, Ivanhoe Energy Inc. (June, 1999 — present); President, Sunwing Energy Ltd. (Bermuda) (April 2004 — present)

All of our directors, with the exception of Mr. Peter Meredith, who was appointed to the Board in December 2007, were elected at our last annual general meeting of shareholders (“AGM”) held on May 3, 2007. The term of office of each director concludes at our next AGM, unless the director’s office is earlier vacated in accordance with our by-laws. There are no family relationships among any of our directors, officers or key employees.

Under the terms of our acquisition of Ensyn, we granted to Ensyn the right to designate two individuals for appointment to our Board of Directors and agreed to use reasonable best efforts to nominate Ensyn’s designees for re-election to our Board of Directors annually for at least five years. Ensyn’s designees, Dr. Robert Graham and Mr. Robert Pirraglia, were originally appointed to the Board of Directors on April 15, 2005.

We plan to reduce the size of our Board of Directors from 12 directors to 7 directors in connection with our proposed reorganization and in order to facilitate more effective decision-making. See “Corporate Strategy” under Items 1 and 2 “Business and Properties”. At our next AGM, scheduled to be held on May 29, 2008, we plan to nominate 7 nominees for election to our Board of Directors for the ensuing year. Information respecting each of these nominees will be included in the management proxy circular in respect of the AGM that we plan to mail to our shareholders on or about April 21, 2008. Those of our incumbent directors who will not be standing for re-election at the upcoming AGM will retire from our Board of Directors at the conclusion of the AGM and are expected to become directors of one or more of our Latin America, Middle East and Sunwing subsidiaries. Following the AGM, it is expected that, effective May 29, 2008, our Board of Directors will appoint our Deputy Chairman, Robert M. Friedland as Executive Chairman and Chief Executive Officer. Our current President and Chief Executive Officer, Joseph I. Gasca has elected not to stand for re-election as a board member, and will step down as President and Chief Executive Officer as of May 29, 2008. Until then, he will continue to serve as President and Chief Executive Officer.

As required under the Business Corporations Act (Yukon), our Board of Directors has an Audit Committee. We also have a Compensation Committee, a Nominating and Corporate Governance Committee and a Business Development Committee. The members of the Audit Committee are Messrs. Brian Downey, Howard R. Balloch and A. Robert Abboud. Mr. Downey, one of our current independent directors, has been determined by the Board of Directors to be an Audit Committee financial expert. We believe that Mr. Downey’s prior experience working as a Certified Management Accountant and significant financial and business experience at the executive levels of management qualifies him to be an Audit Committee financial expert. The current members of the Compensation Committee are Messrs. Howard R. Balloch (Chair), J. Steven Rhodes and Brian Downey. The current members of the Nominating and Corporate Governance Committee are Messrs. Howard R. Balloch (Chair), J. Steven Rhodes and Robert A. Pirraglia. The current members of the Business Development Committee are Messrs. Robert A. Pirraglia (Chair), Robert M. Friedland, Shun-ichi Shimizu, Robert G. Graham, Howard R. Balloch, J. Steven Rhodes, Brian Downey, A. Robert Abboud and Peter G. Meredith. Following the AGM, it is expected that the new Board of Directors will re-constitute each of the above-referenced committees with selected individuals elected as directors at the AGM.

Management is responsible for our financial reporting process including our system of internal controls over financial reporting and for the preparation of consolidated financial statements in accordance with generally accepted accounting principles in Canada. Our independent registered chartered accountants are responsible for auditing those financial statements. The members of the Audit Committee are not our employees, and are not professional accountants or auditors. The Audit Committee’s primary purpose is to assist the Board of Directors in fulfilling its oversight responsibilities by reviewing the financial information provided to shareholders and others, and the systems of internal controls which management has established to preserve our assets and the audit process.

105

It is not the Audit Committee’s duty or responsibility to conduct auditing or accounting reviews or procedures or to determine that our financial statements are complete and accurate and in accordance with generally accepted accounting principles in Canada. In giving its recommendation to the Board of Directors, the Audit Committee has relied on management’s representations that the financial statements have been prepared with integrity and objectivity and in conformity with generally accepted accounting principles in Canada and on the opinion of the independent registered chartered accountants included in their report on our financial statements.

Other Directorships

Messrs. Howard R. Balloch, Peter G. Meredith and Robert M. Friedland are all directors of Ivanhoe Mines Ltd. Mr. Balloch is also a director of Methanex Corporation, East Energy Corp. and Tiens Biotech Group USA Inc. Mr. Meredith is also a director of Entrée Gold Inc., Jinshan Gold Mines Inc., SouthGobi Energy Resources Ltd. and Great Canadian Gaming Corporation.

Code of Business Conduct and Ethics

We have a Code of Business Conduct and Ethics applicable to all employees, consultants, officers and directors regardless of their position in our organization, at all times and everywhere we do business. The Code of Business Conduct and Ethics provides that our employees, consultants, officers and directors will uphold our commitment to a culture of honesty, integrity and accountability and that we require the highest standards of professional and ethical conduct from our employees, consultants, officers and directors. In November 2007 we made some minor amendments to our Code of Business Conduct and Ethics to improve procedures for reporting violations. Our Code of Business Conduct and Ethics, as amended, has been filed as Exhibit 14.1 to this Annual Report on Form 10-K. A copy of our Code of Business Conduct and Ethics, as amended, may be obtained, without charge, by request to Ivanhoe Energy Inc., Suite 654-999 Canada Place, Vancouver, British Columbia, Canada V6C 3E1, Attention: Corporate Secretary or by phone to 604-688-8323.

ITEM 11.   EXECUTIVE COMPENSATION

In accordance with the requirements of applicable securities legislation in Canada, the following executive compensation disclosure is provided in respect of our Chief Executive Officer and Chief Financial Officer as at December 31, 2007, and each of our three most highly compensated executive officers whose annual compensation exceeded Cdn.$150,000 in the year ended December 31, 2007 (collectively, the “Named Executive Officers”). During the year ended December 31, 2007, the aggregate compensation paid to all of our executive officers whose annual compensation exceeded Cdn.$40,000 was U.S.$2,353,067.

106

Summary Compensation Table

The following table sets forth a summary of all compensation paid during the years ending December 31, 2007, 2006 and 2005 to each of the Named Executive Officers.

Summary Compensation Table (U.S.$)
									Long Term Compensation
									Awards
									Securities
	Annual Compensation								Under		Restricted
							Other		Options/		Shares or		Payouts
							Annual		SARs		Restricted				All Other
Name and							Compen-		Granted		Share		LTIP		Compensation
Principal Position	Year		Salary		Bonus(3)(5)		sation		(#)		Units		Payouts		(U.S.$)(4)
Joseph I. Gasca		2007		313,750		—		—		—		—		—		20,500
President and Chief		2006		152,417		—		—		1,000,000		—		—		9,200
Executive Officer(1)		2005		—		—		—		—		—		—		—
W. Gordon Lancaster		2007		243,600		—		—		—		—		—		—
Chief Financial Officer		2006		231,000		80,000		—		—		—		—		—
		2005		225,000		—		—		—		—		—		—
David R. Martin		2007		281,250		—		—		—		—		—		20,500
Executive Co-Chairman		2006		270,000		90,000		—		—		—		—		20,000
		2005		270,000		—		—		—		—		—		16,200
E. Leon Daniel		2007		310,000		—		—		—		—		—		20,500
Deputy Chairman — Projects and		2006		340,000		100,000		—		—		—		—		20,000
Engineering		2005		340,000		—		—		500,000		—		—		16,200
Ed Veith Executive Vice		2007		194,877		—		—		158,000		—		—		15,500
President, Upstream(2)		2006		—		—		—		—		—		—		—
		2005		—		—		—		—		—		—		—

(1)	Mr. Gasca was appointed President and Chief Operating Officer effective July 2006 and was designated the Chief Executive Officer effective January 29, 2007.
(2)	Mr. Veith was appointed as Executive Vice President, Upstream in September 2007.
(3)	Bonuses earned were paid in cash and common shares from our Employees’ and Directors’ Equity Incentive Plan at fair market value on the date of approval by the Compensation Committee.
(4)	Our matching contribution to the 401(k) plan, a U.S. defined contribution retirement plan available to U.S. employees.
(5)	As of the date of this report, our Compensation Committee has not made a final recommendation to the board of directors with respect to the payment of bonuses to our executive officers in respect of 2007. Pending the Compensation Committee’s recommendation and a decision by the board of directors to award bonuses to some or all of our executive officers, the amount of any bonuses payable to the Named Executive Officers in respect of 2007 cannot presently be determined.

Long Term Incentive Plan

We do not presently have a long-term incentive plan for any of our executive officers, including our Named Executive Officers.

Options and Stock Appreciation Rights (SARs)

During the year ended December 31, 2007, we granted to one of our Named Executive Officers incentive stock options exercisable to purchase up to 158,000 common shares. No other incentive stock options or freestanding

107

SARS were granted to any other Named Executive Officer during the year ended December 31, 2007. The following table provides details regarding the incentive stock options granted.

Option/SAR Grants in Last Fiscal Year

Market Value of

Percent of Total

Securities

Number of Securities

Options/SARs

Underlying

Underlying

Granted to

Exercise

Options/SARs on

Options/SARs

Employees in

or Base Price

the Date of Grant

Expiration

Name

Granted

Financial Year

($/Security)

($/Security)

Date

(a)

(#)(b)

(c)

(d)

(e)

(f)

Ed Veith

158,000(1

)

4.9

%

U.S. $

1.92

$

303,360

October 4, 2012

(1)	80% of these incentive stock options vest and become exercisable incrementally as certain business development milestones are achieved.
(2)	On March 5, 2008, in anticipation of Robert M. Friedland’s appointment as Chief Executive Officer, the Board awarded Mr. Friedland 2.5 million incentive stock options, at an exercise price of Cdn.$1.61. Twenty percent of the incentive stock options vested on the date of the grant, with an additional 20% vesting upon the anniversary of the award date each year for the next four years.

Aggregated Option Exercises

During the year ended December 31, 2007, incentive stock options were exercised by a Named Executive Officer to acquire 1,091,195 common shares. The following table indicates for each of the Named Executive Officers the number and value of incentive stock options for common shares which were exercised during the year ended December 31, 2007, the number of exercisable and unexercisable incentive stock options held by each of the Named Executive Officers that remained unexercised as at December 31, 2007 and the value of all unexercised in-the-money incentive stock options as at that date.

Aggregated Option Exercises in Last Fiscal Year and Fiscal Year End Option Values
							Value of Unexercised
					Number of Securities		In-the-Money
					Underlying Unexercised		Options at
	Shares				Options at		December 31, 2007
	Acquired on		Value		December 31, 2007		($U.S.)
	Exercise		Realized		(#)		Exercisable/Unexercisable
Name	(#)		($U.S.)		Exercisable/Unexercisable		(1)
Joseph I. Gasca		—		—		500,000/500,000		—
W. Gordon Lancaster		—		—		250,000/0		—
David R. Martin		1,091,195		1,917,154		2,062,500/0		2,198,158/0
E. Leon Daniel		—		—		466,667/200,000		177,629/0
Ed Veith		—		—		168,694/332,040		—

(1) The value of unexercised in-the-money options at financial year-end is the difference between the closing price of our common shares on December 31, 2007 on the Toronto Stock Exchange (Cdn$1.55) and the exercise prices. This value has not been, and may never be, realized. The actual gains, if any, on exercise will depend on the value of our common shares on the date of option exercise.

Option and SAR Repricings

No options or freestanding SARs were re-priced during the year ended December 31, 2007.

Defined Benefit and Actuarial Plan

We do not presently provide a pension plan for our employees. However, in 2001, the Company adopted a defined contribution retirement or thrift plan (“401(k) Plan”) to assist U.S. employees in providing for retirement or other future financial needs. Employees’ contributions (up to the maximum allowed by U.S. tax laws) were matched 100% by the Company in 2007. The Company’s matching contributions to the 401(k) Plan were $0.5 million, $0.4 million and $0.3 million for the years ended December 31, 2007, 2006 and 2005.

108

Employment Contracts, Termination of Employment and Change-In-Control Arrangements

We have written contracts of employment with our Chief Executive Officer, Joseph I. Gasca and our Chief Financial Officer, Gordon Lancaster. We do not currently have written employment contracts with any of our other Named Executive Officers.

Mr. Gasca’s employment contract respecting his employment as President and Chief Operating Officer commenced on May 15, 2006. Mr. Gasca was elevated to the position of President and Chief Executive Officer on January 29, 2007 but his employment contract was not otherwise amended. Mr. Gasca’s contract established his initial annual base salary and provides for a term of employment of three years, unless terminated earlier in accordance with the provisions of the contract. We may terminate Mr. Gasca’s employment for cause without payment of any compensation. We may terminate Mr. Gasca’s employment without cause by making a lump sum payment in an amount equal to his annual base salary. Under the terms of the contract, Mr. Gasca was granted incentive stock options exercisable to acquire 1,000,000 common shares which are exercisable for ten years and vest over three years. If Mr. Gasca’s employment is terminated within twelve months of a change of control of the Company, Mr. Gasca is entitled to receive a lump sum payment in an amount equal to his annual base salary. At the discretion of the Company’s board of directors, Mr. Gasca is eligible for an annual bonus in an amount determined by the Board.

Mr. Lancaster’s employment contract respecting his employment as Chief Financial Officer commenced on January 1, 2004. Mr. Lancaster’s contract established his initial annual base salary but does not provide for a fixed term of employment. We may terminate Mr. Lancaster’s employment for any reason upon six months’ prior written notice. Under the terms of the contract, Mr. Lancaster was granted incentive stock options exercisable to acquire 250,000 common shares exercisable for five years and vesting over four years.

Director Compensation

Each independent director other than Mr. A. Robert Abboud receives director fees of $2,000 per month. Mr. Abboud receives an annual fee of $250,000 for acting as our Independent Co-Chairman and Lead Director. Mr. Brian Downey receives an additional payment of $7,500 per annum for acting as the Chairman of the Audit Committee. The Chairman of the Compensation and Benefits Committee and the Chairman of the Nominating and Corporate Governance Committee, Mr. Howard Balloch, receives an additional payment of $5,000 per annum per Committee for acting as such. Mr. Robert A. Pirraglia, receives an additional payment of $5,000 per annum for acting as the Chairman of the Business Development Committee. Each independent director, with the exception of Mr. A. Robert Abboud, receives a fee of $1,000 for participation in each Board of Directors meeting and each Committee meeting attended in person or via conference call. We do not pay any other cash or fixed compensation to its directors for acting in the capacity of a director. We reimburse directors for expenses they reasonably incur in the performance of their duties as directors. Each of our directors is also eligible to participate in our Employees’ and Directors’ Equity Incentive Plan.

We compensated certain of our non-management directors for acting as consultants. Details of these arrangements are as follows:

•  during the year ended December 31, 2007, we paid J. Steven Rhodes a monthly fee of U.S.$4,950.00 for providing business development consulting services;

•  during the year ended December 31, 2007, we paid a company controlled by Dr. Robert Graham fees for certain technical consulting services provided personally by Dr. Graham. We also paid additional amounts to a company in which Dr. Graham is a significant shareholder for services rendered to us by that company. See Item 13 “Certain Relationships and Related Transactions and Director Independence — Certain Business Relationships”; and

•  during the year ended December 31, 2007, we paid a company controlled by Shun-ichi Shimizu certain fees and expenses for providing business development consulting and other services. See Item 13 “Certain Relationships and Related Transactions and Director Independence — Certain Business Relationships”.

109

Employees’ and Directors’ Equity Incentive Plan

Our Employees’ and Directors’ Equity Incentive Plan, as amended (the “Plan”) consists of three component plans: a common share option plan (the “Share Option Plan”), a common share bonus plan (the “Share Bonus Plan”), and a common share purchase plan (the “Share Purchase Plan”). The purpose of the Plan is to advance our corporate interests by encouraging equity participation by our directors, officers, employees and service providers through the acquisition of our shares.

The following is a brief description of the terms of the Plan.

Share Option Plan

The Share Option Plan allows the Board of Directors to grant options to acquire our common shares in favor of our directors, officers, employees and service providers. Options are subject to adjustment in the event of a subdivision or consolidation of our common shares, an amalgamation, or other corporate event affecting our common shares. Participation in the Share Option Plan is limited to directors, officers, employees and service providers who are, in the opinion of our Board of Directors, in a position to contribute to our future growth and success.

In determining the number of common shares made subject to an option, we consider, among other things, the optionee’s relative present and potential contribution to our success and to the prevailing policies of each stock exchange on which our shares are listed. The Board of Directors determines the date of grant, the number of optioned common shares, the exercise price per share, the vesting period and the exercise period. The minimum exercise price of any option granted under the Share Option Plan is the weighted average price of our common shares on the principal stock exchange on which our common shares trade for the five trading days prior to the date of grant.

Unless earlier terminated upon an optionee’s death or termination of employment or appointment, options are exercisable for a period of up to ten years. We may, in our discretion, accelerate unvested options if a take-over bid is made for our common shares.

Share Bonus Plan

The Share Bonus Plan permits our Board of Directors to issue common shares as bonus awards to our directors, officers, employees and service providers on a discretionary basis having regard to such merit criteria as the Board of Directors may determine. The Share Bonus Plan limits the number of common shares that may be issued pursuant to bonus awards. As at December 31, 2007, there were 678,582 shares available to be issued from the Share Bonus Plan.

Share Purchase Plan

Participation in the Share Purchase Plan is limited to employees who have completed at least one year (or less, at the discretion of the Board of Directors) of continuous service on a full-time basis and who are designated by the Board of Directors as eligible to participate in the Share Purchase Plan.

Eligible employees may contribute up to 10% of their annual basic salary to the Share Purchase Plan in semi-monthly installments. We then make contributions on a quarterly basis equal to the employee’s contribution.

At the end of each calendar quarter, the eligible employee receives a number of our common shares equal to the aggregate amount contributed by the employee participant and by us, on the participant’s behalf, divided by the weighted average trading price of our common shares on our principal stock exchange during the previous three months.

The Share Purchase Plan component of the Plan has not yet been activated.

110

General

The aggregate maximum number of our common shares, which we may issue, or reserve for issuance under the Plan, including the Share Bonus Plan, is currently 24,000,000 common shares, less the number of common shares previously issued or reserved for issuance under the Plan. Any increase is subject to Toronto Stock Exchange approval and approval by our shareholders.

The maximum number of our common shares which we may at any time reserve for issuance:

•  under the Plan to any one person may not exceed 5% of our issued and outstanding common shares; or

•  under the Plan or under any other security-based compensation arrangement to our insiders may not exceed ten per cent (10%) of our issued and outstanding common shares.

The maximum number of our common shares which we may issue:

•  under the Plan or under any other security-based compensation arrangement within any one-year period to our insiders may not exceed ten per cent (10%) of our issued and outstanding common shares; or

•  under the Plan within any one-year period to any one of our insiders and his or her associates may not exceed five per cent (5%) of our issued and outstanding common shares.

As at December 31, 2007, there were 3,034,400 unallocated shares available to be issued from our Plan.

Our Board of Directors has the power to amend, suspend or terminate the Plan, including the power to make changes of a clerical or grammatical nature, changes regarding the persons eligible to participate in the Plan, changes to the exercise price, vesting, terms and termination provisions of options, changes to the Plan’s cashless exercise provisions, changes to the terms of the Share Bonus Plan provisions (other than the maximum number of common shares issuable under the Share Bonus Plan), changes to the acceleration and vesting of options in the event of a take-over bid and other matters relating to the Share Option Plan and the awards granted thereunder. Certain amendments to the Plan can only be made with the approval of our shareholders. Such amendments include:

•  an amendment to the aggregate number of common shares that may be reserved for issuance under the Plan;

•  an amendment to the aggregate maximum number of common shares issuable under the Share Bonus Plan component of the Plan;

•  an amendment to the Plan’s express limitations on the maximum number of common shares that may be reserved for issuance, or issued, to insiders;

•  an amendment that would reduce the exercise price, or extend the expiry date, of an outstanding option granted to an insider; or

•  an amendment to the amending provisions of the Plan.

Composition of the Compensation Committee

During the year ended December 31, 2007, our Compensation Committee consisted of Messrs. Howard R. Balloch, J. Steven Rhodes and Brian Downey. Since the beginning of the most recently completed financial year, which ended on December 31, 2007, none of Messrs. Balloch, Rhodes or Downey was indebted to the Company or any of its subsidiaries or had any material interest in any transaction or proposed transaction which has materially affected or would materially affect the Company or any of its subsidiaries. None of the Company’s executive officers serve as a member of the Compensation Committee or Board of Directors of any entity that has an executive officer serving as a member of the Compensation Committee or Board of Directors of the Company.

Report on Executive Compensation

Compensation and Benefits Committee and Approach to Executive Compensation

Our executive compensation program is administered by the Compensation Committee. The members of the Compensation Committee are all independent, non-management directors. Following review and approval by the

111

Compensation Committee, decisions relating to executive compensation are reported to, and approved by, the full Board of Directors. The Compensation Committee has directed the preparation of this report and has approved its contents and its submission to shareholders.

Our approach to executive compensation is motivated by a desire to align the interests of our executive officers as closely as possible with the interests of our Company and its shareholders as a whole. In determining the nature and quantum of compensation for our executive officers we are seeking to achieve the following objectives: to provide a strong incentive to management to contribute to the achievement of our short-term and long-term corporate goals; to ensure that the interests of our executive officers and the interests of our shareholders are aligned; to enable us to attract, retain and motivate executive officers of the highest caliber in light of the strong competition in our industry for qualified personnel; and to recognize that the successful implementation of our Company’s corporate strategy cannot necessarily be measured, at this stage of its development, only with reference to quantitative measurement criteria of corporate or individual performance. We take all of these factors into account in formulating our recommendations to the Board of Directors respecting the compensation to be paid to each of our executive officers.

The compensation that we pay to our executive officers generally consists of cash, equity and equity incentives. Our compensation policy reflects a belief that an element of total compensation for our executive officers should be “at risk” in the form of common shares or incentive stock options, so as to create a strong incentive to build shareholder value. The Compensation Committee oversees and sets the general guidelines and principles for the implementation of our executive compensation policies, assesses the individual performance of our executive officers and makes recommendations to the Board of Directors. Based on these recommendations, the Board of Directors makes decisions concerning the nature and scope of the compensation to be paid to our executive officers.

In 2007, we adopted a compensation program which outlines a series of quantitative and qualitative compensation parameters for our executive officers, including our CEO, and our non-executive management personnel. This program is based on a report prepared by an external consultant in 2005 and an internal review of our compensation policies and practices. The compensation program is designed to provide incentives to work for, and stay with, the Company and to drive strong Company performance, and to differentially reward skills more critical to our business plans. Under the 2007 compensation program, the Company seeks to pay near term compensation, using a pay grade system consistent with industry practice, which is competitive with industry while providing incentive compensation that is designed to outperform other options that employees and prospective employees might find in the marketplace.

Base Salary

The base salaries of our executive officers have traditionally been determined based on the requirements of an executive officer’s employment contract as well as a subjective assessment of each individual’s performance, experience and other factors we believe to be relevant, including prevailing industry demand for personnel having comparable skills and performing similar duties, the compensation the individual could reasonably expect to receive from a competitor and the Company’s ability to pay. We have also considered recommendations from outside compensation consultants and used compensation data obtained from publicly available sources.

Salary levels are assessed using a pay grade system that is consistent with industry practice. Each of our employees, including our executive officers, are placed in a pay grade based upon his or her knowledge, skills and relevant experience and credentials. Annual salary increases are made based on performance and relative position within a pay grade. Performance will be assessed and rated based on agreed objectives and behaviors. A simple three-tiered rating system is used for salaries, with top performers rewarded the highest, regular performers rewarded consistent with average industry trends and bottom performers receiving little or no salary increases.

Annual Bonus

The intent of our annual bonus program under the 2007 compensation program is to provide competitive near-term compensation. We use the same pay grade system for determining the target and maximum bonus that is achievable by an employee. Target and maximum bonus award levels will be benchmarked on a regular basis to

112

ensure they are competitive with the industry. Bonus award levels for executive officers and senior non-executive management personnel are determined based on job specific criteria in addition to overall performance rating. The composition of annual bonus awards is a combination of our common shares and cash. In order to preserve cash, bonus awards consist predominantly of common shares with a significantly smaller cash component to facilitate the recipient’s ability to pay applicable income taxes.

For executive officers, potential bonus amounts range from 50% of salary (target) and 70% of salary (maximum) for our Chief Executive Officer, 40% of salary (target) and 60% of salary (maximum) for our Chief Financial Officer and 25%-30% of salary (target) and 37.5%-45% of salary (maximum) for other executive officers. 75% of the targeted bonus amount is earned through the achievement of measurable defined corporate objectives, including share price, net income, net operating cash flow and net production, as well as other specific corporate and individual goals, and 25% of the targeted bonus is based on discretionary factors.

Although several of our executive officers were successful in achieving individual corporate and business development goals, particularly in the areas of technology, financial management, investor relations and corporate governance, results were mixed with respect to more heavily weighted factors in the areas of business development, production, net income and operating expenses and the Compensation Committee has deferred making any quantitative recommendations to the Board of Directors respecting individual bonus awards pending a more thorough review and comparison of the defined performance targets against actual results.

Incentive Compensation

The relationship of corporate performance to executive compensation under our executive compensation program is created, in part, through equity compensation mechanisms. Incentive stock options, which vest and become exercisable through the passage of time, link the bulk of our equity-based executive compensation to shareholder return, measured by increases in the market price of our common shares. All outstanding stock options that have been granted under our equity incentive plan were granted at prices not less than 100% of the fair market value of the Company’s common shares on the dates such options were granted.

We continue to believe that stock-based incentives encourage and reward effective management that results in long-term corporate financial success, as measured by stock appreciation. Stock-based incentives awarded to our executive officers have been traditionally based upon the Compensation Committee’s subjective evaluation of each executive officer’s ability to influence our long-term growth and to reward outstanding individual performance and contributions to our business. Other factors influencing our recommendations respecting the nature and scope of the equity compensation and equity incentives to be awarded to our executive officers in a given year have included: awards made in previous years and, particularly in the case of equity incentives, the number of incentive stock options that remain outstanding and exercisable from grants in previous years and the exercise price and the remaining exercise term of those outstanding stock options.

The intent of our incentive compensation under the 2007 compensation program is to provide incentives that outperform other options that employees and prospective employees might find in the marketplace. In 2007 and in future, we intend to use the same pay grade system for outlining the target and maximum incentive compensation that is achievable for an executive or employee. For executives and higher pay grade employees, annual incentive compensation awards will be provided based on specific performance criteria, value to the Company in terms of skills, knowledge and experience, completion of specific projects as well as subjective criteria. Incentive compensation awards for executives and upper pay grade employees are expected to include stock options and may in the future include other securities such as restricted shares.

Option exercise periods and vesting schedules for options granted to executive officers are determined, on a case by case basis, by the Compensation Committee and the Board. Although we have traditionally taken an approach to vesting that is based on the effluxion of time, we have, in appropriate circumstances, granted options with vesting schedules based on the achievement of specified corporate objectives.

113

Chief Executive Officer Compensation

The base salary of our current CEO was set by the terms of his employment contract, which are described under “Employment Contracts, Termination of Employment and Change-In-Control Arrangements”. Under the terms of his employment contract, our current CEO was granted incentive stock options to acquire 1,000,000 common shares which vest over three years and are exercisable for ten years.

The salary and stock option compensation offered to our current CEO at the time of his appointment were based on competitive market factors, his level of experience and responsibility, the compensation practices of other industry participants, and the negotiations that took place in connection with his appointment. Our CEO’s employment contract also provides that he is eligible to receive an annual bonus at the discretion of the Board of Directors based on performance criteria determined by the Board.

Our current CEO’s eligibility to receive a bonus in respect of the 2007 fiscal year is based on substantially the same performance criteria used to measure the bonus eligibility of our other executive officers, with 75% of the targeted bonus amount to be earned through the achievement of measurable defined corporate objectives and 25% to be based on discretionary factors. As noted above, as of the date of this report, the Compensation Committee has not finalized its recommendations to the Board of Directors respecting individual bonus awards to the current CEO and our other executive officers pending a more thorough review and comparison of the defined performance targets originally set for 2007 against actual results achieved during the year.

Submitted on behalf of the Compensation Committee:

Mr. Howard R. Balloch

Mr. J. Steven Rhodes

Mr. Brian F. Downey

114

Performance Graph

The following graph and table compares the cumulative shareholder return on a $100 investment in our common shares to a similar investment in companies comprising the S&P/TSX Composite Index, including dividend reinvestment, for the period from December 31, 2002 to December 31, 2007.

	As at December 31,
	(Cdn.$)
	2002		2003		2004		2005		2006		2007
Ivanhoe Energy Inc.	$	100	$	674	$	422	$	171	$	218	$	215
S&P/TSX Composite Index	$	100	$	127	$	145	$	180	$	211	$	232

The information provided in this Performance Graph shall not be deemed “soliciting material” or “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 (“Exchange Act”), other than as provided in Item 201 to Regulation S-K under the Exchange Act, or subject to the liabilities of Section 18 of the Exchange Act and shall not be deemed incorporated by reference into any filing under the Securities Act of 1933 or the Exchange Act except to the extent the Company specifically requests that it be treated as soliciting material or specifically incorporates it by reference.

ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Except as set forth below, no person or group is known to beneficially own 5% or more of our issued and outstanding common shares. Based on information known to us, the following table sets forth the beneficial ownership of each such person or group in our common shares as at March 10, 2008.

	Name and Address of	Number of Shares			Percentage
Title of Class	Beneficial Owner	Beneficially Owned(1)			of Class
Common Shares	Robert M. Friedland 150 Beach Road #25-03 The Gateway West Singapore 189720		51,511,725	(2)		20.37
Common Shares	Directors and Executive Officers as a Group (17 persons)		65,083,628	(3)		25.74

(1) Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unissued common shares subject to options, warrants or other

115

convertible securities currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding for the purpose of computing the beneficial ownership of common shares of the person holding such convertible security but are not deemed outstanding for computing the beneficial ownership of common shares of any other person.

(2)	50,594,620 common shares are held indirectly through Newstar Securities SRL, Premier Mines SRL and Evershine SRL, companies controlled by Mr. Friedland.
(3)	Includes 5,777,407 unissued common shares issuable to directors and senior officers upon exercise of incentive stock options.

Security Ownership of Management

The following table sets forth the beneficial ownership as at March 10, 2008 of our common shares by each of our directors, our executive officers and by all of our directors and executive officers as a group:

		Amount
		and Nature
		of Beneficial			Percentage		Incentive Stock
		Ownership (1)			of Class		Options Included in
Title of Class	Name of Beneficial Owner	(a)			(b)		(a)(c)
Common Shares	David R. Martin		3,712,364			1.47		2,062,500
Common Shares	A. Robert Abboud		432,000			0.17		232,000
Common Shares	Robert M. Friedland		51,511,725	(2)		20.37		500,000
Common Shares	E. Leon Daniel		1,246,683			0.49		566,667
Common Shares	Joseph I. Gasca		533,750			0.21		500,000
Common Shares	Shun-ichi Shimizu		180,100			0.07		80,000
Common Shares	Howard R. Balloch		220,000			0.09		170,000
Common Shares	J. Steven Rhodes		331,000			0.13		325,000
Common Shares	Robert G. Graham		5,315,112			2.10		290,000
Common Shares	Robert A. Pirraglia		463,396			0.18		240,000
Common Shares	Brian Downey		220,000			0.09		170,000
Common Shares	Peter G. Meredith		30,000			0.01		30,000
Common Shares	W. Gordon Lancaster		301,451			0.12		250,000
Common Shares	Michael Silverman		104,000			0.04		104,000
Common Shares	Edwin J. Veith		223,618			0.09		187,240
Common Shares	Patrick Chua		96,265			0.04		10,000
Common Shares	Gerald Moench		162,164			0.06		60,000
Common Shares	All directors and executive officers as a group (17 persons)		65,083,628			25.74		5,777,407

(1)

Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Unissued common shares subject to options, warrants or other convertible securities currently exercisable or convertible, or exercisable or convertible within 60 days, are deemed outstanding for the purpose of computing the beneficial ownership of common shares of the person holding such convertible security but are not deemed outstanding for computing the beneficial ownership of common shares of any other person.

(2)

50,594,620 common shares are held indirectly through Newstar Securities SRL, Premier Mines SRL and Evershine SRL, companies controlled by Mr. Friedland.

116

Securities Authorized for Issuance under Equity Compensation Plans

Other than a specific grant of incentive stock options made during 2006 to Joseph I. Gasca as an inducement to accept our offer of employment as President, all of the incentive stock options and equity compensation awards we grant are made under our Plan, the material terms of which are described in Item 11 “Executive Compensation”. The Plan is the only equity compensation plan we have in effect and is intended to further align the interests of our directors and management with our company’s long-term performance and the long-term interests of our shareholders. Our shareholders have approved the Plan and all amendments thereto. The following information is as at December 31, 2007:

	Equity Compensation Plan Information
					Number of Securities
	Number of Securities				Remaining Available
	to be Issued		Weighted-Average		for Future Issuance
	Upon Exercise of		Exercise Price of		Under Equity Compensation
	Outstanding Options,		Outstanding Options,		Plans (Excluding Securities
	Warrants and Rights		Warrants and Rights		Reflected in Column
Plan Category	(a)		(b)		(a))(c)
Equity compensation plans approved by Security holders		11,944,764		Cdn. $2.30		3,034,400
Equity compensation plans not approved by Security holders(1)		1,000,000		Cdn. $3.18		—
Total		12,944,764		Cdn. $2.37		3,034,400

(1) Consists of incentive stock options granted to Mr. Joseph Gasca as an inducement to accepting employment with the Company. These incentive stock options were not granted under the Company’s existing Plan previously approved by shareholders and the common shares reserved for issuance to Mr. Gasca upon the exercise of these incentive stock options are not included in the total number of common shares reserved for issuance under the existing Plan. Under the rules and policies of the Toronto Stock Exchange, security based compensation arrangements offered as inducements to prospective employees do not require shareholder approval.

ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Transactions with Management and Others

We borrowed $1.25 million from Ivanhoe Capital Finance Ltd.; a company wholly owned by Mr. Robert M. Friedland our Deputy Chairman and a director. The unsecured loan was repaid with accrued interest, at U.S. prime plus 3%, in September 2003. We negotiated a revolving credit facility of $1.25 million to re-establish or extend that loan in the future as needs arise.

Certain Business Relationships

We are party to cost sharing agreements with other companies wholly or partially owned by Mr. Robert M. Friedland. Through these agreements, we share office space, furnishings, equipment, air travel and communications facilities in Vancouver, Beijing and Singapore. We also share the costs of employing administrative and non-executive management personnel at these offices. During the year ended December 31, 2007, our share of costs for the Vancouver and Singapore offices was $978,694. Effective as of 2008, we have agreed, as part of our cost sharing arrangements and in connection with Mr. Friedland’s anticipated appointment as Chief Executive Officer, to share the costs of operating an aircraft owned by a private company of which Mr. Friedland is the sole shareholder.

During the year ended December 31, 2007, we paid $844,460 to a wholly owned subsidiary of Ensyn Corporation, an unaffiliated company that was spun off from Ensyn Group, Inc. as a result of our acquisition of Ensyn Group, Inc. on April 15, 2005. Of this amount, $109,825 was reimbursement of salary, benefits and travel expenses for one of our directors, Dr. Robert Graham, in his position as Chief Executive Officer and President of

117

Ensyn Corporation (a position from which he has since resigned). The remaining amount of $734,635 was paid to Ensyn Corporation’s wholly owned subsidiary during the year ended December 31, 2007 for technical services provided to us. Mr. Graham owns an approximate 24% equity interest in Ensyn Corporation. In addition, the Company paid Dr. Graham’s private consulting company $202,788 for his role as interim Chief Technology Officer and subsequent consulting services.

During the year ended December 31, 2007, a company controlled by Mr. Shun-ichi Shimizu, one of our directors, received $1,143,967 for consulting services and out of pocket expenses.

A list of our directors is contained in Item 10 “Directors, Executive Officers and Corporate Governance.”

ITEM 14.   PRINCIPAL ACCOUNTANT’S FEES AND SERVICES

The following table summarizes the aggregate fees billed by Deloitte & Touche LLP:

	Year Ended December 31,
	Cdn.($000)
	2007		2006
Audit fees(a)	$	702	$	835
Audit related fees(b)		—		112
Tax fees(c)		80		135
All other fees(d)		—		—
	$	782	$	1,082

(a) Fees for audit services billed in 2007 and 2006 consisted of:

•  Audit of our annual financial statements

•  Reviews of our quarterly financial statements

•  Comfort letters, statutory and regulatory audits, consents and other services related to Canadian and U.S. securities regulatory matters

•  Review of our internal controls over financial reporting in compliance with the requirements of the Sarbanes Oxley Act of 2002.

(b)	Fees for audit related services billed in 2006 consist of financial and tax analysis in contemplation of our proposed merger with China Mineral Acquisition Corporation.
(c)	Fees for tax services billed in 2007 and 2006 consisted of tax compliance and tax planning and advice:

•  Fees for tax compliance services totaled Cdn.$62,000 and Cdn.$71,000 in 2007 and 2006, respectively. Tax compliance services are services rendered based upon facts already in existence or transactions that have already occurred to document, compute, and obtain government approval for amounts to be included in tax filings and consisted of:

i. Federal, state and local income tax return assistance

ii. Preparation of expatriate tax returns

iii. Assistance with tax return filings in certain foreign jurisdictions

•  Fees for tax planning and advice services totaled Cdn.$18,000 and Cdn.$64,000 in 2007 and 2006, respectively. Tax planning and advice are services rendered with respect to proposed transactions or that alter a transaction to obtain a particular tax result. Such services consisted of tax advice related to structuring certain proposed mergers, acquisitions and disposals.

(d) “All other fees” includes fees for services billed in 2007 and 2006 other than the services reported as “Audit fees”, “Audit related fees”, or “Tax fees”.

118

In considering the nature of the services provided by Deloitte & Touche LLP, the Audit Committee determined that such services are compatible with the provision of independent audit services. The Audit Committee discussed these services with Deloitte & Touche LLP and our management to determine that they are permitted under the rules and regulations concerning auditor independence promulgated by the SEC to implement the Sarbanes-Oxley Act of 2002, as well as the American Institute of Certified Public Accountants.

Audit Committee Pre-Approval Policy

Before Deloitte & Touche LLP is engaged by us or our subsidiaries to render audit or non-audit services, the engagement is approved by our Audit Committee.

The Audit Committee has adopted a pre-approval policy for audit or non-audit service engagements. This policy describes the permitted audit, audit related, tax, and other services (collectively, the “Disclosure Categories”) that Deloitte & Touche LLP may perform. The policy requires that, prior to the beginning of each fiscal year, a description of the services (the “Service List”) expected to be performed by Deloitte & Touche LLP in each of the Disclosure Categories in the following fiscal year be presented to the Audit Committee for approval. Services provided by Deloitte & Touche LLP during the following year that are included in the Service List are pre-approved following the policies and procedures of the Audit Committee.

Any requests for audit, audit related, tax, and other services not contemplated on the Service List must be submitted to the Audit Committee for specific pre-approval and cannot commence until such approval has been granted. Normally, pre-approval is provided at regularly scheduled meetings. However, the authority to grant a specific pre-approval between meetings, as necessary, has been delegated to the Chairman of the Audit Committee. The Chairman must update the Audit Committee at the next regularly scheduled meeting of any services that were granted specific pre-approval.

In addition, although not required by the rules and regulations of the SEC, the Audit Committee generally requests a range of fees associated with each proposed service on the Service List and any services that were not originally included on the Service List. Providing a range of fees for a service incorporates appropriate oversight and control of the independent auditor relationship, while permitting us to receive immediate assistance from the independent auditor when time is of the essence. On a quarterly basis, the Audit Committee reviews the status of services and fees incurred year-to-date against the original Service List and the forecast of remaining services and fees for the fiscal year.

119

PART IV

ITEM 15.   EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

We refer you to the Financial Statements and Supplementary Data in Item 8 of this report where these documents are listed. The following exhibits are filed as part of this Annual Report on Form 10-K:

Exhibits
	3	.1	Articles of Ivanhoe Energy Inc. as amended May 3, 2007.
	3	.2	Bylaws of Ivanhoe Energy Inc. as amended May 15, 2001 and further amended March 8, 2007
	10	.1	Petroleum Contract for Kongnan Block, Dagang Oilfield of the People’s Republic of China dated September 8, 1997 between China National Petroleum Corporation and Pan-China Resources Ltd., as amended June 11, 1999 (Incorporated by reference to Exhibit 3.15 of Form 20-F filed with the Securities and Exchange Commission on February 28, 2000)
	10	.2	Master License Agreement Amendment No. 1 dated October 11, 2000 between Syntroleum Corporation and Ivanhoe Energy Inc. (Incorporated by reference to Exhibit 10.18 of Form 10-K filed with the Securities and Exchange Commission on March 16, 2001)
	10	.3	Petroleum Contract dated September 19, 2002 between China National Petroleum Corporation and Pan-China Resources Ltd. for Zitong Block, Sichuan Basin of the People’s Republic of China (Incorporated by reference to Exhibit 10.12 of Form 10-K filed with the Securities and Exchange Commission on March 19, 2003)
	10	.4	Strategic Development Alliance Letter Agreement dated September 26, 2002 between Ivanhoe Energy Inc. and CITIC Energy Ltd. (Incorporated by reference to Exhibit 10.13 of Form 10-K filed with the Securities and Exchange Commission on March 19, 2003)
	10	.5	Employees’ and Directors’ Equity Incentive Plan as amended May 3, 2007.
	10	.6	Amendment No. 2 to Master License Agreement between Syntroleum Corporation and the Company dated June 1, 2002 (Incorporated by reference to Exhibit 10.6 of Form 10-K filed with the Securities and Exchange Commission on March 15, 2006).
	10	.7	Amendment No. 3 to Master License Agreement between Syntroleum Corporation and the Company dated July 1, 2003 (Incorporated by reference to Exhibit 10.17 of Form 10-K filed with the Securities and Exchange Commission on March 15, 2004)
	10	.8	Terms of Agreement — Conversion of Participating Interest by Richfirst dated February 18, 2006 among Richfirst Holdings Limited, Pan-China Resources Limited, Sunwing Energy Ltd. and the Company (Incorporated by reference to Exhibit 10.2 of Form 8-K filed with the Securities and Exchange Commission on February 24, 2006)
	10	.9	Amended and Restated License Agreement dated December 8, 1997 between Ensyn Technologies Inc. and Ensyn Group, Inc. and as amended on February 12, 1999 (Incorporated by reference to Exhibit 10.12 of Form 10-K filed with the Securities and Exchange Commission on March 15, 2006).
	10	.10	Employment Agreement dated November 25, 2003 between Ivanhoe Energy Inc. and W. Gordon Lancaster (Incorporated by reference to Exhibit 10.22 of Form 10-K filed with the Securities and Exchange Commission on March 10, 2005)
	10	.11	Employment Agreement, dated May 15, 2006 between Ivanhoe Energy Inc. and Joseph I. Gasca (Incorporated by reference to Exhibit 10.1 of Form 8-K filed with the Securities and Exchange Commission on May 26, 2006).
	10	.12	Stock Purchase Agreement, dated May 12, 2006 between Ivanhoe Energy Inc., Sunwing Holding Corporation, Sunwing Energy Ltd and China Mineral Acquisition Corporation (Incorporated by reference to Exhibit 10.1 of Form 8-K filed with the Securities and Exchange Commission on May 17, 2006).
	10	.13	Termination of Stock Purchase Agreement, dated August 31, 2006, between Ivanhoe Energy Inc., Sunwing Holding Corporation, Sunwing Energy Ltd. and China Mineral Acquisition Corporation (Incorporated by reference to Exhibit 99.1 of Form 8-K filed with the Securities and Exchange Commission on September 1, 2006).

120

Exhibits
	10	.14	Facility Agreement, dated September 14, 2007 between Pan-China Resources Ltd., Sunwing Energy Ltd., Sunwing Holding Corporation, Sunwing Zitong Energy Ltd., Standard Bank PLC and Standard Bank Asia Limited (Incorporated by reference to Exhibit 10.15 of Form 10-Q filed with the Securities and Exchange Commission on November 8, 2007).
	10	.15	Credit Agreement, dated October 30, 2006 between Ivanhoe Energy (USA) Inc. and LaSalle Bank N.A.
	10	.16	Indemnification Agreements entered into during the first quarter of 2008 between Ivanhoe Energy Inc. and its executive officers and directors.
	10	.17	Employment Agreement dated May 2, 2007 between Ivanhoe Energy Inc. and Michael Silverman.
	14	.1	Code of Business Conduct and Ethics as amended November 2, 2007.
	21	.1	Subsidiaries of Ivanhoe Energy Inc.
	23	.1	Consent of GLJ Petroleum Consultants Ltd., Petroleum Engineers
	23	.2	Consent of Netherland, Sewell & Associates, Inc.
	23	.3	Consent of Deloitte & Touche LLP
	31	.1	Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

121

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

IVANHOE ENERGY INC.

By: /s/  Joseph I. Gasca

Name:     Joseph I. Gasca

Title:  President and Chief Executive Officer

Dated: March 5, 2008

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date
/s/  JOSEPH I. GASCA Joseph I. Gasca	President and Chief Executive Officer (Principal Executive Officer)	March 5, 2008
/s/  W. GORDON LANCASTER W. Gordon Lancaster	Chief Financial Officer (Principal Financial and Accounting Officer)	March 5, 2008
/s/  DAVID R. MARTIN David Martin	Executive Co-Chairman of the Board and Director	March 5, 2008
/s/  A. ROBERT ABBOUD A. Robert Abboud	Independent Co-Chairman and Lead Director	March 5, 2008
/s/  ROBERT M. FRIEDLAND Robert M. Friedland	Deputy Chairman — Capital Markets and Director	March 5, 2008
/s/  E. LEON DANIEL E. Leon Daniel	Deputy Chairman — Projects and Engineering and Director	March 5, 2008
/s/  SHUN-ICHI SHIMIZU Shun-ichi Shimizu	Director	March 5, 2008
/s/  HOWARD R. BALLOCH Howard Balloch	Director	March 5, 2008
/s/  J. STEVEN RHODES J. Steven Rhodes	Director	March 5, 2008
/s/  ROBERT G. GRAHAM Robert G. Graham	Director	March 5, 2008

122

Signature	Title	Date
/s/  ROBERT A. PIRRAGLIA Robert A. Pirraglia	Director	March 5, 2008
/s/  BRIAN DOWNEY Brian Downey	Director	March 5, 2008
/s/  PETER G. MEREDITH Peter G. Meredith	Director	March 5, 2008

123

EXHIBIT INDEX

Exhibit No.			Description
	3	.1	Articles of Ivanhoe Energy Inc. as amended to May 3, 2007
	3	.2	Bylaws of Ivanhoe Energy Inc. as amended May 15, 2001 and further amended March 8, 2007
	10	.1	Petroleum Contract for Kongnan Block, Dagang Oilfield of the People’s Republic of China dated September 8, 1997 between China National Petroleum Corporation and Pan-China Resources Ltd., as amended June 11, 1999 (Incorporated by reference to Exhibit 3.15 of Form 20-F filed with the Securities and Exchange Commission on February 28, 2000)
	10	.2	Master License Agreement Amendment No. 1 dated October 11, 2000 between Syntroleum Corporation and Ivanhoe Energy Inc. (Incorporated by reference to Exhibit 10.18 of Form 10-K filed with the Securities and Exchange Commission on March 16, 2001)
	10	.3	Petroleum Contract dated September 19, 2002 between China National Petroleum Corporation and Pan-China Resources Ltd. for Zitong Block, Sichuan Basin of the People’s Republic of China (Incorporated by reference to Exhibit 10.12 of Form 10-K filed with the Securities and Exchange Commission on March 19, 2003)
	10	.4	Strategic Development Alliance Letter Agreement dated September 26, 2002 between Ivanhoe Energy Inc. and CITIC Energy Ltd. (Incorporated by reference to Exhibit 10.13 of Form 10-K filed with the Securities and Exchange Commission on March 19, 2003)
	10	.5	Employees’ and Directors’ Equity Incentive Plan as amended May 3, 2007.
	10	.6	Amendment No. 2 to Master License Agreement between Syntroleum Corporation and the Company dated June 1, 2002 (Incorporated by reference to Exhibit 10.6 of Form 10-K filed with the Securities and Exchange Commission on March 15, 2006).
	10	.7	Amendment No. 3 to Master License Agreement between Syntroleum Corporation and the Company dated July 1, 2003 (Incorporated by reference to Exhibit 10.17 of Form 10-K filed with the Securities and Exchange Commission on March 15, 2004)
	10	.8	Terms of Agreement — Conversion of Participating Interest by Richfirst dated February 18, 2006 among Richfirst Holdings Limited, Pan-China Resources Limited, Sunwing Energy Ltd. and the Company (Incorporated by reference to Exhibit 10.2 of Form 8-K filed with the Securities and Exchange Commission on February 24, 2006)
	10	.9	Amended and Restated License Agreement dated December 8, 1997 between Ensyn Technologies Inc. and Ensyn Group, Inc. and as amended on February 12, 1999 (Incorporated by reference to Exhibit 10.12 of Form 10-K filed with the Securities and Exchange Commission on March 15, 2006)
	10	.10	Employment Agreement dated November 25, 2003 between Ivanhoe Energy Inc. and W. Gordon Lancaster (Incorporated by reference to Exhibit 10.22 of Form 10-K filed with the Securities and Exchange Commission on March 10, 2005)
	10	.11	Employment Agreement, dated May 15, 2006 between Ivanhoe Energy Inc. and Joseph I. Gasca (Incorporated by reference to Exhibit 10.1 of Form 8-K filed with the Securities and Exchange Commission on May 26, 2006)
	10	.12	Stock Purchase Agreement, dated May 12, 2006 between Ivanhoe Energy Inc., Sunwing Holding Corporation, Sunwing Energy Ltd and China Mineral Acquisition Corporation (Incorporated by reference to Exhibit 10.1 of Form 8-K filed with the Securities and Exchange Commission on May 17, 2006)
	10	.13	Termination of Stock Purchase Agreement, dated August 31, 2006, between Ivanhoe Energy Inc., Sunwing Holding Corporation, Sunwing Energy Ltd. and China Mineral Acquisition Corporation (Incorporated by reference to Exhibit 99.1 of Form 8-K filed with the Securities and Exchange Commission on September 1, 2006).
	10	.14	Facility Agreement, dated September 14, 2007 between Pan-China Resources Ltd., Sunwing Energy Ltd., Sunwing Holding Corporation, Sunwing Zitong Energy Ltd., Standard Bank PLC and Standard Bank Asia Limited (Incorporated by reference to Exhibit 10.15 of Form 10-Q filed with the Securities and Exchange Commission on November 8, 2007).
	10	.15	Credit Agreement, dated October 30, 2006 between Ivanhoe Energy (USA) Inc. and LaSalle Bank N.A.

128

Exhibit No.			Description
	10	.16	Indemnification Agreements entered into during the first quarter of 2008 between Ivanhoe Energy Inc. and its executive officers and directors.
	10	.17	Employment Agreement, dated May 2, 2007 between Ivanhoe Energy Inc. and Michael Silverman.
	14	.1	Code of Business Conduct and Ethics amended November 2, 2007.
	21	.1	Subsidiaries of Ivanhoe Energy Inc.
	23	.1	Consent of GLJ Petroleum Consultants Ltd., Petroleum Engineers
	23	.2	Consent of Netherland, Sewell & Associates, Inc.
	23	.3	Consent of Deloitte & Touche LLP
	31	.1	Certification by the Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31	.2	Certification by the Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	.1	Certification by the Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	32	.2	Certification by the Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

129

EX-3.1

Exhibit 3.1

YUKON
BUSINESS CORPORATIONS ACT
(Sections 30 and 179)

Form 5-01
ARTICLES OF AMENDMENT

1.	Name of Corporation:
	IVANHOE ENERGY INC.

2.	The Articles of the above-named Corporation were amended pursuant to a Court order:
	Yes o           No þ

3.	The Articles of the above named corporation are amended as follows:
	“4. Number (or minimum and maximum number) of Directors:
	Not less than three (3), nor more than thirteen (13).”

4. Date: August 22, 2007

Signature:	/s/ Beverly A. Bartlett	Title:	Vice President and
	Beverly A. Bartlett		Corporate Secretary

FILED

August 22 2007

REGISTRAR

OF CORPORATIONS

YUKON
BUSINESS CORPORATIONS ACT
(Sections 30 and 179)

Form 5-01
ARTICLES OF AMENDMENT

1. Name of Corporation:

IVANHOE ENERGY INC.

2. The Articles of the above-named Corporation were amended pursuant to a Court order:

Yes   o No   þ

3.	The Articles of the above named corporation are amended as follows:
	“4. Number (or minimum and maximum number) of Directors:
	Not less than three (3), nor more than thirteen (11).”

4. Date: September 22/05

Signature:	/s/ R. Edward Flood	Title:	Director
	R. Edward Flood

FILED

SEP 28 2005

DEPUTY REGISTRAR
OF CORPORATIONS

YUKON

BUSINESS CORPORATIONS ACT
(Sections 27 or 171)

Form 5-01

ARTICLES OF AMENDMENT

1.	Name of Corporation:
	BLACK SEA ENERGY LTD.           Corporate Access Number 25151

2.	THE ARTICLES OF THE ABOVE-NAMED CORPORATION WERE AMENDED PURSUANT TO A COURT ORDER:
	Yes o            No þ

3.	THE ARTICLES OF THE ABOVE-NAMED CORPORATION WERE AMENDED PURSUANT TO A COURT ORDER:
	Name of Corporation changed to:           Ivanhoe Energy Inc.

4.

June 22, 1999	/s/ Beverly Downing	Corporate Secretary
DATE	SIGNATURE	TITLE

FILED

JUN 24 1999

DEPUTY REGISTRAR

OF CORPORATIONS

YUKON
BUSINESS CORPORATIONS ACT
(Sections 175)

Form 5-01
ARTICLES OF AMENDMENT

1.	Name of Corporation:
	BLACK SEA ENERGY LTD. — Corporate Access No.: 25151

2.	The Articles of the above-named Corporation were amended pursuant to a Court order:
	Yes o            No þ

3. The Articles of the above named corporation are amended as follows:

1.	Restrictions in the Articles of Amendment, dated May 31, 1996 and filed June 30, 1996 are deleted and there shall be no restrictions on share transfers.
2.	Schedule “B” of the Articles of Incorporation, dated February 20, 1995, filed February 21, 1995 are amended by deleting the provisions contained in the said Schedule “B” and substituting the following:

“A meeting of the shareholders of the Corporation may, in the Directors’ unfettered discretion, be held at any location in North America, Asia or Europe specified by the Directors in the Notice of such meeting.”

4. Date: April 15, 1997

Signature:	/s/ Peter Meredith	Title:	Assistant Secretary
	Peter Meredith

FILED

APR 16 1997

DEPUTY REGISTRAR

OF CORPORATIONS

YUKON

BUSINESS CORPORATIONS ACT
(Section 27 or 171)

FORM 5-01

ARTICLES OF AMENDMENT

1.	NAME OF CORPORATION
	888 CHINA HOLDINGS LIMITED           Corporate Access Number 24316

2.	THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDED PURSUANT TO A COURT ORDER:
	YESo            NO þ

3. THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDEDAS FOLLOWS:

1.	Name of Corporation: BLACK SEA ENERGY LTD.
3.	Restrictions, if any, on share transfers:
	If, and for so long as, the Corporation is not a “distributing corporation”, no shares may be transferred without the consent of the Board of Directors, who will not be required to give any reason for refusing to consent to any proposed transfer.
6.	Other provisions, if any:
	The Directors may, between annual general meetings, appoint one or more additional Directors of the Corporation to serve until the next annual general meeting, but the number of additional Directors shall not at any time exceed one third of the number of Directors who held office at the expiration of the last annual general meeting of the Corporation, provided that the total number of directors shall not exceed the maximum number of directors fixed pursuant to the Articles.

May 31, 1996	/s/ D. Huberman	Director
4.                          DATE	David Huberman	TITLE
	SIGNATURE

FILED

Jun 03 1996

REGISTRAR

OF CORPORATIONS

YUKON
BUSINESS CORPORATIONS ACT
(Section 8)

Form 1-01
ARTICLES OF INCORPORATION

1. Name of Corporation: 888 CHINA HOLDINGS LIMITED

2.

The classes and any maximum number of shares that the Corporation is authorized to issue:

The Corporation is authorized to issue an unlimited number of shares without nominal or par value and the authorized capital of the Corporation is to be divided into Common and Preferred shares. The attached Schedule “A” setting out the rights, privileges, restrictions and conditions attached to the Common and Preferred shares is incorporated into and forms part of these Articles of Incorporation.

3. Restrictions, if any, on share transfers: None.

4.	Number (or minimum and maximum number) of Directors:
	Not less than three (3), nor more than nine (9).

5.	Restrictions, if any, on business the Corporation may carry on:
	Pursuant to the Yukon Act, the Corporation is restricted from carrying on the business of a railway, steamship, air transport, canal, telegraph, telephone or irrigation company.

6. Other provisions, if any:

            The attached Schedule “B” is incorporated into and forms part of these Articles of Incorporation.

7.	Incorporator:		Date: February 20, 1995
	Leslie McRae, Legal Assistant Preston, Willis & Lackowitcz
	Barristers & Solicitors 2093 Second Avenue Whitehorse, Yukon
	Y1A 1B5		FILED
	Signature:	/s/ Leslie McRae	Feb 21 1995
			REGISTRAR OF CORPORATIONS

SCHEDULE A

TO THE ARTICLES OF INCORPORATION OF
888 CHINA HOLDINGS LIMITED

1. PROVISIONS ATTACHING TO THE COMMON SHARES

The common shares, as a class, shall have attached thereto the following rights, privileges, restrictions and conditions:

1.1 Dividends

Subject to the prior rights of the holders of preferred shares and any other shares ranking senior to the common shares with respect to priority in the payment of dividends, the holders of common shares shall be entitled to receive dividends and the Corporation shall pay dividends thereon, as and when declared by the board of directors of the Corporation out of moneys properly applicable to the payment of dividends, in such amount and in such form as the board of directors of the Corporation may from time to time determine and all dividends which the board of directors of the Corporation may declare on the common shares shall be declared and paid in equal amounts per share on all common shares at the time outstanding.

1.2 Dissolution

In the event of the dissolution, liquidation or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of assets of the Corporation among its shareholders for the purpose of winding-up its affairs, subject to the prior rights of the holders of the preferred shares and any other shares ranking senior to the common shares with respect to priority in the distribution of assets upon dissolution, liquidation, winding-up or distribution for the purpose of winding-up, the holders of the common shares shall be entitled to receive the remaining property and assets of the Corporation.

1.3 Voting Rights

The holders of the common shares shall be entitled to receive notice of and to attend all meetings of the shareholders of the Corporation and shall have one vote for each common share held at all meetings of the shareholders of the Corporation, except meetings at which only holders of another specified class or series of shares of the Corporation are entitled to vote separately as a class or series.

2. PROVISIONS ATTACHING TO THE PREFERRED SHARES

The preferred shares, as a class, shall have attached thereto the following rights, privileges, restrictions and conditions:

2.1 Directors’ Authority to Issue in One or More Series

The board of directors of the Corporation may issue the preferred shares at any time and from time to time in one or more series before the first shares of any particular series are issued, and shall fix the number of preferred shares in such series and, determine, subject to the limitations in the articles, the designation, rights, privileges, restrictions and conditions attached to the shares of such series including without limitation, the rate or rates, amount or method or methods of

calculation of dividends thereon, the time and place of payment of dividends, whether cumulative or non-cumulative or partially cumulative and whether such rate, amount or method of calculation shall be subject to change or adjustment in the future, the currency or currencies of payment of dividends, the priorities thereof in relation to other shares or the priorities of other shares in relation thereto, if any, the consideration and the terms and conditions of any purchase for cancellation, retraction or redemption rights, if any, the conversion or exchange rights attached thereto, if any, the voting rights attached thereto, if any, and the terms and conditions of any share purchase plan or sinking fund with respect thereto. Before the issue of the first shares of a series, the board of directors of the Corporation shall send to the Registrar, as defined in the Business Corporations Act (Yukon), articles of the amendment containing the description of such series including the designation, rights, privileges, restrictions and conditions attached thereto as determined by the board of directors of the Corporation.

2.2 Ranking of Preferred Shares

No rights, privileges, restrictions or conditions attached to a series of preferred shares shall confer upon a series a priority in respect of dividends or return of capital over any other series of preferred shares then outstanding. The preferred shares shall be entitled to priority over the common shares of the Corporation and over any other shares of the Corporation ranking junior to the preferred shares with respect to the payment of dividends and the distribution of assets in the event of the liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, or any other distribution of the assets of the Corporation among its shareholders for the purpose of winding-up its affairs. If any cumulative dividends or amounts payable on a return of capital in respect of a series of preferred shares are not paid in full the preferred shares of all series shall participate rateably in respect of such dividends, including accumulations, if any, in accordance with the sums that would be payable on such shares if all such dividends were declared and paid in full, and in respect of any repayment of capital in accordance with the sums that would be payable on such repayment of capital if all sums so payable were paid in full, provided however, that in the event of there being insufficient assets to satisfy in full all such claims to dividends and return of capital, the claims of the holders of the preferred shares with respect to repayment of capital shall first be paid and satisfied and any assets remaining thereafter shall be applied towards the payment and satisfaction of claims in respect of dividends. After payment to the holders of preferred shares of each series of the amounts of dividends and capital payable in accordance with these provisions and the rights, privileges and restrictions attached to each series of preferred shares, the holders of preferred shares shall not be entitled to share in any further distribution of the property and assets of the Corporation. The preferred shares of any series may also be given such other preferences, not inconsistent with the articles, over the common shares and over any other shares ranking junior to the preferred shares as may be determined in the case of such series of preferred shares.

2.3 Voting Rights

Except as hereinafter referred to or as otherwise required by law or in accordance with any voting rights which may from time to time be attached to any series of preferred shares, the holders of the preferred shares as a class shall not be entitled as such to receive notice of, to attend or to vote at any meeting of the shareholders of the Corporation.

2.4 Approval of Holders of Preferred Shares

The rights, privileges, restrictions and conditions attaching to the preferred shares as a class may be added to, changed or removed but only with the approval of the holders of the preferred shares given as hereinafter specified.

The approval of the holders of preferred shares to add to, change or remove any right, privilege, restriction or condition attaching the preferred shares as a class or to any other matter requiring the consent of the holders of the preferred shares as a class may be given in such manner as may then be required by law, subject to a minimum requirement that such approval shall be given by resolution passed by the affirmative vote of at least two-thirds of the votes cast at a meeting of the holders of preferred shares duly called for that purpose. The formalities to be observed in respect of the giving of notice of any such meeting or any adjourned meeting and the conduct thereof shall be those from time to time required by the Business Corporations Act (Yukon) (as from time to time amended, varied or replaced) and prescribed in the by-laws of the Corporation with respect to meetings of shareholders. On every poll taken at a meeting of holders of preferred shares as a class, each holder entitled to vote thereat shall have one vote in respect of each preferred share held by him.

SCHEDULE B

TO THE ARTICLES OF INCORPORATION OF
888 CHINA HOLDINGS LIMITED

Other provisions, if any:

     A meeting of the shareholders of the Corporation may, in the Directors’ unfettered discretion, be held at any location in North America or Asia specified by the Directors in the Notice of such meeting.

EX-3.2

Exhibit 3.2

IVANHOE ENERGY INC.

BY-LAW NO. 1

May 3, 2007

TABLE OF CONTENTS

			PAGE NO.
PART 1		INTERPRETATION		1
	1.1	Definitions		1
	1.2	Interpretation		2
	1.3	Headings		2
PART 2		BUSINESS OF THE CORPORATION		2
	2.1	Corporate Seal		2
	2.2	Facsimile of Seal		2
	2.3	Affixation of Seal		2
	2.4	Fiscal Period		3
	2.5	Banking		3
	2.6	Voting Rights in Other Bodies Corporate		3
PART 3		BORROWING AND SECURITIES		3
	3.1	Borrowing Power		3
	3.2	Delegation of Borrowing Authority		4
	3.3	Rights Attaching to Debt Obligations		4
PART 4		BOARD OF DIRECTORS		4
	4.1	Calling of Meetings		4
	4.2	Notice of Meeting		4
	4.3	First Meeting of New Board		4
	4.4	Quorum		5
	4.5	Chairman		5
	4.6	Procedure		5
	4.7	Remuneration and Expenses		5
	4.8	Telephone Meetings		5
	4.9	Number of Directors		5
PART 5		COMMITTEES		6
	5.1	Transaction of Business		6
PART 6		PROTECTION AND INDEMNITY OF DIRECTORS AND OTHERS		6
	6.1	Contracts with the Corporation		6
	6.2	Disclosure		7
	6.3	Limitation of Liability		7
	6.4	Amplification of Rights		7

			PAGE NO.
PART 7		SHARES		7
	7.1	Shares and Share Certificates		7
	7.2	Registration of Transfers		8
PART 8		DIVIDENDS AND RIGHTS		8
	8.1	Declaration		8
	8.2	Interest		8
	8.3	Valuation of Non-Cash Dividends		8
	8.4	Dividend Cheques		8
	8.5	Cheques to Joint Holders		8
	8.6	Non-receipt of Cheques		9
	8.7	Unclaimed Dividends		9
PART 9		MEETINGS OF SHAREHOLDERS		9
	9.1	Chairman, Secretary and Scrutineers		9
	9.2	Persons Entitled to be Present		9
	9.3	Quorum		9
	9.4	Time for Deposit of Proxies		10
	9.5	Lodging of Proxies		10
	9.6	Use of Various Communication Methods		10
	9.7	Validity of Proxies		10
	9.8	Joint Shareholders		10
	9.9	Votes to Govern		11
	9.10	Show of Hands		11
	9.11	Ballots		11
	9.12	Adjournment		11
	9.13	Rulings by the Chairman		11
PART 10		EXAMINATION OF RECORDS		12
	10.1	Access by Auditor and Directors		12
	10.2	Inspection by Shareholders		12
PART 11		NOTICES		12
	11.1	Notice to Joint Shareholders		12
	11.2	Signature to Notice		12
	11.3	Day of Transmittal		12
	11.4	Omissions and Errors		13
	11.5	Persons Entitled by Death or Operation of Law		13
	11.6	Waiver of Notice		13
	11.7	Form of Waiver		13

IVANHOE ENERGY INC.

BY-LAW NO. 1

PART 1 INTERPRETATION

1.1	Definitions
	In the by-laws, unless the context otherwise requires:
	Act means the Business Corporations Act (Yukon), or any statute substituted therefor, as from time to time amended;
	appoint includes “elect” and vice versa;
	Board means the Board of Directors of the Corporation;
	by-laws means this by-law and all other by-laws of the Corporation from time to time in effect;
	Corporation means the corporation which adopts this by-law;
	meeting of shareholders includes both an annual meeting and a special meeting of shareholders of the Corporation, and special meeting of shareholders means a meeting of shareholders or of any class or classes of shareholders other than an annual meeting;
	recorded address means:

(i)	in the case of a shareholder, the shareholder’s address as recorded in the securities register,
(ii)	in the case of joint shareholders, the address appearing in the securities register in respect of such joint holding, or the first address so appearing if there is more than one, and
(iii)	in the case of a Director, officer, or auditor, the latest address of the Director, officer or auditor recorded in the records of the Corporation;

signing officer means, in relation to any instrument, a person authorized to sign the instrument on behalf of the Corporation by section 2.3 or by a resolution passed pursuant thereto, and

a word or expression defined in the Act for the purposes of the entire Act has the meaning so defined.

1

1.2	Interpretation
	In the interpretation of the by-laws,

(a)	words importing singular number include the plural and vice versa,
(b)	words importing gender include the masculine, feminine and neuter, and
(c)	a word importing a person includes an individual, body corporate, partnership, trust, estate and an unincorporated organization.

1.3	Headings
	The division of a by-law into parts and the headings of parts and sections will be considered as for convenience of reference only and will not affect the construction or interpretation of the by-law.

PART 2 BUSINESS OF THE CORPORATION

2.1	Corporate Seal
	The Board may adopt a corporate seal for the Corporation and from time to time adopt a new seal in replacement of a seal previously adopted.

2.2	Facsimile of Seal
	To enable the seal of the Corporation to be affixed to any bonds, debentures, share certificates or other securities of the Corporation, or any securities of another corporation to which an instrument of guarantee of the Corporation is endorsed or annexed, whether in definitive or interim form, on which a facsimile of that signature of a Director or officer of the Corporation is, in accordance with these by-laws, printed or otherwise mechanically reproduced, there may be delivered to the person employed to engrave, lithograph or print such definitive or interim bonds, debentures, share certificates or other securities one or more unmounted dies reproducing the Corporation’s seal, and the chairman of the Board, the president or a vice-president, together with the secretary or treasurer or an assistant secretary or assistant treasurer may by a document authorize such person to cause the Corporation’s seal to be affixed to such definitive or interim bonds, debentures, share certificates or other securities by the use of such a die, and bonds, debentures, share certificates or other securities to which the Corporation’s seal is so affixed and the due issue of which is evidenced by at least one authorized signature manually affixed thereto will for all purposes be deemed to be under and to bear the Corporation’s seal lawfully affixed thereto.
2.3	Affixation of Seal
	The corporate seal of the Corporation will not be affixed to any document or instrument except by or in the presence of

(a) such person as is or such persons as are appointed for the purpose by resolution of the Board applying either to a specific instrument or specific

2

	instruments, to instruments of a particular description, or to instruments generally, or
(b)	the secretary or an assistant secretary for the purpose of certifying copies of or extracts from the articles or by-laws of the Corporation, minutes of meetings or resolutions of the shareholders or the Board or committees of the Board, or any instrument executed or issued by the Corporation.

2.4	Fiscal Period
	The fiscal period end of the Corporation will be as from time to time determined by the Board.
2.5	Banking
	The Corporation will maintain accounts in its name with such bank or banks and other depositories, including banks and depositories outside Canada, as the Board from time to time determines, and no funds will be withdrawn from any account except as provided in a by-law or a resolution of the Board related to the operation of the account.
2.6	Voting Rights in Other Bodies Corporate
	To enable to the Corporation to exercise voting rights attaching to securities held by the Corporation,

(a)	signing officers of the Corporation may from time to time execute and deliver proxies and arrange for the issuance of voting certificates or other evidences of such rights in favour of such person or persons as may be determined by the officers by whom they are executed, and
(b)	the Board may from time to time direct the manner in which and the person or persons by whom any particular voting rights or class of voting rights may or will be exercised.

PART 3 BORROWING AND SECURITIES

3.1	Borrowing Power
	Without limiting the powers of the Corporation as set forth in the Act, the Board may from time to time cause the Corporation to

(a)	borrow money on the credit of the Corporation,
(b)	to the extent permitted by the Act, give guarantees on behalf of the Corporation to secure the performance of any present or future indebtedness or other obligation of another person,
(c)	issue, reissue, sell or pledge bonds, debentures, notes or other evidences of indebtedness or guarantee of the Corporation, whether secured or unsecured, and

3

(d) charge, mortgage, hypothecate, pledge or otherwise create a security interest in any or all property of the Corporation, currently owned or subsequently acquired, to secure any present or future indebtedness or other obligation of the Corporation.

3.2	Delegation of Borrowing Authority
	To the extent permitted by the Act, the Board may from time to time delegate to a committee or to one or more of the Directors and officers of the Corporation all or any of the powers conferred on the Board by section 3.1 to such extent and in such manner as the Board from time to time determines.
3.3	Rights Attaching to Debt Obligations
	Any debt obligation of the Corporation may be issued at a discount, premium or otherwise, and with any special privileges as to redemption, surrender, drawing, allotment of or conversion into or exchange for shares or other securities.

PART 4 BOARD OF DIRECTORS

4.1	Calling of Meetings
	The Chairman of the Board, or the President may, and the Secretary upon the request of any Director will, convene a meeting of the Board.
4.2	Notice of Meeting
	Notice of the time and place of each meeting of the Board must be given to each Director not less than 48 hours before the time when the meeting is to be held, but the notice need not specify what matters are to be dealt with at the meeting other than

(a)	a proposal to adopt, amend or repeal any by-law,
(b)	a proposal to authorize any material contract in which a Director will have a material interest or which is with a corporation of which any Director is a Director or officer, or
(c)	as required by the Act.

4.3	First Meeting of New Board
	Provided a quorum of Directors is present, each newly elected Board may without notice hold its first meeting immediately following the meeting of shareholders at which such Board is elected.

4

4.4	Quorum
	The Board may from time to time fix the quorum required for the transaction of business at a meeting of the Board and, if not so fixed, the quorum will be a majority of the number of elected or appointed Directors.
4.5	Chairman
	The chairman of any meeting of the Board will be the first mentioned of the Chairman of the Board, the President and the most senior vice-president or other officer who is a Director and is present at the meeting, but if no such officer is present within 15 minutes after the time appointed for holding the meeting, or if each such officer who is present indicates unwillingness to act as chairman of the meeting, the Directors present will choose one of their number to be chairman.
4.6	Procedure
	A question arising at a meeting of the Board will be decided by a majority of the votes cast, and in case of an equality of votes the chairman may not exercise a second or casting vote.
4.7	Remuneration and Expenses
4.7.1	The Directors will be paid such remuneration for their services to the Corporation as the Board from time to time determines, and will be entitled to be reimbursed for traveling and other expenses properly incurred by them in attending any meeting of the Board or committee of the Board, or meeting of shareholders.
4.7.2	A person who is a Director may serve the Corporation in another capacity and may for so doing receive remuneration in addition to the remuneration to which such person is entitled as a Director.
4.7.3	Remuneration payable to a Director who is also an officer or employee of the Corporation, or who serves the Corporation in a professional capacity, will be in addition to the Director’s salary as an officer or employee or professional fees.
4.8	Telephone Meetings
	A Director may participate in a meeting of the Board or of a committee of the Board by means of telephone or other communication facilities that permit all Directors participating in the meeting to hear each other.
4.9	Number of Directors
	Subject to the Act and to the articles of the Corporation, the number of Directors to be elected at any meeting of shareholders at which Directors are to be elected will be, unless the incumbent Directors otherwise determine prior to giving notice of such meeting of shareholders, the number of Directors holding office as of the date that the notice of such meeting is given.

5

PART 5 COMMITTEES

5.1	Transaction of Business
	Except as otherwise determined by the Board, the proceedings of a committee of the Board will be governed as follows:

(a)	the powers of the committee may be exercised by a meeting at which a quorum of the committee is present;
(b)	meetings of the committee may be held at any place within or outside of Canada;
(c)	a majority of the members of a committee will constitute a quorum thereof;
(d)	a question arising at a meeting will be determined by a majority of the votes cast on the question, and in the case of an equality of votes the chairman of the meeting will not be entitled to a second or casting vote;
(e)	the committee will meet and adjourn as it thinks proper and will have power to elect its chairman, to make rules for the conduct of its business and to appoint such assistants as it deems necessary;
(f)	the committee will keep regular minutes of its transactions and will cause them to be recorded in books kept for that purpose, and report its transactions to the Board at such times as the Board from time to time requires.

PART 6 PROTECTION AND INDEMNITY OF DIRECTORS AND OTHERS

6.1	Contracts with the Corporation
	Subject to the Act,

(a)	no Director is disqualified by being a Director, or by reason of holding any other office or place of profit under the Corporation or under any body corporate in which the Corporation is a shareholder or otherwise interested, from entering into any contract, transaction or arrangement with the Corporation either as vendor, purchaser or otherwise, or from being concerned or interested in any manner whatsoever in any contract, transaction or arrangement made or proposed to be entered into with the Corporation,
(b)	no such contract, transaction or arrangement is thereby void or liable to be avoided, and
(c)	no Director is liable to account to the Corporation for any profit arising from any such office or place of profit or realized by any such contract, transaction or arrangement.

6

6.2	Disclosure
	Except as required by the Act, no director is obliged to make any declaration or disclosure of interest or refrain from voting.
6.3	Limitation of Liability
	Except as otherwise provided in the Act, no Director or officer will be liable:

(a)	for the acts, receipts, neglects or defaults of any other person, or for joining in any receipt or act for conformity,
(b)	for any loss, damage or expense happening to the Corporation through the insufficiency or deficiency of title to any property acquired by, for, or on behalf of the Corporation,
(c)	for the insufficiency or deficiency of any security in or upon which any moneys of the Corporation are invested,
(d)	any loss or damage arising from the bankruptcy, insolvency or wrongful act of any person with whom any money, security or other property of the Corporation is lodged or deposited, or
(e)	for any other loss, damage, or misfortune whatever which may arise out of the execution of the duties of as a Director or in relation thereto.

6.4	Amplification of Rights
	The foregoing provisions of this Part are in amplification of or in addition to, and not by way of limitation of or substitution for, any rights, immunities or protection conferred on any Director or officer by any law or otherwise.

PART 7 SHARES

7.1

Shares and Share Certificates

The shares of the Corporation shall be represented by certificates or, where allowed for or required by applicable law, shall be electronically issued without a certificate. Every holder of one or more shares of the Corporation is entitled, at the option of the holder, to a share certificate, or a non-transferable written certificate of acknowledgement of the right to obtain a share certificate, stating the number and class or series of shares held as shown on the securities registers. Any certificate shall be signed in accordance with these by-laws and need not be under corporate seal. Certificates shall be manually countersigned by at least one director or officer of the corporation or by or on behalf of a registrar or transfer agent of the Corporation. Subject to the Act, the signature of any signing director, officer, transfer agent or registrar may be printed or mechanically reproduced on the certificate. Every printed or mechanically reproduced signature is deemed to be the signature of the person whose signature it reproduces and is binding upon the Corporation. A certificate

7

	executed as set out in this section is valid even if a director or officer whose printed or mechanically reproduced signature appears on the certificate no longer holds office at the date of issue of the certificate.
7.2	Registration of Transfers
	Subject to the Act, a transfer of a share may only be registered in the Corporation’s securities register upon:

(a)	presentation of the certificate representing such share with an endorsement, which complies with the Act, made on the certificate or delivered with the certificate, duly executed by an appropriate person as provided by the Act, together with reasonable assurance that the endorsement is genuine and effective, upon payment of all applicable taxes and any reasonable fees prescribed by the board; or
(b)	in the case of shares electronically issued without a certificate, upon receipt of proper transfer instructions from the registered holder of the shares, a duly authorized attorney of the registered holder of the shares or an individual presenting proper evidence of succession, assignment or authority to the transfer the shares.

PART 8 DIVIDENDS AND RIGHTS

8.1	Declaration
	The Board may from time to time as permitted by law declare dividends payable to the shareholders according to their respective rights and interest in the Corporation.
8.2	Interest
	No dividend will bear interest against the Corporation.
8.3	Valuation of Non-Cash Dividends
	The Board will determine the value of any dividend not paid in money.
8.4	Dividend Cheques
	A dividend payable in money may be paid by cheque of the Corporation or its paying agent to the order of each registered holder of shares of the class or series on which it is declared and mailed by prepaid ordinary mail to the holder at the holder’s recorded address or as the holder otherwise directs.
8.5	Cheques to Joint Holders
	In the case of joint holders, a cheque in payment of dividends will, unless they otherwise jointly direct, be made payable to the order of all of them and mailed to them at their recorded address.

8

8.6	Non-receipt of Cheques
	If a dividend cheque is not received by the person to whom it is so sent, the Corporation will issue to such person a replacement cheque for a like amount on such terms as to evidence of non-receipt and of title, indemnity and reimbursement of expense as the Board prescribes, whether generally or in any particular case.
8.7	Unclaimed Dividends
	Any dividend unclaimed for six years after the date of record for payment will be forfeited and revert to the Corporation.

PART 9 MEETINGS OF SHAREHOLDERS

9.1	Chairman, Secretary and Scrutineers
9.1.1	The chairman of a meeting of shareholders will be the first mentioned of such of the following officers who is present at the meeting and is willing to act: Chairman of the Board, President, or a Vice-President.
9.1.2	If no such officer willing to act is present within 15 minutes after the time fixed for holding the meeting, the persons present and entitled to vote may choose one of their number to be chairman.
9.1.3	If the Secretary of the Corporation is absent, the chairman will appoint some person, who need not be a shareholder, to act as secretary of the meeting.
9.1.4	One or more scrutineers, who need not be shareholders, may be appointed by resolution or by the chairman with the consent of the meeting.
9.2	Persons Entitled to be Present
	The only persons entitled to be present at a meeting of shareholders will be those entitled to vote thereat, the Directors and the auditor of the Corporation and any other person who, although not entitled to vote, is entitled or required under any provision of the Act or the articles or by-laws to be present at the meeting, and any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting.
9.3	Quorum
	A quorum for the transaction of business at any meeting of shareholders is at least one individual present at the commencement of the meeting holding, or representing by proxy the holder or holders of shares carrying in the aggregate not less than thirty-three and one-third per cent (33 1/3%) of the votes eligible to be cast at the meeting.

9

9.4	Time for Deposit of Proxies
	A proxy may be acted on only if, before the time specified in the notice of the meeting, it is deposited with the Corporation or otherwise in accordance with the regulations made pursuant to section 9.5 or, in any case where no such regulation has been made, if it has been received by the secretary of the Corporation or by the chairman of the meeting or any adjournment thereof before the time of voting.
9.5	Lodging of Proxies
	Subject to the Act, the Board may from time to time establish regulations regarding the lodging of proxies at some place or places other than the place at which a meeting or adjourned meeting of shareholders is to be held and for particulars of such proxies to be cabled or telegraphed or sent in writing before the meeting or adjourned meeting to the Corporation or an agent of the Corporation and providing that proxies so lodged may be voted as though the proxies themselves were produced at the meeting or adjourned meeting, and votes given in accordance with such regulations will be valid and will be counted.
9.6	Use of Various Communication Methods
	The chairman of any meeting of shareholders may, subject to any regulations so made, in the chairman’s discretion accept facsimile, telegraphic, cable or other written communication as to the authority of anyone claiming to vote on behalf of and to represent a shareholder notwithstanding that no proxy conferring such authority has been lodged with the Corporation, and votes given in accordance with such telegraphic or cable or written communication accepted by the chairman will be valid and will be counted.
9.7	Validity of Proxies
	A vote given in accordance with the terms of an instrument of proxy will be valid notwithstanding

(a)	the previous death or insanity of the shareholder giving the proxy; or
(b)	the revocation of the proxy or of the authority under which the proxy was executed; or
(c)	the transfer of the share in respect of which the proxy is given;

	unless notice in writing of such death, insanity, revocation or transfer is received at the office of the Corporation or by the chairman of the meeting before the commencement of the meeting or adjourned meeting at which the proxy is used.
9.8	Joint Shareholders
	If two or more of the joint holders of a share are present in person or represented by proxy and vote, the vote of that one of them, or of the proxy holder for that one of them, whose name appears first on the shareholders list of the Corporation in

10

	respect of such share will be accepted to the exclusion of the vote of another, or of the proxy holder for another, of such joint holders.
9.9	Votes to Govern
	At a meeting of shareholders every question will, except as otherwise required by the articles or by-laws, be determined by a majority of the votes cast on the question, and in case of an equality of votes either on a show of hands or on a poll, the chairman of the meeting will not be entitled to a casting vote.
9.10	Show of Hands
9.10.1	On a show of hands every person who is present and entitled to vote will then have one vote.
9.10.2	Whenever a vote by show of hands is taken on a question, then unless a ballot thereon is required or demanded, a declaration by the chairman of the meeting that the vote upon the question has been carried or carried by a particular majority or not carried, and an entry to that effect in the minutes of the meeting, will be prima facie evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against the question, and the result of the vote so taken will be the decision of the shareholders upon such question.
9.11	Ballots
9.11.1	A demand for a ballot may be withdrawn at any time before the taking of the ballot.
9.11.2	If a ballot is taken each person present will be entitled to one vote, or such other number of votes as the by-laws provide, in respect of each share which such person is entitled to vote on the question at the meeting, and the result of the ballot so taken will be the decision of the shareholders upon such question.
9.11.3	A poll demanded on the election of a chairman, or on a question of adjournment will be taken forthwith, and a poll demanded on any other question will be taken at such time as the chairman of the meeting directs.
9.12	Adjournment
	The chairman may, with the consent of any meeting, adjourn the meeting from time to time.
9.13	Rulings by the Chairman
	The chairman of a meeting of shareholders will have regard to accepted rules of parliamentary procedure, and

(a) will have absolute authority over matters of procedure and there will be no appeal from the ruling of the chairman, but if the chairman, in the chairman’s absolute discretion, deems it advisable to dispense with the rules of parliamentary procedure at any general meeting or part thereof,

11

	the chairman will so state and will clearly state the rules under which the meeting or the appropriate part thereof will be conducted,
(b)	any dispute as to the admission or rejection of a vote will be determined by the chairman and the chairman’s determination will be final and conclusive,
(c)	if disorder arises which prevents continuation of the business of a meeting, the chairman may quit the chair and announce the adjournment of the meeting, and upon the chairman’s so doing, the meeting is, notwithstanding section 9. 13, immediately adjourned, and
(d)	the chairman may ask or require anyone who is not a registered shareholder entitled to vote at the meeting or proxyholder representing such a shareholder to leave the meeting.

PART 10 EXAMINATION OF RECORDS

10.1	Access by Auditor and Directors
	The auditor and every Director will at all reasonable times have access to, and may take extracts from, all accounts, records, books and other documents of the Corporation.
10.2	Inspection by Shareholders
	No shareholder will have the right of inspection of any account, record, book or document of the Corporation except as prescribed by statute or authorized by the Board.

PART 11 NOTICES

11.1	Notice to Joint Shareholders
	If two or more persons are registered as joint holders of a share, a notice must be directed to all of them but need be delivered or addressed only to the recorded address of one of them to be sufficient notice to all.
11.2	Signature to Notice
	The signature to any notice to be given by the Corporation may be in whole or in part written, stamped, typewritten or printed.
11.3	Day of Transmittal
	A notice sent by any means of wire or wireless or any other form of recorded communication will be deemed to have been given on the day when it is transmitted by the Corporation or, if transmitted by another, on the day when it is dispatched or delivered to the appropriate communication company or agency or its representative for dispatch, and a certificate or declaration in respect of any thereof in writing signed by an officer or by an employee of a transfer agent or

12

	registrar of the Corporation will be conclusive evidence of the matters therein certified or declared.
11.4	Omissions and Errors
	The accidental omission to give a notice to any shareholder, Director, officer, or auditor or the non-receipt of a notice by any such person or an error in a notice not affecting the substance thereof will not invalidate any action taken at a meeting held pursuant to such notice or otherwise founded thereon.
11.5	Persons Entitled by Death or Operation of Law
	Every person who, by operation of law, transfer, death of a shareholder or any other means whatsoever, becomes entitled to a share, will be bound by every notice in respect of such share which is duly given to the shareholder from whom such person derives title to such share before such person’s name and address is entered on the securities register (whether such notice is given before or after the happening of the event upon which such person becomes so entitled) and before such person furnishes to the Corporation the proof of authority or evidence of entitlement prescribed by the Act.
11.6	Waiver of Notice
	A shareholder (or the duly appointed proxyholder of a shareholder), Director, officer, auditor or member of a committee of the Board may at any time in writing waive any notice, or waive or abridge the time for any notice, required to be given to such person under any provision of the Act, the regulations thereunder, the articles, the by-laws or otherwise, and such waiver or abridgement, if given before the meeting or other event of which notice is required to be given, will cure any default in the giving or in the time of such notice, as the case may be.
11.7	Form of Waiver
	A waiver referred to in Article 11.6 must be in writing except a waiver of notice of a meeting of members or of the Board or of a committee of the Board which may be given in any manner and, in the case of a meeting of the Board or of a committee of the Board, will be deemed to be given by a Director with respect to all business transacted after the Director first attends the meeting.

13

EX-10.5

Exhibit 10.5

IVANHOE ENERGY INC.

EMPLOYEES’ AND DIRECTORS’ EQUITY INCENTIVE PLAN

AMENDED AND RESTATED

MAY 3, 2007

PART 1 — INTRODUCTION

1.1 Purpose

The purpose of the Plan is to secure for the Company and its shareholders the benefits of incentive inherent in share ownership by the directors and key employees of the Company and its Affiliates who, in the judgement of the Board, will be largely responsible for its future growth and success. It is generally recognized that share plans of the nature provided for herein aid in retaining and encouraging employees and directors of exceptional ability because of the opportunity offered to them to acquire a proprietary interest in the Company.

1.2 Definitions

(a)	“Affiliate” has the meaning set forth in Section 1(2) of the Ontario Securities Act, as amended, and includes those issuers that are similarly related, whether or not any of the issuers are corporations, companies, partnerships, limited partnerships, trusts, income trusts or investment trusts or any other organized entity issuing securities.
(b)	“Associate” has the meaning assigned to it in the Ontario Securities Act, as amended.
(c)	“Board” means the board of directors of the Company.

(d)	“Blackout Period” means a period in which the trading of Shares or other securities of the Company is restricted under the Company’s Corporate Disclosure, Confidentiality and Securities Trading Policy, or under an insider trading policy or other policy of the Company then in effect.
(e)	“Code” means the United States Internal Revenue Code of 1986, as amended.

(f)	“Company” means Ivanhoe Energy Inc., a company incorporated under the laws of the Yukon Territory.
(g)	“Committee” has the meaning attributed thereto in Section 6.1.

(h) “Eligible Directors” means the directors of the Company or any Affiliate thereof who are, as such, eligible for participation in the Plan.

(i) “Eligible Employees” means full time and part time employees (including employees who are officers and directors) of the Company or any Affiliate thereof, whether or not they have a written employment contract with the Company, determined by the Board, upon recommendation of the Committee, to be employees, eligible for participation in the Plan. “Eligible Employees” shall include Service Providers eligible for participation in the Plan as determined by the Board.

(j) “Exchange Act” means the United States Securities Exchange Act of 1934, as amended.

- 2 -

(k) “Fair Market Value” means, with respect to a Share subject to Option, the weighted average price of the Shares on the Stock Exchange for the five days on which Shares were traded immediately preceding the date in respect of which Fair Market Value is to be determined. If the Shares are not listed and posted for trading on a Stock Exchange on such day, the Fair Market Value shall be such price per Share as the Board, acting in good faith, may determine.

(l) “Foreign Private Issuer” has the meaning assigned to it in the rules promulgated under the Exchange Act.

(m)	“Insider” has the meaning assigned to it in the Ontario Securities Act, as amended, and also includes an Associate or Affiliate of any person who is an Insider.
(n)	“Option” means an option granted under the terms of the Share Option Plan.
(o)	“Option Period” means the period during which an Option may be exercised.

(p) “Optionee” means an Eligible Employee or Eligible Director to whom an Option has been granted under the terms of the Share Option Plan.

(q) “Participant” means, in respect of any Plan, an Eligible Employee or Eligible Director who participates in such Plan.

(r) “Plan” means, collectively the Share Option Plan, the Share Bonus Plan and the Share Purchase Plan and “Plan” means any such plan as the context requires.

(s) “Service Provider” means a person or company engaged to provide ongoing management or consulting services for the Company or for any entity controlled by the Company.

(t) “Share Bonus Plan” means the plan established and operated pursuant to Part 3 and Part 5 hereof.

(u) “Share Option Plan” means the plan established and operated pursuant to Part 2 and Part 5 hereof.

(v)	“Share Purchase Plan” means the plan established and operated pursuant to Part 4 and Part 5 hereof.
(w)	“Shares” means the common shares of the Company.

(x) “Stock Exchange” means the principal stock exchange upon which the Shares are listed or upon which the Shares have been approved for listing.

(y) “U.S. Optionee” has the meaning assigned to it in Section 2.14 of this Plan.

PART 2 — SHARE OPTION PLAN

2.1 Participation

Options shall be granted only to Eligible Employees and Eligible Directors.

- 3 -

2.2 Administration of Share Option Plan

The Share Option Plan shall be administered by the Committee.

2.3 Price

The exercise price per Share of any Option shall be not less than one hundred per cent (100%) of the Fair Market Value on the date of grant.

2.4 Grant of Option

The Board, on the recommendation of the Committee, may at any time authorize the granting of Options to such Eligible Employees and Eligible Directors as it may select for the number of Shares that it shall designate, subject to the provisions of the Share Option Plan. The date of grant of an Option shall be (i) the date such grant was approved by the Committee for recommendation to the Board, provided the Board approves such grant; or (ii) for a grant of an Option not approved by the Committee for recommendation to the Board, the date such grant was approved by the Board.

Each Option granted to an Eligible Employee or to an Eligible Director shall be evidenced by a stock option agreement with terms and conditions consistent with the Share Option Plan and as approved by the Board on the recommendation of the Committee (which terms and conditions need not be the same in each case and may be changed from time to time, subject to section 5.7 of the Plan and the approval of any material changes by the Stock Exchange).

2.5 Terms of Options

The Option Period shall be ten years from the date such Option is granted or such lesser duration as the Board, on the recommendation of the Committee, may determine at the date of grant, and may thereafter be reduced with respect to any such Option as provided in Section 2.8 hereof covering termination of employment or death of the Optionee; provided, however, that at any time the expiry date of the Option Period in respect of any outstanding Option under this Plan (either before or after its amendment or restatement on May 3, 2007) should be determined to occur either during a Blackout Period or within ten business days following the expiry of the Blackout Period, the expiry date of such Option Period shall be deemed to be the date that is the tenth business day following the expiry of the Blackout Period.

Unless otherwise determined from time to time by the Board, on the recommendation of the Committee, Options may be exercised (in each case to the nearest full Share) during the Option Period as follows:

(a) at any time during the first year of the Option Period, the Optionee may purchase up to 33 1/3% of the total number of Shares reserved for issuance pursuant to his or her Option; and

(b) at any time during each additional year of the Option Period the Optionee may purchase an additional 33 1/3% of the total number of Shares reserved for issuance pursuant to his or her Option plus any Shares not purchased in accordance with the preceding subsection (a) until, in the third year of the Option Period, 100% of the Option will be exercisable.

- 4 -

Notwithstanding the foregoing, Options shall become exercisable at the rate of at least 20% per year over five years from the date the Option is granted, subject to reasonable conditions such as continued employment. However, in the case of an Option granted to officers, directors or consultants of the Company or any of its Affiliates, the Option may become fully exercisable, subject to reasonable conditions such as continued employment, at any time or during any period established by the Company or any of its Affiliates.

Except as set forth in Section 2.8, no Option may be exercised unless the Optionee is at the time of such exercise:

(a)	in the case of an Eligible Employee, in the employ of the Company or an Affiliate and shall have been continuously so employed since the grant of his Option, but absence on leave, having the approval of the Company or such Affiliate, shall not be considered an interruption of employment for any purpose of the Share Option Plan; or
(b)	in the case of an Eligible Director, a director of the Company or an Affiliate and shall have been such a director continuously since the grant of his Option.

The exercise of any Option will be contingent upon receipt by the Company of cash payment of the full purchase price of the Shares being purchased. No Optionee or his legal representatives or legatees will be, or will be deemed to be, a holder of any Shares subject to an Option, unless and until certificates for such Shares are issued to him or them under the terms of the Share Option Plan.

2.6 Share Appreciation Right

A Participant may, if at any time determined by the Board, on the recommendation of the Committee, have the right (the “Right”), when entitled to exercise an Option, to terminate such Option in whole or in part (the “Terminated Option”) by notice in writing to the Company and, in lieu of receiving the Shares (the “Option Shares”) to which the Terminated Option relates, to receive the number of Shares, disregarding fractions, which is equal to the quotient obtained by:

(a)	subtracting the Option exercise price per Share from the Fair Market Value per Share on the day immediately prior to the exercise of the Right and multiplying the remainder by the number of Option Shares; and
(b)	dividing the product obtained under Section 2.6(a) by the Fair Market Value per Share on the day immediately prior to the exercise of the Right.

If a Right is granted in connection with an Option, it is exercisable only to the extent and on the same conditions that the related Option is exercisable. For greater certainty, for purposes of the aggregate number of shares reserved for issuance under Section 5.1 of the Plan, in the event of an exercise of a Right in respect of an Option, the number of Shares available for issuance under the Plan will be reduced by the number of Shares to which the Terminated Option relates rather than the number of Shares issued upon exercise of the Right in respect of such Option.

2.7 Lapsed Options

If Options are surrendered, terminated or expire without being exercised in whole or in part, new Options may be granted covering the Shares not purchased under such lapsed Options,

- 5 -

subject, in the case of the cancellation of an Option in connection with the grant of a new Option to the same person on different terms, to the consent of the Stock Exchange.

2.8 Effect of Termination of Employment or Death

If an Optionee:

(a)	dies while employed by or while a director of the Company or its Affiliate, any Option held by him at the date of death shall become exercisable in whole or in part, but only by the person or persons to whom the Optionee’s rights under the Option shall pass by the Optionee’s will or applicable laws of descent and distribution. Unless otherwise determined by the Board, on the recommendation of the Committee, all such Options shall be exercisable only to the extent that the Optionee was entitled to exercise the Option at the date of his death and only for six months after the date of death or prior to the expiration of the Option Period in respect thereof, whichever is sooner;
(b)	ceases to be employed by or act as a director of the Company or its Affiliate for cause, no Option held by such Optionee will, unless otherwise determined by the Board, on the recommendation of the Committee, be exercisable following the date on which such Optionee ceases to be so employed or ceases to be a director, as the case may be; or
(c)	ceases to be employed by or act as a director of the Company or its Affiliate for any reason other than cause then, unless otherwise determined by the Board, on the recommendation of the Committee, any Option held by such Optionee at the effective date thereof shall become exercisable in whole or in part for a period of up to six months thereafter, but in no event less than 30 days, subject to the earlier expiration of the Option Period.

2.9 Effect of Takeover Bid

If a bona fide offer (the “Offer”) for Shares is made to the Optionee or to shareholders generally or to a class of shareholders which includes the Optionee, which Offer, if accepted in whole or in part, would result in the offeror exercising control over the Company within the meaning of subsection 1(3) of the Ontario Securities Act (as amended from time to time), then the Company shall, immediately upon receipt of notice of the Offer, notify each Optionee currently holding an Option of the Offer, with full particulars thereof, whereupon, notwithstanding Section 2.5 hereof, such Option may be exercised in whole or in part by the Optionee so as to permit the Optionee to tender the Shares received upon such exercise (the “Optioned Shares”) pursuant to the Offer.

2.10 Effect of the Amalgamation or Merger

If the Company amalgamates or merges with or into another corporation, any Shares receivable on the exercise of an Option shall be converted into the securities, property or cash which the Participant would have received upon such amalgamation or merger if the Participant had exercised his Option immediately prior to the record date applicable to such amalgamation or merger, and the option price shall be adjusted appropriately by the Board and such adjustment shall be binding for all purposes of the Share Option Plan. Any such adjustment shall be in accordance with regulatory policies.

- 6 -

2.11 Adjustment in Shares Subject to the Plan

If there is any change in the Shares through the declaration of stock dividends of Shares or consolidations, subdivisions or reclassification of Shares, or otherwise, the number of Shares available under the Share Option Plan, the Shares subject to any Option, and the Option price thereof shall be adjusted appropriately by the Board and such adjustment shall be effective and binding for all purposes of the Share Option Plan.

2.12 Loans to Employees

Subject to applicable law, the Board may at any time authorize the Company to loan money to an Eligible Employee (which for the purpose of this section 2.12 excludes any director or executive officer (or equivalent thereof) of the Company), on such terms and conditions as the Board may reasonably determine, to assist such Eligible Employee to exercise an Option held by him or her. Such terms and conditions shall include, in any event, interest at prevailing market rates, a term not in excess of one year, and security in favour of the Company represented by that number of Shares issued pursuant to the exercise of an Option in respect of which such loan was made or equivalent security which equals the loaned amount divided by the Fair Market Value of the Shares on the date of exercise of the Option, which security may be granted on a non-recourse basis.

2.13 Transfer of Options

Options are non-transferable except by will or by the laws of descent and distribution. Notwithstanding the foregoing, and to the extent permitted by Section 422 of the Code, the Board, in its discretion, may permit distribution of an Option to an inter vivos or testamentary trust in which the Option is to be passed to beneficiaries upon the death of the trustor (settlor).

2.14 United States Residents

Subject to Sections 2.14(b), (c) and (d) of this Plan, any Option granted under this Plan to an Optionee who is a citizen or resident of the United States (including its territories, possessions and all areas subject to its jurisdiction) (a “U.S. Optionee”) shall be an “incentive stock option” within the meaning of Section 422 of the Code (provided, for purposes of this Section 2.14 only, a U.S. Optionee who is a director is then also an officer or employee of the Company or one of its Affiliates). In addition, no provision of this Plan, as it may be applied to a U.S. Optionee, shall be construed so as to be inconsistent with any provision of Section 422 of the Code.

Notwithstanding anything in this Plan to the contrary, the following provisions shall apply to each U.S. Optionee:

(a) any director of the Company or one of its Affiliates who is a U.S. Optionee shall be ineligible to vote upon the granting of such Option to themselves;

- 7 -

(b)	subject to Section 2.14(d), any Option granted under this Plan to a U.S. Optionee shall be an incentive stock option within the meaning of Section 422 of the Code provided that the aggregate Fair Market Value (determined as of the time the Option is granted) of the Shares with respect to which incentive stock options are exercisable for the first time by such U.S. Optionee during any calendar year under this Share Option Plan and all other stock option plans of the Company or its Affiliates does not exceed US$100,000;
(c)	to the extent the aggregate Fair Market Value (determined as of the time the Option is granted) of the Shares with respect to which incentive stock options are exercisable for the first time by such U.S. Optionee during any calendar year under this Share Option Plan and all other stock option plans of the Company or its Affiliates exceeds US$100,000, such Options shall be treated as nonqualified stock options (i.e. Options which fail to qualify as incentive stock options within the meaning of Section 422 of the Code) in accordance with Section 422(d) of the Code;
(d)	any U.S. Optionee who is a Service Provider or director (and who is not also an officer or employee) of the Company or one of its Affiliates will be ineligible to receive incentive stock options but will be permitted to receive nonqualified stock options pursuant to this Plan;
(e)	the purchase price for Shares under each Option granted to a U.S. Optionee pursuant to this Plan shall be not less than the Fair Market Value of such Shares at the time the Option is granted;
(f)	if any U.S. Optionee to whom an Option is to be granted under this Plan is at the time of the grant of such Option the owner of Shares possessing more than 10% of the total combined voting power of all classes of shares of the Company or any of its Affiliates, then the following special provisions shall be applicable to the Option granted to such individual:

(i)	the purchase price per Share subject to such Option shall not be less than 110% of the Fair Market Value of one Share at the time of grant, provided however that this requirement will not apply with respect to any Option granted under the Plan that is subject to Section 2.14(c);
(ii)	for the purpose of this Section 2.14 only, the exercise period shall not exceed five years from the date of grant, provided however that this requirement will not apply with respect to any Option granted under the Plan that is subject to Section 2.14(c);
(iii)	notwithstanding Section 2.14(f)(i), in respect of California citizens or residents, the purchase price per Share subject to such Option shall in no event be less than 110% of the Fair Market Value of one Share at the time of grant;

(g) no Option may be granted hereunder to a U.S. Optionee following the expiry of 10 years after the date on which this Plan is adopted by the Board or the date this Plan is approved by the shareholders of the Company, whichever is earlier; and

(h) no Option granted to a U.S. Optionee under this Plan shall become exercisable unless and until this Plan shall have been approved by the shareholders of the Company.

- 8 -

PART 3 — SHARE BONUS PLAN

3.1 Participants

The Board on the recommendation of the Committee, shall have the right, subject to Section 3.2, to issue or reserve for issuance, for no cash consideration, to any Eligible Employee or Eligible Director any number of Shares as a discretionary bonus subject to such provisos and restrictions as the Board may determine.

3.2 Number of Shares

The aggregate maximum number of shares that may be issued pursuant to Section 3.1 will be limited to 2,400,000 Shares. Shares reserved for issuance and issued under the Share Bonus Plan shall be subject to the limitations set out in Section 5.1.

The Board, on the recommendation of the Committee, in its absolute discretion, shall have the right to reallocate any of the Shares reserved for issuance under the Share Bonus Plan for future issuance under the Share Option Plan or the Share Purchase Plan and, in the event that any Shares specifically reserved under the Share Bonus Plan are reallocated to the Share Option Plan or the Share Purchase Plan, as the case may be, the aggregate maximum number of Shares reserved under the Share Bonus Plan will be reduced to that extent. In no event will the number of Shares allocated for issuance under the Share Bonus Plan exceed 2,400,000 Shares.

3.3 Necessary Approvals

The obligation of the Company to issue and deliver any Shares pursuant to an award made under the Share Bonus Plan will be subject to all necessary approvals of any securities regulatory authority having jurisdiction over the Shares.

PART 4 — SHARE PURCHASE PLAN

4.1 Participants

Participants in the Share Purchase Plan will be Eligible Employees who have been continuously employed by the Company or any of its Affiliates on a full-time basis for at least 12 consecutive months and who have been designated by the Board, on the recommendation of the Committee, as participants in the Share Purchase Plan (“Share Purchase Plan Participants”). The Board, on the recommendation of the Committee, shall have the right, in its absolute discretion, to waive such 12-month period or to refuse any Eligible Employee or group of Eligible Employees the right of participation or continued participation in the Share Purchase Plan.

4.2 Election to Participate in the Share Purchase Plan and Participant’s Contribution

Any Share Purchase Plan Participant may elect to contribute money (the “Participant’s Contribution”) to the Share Purchase Plan in any calendar year if the Share Purchase Plan Participant delivers to the Company a written direction in form and substance satisfactory to the Company authorizing the Company to deduct from the Share Purchase Plan Participant’s salary, in equal instalments, the Participant’s Contribution. Such direction will remain effective until revoked in writing by the Share Purchase Plan Participant or until the Board terminates or suspends the Share Purchase Plan, whichever is earlier.

- 9 -

The Share Purchase Plan Participant’s Contribution as determined by the Board, on the recommendation of the Committee, shall not exceed 10% of the Share Purchase Plan Participant’s basic annual salary from the Company and its Affiliates at the time of delivery of the direction, before deductions, exclusive of any overtime pay, bonuses or allowances of any kind whatsoever (the “Basic Annual Salary”). In the case of a Share Purchase Plan Participant for whom the Board, on the recommendation of the Committee, has waived the 12-month employment requirement, the Share Purchase Plan Participant’s Contribution shall not exceed 10% of his Basic Annual Salary from the Company and its Affiliates at the time of delivery of the direction, prorated over the remainder of the calendar year, before deductions and exclusive of any overtime pay, bonuses or allowances of any kind whatsoever.

4.3 Company’s Contribution

Immediately prior to the date any Shares are issued to a Share Purchase Plan Participant in accordance with Section 4.4, the Company will credit the Share Purchase Plan Participant with, and thereafter hold in trust for the Share Purchase Plan Participant, an amount (the “Company’s Contribution”) equal to the Participant’s Contribution then held in trust by the Company.

4.4 Issue of Shares

On March 31, June 30, September 30 and December 31 in each calendar year the Company will issue to each Share Purchase Plan Participant fully paid and non-assessable Shares, disregarding fractions, which is equal to the aggregate amount of the Participant’s Contribution and the Company’s Contribution divided by the Issue Price. For the purposes of this Section 4.4, “Issue Price” means the weighted average price of the Shares on the Stock Exchange, for the 90-day period immediately preceding the date of issuance. If the Shares are not traded on a Stock Exchange on the date of issuance, the Issue Price shall be such price per Share as the Board, acting in good faith, may determine.

The Company shall hold any unused balance of the Participant’s Contribution for a Share Purchase Plan Participant until used in accordance with the Share Purchase Plan.

4.5 Delivery of Shares

As soon as reasonably practicable following each issuance of Shares to a Share Purchase Plan Participant pursuant to Section 4.4, the Company will cause to be delivered to the Share Purchase Plan Participant a certificate in respect of such Shares provided that, if required by applicable law or the rules and policies of the Stock Exchange, a restrictive legend shall be inscribed on the certificate, which legend shall state that the Shares shall not be transferable for such period as may be prescribed by law or by any regulatory authority or Stock Exchange.

4.6 Effect of Termination of Employment or Death

If a Participant ceases to be employed by the Company or any of its Affiliates for any reason or receives notice from the Company of the termination of his or her employment, the Share Purchase Plan Participant’s participation in the Share Purchase Plan will be deemed to be terminated and any portion of the Participant’s Contribution then held in trust shall be paid to the Share Purchase Plan Participant or his estate or successor as the case may be.

- 10 -

4.7 Effect of Amalgamation or Merger

If the Company amalgamates or merges with or into another corporation, each Share Purchase Plan Participant to whom Shares are to be issued will receive, on the date on which any Shares would otherwise have been delivered to the Share Purchase Plan Participant in accordance with Section 4.5, the securities, property or cash to which the Share Purchase Plan Participant would have been entitled on such amalgamation, consolidation or merger had the Shares been issued immediately prior to the record date of such amalgamation or merger.

PART 5 — GENERAL

5.1 Number of Shares

The aggregate number of Shares that may be reserved for issuance under the Plan shall not exceed 24,000,000 Shares inclusive of those Shares reserved under the Share Bonus Plan pursuant to Section 3.2. In addition, the aggregate number of Shares:

(a)	that may be reserved for issuance to Insiders for options granted under the Plan (or when combined with all of the Company’s other security based compensation arrangements) shall not exceed 10% of the Company’s outstanding issue from time to time;
(b)	that may be issued to Insiders for options granted under the Plan (or when combined with all of the Company’s other security based compensation arrangements) within any one-year period shall not exceed 10% of the Company’s outstanding issue from time to time; and
(c)	that may be issued to any one Insider and his or her Associates for options granted under the Plan within any one-year period shall not exceed 5% of the Company’s outstanding issue from time to time.

In no event will the number of Shares at any time reserved for issuance to any Participant exceed 5% of the Company’s outstanding issue from time to time.

For the purposes of this Section 5.1, “outstanding issue” means the total number of Shares, on a non-diluted basis, that are issued and outstanding as of the date that any Shares are issued or reserved for issuance pursuant to an award under the Plan to an Insider or such Insider’s Associates, excluding any Shares issued under the Plan during the immediately preceding 12 month period.

5.2 Transferability

Any benefits, rights and options accruing to any Participant in accordance with the terms and conditions of the Plan shall not be transferable unless specifically provided herein. Except as otherwise provided in Section 2.13, during the lifetime of a Participant, all benefits, rights and options may only be exercised by the Participant.

5.3 Employment

Nothing contained in any Plan shall confer upon any Participant any right with respect to employment or continuance of employment with the Company or any Affiliate, or interfere in any

- 11 -

way with the right of the Company or any Affiliate to terminate the Participant’s employment at any time. Participation in any Plan by a Participant is voluntary.

5.4 Record Keeping

The Company shall maintain a register in which shall be recorded:

(a)	the name and address of each Participant;
(b)	the Plan or Plans in which the Participant participates;
(c)	any Participant’s Contributions;
(d)	the number of unissued Shares reserved for issuance pursuant to an Option or pursuant to an award made under the Share Bonus Plan in favour of a Participant; and
(e)	such other information as the Board may determine.

5.5 Necessary Approvals

The Plan shall be effective only upon formal adoption by the Board following the approval of the shareholders of the Company. Any Option exercised before shareholder approval is obtained shall be rescinded if shareholder approval is not obtained within 12 months before or after the Plan is adopted. Such shares shall not be counted in determining whether such approval is obtained.

The obligation of the Company to sell and deliver Shares in accordance with the Plan is subject to the approval of any Stock Exchange or governmental authority having jurisdiction in respect of the Shares which may be required in connection with the authorization, issuance or sale of such Shares by the Company. If any Shares cannot be issued to any Participant for any reason including, without limitation, the failure to obtain such approval, the obligation of the Company to issue such Share shall terminate and any Participant’s Contribution or option price paid to the Company shall be returned to the Participant.

5.6 Income Taxes

As a condition of, and prior to participation in, the Plan, a Participant shall, at the Company’s request, authorize the Company in writing to withhold from any remuneration or consideration whatsoever payable to such Participant hereunder, any amounts required by any taxing authority to be withheld for taxes of any kind as a consequence of such participation in the Plan.

5.7 Amendments to Plan

The Board shall have the power to, at any time and from time to time, either prospectively or retrospectively, amend, suspend or terminate the Plan or any Option or other award granted under the Plan without shareholder approval, including, without limiting the generality of the foregoing: changes of a clerical or grammatical nature, changes regarding the persons eligible to participate in the Plan, changes to the exercise price, vesting, term and termination provisions of Options, changes to the share appreciation right provisions, changes to the share bonus plan provisions (other than the maximum number of Shares issuable under the Bonus Plan in

- 12 -

Section 3.2 of the Plan), changes to the authority and role of the Compensation Committee under the Plan, changes to the acceleration and vesting of Options in the event of a takeover bid, and any other matter relating to the Plan and the Options and awards granted thereunder, provided however that:

(a) such amendment, suspension or termination is in accordance with applicable laws and the rules of any stock exchange on which the Shares are listed;

(b) no amendment to the Plan or to an Option granted hereunder will have the effect of impairing, derogating from or otherwise adversely affecting the terms of an Option which is outstanding at the time of such amendment without the written consent of the holder of such Option;

(c)	the expiry date of an Option Period in respect of an Option shall not be more than ten years from the date of grant of an Option except as expressly provided in Section 2.5;
(d)	the Directors shall obtain shareholder approval of:

(i)	any amendment to the aggregate maximum number of Shares specified in subsection 3.2 (Share Bonus Plan);
(ii)	any amendment to the aggregate number of Shares specified in subsection 5.1 (being the aggregate number of Shares that may be reserved for issuance under the Plan) other than pursuant to section 2.11;
(iii)	any amendment to the limitation on Shares that may be reserved for issuance, or issued, to Insiders under subsection 5.1(a) and (c); or
(iv)	any amendment that would reduce the exercise price of an outstanding Option of an Insider other than pursuant to section 2.11;
(v)	any amendment that would extend the expiry date of the Option Period in respect of any Option granted under the Plan to an Insider except as expressly contemplated in subsection 2.5; and
(vi)	any amendment to the amending provision set out in subsection 5.7 (Amendments to Plan).

If the Plan is terminated, the provisions of the Plan and any administrative guidelines and other rules and regulations adopted by the Board and in force on the date of termination will continue in effect as long as any Option or any rights pursuant thereto remain outstanding and, notwithstanding the termination of the Plan, the Board shall remain able to make such amendments to the Plan or the Options as they would have been entitled to make if the Plan were still in effect.

5.8 Foreign Private Issuer Status

If, and for so long as, the Company is not a Foreign Private Issuer or if the directors and officers of the Company otherwise become subject to Section 16 of the Exchange Act, then notwithstanding any provision of the Plan to the contrary:

- 13 -

(a) the Plan shall be administered by a committee consisting of two or more persons (the “Committee”) appointed by the Board, each of whom is a director qualifying as a “disinterested” person, as such term is defined, from time to time, in Rule 16b-3 under the Exchange Act;

(b) the Committee shall determine and designate, from time to time, the individuals to whom awards shall be made hereunder, the amount of the awards and the other terms and conditions of such awards;

(c) each member of the Committee shall, upon his appointment or election to the Committee for the first time, automatically be granted an immediately exercisable Option to purchase 10,000 Shares at a price per share equal to the Fair Market Value at the date of grant for an Option Period of ten years but shall not otherwise be eligible to participate in the Plan;

(d) no Option granted to a director or officer under the Plan may be exercised during the first six months following the date of grant;

(e) directors and officers of the Company will be required to hold Shares acquired under the Share Purchase Plan for a period of six months, provided that no such hold period will be required in respect of any such director or officer who makes an irrevocable election to waive his right to withdraw from the Share Purchase Plan or to change his Participant’s Contribution at least six months prior to his acquisition of such Shares;

(f) Subsections 5.8(c), (d) and (e) may only be amended or modified by the Board or the shareholders of the Company once in any six month period; and

(g) the Board may, subject to Subsection 5.8(f) and Section 5.7, amend or modify the Plan to the extent that the Board, based upon the advice of legal counsel, considers necessary or desirable to bring the Plan into compliance with Rule 16b-3 under the Exchange Act.

5.9 No Representation or Warranty

The Company makes no representation or warranty as to the future market value of any Shares issued in accordance with the provisions of the Plan.

5.10 Audited Financial Statements

The Company shall provide annual financial statements of the Company to each Participant holding an outstanding award under the Plan. Such financial statements need not be audited and need not be issued to key employees whose duties at the Company assure them access to equivalent information.

- 14 -

5.11 Compliance with Applicable Law, etc

If any provision of the Plan or any agreement entered into pursuant to the Plan contravenes any law or any order, policy, by-law or regulation of any regulatory body or Stock Exchange having authority over the Company or the Plan then such provision shall be deemed to be amended to the extent required to bring such provision into compliance therewith.

PART 6 — ADMINISTRATION OF THE PLAN

6.1 Administration by the Committee

(a) Unless otherwise determined by the Board, the Plan shall be administered by the Compensation Committee (the “Committee”) appointed by the Board and constituted in accordance with such Committee’s charter. The members of the Committee serve at the pleasure of the Board and vacancies occurring in the Committee shall be filled by the Board.

(b) The Committee shall have the power, where consistent with the general purpose and intent of the Plan and subject to the specific provisions of the Plan, to:

(i)

adopt and amend rules and regulations relating to the administration of the Plan and make all other determinations necessary or desirable for the administration of the Plan. The interpretation and construction of the provisions of the Plan and related agreements by the Committee shall be final and conclusive. The Committee may correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any related agreement in the manner and to the extent it shall deem expedient to carry the Plan into effect and it shall be the sole and final judge of such expediency; and

(ii)

otherwise exercise the powers delegated to the Committee by the Board and under the Plan as set forth herein.

6.2 Board Role

(a) The Board, on the recommendation of the Committee, shall determine and designate from time to time the individuals to whom awards shall be made, the amounts of the awards and the other terms and conditions of the awards.

(b) The Board may delegate any of its responsibilities or powers under the Plan to the Committee, provided that the grant of all Shares, Options or other awards under the Plan shall be subject to the approval of the Board. No Option shall be exercisable in whole or in part unless and until such approval is obtained.

(c) In the event the Committee is unable or unwilling to act in respect of a matter involving the Plan, the Board shall fulfill the role of the Committee provided for herein.

EX-10.15

Exhibit 10.15

CREDIT AGREEMENT

among

IVANHOE ENERGY (USA) INC.,
as Borrower

IVANHOE ENERGY INC.,
IVANHOE ENERGY HOLDINGS INC.,
IVANHOE ENERGY ROYALTY INC.,
IVANHOE ENERGY HTL INC.,
IVANHOE HTL PETROLEUM LTD.,
IVANHOE ENERGY PETROLEUM PROJECTS INC.,
AND
IVANHOE ENERGY HTL (USA) INC.,
as Guarantors

LASALLE BANK, NATIONAL ASSOCIATION,
as Administrative Agent and Issuing Lender

AND THE FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTY HERETO,
as Lenders

Dated as of OCTOBER 30, 2006

TABLE OF CONTENTS

	Page
ARTICLE I. DEFINITIONS		1
1.01 Certain Defined Terms		1
1.02 Other Interpretive Provisions		16
1.03 Accounting Principles		17
ARTICLE II. THE CREDIT		17
2.01 Amounts and Terms of the Commitments		17
2.02 Procedure for Borrowings		18
2.03 Conversion and Continuation Elections		18
2.04 Optional Prepayments		19
2.05 Borrowing Base Determinations, Mandatory Prepayments of Loans		19
2.06 Repayment		20
2.07 Fees		21
2.08 Computation of Fees and Interest		22
2.09 Payments by the Company; Borrowings Pro Rata		22
2.10 Issuing the Letters of Credit		23
2.11 Payments by the Lenders to the Administrative Agent		25
2.12 Sharing of Payments, Etc.		26
ARTICLE III. TAXES, YIELD PROTECTION AND ILLEGALITY		26
3.01 Taxes		26
3.02 Illegality		27
3.03 Increased Costs and Reduction of Return		28
3.04 Funding Losses		28
3.05 Inability to Determine Rates		29
3.06 Certificates of Lenders		29
3.07 Substitution of Lenders		29
3.08 Survival		29
ARTICLE IV. SECURITY		29
4.01 The Security		29
4.02 Agreement to Deliver Security Documents		29
4.03 Perfection and Protection of Security Interests and Liens		30
4.04 Offset		30
4.05 Subsidiary Guaranty		30
4.06 Assignment of Production		31
4.07 Assignment of Runs		31

Credit Agreement

(i)

	Page
ARTICLE V. CONDITIONS PRECEDENT	32
5.01 Conditions of Initial Credit Extensions	32
5.02 Conditions to All Loans	34
5.03 Post Closing Conditions	34
ARTICLE VI. REPRESENTATIONS AND WARRANTIES	34
6.01 Organization, Existence and Power	34
6.02 Corporate Authorization; No Contravention	35
6.03 Governmental Authorization	35
6.04 Binding Effect	35
6.05 Litigation	35
6.06 No Default	35
6.07 ERISA Compliance	36
6.08 Margin Regulations	36
6.09 Title to Properties	36
6.10 Oil and Gas Reserves	36
6.11 Initial Reserve Report	37
6.12 Gas Imbalances	37
6.13 Taxes	37
6.14 Financial Condition	37
6.15 Environmental Matters	38
6.16 Regulated Entities	39
6.17 No Burdensome Restrictions	39
6.18 Copyrights, Patents, Trademarks and Licenses, etc.	39
6.19 Subsidiaries	39
6.20 Insurance	39
6.21 Derivative Contracts	39
6.22 Full Disclosure	39
6.23 Solvency	39
ARTICLE VII. AFFIRMATIVE COVENANTS	39
7.01 Financial Statements	40
7.02 Certificates; Other Production and Reserve Information	40
7.03 Notices	42
7.04 Preservation of Existence, Etc.	43
7.05 Maintenance of Property	43
7.06 Title Information	43
7.07 Additional Collateral	44
7.08 Insurance	44

Credit Agreement

(ii)

	Page
7.09 Payment of Obligations	44
7.10 Compliance with Laws	44
7.11 Compliance with ERISA	45
7.12 Inspection of Property and Books and Records	45
7.13 Environmental Laws	45
7.14 New Subsidiary Guarantors	46
7.15 Reserved	46
7.16 Use of Proceeds	46
7.17 Operating Accounts	46
7.18 Phase I Reports	46
7.19 Further Assurances	46
7.20 Derivative Contracts	47
ARTICLE VIII. NEGATIVE COVENANTS	47
8.01 Limitation on Liens	47
8.02 Disposition of Assets	48
8.03 Consolidations and Mergers	48
8.04 Loans and Investments	49
8.05 Limitation on Indebtedness	49
8.06 Transactions with Affiliates	50
8.07 Margin Stock	50
8.08 Contingent Obligations	50
8.09 Restricted Payments; Restrictive Agreements	50
8.10 Derivative Contracts	51
8.11 Change in Business and Corporate Structure	52
8.12 Accounting Changes	52
8.13 ERISA Compliance	52
8.14 Financial Covenants	53
ARTICLE IX. EVENTS OF DEFAULT	54
9.01 Event of Default	54
9.02 Remedies	56
9.03 Rights Not Exclusive	56
ARTICLE X. AGENTS	56
10.01 Appointment and Authorization	56
10.02 Duties and Obligations of Administrative Agent	57
10.03 Action by Administrative Agent	57
10.04 Reliance by Administrative Agent	58
10.05 Sub-agents	58

Credit Agreement

(iii)

	Page
10.06 Administrative Agent as Lender	58
10.07 No Reliance	58
10.08 Administrative Agent May File Proofs of Claim	59
10.09 Authority of Administrative Agent to Release Collateral and Liens	59
10.10 Reserved	59
10.11 Successor Administrative Agent	59
10.12 Withholding Tax	60
ARTICLE XI. MISCELLANEOUS	61
11.01 Amendments and Waivers	61
11.02 Notices	62
11.03 No Waiver; Cumulative Remedies	63
11.04 Costs and Expenses	63
11.05 Indemnity	63
11.06 Payments Set Aside	64
11.07 Successors and Assigns	64
11.08 Assignments, Participations, etc.	64
11.09 Interest	66
11.10 Indemnity and Subrogation	67
11.11 Collateral Matters; Derivative Contracts	67
11.12 USA Patriot Act Notice	67
11.13 Automatic Debits of Fees	67
11.14 Notification of Addresses, Lending Offices, Etc.	68
11.15 Counterparts	68
11.16 Severability	68
11.17 No Third Parties Benefited	68
11.18 Governing Law, Jurisdiction and Waiver of Jury Trial	68
11.19 Entire Agreement	69
11.20 NO ORAL AGREEMENTS	69

Credit Agreement

(iv)

SCHEDULES

		Page
Schedule 2.01 Schedule 4.01 Schedule 6.05 Schedule 6.07 Schedule 6.15 Schedule 6.19 Schedule 6.21 Schedule 8.01 Schedule 8.05 Schedule 8.08 Schedule 8.14(c) Schedule 11.02	Commitments and Pro Rata Shares Security Documents Litigation ERISA Compliance Environmental Matters Subsidiaries Derivative Contracts Liens Indebtedness Contingent Obligations Capital Expenditures and G&A Expenses Lending Offices; Addresses for Notices

EXHIBITS

Exhibit A
Exhibit B
Exhibit C
Exhibit D
Exhibit E
Exhibit F
Exhibit G
Exhibit H Form of Notice of Borrowing
Form of Notice of Conversion/Continuation
Form of Compliance Certificate
Form of Assignment and Acceptance Agreement
Form of Note
Form of Pricing Grid Certificate
Form of Continuing Guaranty Agreement
Form of Security Agreement and Pledge

Credit Agreement

 (v) 

CREDIT AGREEMENT

     THIS CREDIT AGREEMENT is dated as of October 30, 2006, among IVANHOE ENERGY (USA) INC., a Nevada corporation (the “Company”), IVANHOE ENERGY INC., a corporation formed under the laws of the Yukon Territory of Canada (“Parent”), IVANHOE ENERGY HOLDINGS INC., a Nevada corporation, IVANHOE ENERGY ROYALTY INC., a Nevada corporation, IVANHOE HTL PETROLEUM LTD., a Nevada corporation, IVANHOE ENERGY PETROLEUM PROJECTS INC., a Nevada corporation, IVANHOE ENERGY HTL INC., a Nevada corporation, and IVANHOE ENERGY HTL (USA) INC. a Nevada corporation (collectively “Guarantors”), each of the financial institutions from time to time party hereto (individually, a “Lender” and collectively, the “Lenders”), and LASALLE BANK, NATIONAL ASSOCIATION, as administrative agent for the Lenders (in such capacity, together with its successors in such capacity, the “Administrative Agent”), and as Issuing Lender (in such capacity, the “Issuing Lender”).

     In consideration of the representations, warranties, covenants and agreements contained herein, and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the Company, Guarantors, Administrative Agent, Issuing Lender and Lenders hereby agree as follows:

ARTICLE I .

DEFINITIONS

     1.01 Certain Defined Terms. The following terms have the following meanings:

          “Acquisition” means any transaction or series of related transactions for the purpose of or resulting, directly or indirectly, in (a) the acquisition of all or substantially all of the assets of a Person, or of any business or division of a Person, (b) the acquisition of in excess of 50% of the capital stock of a corporation (or similar entity), which stock has ordinary voting power for the election of the members of such entity’s board of directors or persons exercising similar functions (other than stock having such power only by reason of the happening of a contingency), or the acquisition of in excess of 50% of the partnership interests or equity of any Person not a corporation which acquisition gives the acquiring Person the power to direct or cause the direction of the management and policies of such Person, or (c) a merger or consolidation or any other combination with another Person.

          “Administrative Agent” has the meaning specified in the introductory clause hereto.

          “Administrative Agent’s Payment Office” means the address for payments as the Administrative Agent may from time to time specify.

          “Affected Lender” has the meaning specified in Section 3.07.

          “Affiliate” means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, by contract, or otherwise.

          “Agent-Related Persons” as to the Administrative Agent, means the Administrative Agent, its Affiliates, and the officers, directors, employees, agents and attorneys-in-fact of the Administrative Agent and its Affiliates.

Credit Agreement

1

          “Agreement” means this Credit Agreement.

          “Applicable Margin” means, with respect to Base Rate Loans and LIBOR Loans, the respective margins therefor as determined under the Pricing Grid.

          “Assignee” has the meaning specified in Subsection 11.08(a).

          “Assignment and Acceptance” has the meaning specified in Subsection 11.08(a).

          “Attorney Costs” means and includes all reasonable fees and disbursements of any law firm or other external counsel, the allocated cost of internal legal services and all disbursements of internal counsel.

          “Availability Period” has the meaning specified in Subsection 2.01(b).

          “Available Borrowing Base” means, at the particular time in question, the Borrowing Base then in effect minus the Effective Amount at such time.

          “Bankruptcy Code” means the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. §101, et seq.), as amended, and regulations promulgated thereunder.

          “Base Rate” means, for any day, the fluctuating rate of interest in effect for such day which rate per annum shall be equal to the higher of (a) the rate of interest as publicly announced from time to time by Administrative Agent as its “prime commercial lending rate,” and (b) one-half of one percent (0.50%) per annum above the Federal Funds Rate in effect from time to time. (The “prime commercial lending rate” is a rate set by Administrative Agent based upon various factors including costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate.) Any change in the prime commercial lending rate announced by Administrative Agent shall take effect at the opening of business on the day specified in the public announcement of such change.

          “Base Rate Loan” means a Loan that bears interest based at the Base Rate plus the Applicable Margin.

          “Borrower Group” means the Company and the Guarantors (other than Parent).

          “Borrowing” means a borrowing hereunder consisting of Loans of the same Interest Rate Type made to the Company on the same day by the Lenders under Article II, and, other than in the case of Base Rate Loans, having the same Interest Period.

          “Borrowing Base” means at the particular time in question, the amount provided for in Section 2.05; provided, however, in no event shall the Borrowing Base ever exceed the Maximum Loan Amount.

          “Borrowing Base Deficiency” means at any time, the Effective Amount exceeds the Borrowing Base then in effect.

          “Borrowing Base Period” means the period from Closing to the initial Scheduled Borrowing Base Determination Date, and thereafter, each six-month period between Scheduled Borrowing Base Determination Dates.

Credit Agreement

2

          “Borrowing Base Reduction Amount” means at the particular time in question, the amount provided for in Section 2.05.

          “Borrowing Date” means any date on which a Borrowing occurs under Section 2.02.

          “Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks in Houston, Texas or Chicago, Illinois are authorized or required by law to close and, if the applicable Business Day relates to any LIBOR Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market.

          “Capital Adequacy Regulation” means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any Lender or of any corporation controlling a Lender.

          “Capital Expenditures and General Administrative Expenses” shall be determined in accordance with and have the same meanings as such terms are used in GAAP.

          “Capital Lease” means, when used with respect to any Person, any lease in respect of which the obligations of such Person constitute Capitalized Lease Obligations.

          “Capitalized Lease Obligations” means, when used with respect to any Person, without duplication, all obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations shall have been or should be, in accordance with GAAP, capitalized on the books of such Person.

          “Cash Equivalents” means: (a) securities issued or fully guaranteed or insured by the United States Government or any agency thereof and backed by the full faith and credit of the United States and having maturities of not more than twelve (12) months from the date of acquisition; (b) certificates of deposit, time deposits, Eurodollar time deposits, or bankers’ acceptances having in each case a tenor of not more than twelve (12) months from the date of acquisition issued by, and demand deposits with, any U.S. commercial bank or any branch or agency of a non-U.S. commercial bank licensed to conduct business in the U.S. having combined capital and surplus of not less than $500,000,000, whose long term securities are rated at least A (or then equivalent grade) by S&P and A2 (or then equivalent grade) by Moody’s at the time of acquisition; (c) commercial paper of an issuer rated at least A-1 by S&P or P-1 by Moody’s at the time of acquisition, and in either case having a tenor of not more than twelve (12) months; (d) debt securities which are registered under the Securities Act of 1933, as amended (the “Securities Act”) (and not “restricted securities” in the Company’s hands as defined in Rule 144 under the Securities Act), or adjustable rate preferred stock traded on a national securities exchange and issued by a corporation duly incorporated under the laws of a state of the United States, or issued by any state, county or municipality located in the United States of America, provided, however, that such debt securities are rated A2 by Moody’s and A or better by S&P at the time of acquisition, and such debt securities have a maturity not in excess of twelve (12) months from the date of creation thereof; (e) repurchase agreements with a term of not more than seven (7) days for underlying securities of the types described in clauses (a) and (b) above; and (f) money market mutual or similar funds having assets in excess of $100,000,000.

          “Casualty Event” means any loss, casualty or other insured damage to, or any nationalization, taking under power of eminent domain or by condemnation or similar proceeding of, any Property of the Company or any Guarantor having a fair market value in excess of $250,000.

          “Change of Control” means (a) any Person (other than Robert Friedland and/or his Affiliates) becomes the owner of 25% or more of the

Credit Agreement

3

equity securities of the Parent entitled to vote for members of the board of directors or equivalent governing body of the Parent on a fully diluted basis; or (b) the Parent shall cease to own directly or indirectly, 100% of the issued and outstanding shares of capital stock of the Company or any other Guarantor; or (c) a sale of all or substantially all of the assets of the Company or any Guarantor to any Person or group of Persons; or (d) the liquidation or dissolution of the Company or any Guarantor; or (e) the first day on which a majority of the board of directors of the Parent are not Continuing Directors. “Continuing Directors” means any member of the board of directors of the Parent who (A) is a member of such board of directors as of the date of this Agreement or (B) was nominated for election or elected to such board of directors with the affirmative vote of two-thirds of the Continuing Directors who were members of such board of directors at the time of such nomination or election (not including as board nominees any directors which the board is obligated to nominate pursuant to shareholders’ agreements, voting trust arrangements or similar arrangements).

          “Code” means the Internal Revenue Code of 1986, as amended, and regulations promulgated thereunder.

          “Collateral” means all property of any kind which is subject to a Lien in favor of Administrative Agent or which under the terms of any Security Document is purported to be subject to such Lien.

          “Commitment” means, as to each Lender, such Lender’s Pro Rata Share of the lesser of (a) the current Borrowing Base or (b) the Maximum Loan Amount, as such commitment may be terminated and/or reduced from time to time in accordance with the provisions hereof.

          “Commitment Fee” means the fee payable pursuant to Subsection 2.07(a).

          “Company” has the meaning specified in the introductory paragraph hereto.

          “Compliance Certificate” means a certificate substantially in the form of Exhibit C.

          “Consolidated Interest Expense” means, with respect any Person, for any fiscal period, the sum of the aggregate amount of all costs, fees and expenses paid such Person in such fiscal period which are classified as interest expense on the consolidated financial statements of such Person determined in conformity with GAAP, plus all other cash interest expense paid during such fiscal period, including any debt issuance costs and commissions, discounts and other fees and charges associated with Indebtedness, whether or not such amounts are included as interest expense or are required to be capitalized on such Person’s balance sheet or are otherwise accounted for under GAAP.

          “Consolidated Net Income” means, for any Person and for any period of time, the net income (or net loss) of such Person for such period determined on a consolidated basis in accordance with GAAP; provided, the effect, if any, resulting from the application of FAS 133 shall be excluded from the calculation of net income (or net loss).

          “Contingent Obligation” means, as to any Person without duplication, any direct or indirect liability of that Person with or without recourse, (a) with respect to any Indebtedness, dividend, letter of credit or other similar obligation (the “primary obligations”) of another Person (the “primary obligor”), including any obligation of that Person (i) to purchase, repurchase or otherwise acquire such primary obligations or any security therefor, (ii) to advance or provide funds for the payment or discharge of any such primary obligation, or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency or any balance sheet item, level of income or financial condition of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (iv)

Credit Agreement

4

otherwise to assure or hold harmless the holder of any such primary obligation against loss in respect thereof (each, a “Guaranty Obligation”); (b) with respect to any Surety Instrument issued for the account of that Person or as to which that Person is otherwise liable for reimbursement of drawings or payments; (c) to purchase any materials, supplies or other property from, or to obtain the services of, another Person, other than in the ordinary course of business, if the relevant contract or other related document or obligation requires that payment for such materials, supplies or other property, or for such services, shall be made regardless of whether delivery of such materials, supplies or other property is ever made or tendered, or such services are ever performed or tendered, or (d) in respect of any Derivative Contract. The amount of any Contingent Obligation shall, in the case of Guaranty Obligations, be deemed equal to the lesser of (a) the stated maximum amount, if any, of such Contingent Obligation and (b) the maximum stated or determinable amount of the primary obligation in respect of which such Guaranty Obligation is made or, if not stated or if indeterminable, the maximum reasonably anticipated liability in respect thereof, and in the case of other Contingent Obligations, shall be equal to the lesser of (a) the stated maximum amount, if any, of such Contingent Obligation and (b) the maximum reasonably anticipated liability in respect thereof.

          “Continuing Directors” has the meaning specified in the definition of “Change of Control.”

          “Contractual Obligation” means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound.

          “Conversion/Continuation Date” means any date on which, under Section 2.03, the Company (a) converts Loans of one Interest Rate Type to another Interest Rate Type, or (b) continues Loans having Interest Periods expiring on such date as Loans of the same Interest Rate Type but with a new Interest Period.

          “Credit Extension” means and includes the making of any Loans or issuance of any Letter of Credit (including the extension of any existing Letter of Credit) hereunder.

          “Current Assets” means, for any Person as of any time, the current assets of such Person and its consolidated Subsidiaries, on a consolidated basis at such time, plus, the Available Borrowing Base at such time, less, for purposes of this definition, any non-cash gains for any Derivative Contract resulting from the requirements of FAS 133 at such time.

          “Current Liabilities” means, for any Person as of any time, the current liabilities of such Person and its consolidated Subsidiaries, on a consolidated basis at such time, less the sum of (a) current maturities of the Obligations to the extent such payments are not past due and (b) non-cash losses or charges on any Derivative Contract resulting from the requirements of FAS 133 at such time.

          “Default” means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default.

          “Default Rate” has the meaning specified in Subsection 2.06(b)(iii).

          “Derivative Contract” means all futures contracts, forward contracts, swap, cap or collar contracts, option contracts, hedging contracts or other derivative contracts or similar agreements covering oil and gas commodities or prices or financial, monetary or interest rate instruments.

          “Dispositions” has the meaning specified in Section 8.02.

Credit Agreement

5

          “Dollars”, “dollars” and “$” each mean lawful money of the United States.

          “EBITDA” means, for any Person and for any period of time, the sum of Consolidated Net Income of such Person for such period plus, without duplication, the following expenses or charges, to the extent deducted from Consolidated Net Income for such period: exploration expense, interest expense, depletion, depreciation, amortization, unrealized loss on Derivative Contracts which relate to hedging, loss on sale of assets, cumulative effect of accounting changes, income taxes, non-cash deferred stock compensation, and other noncash charges, minus, without duplication, the following gains or credits to the extent added to Consolidated Net Income in such twelve month period: unrealized gain on Derivative Contracts which relate to hedging, gain on sale of assets, stock based compensation paid, cumulative effect of accounting changes and other noncash income. All calculations of EBITDA, for any applicable period during which a permitted Acquisition or Disposition is consummated, shall be determined on a pro forma basis (such calculation to be acceptable to, and approved by, Administrative Agent) as if such Acquisition or Disposition was consummated on the first day of such applicable period.

          “Effective Amount” means on any date, the aggregate outstanding principal amount of all Loans thereof after giving effect to any prepayments or repayments of Loans occurring on such date plus the LC Obligation.

          “Effective Date” means the date on which all conditions precedent set forth in Sections 5.01 and 5.02 are satisfied or waived by Administrative Agent.

          “Eligible Assignee” means (a) a commercial bank organized under the laws of the United States, or any state thereof, and having a combined capital and surplus of at least $100,000,000; (b) a commercial bank organized under the laws of any other country which is a member of the Organization for Economic Cooperation and Development, or a political subdivision of any such country, and having a combined capital and surplus of at least $100,000,000, provided that such bank is acting through a branch or agency located in the United States; (c) a Person with a combined capital and surplus of at least $100,000,000 that is primarily engaged in the business of commercial banking and that is (i) a Subsidiary of a bank, (ii) a Subsidiary of a Person of which a bank is a Subsidiary, or (iii) a Person of which a bank is a Subsidiary; (d) a finance company, insurance company or other financial institution or fund (whether a corporation, partnership, trust or other entity) that is engaged in making, purchasing or otherwise investing in commercial loans in the ordinary course of its business and having total assets in excess of $100,000,000; and (e) any other Person approved by the Administrative Agent.

          “Environmental Claims” means all material claims by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment.

          “Environmental Laws” means all material federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all material administrative orders, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, and safety matters.

          “Equity” means all shares, options, warrants, general or limited partnership interests, participations or other equivalents (regardless of how designated) of or in a corporation, limited liability company, partnership or equivalent entity whether voting or nonvoting, including, without limitation, common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended).

Credit Agreement

6

          “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and regulations promulgated thereunder.

          “ERISA Affiliate” means any trade or business (whether or not incorporated) under common control with the Company or any Guarantor within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code).

          “ERISA Event” means (a) a Reportable Event with respect to a Pension Plan; (b) a withdrawal by the Company or any Guarantor or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any Guarantor or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate (other than pursuant to Section 4041(b) of ERISA), the treatment of a Plan amendment as a termination under Section 4041(c) or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any Guarantor or any ERISA Affiliate.

          “Event of Default” means any of the events or circumstances specified in Section 9.01.

          “Exchange Act” means the Securities and Exchange Act of 1934, and regulations promulgated thereunder.

          “Existing Credit Agreement” means that certain Credit Agreement dated as of February 3, 2003 by and between the Company and Wells Fargo Bank, National Association, as the same has been modified and amended through the date hereof.

          “FAS 133” means Statement No. 133 of the Financial Accounting Standards Board to Derivative Contracts or any equivalent ruling or regulation arising under Canadian generally accepted accounting principles.

          “FDIC” means the Federal Deposit Insurance Corporation, and any Governmental Authority succeeding to any of its principal functions.

          “Federal Funds Rate” means, for any day, the rate set forth in the weekly statistical release designated as H.15(519), or any successor publication, published by the Federal Reserve Bank of New York (including any such successor, “H.15(519)”) on the preceding Business Day opposite the caption “Federal Funds (Effective)”; or, if for any relevant day such rate is not so published on any such preceding Business Day, the rate for such day will be the arithmetic mean as determined by the Administrative Agent of the rates for the last transaction in overnight Federal funds arranged prior to 9:00 a.m. (New York, New York time) on that day by each of three leading brokers of Federal funds transactions in New York, New York selected by the Administrative Agent.

          “Fee Letter” shall have the meaning specified in Subsection 2.07(c) hereof.

          “Final Maturity Date” means the earlier of (a) the date that is two (2) years after the date of this Agreement or (b) the date on which the Obligations otherwise finally become due and payable in full in accordance with the provisions of this Agreement.

Credit Agreement

7

          “FRB” means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions.

          “GAAP” means generally accepted accounting principles in Canada set forth from time to time in the opinions and pronouncements of the Canadian Institute of Chartered Accountants (or agencies with similar functions of comparable stature and authority within the Canadian accounting profession), which are applicable to the circumstances as of the date of determination.

          “Governmental Authority” means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

          “Guarantors” means, collectively, the entities identified in the introduction hereto as Guarantors, together with any Subsidiary of Ivanhoe Energy Holdings Inc. which is required to execute a Guaranty under Section 7.15. “Guarantor” means, individually, any one of the Guarantors.

          “Guaranties” means, collectively, each Continuing Guaranty Agreement, substantially in the form of Exhibit G hereto, executed by the Guarantors in favor of Administrative Agent, as same may be amended, supplemented or otherwise modified from time to time. “Guaranty” means, individually, any one of the Guaranties.

          “Guaranty Obligation” has the meaning specified in the definition of “Contingent Obligation.”

          “Highest Lawful Rate” means, as of a particular date, the maximum nonusurious interest rate that under applicable federal and state law may then be contracted for, charged or received by the Lenders in connection with the Obligations.

          “HTL Technology Development Subsidiaries” is a collective reference to Ivanhoe Energy HTL Inc., Ivanhoe Energy Petroleum Projects Inc., Ivanhoe HTL Petroleum Ltd., and Ivanhoe Energy HTL (USA) Inc., and any other Subsidiary of Parent actively engaged in the HTL technology development project currently ongoing among Parent and certain of its Subsidiaries.

          “Hydrocarbon Interests” means leasehold and other interests in or under oil, gas and other liquid or gaseous hydrocarbon leases wherever located, mineral fee interests, overriding royalty and royalty interests, net profit interests, production payment interests relating to oil, gas or other liquid or gaseous hydrocarbons wherever located including any reserved or residual interest of whatever nature.

          “Indebtedness” of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or Lender under such agreement in the event of default are limited to repossession or sale of such property) including, without limitation, production payments, net profit interests and other Hydrocarbon Interests subject to repayment out

Credit Agreement

8

           of future Oil and Gas production; (f) all obligations with respect to Capital Leases; (g) all net obligations with respect to Derivative Contracts; (h) all indebtedness referred to in clauses (a) through (g) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (i) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above.

          “Indemnified Liabilities” has the meaning specified in Section 11.05.

          “Indemnified Person” has the meaning specified in Section 11.05.

          “Independent Auditor” has the meaning specified in Subsection 7.01(a).

          “Independent Engineer” has the meaning specified in Section 6.11.

          “Initial Reserve Report” has the meaning specified in Section 6.11.

          “Insolvency Proceeding” means (a) any case, action or proceeding relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshaling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. federal, state or foreign law, including the Bankruptcy Code.

          “Interest Payment Date” (a) as to any Base Rate Loan, means the last Business Day of each month prior to the Final Maturity Date, and the Final Maturity Date and (b) as to any LIBOR Loan, the last day of each Interest Period applicable to such Loan; provided, however, that if any Interest Period for a LIBOR Loan exceeds three months, the date that falls three months after the beginning of such Interest Period, and the date that falls three months after each Interest Payment Date thereafter for such Interest Period, is also an Interest Payment Date.

          “Interest Period” means, as to any LIBOR Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as LIBOR Loan, and ending on the date one, two, three or six months thereafter as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided that: (a) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless, in the case of a LIBOR Loan, the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day; (b) any Interest Period pertaining to an LIBOR Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and (c) no Interest Period for any Loan shall extend beyond the Final Maturity Date.

          “Interest Rate Type” means, with respect to any Loan, the interest rate, being either the Base Rate or the LIBOR forming the basis upon which interest is charged against such Loan hereunder.

          “IRS” means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code.

Credit Agreement

9

          “Issue” means with respect to any Letter of Credit, to issue or extend the expiry of, or to renew or increase the amount of, such Letter of Credit; and the terms “Issued,” “Issuing” and “Issuance” have corresponding meanings.

          “Issuing Lender” has the meaning specified in the introductory clause hereto.

          “LC Application” means an application or agreement for a standby Letter of Credit in such form acceptable to the Issuing Lender in its sole discretion, and duly executed by the Company pursuant to Section 2.10(a).

          “LC Collateral” means any amounts held by the Administrative Agent as security for LC Obligations of the Company.

          “LC Collateral Account” means a blocked deposit account held by the Administrative Agent.

          “LC Obligation” means, at the time in question, the sum of the Matured LC Obligations plus the aggregate amount outstanding under all Letters of Credit then outstanding.

          “LC Related Document” means the Letters of Credit, LC Applications and any other document relating to any Letter of Credit including any of the Issuing Lender’s standard form documents for Letter of Credit issuances.

          “Lenders” has the meaning specified in the introductory clause hereto.

          “Lending Office” means, as to any Lender, the office or offices of such Lender specified as its “Lending Office” or “Domestic Lending Office” or “Offshore Lending Office”, as the case may be, on Schedule 11.02, or such other office or offices as such Lender may from time to time notify the Company and the Administrative Agent.

          “Letter of Credit” means any stand-by letter of credit issued by the Issuing Lender pursuant to this Agreement and upon an LC Application.

          “Letter of Credit Fee” means the fee specified in Subsection 2.07(b).

          “LIBOR” ” shall mean a rate of interest equal to (a) the per annum rate of interest at which United States dollar deposits for a period equal to the relevant Interest Period are offered in the London Interbank Eurodollar market at 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period (or three Business Days prior to the commencement of such Interest Period if banks in London, England were not open and dealing in offshore United States dollars on such second preceding Business Day), as displayed in the Bloomberg Financial Markets system (or other authoritative source selected by the Administrative Agent in its sole discretion), divided by (b) a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), or as LIBOR is otherwise determined by the Administrative Agent in its sole and absolute discretion. The Administrative Agent’s determination of LIBOR shall be conclusive, absent manifest error.

          “LIBOR Loan” means a Loan that bears interest based on LIBOR plus the Applicable Margin.

Credit Agreement

10

          “Lien” means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, lien (statutory or other) or preferential arrangement of any kind or nature whatsoever in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement and the interest of a lessor under a Capital Lease), any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the Uniform Commercial Code or any comparable law and any contingent or other agreement to provide any of the foregoing, but not including (a) the interest of a lessor under a lease on Oil and Gas Properties and (b) the interest of a lessor under an Operating Lease.

          “Loan” means an extension of credit by a Lender to the Company under Article II.

          “Loan Documents” means this Agreement, the Notes, each Guaranty, the Security Documents, each LC Application and Letter of Credit and all other documents delivered to the Administrative Agent or any Lender in connection herewith, including without limitation, the Fee Letter and any commitment letters.

          “Margin Stock” means “margin stock” as such term is defined in Regulation T, U or X of the FRB.

          “Material Adverse Effect” means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties or financial condition of the Company or the Company and the Guarantors taken as a whole, including without limitation, any material adverse change in commodity prices or reserve estimates of the Oil and Gas Properties of the Company or the Company and the Guarantors taken as a whole; (b) a material impairment of the ability of the Company or any Guarantor to perform under any material Loan Document and to avoid any Default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company or any Guarantor of any material Loan Document.

          “Matured LC Obligation” means the aggregate amount of payments theretofore made by the Issuing Lender in respect to Letters of Credit and not theretofore reimbursed by the Company to the Issuing Lender or deemed Loans pursuant to Subsection 2.10(d).

          “Maximum Loan Amount” means the amount of $15,000,000.

          “Monthly Status Report” means a status report prepared monthly by the Company in form, scope and content acceptable to the Administrative Agent, setting forth as of such month then ended (a) detailing production from the Oil and Gas Properties, the volumes of Oil and Gas produced and saved, the volumes of Oil and Gas sold, gross revenue, net income, related leasehold operating expenses, severance taxes, other taxes, capital costs and any production imbalances incurred during such period and (b) information concerning any Derivative Contracts entered into by the Company or any Guarantor, and (c) such additional information with respect to any of the Oil and Gas Properties as may be reasonably requested by Administrative Agent.

          “Mortgages” means the mortgages from the Company or any Guarantor in favor of Administrative Agent, for the benefit of the Lenders, described on Schedule 4.01 hereto, and all supplements, assignments, amendments and restatements thereto (or any agreement in substitution therefor) as same may be released in whole or in part from time to time which are executed and delivered to Administrative Agent for benefit of the Lenders pursuant to Article IV of this Agreement.

Credit Agreement

11

          “Mortgaged Properties” means such Oil and Gas Properties upon which the Company or any Guarantor has granted the Administrative Agent for the benefit of the Lenders a Lien pursuant to the Mortgages.

          “Multiemployer Plan” means a “multiemployer plan”, within the meaning of Section 4001(a)(3) of ERISA, to which the Company, any Guarantor or any ERISA Affiliate makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions.

          “Notes” means the promissory notes, whether one or more, specified in Section 2.01, substantially in the same form as Exhibit E including any amendments, modifications, renewals or replacements of such promissory notes.

          “Notice of Borrowing” means a notice in substantially the form of Exhibit A.

          “Notice of Conversion/Continuation” means a notice in substantially the form of Exhibit B.

          “Obligations” means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company or any Guarantor to any Lender, the Administrative Agent, or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising, including all net Indebtedness owed to the Lenders or their Affiliates with respect to Derivative Contracts (except to the extent excluded under Section 11.11).

          “Oil and Gas” means petroleum, natural gas and other related hydrocarbons or minerals or any of them and all other substances produced or extracted in association therewith.

          “Oil and Gas Liens” means liens reserved under oil and gas leases, overriding royalty agreements, net profits agreements, royalty trust agreements, farm-out agreements, division orders, contracts for the sale, purchase, exchange, transportation, gathering or processing of oil, gas or other hydrocarbons, unitizations and pooling designations, declarations, orders and agreements, development agreements, Operating Agreements, production sales contracts, area of mutual interest agreements, gas balancing or deferred production agreements, injection, repressuring and recycling agreements, salt water or other disposal agreements, seismic or geophysical permits or agreements, and other agreements that are customary in the oil and gas business and are entered into by any member of the Borrower Group in the ordinary course of business, provided in all instances that such Liens are limited to the assets that are the subject of the relevant agreement.

          “Oil and Gas Properties” means Hydrocarbon Interests now owned by any member of the Borrower Group and contracts executed in connection therewith and all tenements, hereditaments, appurtenances, and properties belonging, affixed or incidental to such Hydrocarbon Interests, including, without limitation, any and all property, real or personal, now owned by the Company or any Guarantor and situated upon or to be situated upon, and used, built for use, or useful in connection with the operating, working or developing of such Hydrocarbon Interests, including, without limitation, any and all petroleum and/or natural gas wells, buildings, structures, field separators, liquid extractors, plant compressors, pumps, pumping units, field gathering systems, tank and tank batteries, fixtures, valves, fittings, machinery and parts, engines, boilers, liters, apparatus, equipment, appliances, tools, implements, cables, wires, towers, taping, tubing and rods, surface leases, rights-of-way, easements and servitudes, and all additions, substitutions, replacements for, fixtures and attachments to any and all of the foregoing owned by any member of the Borrower Group.

Credit Agreement

12

          “Operating Agreements” mean those agreements now or hereafter executed by any member of the Borrower Group and other working interest owners of the Oil and Gas Properties in connection with the operation of the Oil and Gas Properties.

          “Operating Lease” means an operating lease determined in accordance with GAAP.

          “Organization Documents” means (a) for any corporation: the articles of incorporation, the bylaws, any certificate of determination or instrument relating to the rights of the shareholders of such corporation, any shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) of such corporation; (b) for any limited liability company: the articles of organization, the regulations or operating agreement, certificate of organization and all applicable resolutions of the members of such company; and (c) for any limited partnership: the limited partnership agreement and all Organization Documents for its general partner, as any of the foregoing have been amended or supplemented from time to time.

          “Other Taxes” means any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Documents.

          “Parent” has the meaning specified in the introductory clause hereto.

          “Participant” has the meaning specified in Subsection 11.08(d).

          “PBGC” means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA.

          “Pension Plan” means a pension plan (as defined in Section 3(2) of ERISA) subject to Title IV of ERISA, other than a Multiemployer Plan, which the Company or any Guarantor sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years.

          “Permitted Liens” has the meaning specified in Section 8.01.

          “Person” means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture or Governmental Authority.

          “Plan” means an employee benefit plan (as defined in Section 3(3) of ERISA) which is subject to ERISA, other than a Multiemployer Plan, which the Company or any Guarantor sponsors, maintains, or to which it makes, is making, or is obligated to make contributions, or in the case of a multiple employer plan (as described in Section 4064(a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years.

          “Pricing Grid” means the annualized variable rates (stated in terms of basis points (“bps”)) set forth below for the Applicable Margin, Commitment Fee and Letter of Credit Fee, based upon the ratio of the Effective Amount to the Borrowing Base Amount, as follows:

Credit Agreement

13

	Applicable Margin
Effective Amount/	LIBOR				Commitment		Letter of Credit
Borrowing	Rate				Fee		Fee
Base Amount	(bps)		Base Rate (bps)		(bps)		(bps)
> 90%		325.00		225.00		50.00		325.00
< 90% ³ 50%		300.00		200.00		50.00		300.00
< 50%		275.00		175.00		50.00		275.00

The Pricing Grid for any date shall be determined by reference to the ratio of the Effective Amount and Borrowing Base as of the last day of the fiscal quarter most recently ended and any change (a) shall become effective upon the delivery to the Administrative Agent of a Pricing Grid Certificate of a Responsible Officer of the Company (which certificate shall be delivered simultaneously with (i) the delivery of each Notice of Borrowing, any notice required under Section 2.04, Notice of Conversion/Continuation or a request for issuance or extension of a Letter of Credit and (ii) any change in the amount of the Borrowing Base), and (b) shall apply (i) in the case of the Base Rate Loans, to Base Rate Loans outstanding on such delivery date or made on and after such delivery date and (ii) in the case of the LIBOR Loans, to LIBOR Loans made, continued or converted on and after such delivery date. Notwithstanding the foregoing, at any time during which the Company has failed to deliver the Pricing Grid Certificate when due, the ratio of Effective Amount to the Borrowing Base shall be deemed, solely for the purposes of this definition, to be greater than 90% until such time as the Company shall deliver such certificate.

          “Pricing Grid Certificate” means a Pricing Grid Certificate substantially in the form of Exhibit F hereto.

          “Principal Business” means (a) the business of the exploration for, and development, acquisition, production, and upstream marketing and transportation of Oil and Gas, (b) the business of developing raw land acquired in conjunction with the exploration for, and development, acquisition, production, and upstream marketing and transportation of Oil and Gas, and remediating such land for resale; (c) the business of owning real estate and improvements thereon, including rental properties, development and joint ventures; (d) the business of providing services in connection with the production of Oil and Gas; and (e) the business of developing and deploying HTL technology.

          “Production Sales Contracts” mean those agreements now or hereafter executed in connection with the sale of Oil and Gas attributable to the Oil and Gas Properties.

          “Property” means any interest in any kind of property or asset, whether real, personal or mixed, tangible or intangible.

          “Pro Rata Share” means, as to any Lender at any time, the percentage set forth opposite its name on Schedule 2.01 hereto, as modified by any Assignment and Acceptance.

          “Regulation U” and “Regulation X” means Regulation U and Regulation X, respectively, of the FRB from time to time in effect and shall include any successor or other regulations or official interpretations of the FRB relating to the subject matter addressed therein.

          “Remedial Work” has the meaning specified in Section 7.13.

          “Replacement Lender” has the meaning specified in Section 3.07.

Credit Agreement

14

          “Reportable Event” means, any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC.

          “Required Lenders” means, at any time, the Administrative Agent and the Lenders holding at least sixty-six and two-thirds percent (66^2/3%) of the sum of the Effective Amount or, if there is no Effective Amount, the Administrative Agent and the Lenders holding at least sixty-six and two-thirds percent (66^2/3%) of the sum of the Commitments of all of the Lenders.

          “Requirement of Law” means, as to any Person, any law (statutory or common), treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject.

          “Reserve Report” means a report, in form, scope and content acceptable to the Lenders, covering proved developed and proved undeveloped Oil and Gas reserves attributable to the Mortgaged Properties and setting forth with respect thereto, (a) the total quantity of proved developed and proved undeveloped reserves (separately classified as to producing, shut-in, behind pipe, and undeveloped), (b) the estimated future net revenues and cumulative estimated future net revenues, (c) the present discounted value of future net revenues, and (d) such other information and data with respect to the Mortgaged Properties as the Administrative Agent may reasonably request.

          “Responsible Officer” means any CEO or co-CEO, president, chief financial officer or treasurer of the Company.

          “Scheduled Borrowing Base Determination” means a redetermination of the Borrowing Base in accordance with Subsection 2.05(a) on each Scheduled Borrowing Base Determination Date.

          “Scheduled Borrowing Base Determination Date” means December 1 and June 1 of each calendar year, commencing on December 1, 2006.

          “SEC” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.

          “Security Agreements” means collectively, each agreement in substantially the form of Exhibit H executed by the Company or any Guarantor in favor of Administrative Agent for the benefit of the Lenders.

          “Security Documents” means the Mortgages, the Security Agreements and related financing statements as same may be amended from time to time and any and all other instruments now or hereafter executed in connection with or as security for the payment of the Obligations.

          “Solvent” means, as to any Person at any time, that (a) the fair value of all of the property of such Person is greater than the amount of such Person’s liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(32) of the Bankruptcy Code; (b) the present fair salable value of all of the property of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature; and (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person’s property would constitute unreasonably small capital.

Credit Agreement

15

          “Special Borrowing Base Determination” has the meaning specified in Subsection 2.05(b).

          “Subsidiary” of a Person means any corporation, limited liability company, association, partnership, joint venture or other business entity of which more than 50% of the voting stock or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a “Subsidiary” refer to a subsidiary of the Parent.

          “Super-Majority Lenders” means, at any time, the Administrative Agent and the Lenders holding at least seventy-five percent (75%) of the sum of the Effective Amount or, if there is no Effective Amount, the Administrative Agent and the Lenders holding at least seventy-five percent (75%) of the sum of the Commitments of all of the Lenders.

          “Surety Instruments” means all letters of credit (including standby), banker’s acceptances, bank guaranties, shipside bonds, surety bonds and similar instruments.

          “Surface Estate” means any fee simple interest and estate from the surface down to 500 feet below the surface in any and all such properties less and except (a) all Oil and Gas beneath, within or that may be produced from any and all such properties and (b) the right to occupy, use and improve the surface and subsurface of any and all such properties insofar as necessary or convenient to prospecting, exploring, and drilling for, producing, storing, treating and transporting any and all such Oil and Gas.

          “Taxes” means any and all present or future taxes, levies, imposts, deductions, charges or withholdings thereto imposed upon or related to the transactions under this Agreement, and all liabilities with respect to this transaction, excluding, in the case of each Lender and the Administrative Agent, (a) such taxes (including income taxes or franchise taxes) as are imposed on or measured by each Lender’s net income, gross receipts or capital by the jurisdiction (or any political subdivision thereof) under the laws of any applicable jurisdiction, (b) such withholding taxes as are in effect and would apply to a payment to such Lender or Administrative Agent at the time such person becomes a party to this Agreement, for the avoidance of doubt whether as an original Lender or as an Assignee (or designated a new Lending Office), and (c) such taxes as would not have been imposed but for the failure of such Lender to comply with the certification requirements described in Section 10.12 hereof.

          “Termination Date” means the earlier of (a) the date that is eighteen (18) months after the date of this Agreement, or (b) the date on which the Lenders’ Commitments terminate in accordance with the provisions of this Agreement.

          “Total Indebtedness” means, for any Person as of any date, all Indebtedness of such Person and its Subsidiaries on a consolidated basis.

          “Unfunded Pension Liability” means the excess of a Plan’s benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan’s assets, determined in accordance with the assumptions used for funding the Pension Plan pursuant to Section 412 of the Code for the applicable plan year.

          “United States” and “U.S.” each means the United States of America.

          1.02 Other Interpretive Provisions. The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms. Unless otherwise specified or the context clearly requires otherwise, the words “hereof,” “herein,” “hereunder” and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section,

Credit Agreement

16

Schedule and Exhibit references are to this Agreement. The term “documents” includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced. The term “including” is not limiting and means “including without limitation.” In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including,” the words “to” and “until” each mean “to but excluding,” and the word “through” means “to and including.” Unless otherwise expressly provided herein, (a) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (b) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation. The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement. This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are cumulative and shall each be performed in accordance with their terms. This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Administrative Agent, the Company and the other parties, and are the products of all parties. Accordingly, they shall not be construed against the Lenders or the Administrative Agent merely because of the Administrative Agent’s or Lenders’ involvement in their preparation.

     1.03 Accounting Principles. Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied. References to “consolidated,” when it precedes any accounting term, means such term as it would apply to the Parent and its Subsidiaries or the Borrower Group, as applicable, each on a consolidated basis, determined in accordance with GAAP.

ARTICLE II .

THE CREDIT

     2.01 Amounts and Terms of the Commitments.

          (a) Each Lender severally agrees, on the terms and conditions set forth herein, to make loans to the Company (each such loan, a “Loan”) from time to time on any Business Day during the period from the Effective Date to the Termination Date, so long as (a) with respect to any Lender, such Loans then requested to be made by such Lender do not exceed such Lender’s Pro Rata Share of the aggregate amount of all Loans then requested from the Lenders, and (b) the aggregate amount of all the Lenders’ Loans and the LC Obligation outstanding at any time does not exceed the Borrowing Base in effect at such time. The obligation of the Company to repay to each Lender the aggregate amount of all Loans made by such Lender, together with interest accruing in connection therewith, shall be evidenced by a promissory note from the Company payable to the order of such Lender (herein called such Lender’s “Note” and collectively, the “Notes”). The amount of principal owing on any Lender’s Note at any given time shall be the aggregate amount of all Loans theretofore made by such Lender minus all payments of principal theretofore received by such Lender on such Note. Interest on each Note shall accrue and be due and payable as provided herein and therein. Subject to the terms and conditions hereof, until the Termination Date, Company may borrow, repay, and reborrow hereunder.

          (b) Subject to the terms and conditions of Section 2.10 below and relying upon the representations and warranties herein set forth, the Issuing Lender for the account of the Lenders agrees to issue Letters of Credit as support for payment obligations incurred by the Company in the ordinary course of business upon the request of the Company at any time and from time to time on

Credit Agreement

17

and after the Effective Date and up to, but excluding, the Termination Date (the “Availability Period”). No Letter of Credit will be issued in a face amount which, after giving effect to the issuance of such Letter of Credit, would cause either the LC Obligation to exceed $500,000 or the Effective Amount to exceed the Borrowing Base then in effect. If any Letter of Credit has been drawn upon and the amount so drawn has not been reimbursed to the Issuing Lender, the Commitment of each Lender shall be deemed to be utilized for all purposes hereof in an amount equal to such Lender’s Pro Rata Share of the LC Obligations.

          (c) Upon not less than five (5) Business Days’ notice, the Company may (i) terminate the Loan Documents and the Commitment of each Lender, provided that all Obligations are paid and discharged in full concurrently with such termination or (ii) permanently reduce the unused portion of the Maximum Loan Amount in an amount equal to $250,000 or any integral multiple of $250,000 in excess thereof.

     2.02 Procedure for Borrowings.

          (a) Each Borrowing of Loans shall be made upon the Company’s irrevocable written notice delivered to the Administrative Agent in the form of a Notice of Borrowing duly completed; which notice must be received by the Administrative Agent prior to 11:00 a.m. (Chicago, Illinois time) (i) three (3) Business Days prior to the requested Borrowing Date, in the case of LIBOR Loans; and (ii) on the requested Borrowing Date, in the case of Base Rate Loans.

          (b) Each Notice of Borrowing shall specify (i) the amount of the Borrowing, which shall be in an aggregate minimum amount (A) for Base Rate Loans equal to the lesser of (y) $250,000 or any multiple integrals of $250,000 in excess thereof or (z) the unadvanced portion of the Available Borrowing Base and (B) for LIBOR Loans $250,000 or any multiple integrals of $250,000 in excess thereof (if the Available Borrowing Base as of such Borrowing Date will be less than $250,000, then the Company may not request a LIBOR Loan); (ii) the requested Borrowing Date, which shall be a Business Day; (iii) the Interest Rate Type of Loans comprising the Borrowing; and (iv) for LIBOR Loans the duration of the Interest Period applicable to such Loans. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of LIBOR Loans, such Interest Period shall be three months.

          (c) The number of tranches outstanding of Base Rate Loans and LIBOR Loans, whether under a Borrowing, conversion or continuation, shall not exceed five (5) at any one time.

          (d) The Administrative Agent will promptly notify each Lender of its receipt of any Notice of Borrowing and of the amount of such Lender’s Pro Rata Share of that Borrowing.

          (e) Provided the applicable conditions in Article V are met, each Lender will make the amount of its Pro Rata Share of each Borrowing available to the Administrative Agent for the account of the Company at the Administrative Agent’s Payment Office by 1:00 p.m. (Chicago, Illinois time) on the Borrowing Date requested by the Company in funds immediately available to the Administrative Agent. The proceeds of all such Loans will then be made available to the Company by the Administrative Agent to the Company’s operating account with the Administrative Agent or by wire transfer in accordance with written instructions provided to the Administrative Agent by the Company of like funds as received by the Administrative Agent.

     2.03 Conversion and Continuation Elections.

          (a) During the period from the Effective Date to the Final Maturity Date, the Company may, upon irrevocable written notice to the Administrative Agent in accordance with Subsection 2.03(b): (i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of LIBOR Loans, to convert any such Loans into Loans of any other Interest Rate Type; or

Credit Agreement

18

(ii) elect as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day; provided, that if at any time a LIBOR Loan in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to less than $250,000, such LIBOR Loan shall automatically convert into a Base Rate Loan.

          (b) The Company shall deliver a Notice of Conversion/Continuation to be received by the Administrative Agent not later than 11:00 a.m. (Chicago, Illinois time) at least (i) three (3) Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as LIBOR Loans; and (ii) on the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying: (A) the proposed Conversion/Continuation Date; (B) the aggregate amount of Loans to be converted or continued; (C) the Interest Rate Type of Loans resulting from the proposed conversion or continuation; and (D) other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period.

          (c) If upon the expiration of any Interest Period applicable to LIBOR Loans, the Company has failed to select timely a new Interest Period to be applicable to LIBOR Loans, or if any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such LIBOR Loans into Base Rate Loans effective as of the expiration date of such Interest Period.

          (d) The Administrative Agent will promptly notify each Lender of its receipt of a Notice of Conversion/Continuation, or, if no timely notice is provided by the Company, the Administrative Agent will promptly notify each Lender of the details of any automatic conversion. All conversions and continuations shall be made ratably according to the respective Lender’s Pro Rata Share of outstanding principal amounts of the Loans with respect to which the notice was given.

     2.04 Optional Prepayments. Subject to Section 3.04, the Company may, at any time or from time to time,

          (a) prepay Base Rate Loans, without premium or penalty, upon irrevocable notice to the Administrative Agent of not less than one (1) Business Day, ratably as to each Lender, in whole or in part, in aggregate minimum principal amounts of $250,000 or multiple integrals thereof (unless the outstanding principal amount of all Base Rate Loans is less than $250,000, then such prepayments shall be equal to such outstanding principal amount) and

          (b) prepay LIBOR Loans, without premium or penalty (but subject to Section 3.04) upon irrevocable notice to the Administrative Agent of not less than three (3) Business Days, ratably as to each Lender, in whole or in part, in aggregate minimum principal amounts of $250,000 or multiple integrals thereof. Each such notice of prepayment shall specify the date and amount of such prepayment and the Interest Rate Type(s) of Loans to be prepaid. The Administrative Agent will promptly notify each Lender of its receipt of any such notice, and of such Lender’s Pro Rata Share of such prepayment. The payment amount specified in such notice shall be due and payable on the date specified therein.

     2.05 Borrowing Base Determinations, Mandatory Prepayments of Loans.

          (a) Scheduled Borrowing Base Determinations. At all times prior to the Final Maturity Date, the Effective Amount shall not exceed the Borrowing Base then in effect. From and after the Effective Date, the initial Borrowing Base hereunder shall be $8,000,000, and the initial Borrowing Base Reduction Amount shall be $250,000, in each case until redetermined pursuant to the terms of this Section 2.05. Upon notice to the Company, the Borrowing Base and the Borrowing Base Reduction Amount shall be redetermined for each Borrowing Base Period on each Scheduled Borrowing Base Determination Date, and each such redetermination shall be effective as of the date set forth in such notice of redetermination. The

Credit Agreement

19

Borrowing Base and the Borrowing Base Reduction Amount shall be determined based upon the loan collateral value assigned to the Mortgaged Properties and such other credit factors (including without limitation the assets, liabilities, cash flow, business, properties, prospects, management and ownership of the Company and the Guarantors) which the Lenders deem significant. The Lenders’ determination of the Borrowing Base and the Borrowing Base Reduction Amount shall be in their sole discretion and shall not be subject to review or challenge under Sections 11.18 and 11.19 hereof. Upon each redetermination of the Borrowing Base and the Borrowing Base Reduction Amount, the Administrative Agent shall recommend to the Lenders a new Borrowing Base and a new Borrowing Base Reduction Amount and the Lenders in accordance with their customary policies and procedures for extending credit to Oil and Gas reserve-based customers shall (by unanimous agreement in the case of Borrowing Base increases or Borrowing Base Reduction Amount decreases and by agreement of the Super-Majority Lenders in the case of Borrowing Base decreases or affirmations or Borrowing Base Reduction Amount increases or affirmations) establish the redetermined Borrowing Base and Borrowing Base Reduction Amount. If the Company does not furnish the Reserve Reports or all such other information and data by the date required, the Lenders may nonetheless determine a new Borrowing Base and Borrowing Base Reduction Amount. It is expressly understood that the Lenders shall have no obligation to determine the Borrowing Base or the Borrowing Base Reduction Amount at any particular amount, either in relation to the Maximum Loan Amount or otherwise.

          (b) Special Borrowing Base Determinations. In addition to Scheduled Borrowing Base Determinations pursuant to Subsection 2.05(a), the Company and the Lenders may each request one (1) additional redetermination of the Borrowing Base and Borrowing Base Reduction Amount during each Borrowing Base Period (“Special Borrowing Base Determination”). In the event the Company requests a Special Borrowing Base Determination pursuant to this Subsection 2.05(b), the Company shall deliver written notice of such request to the Lenders which shall include: (i) Reserve Report(s) prepared as of a date not more than thirty (30) calendar days prior to the date of such request, for the benefit of the Lenders, and (ii) such other information as the Lenders shall request prepared as of a date not more than thirty (30) calendar days prior to the date of such request. Likewise, in the event the Lenders exercise their option for a Special Borrowing Base Determination, the Administrative Agent shall give the Company notice of the redetermined Borrowing Base and Borrowing Base Reduction Amount.

          (c) Interim Borrowing Base Reductions. On the last day of each month after each Schedule Borrowing Base Determination Date or the date of each Special Borrowing Base Determination, the Borrowing Base shall, automatically and without notice or further action, reduce by the Borrowing Base Reduction Amount most recently determined or redetermined.

          (d) Mandatory Prepayment of Loans. If on any date a Borrowing Base Deficiency shall exist as a result of a Borrowing Base redetermination or the application of a Borrowing Base Reduction Amount, then the Company shall exercise any one or combination of the following (subject to the proviso below): (i) make a mandatory principal prepayment in an amount equal to the amount of the Borrowing Base Deficiency, either (x) in a lump sum payment within thirty (30) days after such Borrowing Base redetermination or (y) in three (3) equal consecutive monthly installments commencing on the last day of the month following the date of such Borrowing Base redetermination; or (ii) within thirty (30) days after such Borrowing Base redetermination, pledge, or cause any Guarantor to pledge, additional unencumbered collateral of sufficient value and character (as determined by the Lenders in their sole discretion) that when added to the existing Collateral shall cause the Borrowing Base to equal or exceed the Effective Amount; provided that if the Borrowing Base Deficiency shall exist as the result of the application of any Borrowing Base Reduction Amount or occurs after the Termination Date, the Borrower shall eliminate the Borrowing Base Deficiency by making a lump sum payment within three (3) days after the Borrowing Base Deficiency occurs.

Credit Agreement

20

          2.06 Repayment.

     (a) Principal. The Company shall repay to the Administrative Agent (for the account of the Lenders in accordance with their respective Pro Rata Shares) the Effective Amount outstanding on the Termination Date in six (6) equal consecutive monthly installments, commencing on the last day of the month in which the Termination Date occurs and continuing on the last day of each month thereafter until paid in full. If not sooner paid in full, all Obligations shall be due and payable in full on the Final Maturity Date.

     (b) Interest.

          (i) Each Loan shall bear interest on the aggregate outstanding principal amount thereof from the applicable Borrowing Date or date of conversion or continuation pursuant to Section 2.03, as the case may be, at a rate per annum equal to the lesser of (A) the LIBOR or the Base Rate, as the case may be, plus the Applicable Margin, or (B) the Highest Lawful Rate.

          (ii) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Subsection 2.04(b) or 2.05(d) (except in the case of Base Rate Loans) for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Administrative Agent.

          (iii) Notwithstanding Subsection 2.06(b)(i), while any Event of Default exists, the Company shall pay interest (after, as well as before, entry of judgment thereon, to the extent permitted by law) on the principal amount of all outstanding Loans, at a rate per annum equal to the lesser of (A) the Highest Lawful Rate and (B) the Base Rate plus the Applicable Margin for Base Rate Loans plus two percent (2%)(the “Default Rate”).

     2.07 Fees.

          (a) Commitment Fee. The Company shall pay to the Administrative Agent, for the account of the Lenders, an aggregate commitment fee calculated on the average daily amount of the Available Borrowing Base at a per annum rate equal to the amount set forth on the Pricing Grid. Such commitment fee shall accrue from the Effective Date to the Termination Date and shall be due and payable quarterly in arrears on the first Business Day of the first month of each quarter commencing on January 2, 2007, through the Termination Date, with the final payment to be made on the Termination Date; provided that, in connection with any reduction or termination of Commitments, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to the following quarterly payment date. The commitment fee provided in this subsection shall accrue at all times after the Effective Date up to the Termination Date, including at any time during which one or more conditions in Section 5.02 are not met.

          (b) Letter of Credit Fee. The Company agrees to pay (i) to Issuing Lender (for the ratable account of the Lenders in their respective Pro Rata Shares), a fee for each Letter of Credit, to be paid quarterly in arrears following the Issuance of such Letter of Credit (including the initial Issuance and any renewal, extension or increase in the amount thereof) in the amount equal to the greater of (A) $500.00 and (B) the product equal to the Letter of Credit rate set forth on the Pricing Grid multiplied by the undrawn amount available under such Letter of Credit (such fee shall be deemed to be fully earned and owing upon the Issuance of such Letter of Credit, and no refund shall be due in the event such Letter of Credit is terminated prior to its expiry date), and (ii) to the Issuing Lender for its account a fee for the issuance of each Letter of Credit (including the initial Issuance and any renewal, extension or increase in the amount thereof), at the Issuance of such Letter of Credit, in an amount equal to the greater of (A) $500.00 and (B) one-eighth of one percent

Credit Agreement

21

(0.125%) multiplied by the aggregate amount available under each Letter of Credit (such fees shall be prorated for any period less than a full year but shall not be refunded in the event any such Letter of Credit is terminated prior to its expiry date) and (iii) Issuing Lender’s usual and customary fees for amendment to transfer of or negotiation of the terms of each Letter of Credit. The Administrative Agent shall pay to each Lender its Pro Rata Share of the Letter of Credit Fee paid pursuant to Subsection 2.07(b)(i). The Administrative Agent shall pay to the Issuing Lender the Letter of Credit fees paid pursuant to Subsection 2.07(b)(ii) and (iii).

          (c) Agency Fees. The Company shall pay fees to the Administrative Agent for the Administrative Agent’s own account, as required by that certain letter agreement (as the same may be from time to time modified or amended, the “Fee Letter”) between the Company and the Administrative Agent of even date herewith, relating hereto.

     2.08 Computation of Fees and Interest.

          (a) All computations of interest for Base Rate Loans shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof.

          (b) Each determination of an interest rate by the Administrative Agent shall be conclusive and binding on the Company and the Lenders in the absence of manifest error.

     2.09 Payments by the Company; Borrowings Pro Rata.

          (a) All payments to be made by the Company shall be made without set-off, recoupment or counterclaim. All payments by the Company shall be made in immediately available funds to the Administrative Agent by credit to the Company’s operating account at the Administrative Agent’s Payment Office for the account of the Administrative Agent or the Lender to whom such payment is owed, and shall be made in dollars and in immediately available funds, no later than 11:00 a.m. (Chicago, Illinois time) on the date specified herein. Except to the extent otherwise provided herein, (i) each payment by the Company of fees shall be made pro rata for the account of the Lenders in accordance with their respective Pro Rata Shares, (ii) each payment of principal of Loans shall be made for the pro rata account of the Lenders in accordance with their respective outstanding principal amount of Loans, and (iii) each payment of interest on Loans shall be made for the account of the Lenders pro rata in accordance with their respective shares of the aggregate amount of interest due and payable to the Lenders. Notwithstanding the foregoing, to the extent money is received by the Administrative Agent pursuant to the exercise of remedies under the Security Documents such money shall be applied to the pro rata payment of Obligations secured by such Security Document.

          (b) The Administrative Agent will promptly distribute to each Lender its applicable share of such payment in like funds as received. Any payment received by the Administrative Agent later than 11:00 a.m. (Chicago, Illinois time) shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue. When the Administrative Agent collects or receives money on account of the Obligations or otherwise pursuant to the Security Documents if such money is insufficient to pay all such Obligations, such money shall be applied first to any reimbursements due Administrative Agent under Section 11.05 or 11.06.

          (c) Subject to the provisions set forth in the definition of “Interest Period” herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be.

Credit Agreement

22

          (d) Unless the Administrative Agent receives notice from the Company prior to the date on which any payment is due to the Lenders that the Company will not make such payment in full as and when required, the Administrative Agent may assume that the Company has made such payment in full to the Administrative Agent on such date in immediately available funds and the Administrative Agent may (but shall not be so required), in reliance upon such assumption, distribute to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent the Company has not made such payment in full to the Administrative Agent, each Lender shall repay to the Administrative Agent on demand such amount distributed to such Lender, together with interest thereon for each day from the date such amount is distributed to such Lender until two days following demand by the Administrative Agent at the Federal Funds Rate and for each day thereafter until the date repaid at the Base Rate.

          (e) Except to the extent otherwise expressly provided herein, each borrowing hereunder shall be from the Lenders pro rata in accordance with their respective Pro Rata Shares.

     2.10 Issuing the Letters of Credit.

          (a) Subject to the terms and conditions set forth herein, the Company may request the Issuing Lender to issue Letters of Credit for its own account, in a form reasonably acceptable to the Administrative Agent and the Issuing Lender, at any time and from time to time during the Availability Period; provided that the Company may not request the issuance, amendment, renewal or extension of Letters of Credit hereunder if the Effective Amount exceeds the Borrowing Base at such time or would exceed the Borrowing Base as a result thereof.

          (b) In order to effect the issuance of a Letter of Credit, the Company shall submit a Notice of Borrowing and a LC Application in writing by telecopy to the Administrative Agent (who shall promptly notify the Issuing Lender) not later than 1:00 p.m., Chicago, Illinois time, three (3) Business Days before the requested date of issuance of such Letter of Credit. Each such Notice of Borrowing and LC Application shall (i) be signed by the Company, (ii) specify the Business Day on which such Letter of Credit is to be issued, (iii) specify the purpose for the requested Letter of Credit, (iv) specify the availability for Letters of Credit under (A) the Borrowing Base and (B) the $500,000 aggregate LC Obligation limitation, as of the date of issuance of such Letter of Credit, and (v) specify the expiry date thereof, which shall not be later than the earlier of (A) twelve (12) months from the date of issuance of such Letter of Credit and (B) five (5) Business Days prior to the Final Maturity Date.

          (c) Upon satisfaction of the applicable terms and conditions set forth in Article V, the Issuing Lender shall issue such Letter of Credit to the specified beneficiary not later than the close of business, Chicago, Illinois time, on the date so specified. The Administrative Agent shall provide the Company and each Lender with a copy of each Letter of Credit so issued. Each such Letter of Credit shall (i) provide for the payment of drafts, presented for honor thereunder by the beneficiary in accordance with the terms thereon, at sight when accompanied by the documents described therein and (ii) unless otherwise expressly agreed by the Issuing Lender and the Company at the time such Letter of Credit is issued, be subject to the rules of the “International Standby Practices 1998” or such later version as may be published by the Institute of International Banking Law and Practice (the “ISP 1998”), or any successor entity, and shall, as to matters not governed by the ISP 1998, be governed by, and construed and interpreted in accordance with, the laws of the State of New York.

          (d) Upon the issuance date of each Letter of Credit, the Issuing Lender shall be deemed, without further action by any party hereto, to have sold to each other Lender, and each other Lender shall be deemed, without further action by any party hereto, to have purchased from the Issuing Lender, a participation, to the extent of such Lender’s Pro Rata Share, in such Letter of Credit, the obligations

Credit Agreement

23

thereunder and in the reimbursement obligations of the Company due in respect of drawings made under such Letter of Credit. If requested by the Issuing Lender, the other Lenders will execute any other documents reasonably requested by the Issuing Lender to evidence the purchase of such participation.

          (e) Upon the presentment of any draft for honor under any Letter of Credit by the beneficiary thereof which the Issuing Lender determines is in compliance with the conditions for payment thereunder, the Issuing Lender shall promptly notify the Company, the Administrative Agent and each Lender of the intended date of honor of such draft and the Company hereby promises and agrees, at the Company’s option, to either (i) pay to the Administrative Agent for the account of the Issuing Lender, by 11:00 a.m., Chicago, Illinois time, on the date payment is due as specified in such notice, the full amount of such draft in immediately available funds or (ii) request a Loan pursuant to the provisions of Subsection 2.01(a) and Section 2.02 of this Agreement in the full amount of such draft, which request shall specify that the Borrowing Date is to be the date payment is due under the Letter of Credit as specified in the Issuing Lender’s notice. If the Company fails timely to make such payment because a Loan cannot be made pursuant to Subsection 2.01(a) and/or Section 5.02, each Lender shall, notwithstanding any other provision of this Agreement (including the occurrence and continuance of a Default or an Event of Default), make available to the Administrative Agent for the benefit of the Issuing Lender an amount equal to its Pro Rata Share of the presented draft on the day the Issuing Lender is required to honor such draft. If such amount is not in fact made available to the Administrative Agent by such Lender on such date, such Lender shall pay to the Administrative Agent for the account of the Issuing Lender, on demand made by the Issuing Lender, in addition to such amount, interest thereon at the Federal Funds Rate for the first two days following demand and thereafter until paid at the Base Rate. Upon receipt by the Administrative Agent from the Lenders of the full amount of such draft, notwithstanding any other provision of this Agreement (including the occurrence and continuance of a Default or an Event of Default) the full amount of such draft shall automatically and without any action by the Company, be deemed to have been a Base Rate Loan as of the date of payment of such draft. Nothing in this Subsection 2.10(e) or elsewhere in this Agreement shall diminish the Company’s obligation under this Agreement to provide the funds for the payment of, or on demand to reimburse the Issuing Lender for payment of, any draft presented to, and duly honored by, the Issuing Lender under any Letter of Credit, and the automatic funding of a Loan as in this subsection provided shall not constitute a cure or waiver of the Event of Default for failure to provide timely such funds as in this subsection agreed.

          (f) In order to induce the issuance of Letters of Credit by the Issuing Lender and the purchase of participations therein by the other Lenders, the Company agrees with Administrative Agent, Issuing Lender and the other Lenders that neither Administrative Agent nor any Lender (including the Issuing Lender) shall be responsible or liable (except as provided in the following sentence) for amounts paid by the Issuing Lender, as provided in Subsection 2.10(e), on account of drafts so honored under the Letters of Credit, and the Company’s unconditional obligation to reimburse the Issuing Lender through the Administrative Agent for such amounts shall not be affected by, any circumstance, act or omission whatsoever (whether or not known to the Administrative Agent or any Lender (including the Issuing Lender) other than a circumstance, act or omission resulting from the gross negligence or willful misconduct of the Administrative Agent or any Lender, including the Issuing Lender. The Company agrees that any action taken or omitted to be taken by the Administrative Agent or any Lender (including the Issuing Lender) under or in connection with any Letter of Credit or any related draft, document or Property shall be binding on the Company and shall not put the Administrative Agent or any Lender (including the Issuing Lender) under any resulting liability to the Company, unless such action or omission is the result of the gross negligence or willful misconduct of the Administrative Agent or any such Lender (including the Issuing Lender). The Company hereby waives presentment for payment (except the presentment required by the terms of any Letter of Credit) and notice of dishonor, protest and notice of protest with respect to drafts honored under the Letters of Credit. The Issuing Lender agrees promptly to notify the Company whenever a draft is presented under any Letter of Credit, but failure to so notify the Company shall not in any way affect the Company’s obligations hereunder. Subject to Section 3.07, if while any Letter of Credit is outstanding, any law, executive order or regulation is

Credit Agreement

24

enforced, adopted or interpreted by any public body, governmental agency or court of competent jurisdiction so as to affect any of the Company’s obligations or the compensation to any Lender in respect of the Letters of Credit or the cost to such Lender of establishing and/or maintaining the Letters of Credit (or any participation therein), such Lender shall promptly notify the Company thereof in writing and within ten (10) Business Days after receipt by the Company of such Lender’s request (through the Administrative Agent) for reimbursement or indemnification or within thirty (30) days after receipt of a notice in respect of Taxes or Other Taxes, the Company shall reimburse or indemnify such Lender, as the case may be, with respect thereto so that such Lender shall be in the same position as if there had been no such enforcement, adoption or interpretation, unless the Company notifies the Administrative Agent of its good faith contest to, and dispute of, the requested amount. The foregoing agreement of the Company to reimburse or indemnify the Lenders shall apply in (but shall not be limited to) the following situations: an imposition of or change in reserve, capital maintenance or other similar requirements or in excise or similar taxes or monetary restraints, except a change in franchise taxes imposed on such Lender or in tax on the net income of such Lender.

          (g) In the event that any provision of a LC Application is inconsistent with, or in conflict of, any provision of this Agreement, including provisions for the rate of interest applicable to drawings thereunder or rights of setoff or any representations, warranties, covenants or any events of default set forth therein, the provisions of this Agreement shall govern.

          (h) If the Obligations, or any part thereof, are declared or otherwise become immediately due and payable pursuant to Article IX of this Agreement (for the purposes of this subsection, the “Matured Obligations”), then all LC Obligations shall become immediately due and payable without regard for actual drawings or payments on the Letters of Credit, and the Company shall be obligated to pay to the Administrative Agent immediately an amount equal to the LC Obligations. All amounts made due and payable by the Company under this Subsection 2.10(h) may be applied as the Issuing Lender and the Lenders elect to any of the various LC Obligations; provided, however, that such amounts applied by the Issuing Lender and the Lenders to the LC Obligations shall be (i) first applied to the Matured LC Obligations, and (ii) second held by the Administrative Agent for the benefit of the Issuing Lender and the Lenders as LC Collateral in the LC Collateral Account until all remaining Matured Obligations have been satisfied. This Subsection 2.10(h) shall not limit or impair any rights which the Administrative Agent, the Issuing Lender or any of the Lenders may have under any other document or agreement relating to any Letter of Credit or LC Obligation, including without limitation, any LC Application. The Company hereby grants a security interest in and lien on the LC Collateral Account to the Administrative Agent for and on behalf of the Lenders as security for the Obligations. The Company agrees to execute and deliver from time to time such documentation as the Administrative Agent may reasonably request to further assure such security interest.

     2.11 Payments by the Lenders to the Administrative Agent.

          (a) Unless the Administrative Agent receives notice from a Lender on or prior to the Effective Date or, with respect to any Borrowing after the Effective Date, at least one (1) Business Day prior to the date of such Borrowing, that such Lender will not make available as and when required hereunder to the Administrative Agent for the account of the Company the amount of that Lender’s Pro Rata Share of the Borrowing, the Administrative Agent may assume that each Lender has made such amount available to the Administrative Agent in immediately available funds on the Borrowing Date and the Administrative Agent may (but shall not be so required), in reliance upon such assumption, make available to the Company on such date a corresponding amount. If and to the extent any Lender shall not have made its full amount available to the Administrative Agent in immediately available funds and the Administrative Agent in such circumstances has made available to the Company such amount, that Lender shall on the Business Day following such Borrowing Date make such amount available to the Administrative Agent, together with interest at the Federal Funds Rate for the first two days during such period and thereafter at the Base Rate. A notice of the Administrative Agent submitted to any Lender with respect to amounts owing under this Subsection 2.11(a)

Credit Agreement

25

shall be conclusive, absent manifest error. If such amount is so made available, such payment to the Administrative Agent shall constitute such Lender’s Loan on the date of Borrowing for all purposes of this Agreement. If such amount is not made available to the Administrative Agent on the Business Day following the Borrowing Date, the Administrative Agent will notify the Company of such failure to fund and, upon demand by the Administrative Agent, the Company shall pay such amount to the Administrative Agent for the Administrative Agent’s account, together with interest thereon for each day elapsed since the date of such Borrowing, at a rate per annum equal to the interest rate applicable at the time to the Loans comprising such Borrowing.

          (b) The failure of any Lender to make any Loan on any Borrowing Date shall not relieve any other Lender of any obligation hereunder to make a Loan on such Borrowing Date, but no Lender shall be responsible for the failure of any other Lender to make the Loan to be made by such other Lender on any Borrowing Date.

     2.12 Sharing of Payments, Etc. If any Lender shall obtain on account of the Obligations made by it any payment (whether voluntary, involuntary, through the exercise of any right of set-off, or otherwise) or receive any collateral in respect thereof in excess of the amount such Lender was entitled to receive pursuant to the terms hereof, such Lender shall immediately (a) notify the Administrative Agent of such fact, and (b) purchase from the other Lenders such participations in the Loans made by them as shall be necessary to cause such purchasing Lender to share the excess payment according to the terms hereof; provided, however, that if all or any portion of such excess payment is thereafter recovered from the purchasing Lender, such purchase shall to that extent be rescinded and each other Lender shall repay to the purchasing Lender the purchase price paid therefor, together with an amount equal to such paying Lender’s ratable share (according to the proportion of (i) the amount of such paying Lender’s required repayment to (ii) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Company agrees that any Lender so purchasing a participation from another Lender may, to the fullest extent permitted by law, exercise all its rights of payment (including the right of set-off, but subject to Section 11.09) with respect to such participation as fully as if such Lender were the direct creditor of the Company in the amount of such participation. The Administrative Agent will keep records (which shall be conclusive and binding in the absence of manifest error) of participations purchased under this Section and will in each case notify the Lenders following any such purchases or repayments.

ARTICLE III .

TAXES, YIELD PROTECTION AND ILLEGALITY

     3.01 Taxes.

          (a) Any and all payments by the Company to each Lender or the Administrative Agent under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for any Taxes. In addition, the Company shall pay all Other Taxes.

          (b) The Company agrees to indemnify and hold harmless each Lender and the Administrative Agent for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section) paid by the Lender or the Administrative Agent and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within thirty (30) days after the date the Lender or the Administrative Agent makes written demand therefor.

Credit Agreement

26

          (c) If the Company shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to any Lender or the Administrative Agent, then: (i) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section) such Lender or the Administrative Agent, as the case may be, receives an amount equal to the sum it would have received had no such deductions or withholdings been made; (ii) the Company shall make such deductions and withholdings; and (iii) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law.

          (d) Upon request of the Administrative Agent, the Company shall furnish the Administrative Agent the original or a certified copy of a receipt evidencing payment by the Company of Taxes or Other Taxes under Subsection 3.01(c), or other evidence of payment satisfactory to the Administrative Agent.

          (e) If the Company is required to pay additional amounts to any Lender or the Administrative Agent pursuant to this Section 3.01, then upon written request of the Company such Lender shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office and take such other steps, in each case, so as to eliminate any such additional payment by the Company which may thereafter accrue, if such change or step, as applicable, in the judgment of such Lender is not otherwise disadvantageous to such Lender.

          (f) If the Company pays any additional amounts under this Section 3.01 to a Lender and such Lender determines that it has actually received or realized in connection therewith any refund or reduction of, or credit against, its tax liability in or with respect to the taxable year in which the additional amount is paid (a “Tax Benefit”), such Lender shall pay to the Company an amount that such Lender shall determine is equal to the net benefit after tax, which was obtained by such Lender in such year as a consequences of such Tax Benefit. If the Company determines in good faith that a reasonable basis exists for contesting any Taxes or Other Taxes with respect to which the Company has paid any additional amounts under this Section 3.01 or for which indemnification has been demanded hereunder, the relevant Lender or Administrative Agent, as applicable, may, in its discretion, not to be unreasonably withheld, cooperate with the Company in challenging such Taxes or Other Taxes at the Company’s expense if so requested by the Company in writing.

     3.02 Illegality.

          (a) If any Lender determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has, since the Effective Date, made it unlawful, or that, since the Effective Date, any central bank or other Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make LIBOR Loans, then, on notice thereof by the Lender to the Company through the Administrative Agent, any obligation of that Lender to make LIBOR Loans shall be suspended until the Lender notifies the Administrative Agent and the Company that the circumstances giving rise to such determination no longer exist; such notice to be promptly given upon the determination that such circumstances no longer exist.

          (b) If a Lender determines that it is unlawful to maintain any LIBOR Loan, the Company shall, upon its receipt of notice of such fact and demand from such Lender (with a copy to the Administrative Agent), convert such LIBOR Loans of that Lender then outstanding, together with interest accrued thereon and amounts required under Section 3.04 into a Base Rate Loan without regard to conditions precedent described in Subsection 5.02(b), either on the last day of the Interest Period thereof, if the Lender may lawfully continue to maintain such LIBOR Loans to such day, or immediately, if the Lender may not lawfully continue to maintain such LIBOR Loan. If the Company is required to so prepay any LIBOR Loan, then

Credit Agreement

27

concurrently with such prepayment, the Company shall borrow from the affected Lender, in the amount of such repayment, a Base Rate Loan.

          (c) If the obligation of any Lender to make or maintain LIBOR Loans has been so terminated or suspended, all Loans which would otherwise be made by the Lender as LIBOR Loans shall be instead Base Rate Loans.

          (d) Before giving any notice to the Administrative Agent under this Section, the affected Lender shall designate a different Lending Office with respect to its LIBOR Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Lender, be illegal or otherwise disadvantageous to the Lender.

     3.03 Increased Costs and Reduction of Return.

          (a) If any Lender determines, after the Effective Date, that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the LIBOR) in or in the interpretation of any law or regulation or (ii) the compliance by that Lender with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to such Lender of agreeing to make or making, funding or maintaining any LIBOR Loans, (except for any such increased cost resulting from taxes of any kind, including Taxes and Other Taxes, as to which Section 3.01 shall govern) then the Company shall be liable for, and shall from time to time, upon demand (with a copy of such demand to be sent to the Administrative Agent), pay to the Administrative Agent for the account of such Lender, additional amounts as are sufficient to compensate such Lender for such increased costs.

          (b) If any Lender shall have determined, after the Effective Date, that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Lender (or its Lending Office) or any corporation controlling the Lender with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Lender or any corporation controlling the Lender and (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy and such Lender’s desired return on capital) determines that the amount of such capital is increased as a consequence of its Commitments, loans, credits or obligations under this Agreement, then, upon demand of such Lender to the Company through the Administrative Agent, the Company shall pay to the Lender, from time to time as specified by the Lender, additional amounts sufficient to compensate the Lender for such increase.

     3.04 Funding Losses. The Company shall reimburse each Lender and hold each Lender harmless from any loss or expense excluding consequential losses which the Lender may sustain or incur as a consequence of: (a) the failure of the Company to make on a timely basis any payment of principal of any LIBOR Loan; (b) the failure of the Company to borrow, continue or convert a Loan after the Company has given (or is deemed to have given) a Notice of Borrowing or a Notice of Conversion/Continuation (including by reason of the failure to satisfy any condition precedent thereto); (c) the failure of the Company to make any prepayment in accordance with any notice delivered under Section 2.04; (d) the prepayment (including pursuant to Section 2.05 or 2.06) or other payment (including after acceleration thereof) of an LIBOR Loan on a day that is not the last day of the relevant Interest Period; or (e) the automatic conversion under Section 2.03 of any LIBOR Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period; including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its LIBOR Loans or from fees payable to terminate the deposits from which such funds were obtained. For purposes of calculating amounts payable by the Company to the Lenders under this Section and

Credit Agreement

28

under Subsection 3.03(a), each LIBOR Loan made by a Lender (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the LIBOR used in determining the LIBOR for such LIBOR Loan by a matching deposit or other borrowing in the interbank Eurodollar market for a comparable amount and for a comparable period, whether or not such LIBOR Loan is in fact so funded.

     3.05 Inability to Determine Rates. If Administrative Agent determines that for any reason adequate and reasonable means do not exist for determining the LIBOR for any requested Interest Period with respect to a proposed LIBOR Loan, or that the LIBOR applicable pursuant to Subsection 2.06(b) for any requested Interest Period with respect to a proposed LIBOR Loan does not adequately and fairly reflect the cost to the Lenders of funding such Loan, the Administrative Agent will promptly so notify the Company and each Lender. Thereafter, the obligation of the Lenders to make or maintain LIBOR Loans hereunder shall be suspended until the Administrative Agent upon the instruction of the Lenders revokes such notice in writing; such written revocation to be promptly given upon determination that such circumstances no longer exist. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such Notice, the Lenders shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of LIBOR Loans.

     3.06 Certificates of Lenders. Any Lender claiming reimbursement or compensation under this Article III shall deliver to the Company (with a copy to the Administrative Agent) a certificate setting forth in reasonable detail the amount payable to the Lender hereunder and such certificate shall be conclusive and binding on the Company in the absence of manifest error provided, however, that such Lender shall only be entitled to collect amounts incurred within 180 days of such notice.

     3.07 Substitution of Lenders. Upon the receipt by the Company from any Lender (an “Affected Lender”) of a claim for compensation under this Article III, the Company may: (a) obtain a replacement Lender or financial institution satisfactory to the Administrative Agent (a “Replacement Lender”) to acquire and assume all or a ratable part of all of such Affected Lender’s Loans and Commitment; or (b) request one more of the other Lenders to acquire and assume all or part of such Affected Lender’s Loans and Commitment but none of the Lenders shall have any obligation to do so. Any such designation of a Replacement Lender under (a) shall be subject to the prior written consent of the Administrative Agent which consent shall not be unreasonably withheld or delayed.

     3.08 Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations.

ARTICLE IV .

SECURITY

     4.01 The Security. The Obligations will be secured by the Security Documents described in Schedule 4.01 and any additional Security Documents hereafter delivered by the Company or any Guarantor and accepted by the Administrative Agent.

     4.02 Agreement to Deliver Security Documents. The Company and each Guarantor agrees to deliver, to further secure the Obligations whenever requested by the Administrative Agent in its sole and absolute discretion, deeds of trust, mortgages, chattel mortgages, security agreements, financing statements and other Security Documents in form and substance reasonably satisfactory to the Administrative Agent for the purpose of granting, confirming, and perfecting first and prior liens or security interests in all Oil and Gas Properties now owned or hereafter acquired by the Company or any Guarantor, subject to Permitted Liens.

Credit Agreement

29

The Company and each Guarantor also agrees to deliver, whenever requested by the Lenders, title opinions from legal counsel acceptable to the Lenders or such other evidence of title satisfactory to the Lenders with respect to the Mortgaged Properties designated by the Lenders, based upon abstract or record examinations to dates acceptable to the Lenders and (a) stating that the applicable member of the Borrower Group has good and defensible title to such properties and interests, free and clear of all Liens except Permitted Liens, (b) confirming that such Oil and Gas Properties are subject to Security Documents securing the Obligations that constitute and create legal, valid and duly perfected deed of trust or mortgage liens in such Oil and Gas Properties and assignments of and security interests in the Oil and Gas attributable to such Oil and Gas Properties and the proceeds thereof, in each case subject only to Permitted Liens, and (c) covering such other matters as the Lenders may reasonably request.

     4.03 Perfection and Protection of Security Interests and Liens. The Company and each Guarantor will from time to time deliver to the Administrative Agent any financing statements, amendment, assignment and continuation statements, extension agreements and other documents, properly completed and executed if required by law (and acknowledged when required) by the Company or any Guarantor, as applicable, in form and substance reasonably satisfactory to the Administrative Agent, which the Administrative Agent reasonably requests for the purpose of perfecting, confirming, or protecting any Liens or other rights in Collateral securing any Obligations.

     4.04 Offset. To secure the repayment of the Obligations, the Company and each Guarantor hereby grants the Administrative Agent and each Lender a security interest, a lien, and a right of offset, each of which shall be in addition to all other interests, liens, and rights of the Administrative Agent at common law, under the Loan Documents, or otherwise, and each of which shall be upon and against (a) any and all moneys, securities or other property (and the proceeds therefrom) of the Company or any Guarantor now or hereafter held or received by or in transit to the Administrative Agent or any Lender from or for the account of the Company or any Guarantor, whether for safekeeping, custody, pledge, transmission, collection or otherwise, (b) any and all deposits (general or special, time or demand, provisional or final) of the Company or any Guarantor with the Administrative Agent or any Lender, and (c) any other credits and claims of the Company or any Guarantor at any time existing against the Administrative Agent or any Lender, including claims under certificates of deposit. During the existence of any Event of Default, the Administrative Agent or any Lender is hereby authorized to foreclose upon, offset, appropriate, and apply, at any time and from time to time, without notice to the Company or any Guarantor, any and all items hereinabove referred to against the Obligations then due and payable.

     4.05 Subsidiary Guaranty.

          (a) Ivanhoe Energy Holdings Inc. and each Subsidiary of Ivanhoe Energy Holdings Inc. (other than the Company) now existing or created, acquired or coming into existence after the date hereof, and the Parent, shall promptly upon request by the Administrative Agent, execute and deliver to the Administrative Agent an absolute and unconditional guaranty of the timely repayment, and the due and punctual performance, of the Obligations of the Company hereunder, which Guaranty shall be substantially in the form and substance of Exhibit G. Ivanhoe Energy Holdings Inc. and each such Subsidiary and the Parent will deliver to the Administrative Agent, simultaneously with its delivery of such a Guaranty, written evidence satisfactory to the Administrative Agent and its counsel that such Subsidiary has taken all organizational action necessary to duly approve and authorize its execution, delivery and performance of such Guaranty and any other documents which it is required to execute.

          (b) The Company and each Guarantor are Affiliates and are mutually dependent on each other in the conduct of their respective businesses, with the credit needed from time to time by each often being provided by another or by means of financing obtained by one with the support of the other for their mutual benefit and the ability of each to obtain such financing is dependent on the successful operations of the

Credit Agreement

30

other. The board of directors or managers, where applicable, of each Guarantor has determined that such Guarantor’s execution, delivery and performance of this Agreement may reasonably be expected to directly or indirectly benefit such Guarantor and is in the best interests of such Guarantor.

          (c) The direct or indirect value of the consideration received and to be received by such Guarantor in connection herewith is reasonably worth at least as much as the liability and obligations of each Guarantor hereunder, and the incurrence of such liability and obligations in return for such consideration may reasonably be expected to benefit such Guarantor, directly or indirectly.

          (d) The Company and the Guarantors, taken as a whole, are Solvent on the date hereof. Each of the Company and each Guarantor has capital which is adequate for the businesses in which such Person is engaged and intends to be engaged. Neither of the Company nor any Guarantor has incurred (whether hereby or otherwise), nor does the Company or any Guarantor intend to incur or believe that it will incur, liabilities which will be beyond its ability to pay as such liabilities mature.

     4.06 Assignment of Production.

          (a) The Company shall provide to Administrative Agent undated letters in blank to purchasers of production and disbursers of proceeds of production from or attributable to the Company’s Mortgaged Properties, with the names and addressees left blank, authorizing and directing the addressees to make future payments attributable to production from the Mortgaged Properties directly to Administrative Agent for the ratable account of the Lenders.

          (b) The Company hereby designates Administrative Agent as its agent and attorney-in-fact, to act in its name, place, and stead for the purpose of completing and delivering any and all of the letters in lieu of transfer orders delivered by the Company to Administrative Agent, including, without limitation, completing any blanks contained in such letters and attaching exhibits thereto describing the relevant Collateral. The Company hereby ratifies and confirms all that Administrative Agent shall lawfully do or cause to be done by virtue of this power of attorney and the rights granted with respect to such power of attorney. This power of attorney is coupled with the interest of Administrative Agent in the Collateral, shall commence and be in full force and effect as of the date hereof and shall remain in full force and effect and shall be irrevocable so long as any Obligation remains outstanding or unpaid or any Commitment exists. The powers conferred on Administrative Agent by this appointment are solely to protect the interests of the secured parties under the Loan Documents and shall not impose any duty upon Administrative Agent to exercise any such powers. Administrative Agent shall be accountable only for amounts that it actually receives as a result of the exercise of such powers and shall not be responsible to any of the Company, Guarantors, or any other Person for any act or failure to act with respect to such powers, except for Administrative Agent’s gross negligence or willful misconduct.

     4.07 Assignment of Runs. Notwithstanding that, under of the Mortgages, the Company has assigned to Administrative Agent for the ratable account of itself, the Issuing Lender, and the Lenders (and any Affiliate thereof) all of the proceeds of production accruing to the Company’s Mortgaged Properties covered thereby:

          (a) Until such time as an Event of Default shall have occurred and be continuing, the Company shall be entitled to receive from the purchasers or disbursers of its production all such proceeds, subject however to the liens created under the Mortgages. Upon the occurrence and during the continuance of an Event of Default, Administrative Agent may deliver to the addressees the letters-in-lieu described in Section 4.06 above and may exercise all rights and remedies granted under the Mortgages, including the right to obtain possession of all proceeds of runs then held by the Company or any Guarantor or to receive directly from the purchaser or disburser of production such proceeds of production.

Credit Agreement

31

          (b) In no case shall any failure, whether intentional or inadvertent, by Administrative Agent to collect directly any such proceeds of runs constitute in any way a waiver, rescission or release of any of its rights under the Mortgages, nor shall any release of any other proceeds of runs or of any rights of Administrative Agent to collect other proceeds of runs thereafter.

ARTICLE V.

CONDITIONS PRECEDENT

     5.01 Conditions of Initial Credit Extensions. The effectiveness of this Agreement and the obligation of each Lender to make its initial Loan hereunder and the obligation of the Issuing Lender to issue Letters of Credit hereunder, are subject to the condition that the Administrative Agent shall have received all of the following, in form and substance satisfactory to the Administrative Agent, and in sufficient copies for each Lender:

          (a) Credit Agreement and Notes. This Agreement, the Notes, the Guaranties, the Security Documents and the other Loan Documents executed by each party thereto;

          (b) Resolutions; Incumbency; Organization Documents, Good Standing. A certificate of the Secretary or Assistant Secretary of the Company and each Guarantor, or in the event that the Company or any such Guarantor is a limited partnership, such Person’s general partner, certifying as of the Effective Date: (i) Resolutions of its board of directors or members, authorizing the transactions contemplated hereby; (ii) the names and genuine signatures of the Responsible Officers of such Person, authorized to execute, deliver and perform, as applicable, this Agreement, the Notes, the Guaranties, the Security Documents, and all other Loan Documents to be delivered by such Person hereunder; (iii) the Organization Documents of such Person as in effect as of the Effective Date; (iv) the good standing certificate for such Person, from its state of incorporation, formation or organization, as applicable, evidencing its qualification to do business in such state as of a date no more than thirty (30) days prior to the Effective Date; and (v) as applicable, certificate(s) of authority for such Person from foreign states wherein such Person conducts business, evidencing such Person’s qualification to do business in such state as of a date no more than thirty (30) days prior to the Effective Date;

          (c) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses owed pursuant to this Agreement to the extent then due and payable on the Effective Date, including any such costs, fees and expenses arising under or referenced in Sections 2.07 and 11.04;

          (d) Certificate. A certificate signed by a Responsible Officer, dated as of the Effective Date, stating that (i) the representations and warranties contained in Article VI are true and correct in all material respects on and as of such date, as though made on and as of such date; (ii) no litigation is pending or threatened against any of the Company or any Subsidiary in which there is a reasonable probability of an adverse decision that could reasonably be expected to result in a Material Adverse Effect; and (iii) there has occurred no event or circumstance that has resulted or could reasonably be expected to result in a Material Adverse Effect;

          (e) Insurance Certificates. Insurance certificates in form and substance reasonably satisfactory to the Administrative Agent, from the Company’s and the Guarantors’ insurance carriers reflecting the current insurance policies required under Section 7.08 including any necessary endorsements to reflect the Administrative Agent as additional insured and loss payee for the ratable benefit of the Lenders;

Credit Agreement

32

          (f) Corporate Due Diligence. Due diligence review satisfactory to the Administrative Agent including but not limited to review of and satisfaction with the legal structure of the Parent and its Subsidiaries, and consolidated pro-forma financial statements;

          (g) Reserve Engineering. The Lenders shall have completed, to their satisfaction, an independent engineering review of the Oil and Gas Properties;

          (h) Environmental. Copies of all environmental assessments, reports and other information in the possession or control of the Company or any Guarantor, with contents and findings satisfactory to Administrative Agent with respect to the Mortgaged Properties;

          (i) Title. The Company and the Guarantors shall have good and defensible title, on at least 80% of the net present value of the Oil and Gas Properties (the net present value of which has been determined by a discount factor of 10%) subject to no other liens, other than Permitted Liens, evidenced by current opinions of title or other title information satisfactory to the Administrative Agent and the Lenders, and substantially all of the Oil and Gas Properties of the Borrower Group shall be covered by the Mortgages;

          (j) Material Contracts. Copies of all material contracts entered into by the Company or any Guarantor to the extent requested by Administrative Agent or the Lenders;

          (k) Equity Pledge. To the extent certificated, the Company shall have delivered to Administrative Agent original certificates for all Equity held (i) by the Parent in Ivanhoe Energy Holdings Inc., and (ii) by Ivanhoe Energy Holdings Inc. and/or its Subsidiaries in every member of the Borrower Group, together with undated, blank stock powers for each certificate, representing all issued and outstanding Equity of each such Subsidiary;

          (l) Opinion of Counsel. Opinions of Goodmans LLP, Erwin & Thompson LLP, and Lackowicz, Shier & Hoffman, as counsel for the Company and each of the Guarantors, covering such matters as Administrative Agent may require and in form and substance satisfactory to Administrative Agent dated as of the Effective Date;

          (m) Repayment of Existing Indebtedness. Evidence satisfactory to Administrative Agent that all Indebtedness outstanding under the Existing Credit Agreement has been paid in full, assurances reasonably satisfactory to the Administrative Agent that all liens and security interests securing such Indebtedness have been or will be released of record, and all commitments under such Existing Credit Agreement have expired or been terminated;

          (n) Operating Accounts. Evidence that (i) each of the Company and the Parent has established and will maintain all of its principal depository and operating accounts with the Administrative Agent and (ii) each member of the Borrower Group other than the Company has established and will maintain any of its depository or operating accounts with the Administrative Agent if any such account has an average collected balance for any month in excess of $100,000.00.

          (o) Derivative Contracts. Evidence satisfactory to the Administrative Agent that the Borrower Group has entered into Derivative Contracts covering not less than 75% of the estimated production from the Oil and Gas Properties of the Borrower Group for a term of at least 24 months, with counterparties and otherwise having terms and conditions satisfactory to the Administrative Agent and the Required Lenders.

          (p) Other Documents. Such other approvals, opinions, documents or materials as the Administrative Agent or any Lender may reasonably request.

Credit Agreement

33

     5.02 Conditions to All Loans. The obligation of each Lender to make any Loan (including its initial Loan) or to continue or convert any Loan under Section 2.03 (but specifically excluding the conversion of LIBOR Loans on the last day of the Interest Period therefor into Base Rate Loans or the continuation of Base Rate Loans) is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date or Conversion/Continuation Date and immediately after giving effect to such Borrowing or Conversion/Continuation:

          (a) Notice. The Administrative Agent shall have received a Notice of Borrowing or a Notice of Conversion/Continuation, as applicable;

          (b) Continuation of Representations and Warranties. The representations and warranties in Article VI shall be true and correct in all material respects on and as of such Borrowing Date or Conversion/Continuation Date with the same effect as if made on and as of such Borrowing Date or Conversion/Continuation Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct as of such earlier date);

          (c) Continuation of Covenants. The Company and each Guarantor shall be in compliance with the covenants in Articles VII and VIII;

          (d) No Material Adverse Effect. No Material Adverse Effect shall have occurred or shall exist from such Borrowing or continuation or conversion; and

          (e) No Existing Default. No Default or Event of Default shall exist or shall result from such Borrowing or continuation or conversion.

Each Notice of Borrowing or Notice of Conversion/Continuation submitted by the Company hereunder shall constitute a representation and warranty by the Company and each Guarantor hereunder, as of the date of each such notice and as of each Borrowing Date or Conversion/Continuation Date, as applicable, that the conditions in this Section 5.02 are satisfied.

     5.03 Post Closing Condition. The obligation of each Lender to continue to make Loans and the obligation of the Issuing Bank to continue to issue Letters of Credit are subject to satisfaction of the condition that the Company deliver a Phase 1 report covering the Mortgaged Properties designated by the Administrative Agent in form and substance satisfactory to the Administrative Agent within sixty (60) days after the date hereof. In the event such condition is not met within the deadlines herein stated, the Lenders’ Commitments shall terminate and such failure shall constitute an Event of Default.

ARTICLE VI .

REPRESENTATIONS AND WARRANTIES

     Each of the Company and the Guarantors represents and warrants to the Administrative Agent and each Lender that:

     6.01 Organization, Existence and Power. Each of the Company and the Guarantors: (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its formation; (b) has the power and authority and all material governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents; (c) is duly qualified as a foreign corporation or other organization and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business

Credit Agreement

34

requires such qualification or license, except where failure to do so would not reasonably be expected to have a Material Adverse Effect; and (d) is in compliance in all material respects with all Requirements of Law.

     6.02 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company and the Guarantors of this Agreement and each other Loan Document to which such Person is a party, have been duly authorized by all necessary organizational action, and do not and will not: (a) contravene the terms of any of that Person’s Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which such Person is a party that would be prior to the Liens granted to the Administrative Agent for the benefit of the Lenders or otherwise that would constitute a Material Adverse Effect or any order, injunction, writ or decree of any Governmental Authority to which such Person or its property is subject; or (c) violate any Requirement of Law, that would constitute a Material Adverse Effect.

     6.03 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company or any Guarantor of this Agreement or any other Loan Document to which it is a party, except for filings necessary to obtain and maintain perfection of Liens; routine filings related to the Company and the Guarantors and the operation of their business; and such filings as may be necessary in connection with Lenders’ exercise of its remedies hereunder.

     6.04 Binding Effect. This Agreement and each other Loan Document to which the Company or any Guarantor is a party constitute the legal, valid and binding obligations of the Company or such Guarantor, enforceable against such Person in accordance with their respective terms, except as enforceability may be limited by applicable Bankruptcy, insolvency, or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability.

     6.05 Litigation. Unless specifically disclosed in Schedule 6.05 attached hereto, there are no actions, suits, proceedings, claims or disputes pending, or to the knowledge of the Company or any Guarantor, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company or any Guarantor or any of their respective properties which: (a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or (b) if determined adversely to the Company or such Guarantor, would reasonably be expected to have a Material Adverse Effect. To the knowledge of the Company and each Guarantor, no injunction, writ, temporary restraining order or any order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the transactions provided for herein or therein not be consummated as herein or therein provided.

     6.06 No Default. No Default or Event of Default exists or would be reasonably expected to result from the incurring of any Obligations by the Company or the Guarantors. As of the Effective Date, neither the Company nor any Guarantor is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, would reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Effective Date, create an Event of Default under Subsection 9.01(e). Each of the Company and the Guarantors is in compliance with all requirements of any Governmental Authority applicable to it or its Property and all agreements and other instruments binding upon it or its Property, and possesses all licenses, permits, franchises, exemptions, approvals and other authorizations granted by Governmental Authorities necessary for the ownership of its Property and the present conduct of its business, except in each case where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect.

Credit Agreement

35

     6.07 ERISA Compliance. Except as specifically disclosed in Schedule 6.07:

          (a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law. Each Plan which is intended to qualify under Section 401(a) of the Code has received a favorable determination letter from the IRS and to the knowledge of the Company and the Guarantors, nothing has occurred which would cause the loss of such qualification. The Company, the Guarantors and each ERISA Affiliate has made all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan.

          (b) There are no pending or, to the knowledge of Company or any Guarantor, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably be expected to result in a Material Adverse Effect.

          (c) (i) No ERISA Event has occurred or is reasonably expected to occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither the Company, any Guarantors nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability under Title IV of ERISA with respect to any Pension Plan (other than premiums due and not delinquent under Section 4007 of ERISA); (iv) neither the Company, any Guarantor nor any ERISA Affiliate has incurred, or reasonably expects to incur, any liability (and no event has occurred which, with the giving of notice under Section 4219 of ERISA, would result in such liability) under Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v) neither the Company, any Guarantor nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or 4212(c) or ERISA.

     6.08 Margin Regulations. The proceeds of the Loans shall be used solely for the purposes set forth in and permitted by Section 7.16. Neither the Company nor any Guarantor is generally engaged in the business of purchasing or selling Margin Stock or extending credit for the purpose of purchasing or carrying Margin Stock.

     6.09 Title to Properties. Subject to Permitted Liens, the Company and each Guarantor have good and defensible title to all of its Oil and Gas Properties evaluated in the most recently delivered Reserve Report, and except for such defects in title as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, and the Company and each Guarantor have good title to all other Oil and Gas Properties necessary or used in the ordinary conduct of their respective businesses. After giving full effect to the Permitted Liens, the Company or any Guarantor specified as the owner under the most recently delivered Reserve Report owns the net interests in production attributable to the Oil and Gas Properties as reflected in the most recently delivered Reserve Report, and the ownership of such Properties shall not in any material respect obligate the Company or any Guarantor to bear the costs and expenses relating to the maintenance, development and operations of each such Property in an amount in excess of its working interest of each Property set forth in the most recently delivered Reserve Report that is not offset by a corresponding proportionate increase in the Company’s or any Guarantor’s net revenue interest in such Property. No consents or rights of first refusal exist or remain outstanding with respect to the Company’s or any Guarantor’s interest in the Mortgaged Properties assigned to it pursuant to any Acquisition of Oil and Gas Properties other than Permitted Liens. As of the Effective Date, the Property of the Company and the Guarantors is subject to no Liens, other than Permitted Liens.

     6.10 Oil and Gas Reserves. The Company and each Guarantor is and will hereafter be, in all material respects, the owner of the Oil and Gas that it purports to own from time to time in and under its Oil and Gas Properties, together with the right to produce the same. The Oil and Gas Properties are not subject to

Credit Agreement

36

any Lien other than as set forth in the financial statements referred to in Section 6.14, as disclosed to the Lenders in writing prior to the date of this Agreement and Permitted Liens. All Oil and Gas have been and will hereafter be produced, sold and delivered in accordance in all material respects with all applicable laws and regulations of governmental authority; each of the Company and the Guarantors has complied in all material respects and will hereafter use commercially reasonable efforts to comply with all material terms of each oil, gas and mineral lease and any other agreement comprising its Oil and Gas Properties; and all such oil, gas and mineral leases and other agreements have been and will hereafter be maintained in full force and effect. Provided, however that nothing in this Section 6.10 shall prevent the Company or any Guarantor from abandoning any well or forfeiting, surrendering, releasing or defaulting under any lease in the ordinary course of business which is not disadvantageous in any way to the Lenders and which, in the opinion of the Company or such Guarantor, is in its best interest, and the Company and each Guarantor is and will hereafter be in compliance with all obligations hereunder. All of the Company’s and each Guarantor’s Operating Agreements and Operating Leases with respect to its Oil and Gas Properties are and will hereafter be enforceable in all material respects in accordance with their terms except as such may be modified by applicable bankruptcy law or an order of a court in equity.

     6.11 Initial Reserve Report. The Company has heretofore delivered to the Lenders a true and complete copy of a report, dated effective as of December 31, 2005, prepared by Netherland, Sewell and Associates, Inc. (the “Initial Reserve Report”) relating to an evaluation of the Oil and Gas attributable to certain of the Mortgaged Properties described therein. To the knowledge of the Company and the Guarantors, (a) the assumptions stated or used in the preparation of the Initial Reserve Report are reasonable, (b) all information furnished by the Company or any Guarantor to Netherland, Sewell and Associates, Inc. (the “Independent Engineer”) for use in the preparation of the Initial Reserve Report was accurate in all material respects, (c) there has been no material adverse change in the amount of the estimated Oil and Gas shown in the Initial Reserve Report since the date thereof, except for changes which have occurred as a result of production in the ordinary course of business, and (d) the Initial Reserve Report does not omit any material statement or information necessary to cause the same not to be misleading to the Lenders.

     6.12 Gas Imbalances. There are no gas imbalances, take or pay or other prepayments with respect to any of the Oil and Gas Properties which would require the Company or any Guarantor to deliver Oil and Gas produced from any of the Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor exceeding 50,000 Mcf of gas (on an MMBTU equivalent basis) in the aggregate.

     6.13 Taxes. The Company and the Guarantors have filed all federal tax returns and reports required to be filed, and have paid all federal taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. The Company and the Guarantors have filed all state and other non-federal tax returns and reports required to be filed, and have paid all state and other non-federal taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets prior to delinquency thereof, except those which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP. To the Company’s and each Guarantor’s knowledge, there is no proposed tax assessment against the Company or any Guarantor that would, if made, reasonably be expected to have a Material Adverse Effect.

     6.14 Financial Condition.

          (a) The Company has heretofore furnished to the Lenders (i) the unaudited financial statements for the Company, as of and for the fiscal year ending December 31, 2005 and the six months ended June 30, 2006 (the “Company Initial Financial Statements”), and (ii) the Parent’s audited consolidated financial statements, as of and for the fiscal year ending December 31, 2005 and the Parent’s unaudited

Credit Agreement

37

consolidated financial statements, as of and for the six months ended June 30, 2006 (the “Parent Initial Financial Statements”), each certified by a Responsible Officer. Such Company Initial Financial Statements present fairly, in all material respects, the financial position, results of operations and cash flows of the Company as of such dates and for such periods then ended in accordance with GAAP, subject to the absence of footnotes. Such Parent Initial Financial Statements present fairly, in all material respects, the financial position, results of operations and cash flows of the Parent and its Subsidiaries, on a consolidated basis as of such dates and for such periods then ended in accordance with GAAP.

          (b) Since June 30, 2006, (i) there has been no event, development or circumstance that has had or could reasonably be expected to have a Material Adverse Effect, and (ii) the business of the Company and the Guarantors has been conducted only in the ordinary course consistent with past business practices.

     6.15 Environmental Matters. Except as described on Schedule 6.15 hereto or as could not be reasonably expected to have a Material Adverse Effect (or with respect to (c) and (d) below, where the failure to take such actions could not be reasonably expected to have a Material Adverse Effect):

          (a) neither any Property of the Company or any Guarantor nor the operations conducted thereon violate Environmental Laws.

          (b) no Property of the Company or any Guarantor nor the operations currently conducted thereon by the Company or any Guarantor or, to the knowledge of the Company or any Guarantor, no operations conducted thereon by any prior owner or operator of such Property, are in violation of or subject to any existing, or to the knowledge of the Company or any Guarantor, pending or threatened action, suit, investigation, inquiry or proceeding by or before any court or Governmental Authority under Environmental Laws.

          (c) all notices, permits, licenses, exemptions, and approvals, if any, required to be obtained or filed under any Environmental Law in connection with the operation or use of any and all Property by the Company and each Guarantor, including, without limitation, past or present treatment, storage, disposal or release of a hazardous substance, oil and gas waste or hazardous waste into the environment, have been duly obtained or filed or requested, and the Company and each Guarantor are in compliance with the material terms and conditions of all such notices, permits, licenses, exemptions and approvals.

          (d) all hazardous substances, hazardous waste and oil and gas waste, if any, generated by the Company or any Guarantor at any and all Property of the Company or any Guarantor have in the past been transported, treated and disposed of in compliance with Environmental Laws then in effect, and, to the knowledge of the Company and each Guarantor, transport carriers and treatment and disposal facilities known by the Company or any Guarantor to have been used by the Company or any Guarantor are not the subject of any existing action, investigation or inquiry by any Governmental Authority under any Environmental Laws.

          (e) no hazardous substances, hazardous waste or oil and gas waste, have been disposed of or otherwise released by the Company or any Guarantor on or to any Property of the Company or any Guarantor except in compliance with Environmental Laws.

          (f) neither the Company nor any Guarantor has any known pending assessment, investigation, monitoring, removal or remedial obligations under applicable Environmental Laws in connection with any release or threatened release of any hazardous substance, hazardous waste or oil and gas waste into the environment by the Company or any Guarantor.

Credit Agreement

38

     6.16 Regulated Entities. None of the Company, any Guarantor or any Person controlling the Company or any Guarantor, is an “Investment Company” within the meaning of the Investment Company Act of 1940. None of the Company, any Guarantor or any Person controlling the Company or any Guarantor, is subject to regulation under the Federal Power Act, the Interstate Commerce Act, any state public utilities code, or any other Federal or state statute or regulation limiting its ability to incur Indebtedness.

     6.17 No Burdensome Restrictions. Neither the Company nor any Guarantor is a party to or bound by any Contractual Obligation, or subject to any restriction in any Organization Document, or any Requirement of Law, which would reasonably be expected to have a Material Adverse Effect.

     6.18 Copyrights, Patents, Trademarks and Licenses, etc. The Company and each Guarantor own or are licensed or otherwise have the right to use all of the material patents, trademarks, service marks, trade names, copyrights, contractual franchises, authorizations and other rights that are reasonably necessary for the operation of their respective businesses, without material conflict with the rights of any other Person. To the knowledge of the Company and each Guarantor, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by the Company or any Guarantor infringes in a material respect upon any rights held by any other Person. Except as specifically disclosed in Schedule 6.05, no claim or litigation regarding any of the foregoing is pending or threatened, and no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the knowledge of the Company and each Guarantor, proposed, which, in either case, could reasonably be expected to have a Material Adverse Effect.

     6.19 Subsidiaries. The Parent has no Subsidiary or other material equity investment other than those specifically disclosed in Schedule 6.19 hereto. The Parent owns the percentage interest of all issued and outstanding Equity in each Subsidiary or other material equity investment described on Schedule 6.19. The Company may update and replace Schedule 6.19 from time to time to reflect changes resulting from transactions or other events permitted hereunder.

     6.20 Insurance. The Properties of the Company and each Guarantor are insured with financially sound and reputable insurance companies not Affiliates of the Company or any Guarantor, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Company or such Guarantor operates.

     6.21 Derivative Contracts. Schedule 6.21 sets forth, a true and complete list of all Derivative Contracts of the Borrower Group outstanding as of the Effective Date, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark-to-market value thereof, all credit support agreements relating thereto (including any margin required or supplied) and the counterparty to each such agreement.

     6.22 Full Disclosure. None of the representations or warranties made by the Company or any Guarantor in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, written statement or certificate furnished by or on behalf of the Company or any Guarantor in connection with the Loan Documents, taken as whole, contains any untrue statement of a material fact known to the Company or any Guarantor or omits any material fact known to the Company or any Guarantor required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered.

     6.23 Solvency. The Company and the Guarantors, taken as a whole, are Solvent.

Credit Agreement

39

ARTICLE VII.

AFFIRMATIVE COVENANTS

     So long as the Issuing Lender or any Lender shall have any Commitment hereunder, or any Loan, Letter of Credit or other Obligation shall remain unpaid or unsatisfied, unless the Lenders waive compliance in writing:

     7.01 Financial Statements. Each of the Parent and the Company shall maintain for itself and each Subsidiary on a consolidated basis a system of accounting established and administered in accordance with GAAP and deliver to the Administrative Agent, with sufficient copies for each Lender:

          (a) As soon as available, but not later than 90 days after the end of each fiscal year (i) a copy of the annual audited consolidated financial statements of the Parent and its Subsidiaries as of the end of such year, setting forth in each case in comparative form the figures for the previous fiscal year, (A) certified by a Responsible Officer as fairly presenting in all material respects, in accordance with GAAP, the consolidated financial position, results of operations and cash flows of the Parent and its Subsidiaries, and (B) accompanied by the unqualified opinion and a copy of a management letter (if one is issued) of a nationally recognized independent public accounting firm (the “Independent Auditor”), which opinion and letter shall state that such consolidated financial statements present fairly, in all material respects, the financial position, results of operations and cash flows for the periods indicated in conformity with GAAP applied on a basis consistent with prior years, and (ii) a copy of the annual unaudited consolidated financial statements for the Company as of the end of such year, certified by a Responsible Officer as fairly presenting in all material respects, in accordance with GAAP, the financial position, results of operations and cash flows of the Company; and

          (b) As soon as available, but not later than 45 days after the close of each of the first three quarterly periods of each fiscal year, a copy of the unaudited consolidated financial statements setting forth the financial position, results of operations and cash flows, for the period commencing on the first day and ending on the last day of such quarter, and for the fiscal year up through the quarter then ended of (i) the Parent and its Subsidiaries, certified by a Responsible Officer as being fairly presented in all material respects, in accordance with GAAP and (ii) the Company and its Subsidiaries, certified by a Responsible Officer as being fairly presented in all material respects, in accordance with GAAP subject to the absence of footnotes.

     7.02 Certificates; Other Production and Reserve Information. The Company shall furnish to the Administrative Agent, with sufficient copies for each Lender:

          (a) As soon as available, but not later than 45 days after the close of each month, a Monthly Status Report in a form reasonably acceptable to the Lenders, as of the last day of the immediately preceding month;

          (b) Concurrently with any delivery of financial statements under Subsections 7.01(a) and (b), a certificate of a Responsible Officer, in form and substance satisfactory to the Administrative Agent, setting forth as of the last Business Day of such fiscal quarter or fiscal year, a true and complete list of all Derivative Contracts of the Borrower Group, the material terms thereof (including the type, term, effective date, termination date and notional amounts or volumes), the net mark-to-market value therefor, any new credit support agreements relating thereto not listed on Schedule 6.21, any margin required or supplied under any credit support document, and the counterparty to each such agreement;

          (c) Concurrently with the delivery of the statements referred to in Subsection 7.01(b) and within sixty (60) days following the end of the Company’s fiscal year, a Pricing Grid Certificate executed by a Responsible Officer;

Credit Agreement

40

          (d) Concurrently with the delivery of the statements and reports referred to in Subsections 7.01(a) and (b), and 7.02(a) a Compliance Certificate executed by a Responsible Officer;

          (e) Annually commencing April 15, 2007, dated as of January 1^st of such year, a Reserve Report prepared by the Independent Engineer or other independent petroleum engineer reasonably acceptable to the Administrative Agent and the Company, and annually, commencing October 15, 2006, dated as of July 1^st of such year, a Reserve Report prepared by personnel of the Company and certified by a Responsible Officer of the Company as true and correct in all material respects. Each Reserve Report shall be in form and substance reasonably satisfactory to the Lenders. With the delivery of each Reserve Report, the Company shall provide to the Administrative Agent and the Lenders a certificate from a Responsible Officer certifying that in all material respects: (i) the information contained in the Reserve Report and any other information delivered in connection therewith is true and correct, (ii) the Company or a Guarantor owns good and defensible title to the Oil and Gas Properties evaluated in such Reserve Report and such Properties are free of all Liens except for Liens permitted by Section 8.01, (iii) except as set forth on an exhibit to the certificate, on a net basis there are no gas imbalances, take or pay or other prepayments in excess of the volume specified in Section 6.12 with respect to their Oil and Gas Properties evaluated in such Reserve Report that would require the Company or any Guarantor to deliver Oil and Gas either generally or produced from such Oil and Gas Properties at some future time without then or thereafter receiving full payment therefor, (iv) none of their proved Oil and Gas Properties have been sold since the date of the last Borrowing Base determination except as set forth on an exhibit to the certificate, which certificate shall list all of its proved Oil and Gas Properties sold and in such detail as reasonably required by the Administrative Agent, (v) attached to the certificate is a list of all marketing agreements entered into subsequent to the most recently delivered Reserve Report and (vi) attached thereto is a schedule of the Oil and Gas Properties evaluated by such Reserve Report that are Mortgaged Properties and demonstrating the percentage of the present value that such Mortgaged Properties represent;

          (f) Promptly after the furnishing thereof, copies of all periodic and other financial reports and other financial materials (not otherwise required to be delivered within a specific timeframe pursuant to the terms hereof) distributed by the Parent to its shareholders;

          (g) Promptly after the furnishing thereof, copies of any financial statement, report or notice furnished to or by any Person pursuant to the terms of any preferred stock designation, indenture, loan or credit or other similar agreement, other than this Agreement and not otherwise required to be furnished to the Lenders pursuant to any other provision of this Section 7.02;

          (h) Concurrently with the delivery of any Reserve Report to the Administrative Agent pursuant to Subsection 7.02(e), or after an Event of Default, upon request, a list of all Persons purchasing Oil and Gas from the Company or any Guarantor;

          (i) In the event the Company or any Guarantor intends to sell, transfer, assign or otherwise dispose of any Oil or Gas Properties included in the most recently delivered Reserve Report (or any Equity Interests in the Company or any Guarantor owning interests in such Oil and Gas Properties) during any Borrowing Base Period having a fair market value, individually or in the aggregate, in excess of $250,000, prior written notice of such disposition, the price thereof, the anticipated date of closing, and any other details thereof requested by the Administrative Agent;

          (j) Prompt written notice, and in any event within three (3) Business Days, of the occurrence of any Casualty Event;

          (k) Prompt written notice (and in any event within thirty (30) days prior thereto) of any change (i) in the Company or any Guarantor’s organizational name or in any trade name used to identify such

Credit Agreement

41

Person in the conduct of its business or in the ownership of its Properties, (ii) in the location of the Company or any Guarantor’s chief executive office or principal place of business, (iii) in the Company or any Guarantor’s identity or organizational structure or in the jurisdiction in which such Person is incorporated or formed, (iv) in the Company or any Guarantor’s jurisdiction of organization or such Person’s organizational identification number in such jurisdiction of organization, and (v) in the Company or any Guarantor’s federal taxpayer identification number, if any;

          (l) Promptly upon the request of the Administrative Agent, such copies of all geological, engineering and related data contained in the Company’s or any Guarantor’s files or readily accessible to the Company or any Guarantor relating to the Oil and Gas Properties as may reasonably be requested;

          (m) On request by the Administrative Agent, based upon the Administrative Agent’s or Lenders’ good faith belief that the Company’s or any Guarantor’s title to the Mortgaged Properties or the Administrative Agent’s lien thereon is subject to claims of third parties, or if required by regulations to which the Administrative Agent or any of the Lenders is subject, title and mortgage lien evidence satisfactory to the Administrative Agent covering such Mortgaged Property as may be designated by the Administrative Agent, covering the Company’s or any Guarantor’s title thereto and evidencing that the Obligations are secured by liens and security interests as provided in this Agreement and the Security Documents;

          (n) As soon as available, and in any event within 90 days after the end of each fiscal year, a business and financial plan for the Company and the Parent (in form reasonably satisfactory to the Administrative Agent), prepared by a Responsible Officer, setting forth for the current fiscal year, quarterly financial projections and budgets for the Company and the Guarantors, and for the next fiscal year thereafter a yearly financial projection and budget; and

          (o) Promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Guarantor as the Administrative Agent, at the reasonable request of any Lender, may from time to time request.

     7.03 Notices. The Company shall promptly notify the Administrative Agent:

          (a) of the occurrence of any Default or Event of Default or any event or circumstance that would reasonably be expected to become a Default or Event of Default;

          (b) of any matter that has resulted or may reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of the Company or any Guarantor; (ii) any dispute, litigation, investigation, proceeding or suspension between the Company or any Guarantor and any Governmental Authority; (iii) the commencement of, or any material development in, any litigation, proposed legislation, ordinance or regulation of a Governmental Authority, or proceeding affecting the Company or any Guarantor; including pursuant to any applicable Environmental Laws; or (iv) revocation, cancellation or failure to renew any license, permit or franchise where such revocation, failure or loss could reasonably be expected to have a Material Adverse Effect;

          (c) of any material change in accounting policies or financial reporting practices by the Company or any Guarantor; or

          (d) of the formation or acquisition of any Subsidiary of Ivanhoe Energy Holdings Inc.

Each notice under this Section 7.03 shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action the Company or any affected Guarantor proposes to take with respect thereto and at what time. Each notice under Subsection 7.03(a) shall

Credit Agreement

42

describe with particularity any and all clauses or provisions of this Agreement or other Loan Document that have been (or foreseeably will be) breached or violated.

     7.04 Preservation of Existence, Etc. The Company and each Guarantor shall:

          (a) preserve and maintain in full force and effect its legal existence, and maintain its good standing under the laws of its state or jurisdiction of formation, except as otherwise permitted hereunder;

          (b) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business except where the failure to do so would not reasonably be expected to have a Material Adverse Effect;

          (c) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill except where the failure to do so would not reasonably be expected to have a Material Adverse Effect; and

          (d) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect.

     7.05 Maintenance of Property. The Company and each Guarantor shall maintain and preserve all its Property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted and to use the standard of care typical in the industry in the operation and maintenance of its facilities except where the failure to do so would not reasonably be expected to have a Material Adverse Effect provided, however, that nothing in this Section 7.05 shall prevent the Company or any Guarantor from abandoning any well or forfeiting, surrendering, releasing or defaulting under any lease in the ordinary course of business which is not materially disadvantageous in any way to the Lenders and which, in its opinion, is in the best interest of the Company or such Guarantor.

     7.06 Title Information.

          (a) On or before the delivery to the Administrative Agent and the Lenders of each Reserve Report required by Subsection 7.02(e), the Company will deliver title information in form and substance acceptable to the Administrative Agent covering enough of the Oil and Gas Properties evaluated by such Reserve Report that were not included in the immediately preceding Reserve Report, so that the Administrative Agent shall have received together with title information previously delivered to the Administrative Agent, satisfactory title information on at least 80% of the total net present value (determined by a discount factor of 10%) of the proved Oil and Gas Properties evaluated by such Reserve Report.

          (b) If the Company has provided title information for additional Properties under Subsection 7.06(a), the Company shall, within 60 days of notice from the Administrative Agent that title defects or exceptions exist with respect to such additional Properties, either (i) cure any such title defects or exceptions (including defects or exceptions as to priority) which are not permitted by Section 8.01 raised by such information, (ii) substitute acceptable Mortgaged Properties with no title defects or exceptions except for Permitted Liens having an equivalent value or (iii) deliver title information in form and substance reasonably acceptable to the Administrative Agent so that the Administrative Agent shall have received, together with title information previously delivered to the Administrative Agent, satisfactory title information on at least 80% of the net present value (determined by a discount factor of 10%) of the Oil and Gas Properties evaluated by such Reserve Report.

          (c) If the Company is unable to cure any title defect requested by the Administrative Agent or the Lenders to be cured within the 60-day period or the Company does not comply with the

Credit Agreement

43

requirements to provide acceptable title information covering 80% of the net present value (determined by a discount factor of 10%) of the Oil and Gas Properties evaluated in the most recent Reserve Report, such default shall not be a Default, but instead the Administrative Agent and/or the Required Lenders shall have the right to exercise the following remedy in their sole discretion from time to time, and any failure to so exercise this remedy at any time shall not be a waiver as to future exercise of the remedy by the Administrative Agent or the Lenders. To the extent that the Administrative Agent or the Required Lenders are not reasonably satisfied with title to any Mortgaged Property after the 60-day period has elapsed, such unacceptable Mortgaged Property shall not count towards “the 80% requirement”, and the Administrative Agent may send a notice to the Company and the Lenders that the then outstanding Borrowing Base shall be reduced by an amount as determined by the Super-Majority Lenders to cause the Company to be in compliance with the requirement to provide acceptable title information on 80% of the net present value (determined by a discount factor of 10%) of the Oil and Gas Properties. This new Borrowing Base shall become effective immediately after receipt of such notice.

     7.07 Additional Collateral. In connection with each redetermination of the Borrowing Base, the Company shall review the Reserve Report and the list of current Mortgaged Properties (as described in Subsection 7.02(e)) to ascertain whether the Mortgaged Properties represent substantially all of the total net present value (determined by a discount factor of 10%) of the Oil and Gas Properties evaluated in the most recently completed Reserve Report after giving effect to exploration and production activities, acquisitions, dispositions and production. In the event that the Mortgaged Properties do not represent substantially all of such total net present value, then the Company and the Guarantors shall grant, within thirty (30) days of delivery of the certificate required under Subsection 7.02(e), to the Administrative Agent or its designee as security for the Obligations a first-priority Lien interest on additional Oil and Gas Properties not already subject to a Lien of the Security Documents such that after giving effect thereto, the Mortgaged Properties will represent substantially all of such total net present value. All such Liens will be created and perfected by and in accordance with the provisions of deeds of trust, security agreements and financing statements or other Security Documents, all in form and substance reasonably satisfactory to the Administrative Agent or its designee and in sufficient executed (and acknowledged where necessary or appropriate) counterparts for recording purposes.

     7.08 Insurance. The Company and each Guarantor shall maintain, with financially sound and reputable independent insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons except where the failure to do so would not reasonably be expected to have a Material Adverse Effect. The loss payable clauses or provisions in said insurance policy or policies insuring any of the Collateral for the Loan shall be endorsed in favor of and made payable to the Administrative Agent as its interests may appear and such policies shall name the Administrative Agent and the Lenders as “additional insured” and provide that the insurer will give at least 30 days prior notice of any cancellation to the Administrative Agent.

     7.09 Payment of Obligations. The Company and each Guarantor shall pay and discharge prior to delinquency, all their respective obligations and liabilities, including: (a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Guarantor; (b) all lawful claims which, if unpaid, would by law become a Lien upon its property; and (c) all Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness; except in each of (a), (b) and (c), where the failure to do so would not reasonably be expected to have a Material Adverse Effect.

     7.10 Compliance with Laws. The Company and each Guarantor shall comply in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its

Credit Agreement

44

business (including Environmental Laws, the Federal Fair Labor Standards Act and any California Requirement of Law promulgated with respect to earthquakes), except (a) such as may be contested in good faith or as to which a bona fide dispute may exist or (b) where the failure to do so would not reasonably be expected to have a Material Adverse Effect.

     7.11 Compliance with ERISA. The Company and each Guarantor shall, and each shall cause each of its ERISA Affiliates to: (a) maintain each Plan in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law; (b) cause each Plan which is qualified under Section 401(a) of the Code to maintain such qualification; and (c) make all required contributions to any Plan subject to Section 412 of the Code.

     7.12 Inspection of Property and Books and Records. The Company and each Guarantor shall maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Company and such Guarantor. The Company and each Guarantor shall permit, representatives and independent contractors of the Administrative Agent or any Lender to visit and inspect any of their respective properties, to examine their respective company, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective managers, directors, officers, and independent public accountants, all at the expense of the Company or such Guarantor and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Company or such Guarantor; provided, however, when an Event of Default exists the Administrative Agent or any Lender may do any of the foregoing at the expense of the Company or such Guarantor at any time during normal business hours and without advance notice.

     7.13 Environmental Laws.

          (a) The Company and each Guarantor shall conduct its operations and keep and maintain its property in compliance with all Environmental Laws and maintain all environmental, health and safety permits, licenses and authorizations necessary for its operations and will maintain such in full force and effect except where the failure to do so would not reasonably be expected to have a Material Adverse Effect. The Company and each Guarantor shall promptly commence and diligently prosecute to completion any assessment, evaluation, investigation, monitoring, containment, cleanup, removal, repair, restoration, remediation or other remedial obligations (collectively, the “Remedial Work”) in the event any Remedial Work is required or reasonably necessary under applicable Environmental Laws because of or in connection with the actual or suspected past, present or future disposal or other release of any oil, oil and gas waste, hazardous substance or solid waste on, under, about or from any of the Company’s or such Guarantor’s Properties, which failure to commence and diligently prosecute to completion could reasonably be expected to have a Material Adverse Effect.

          (b) The Company and each Guarantor will establish and implement such procedures as may be reasonably necessary to continuously determine and assure that the Company’s and such Guarantor’s obligations under this Section 7.13 are timely and fully satisfied, which failure to establish and implement could reasonably be expected to have a Material Adverse Effect

          (c) The Company and each Guarantor will promptly furnish to the Administrative Agent all written notices of violation, orders, claims, citations, complaints, penalty assessments, suits or other proceedings received by the Company or such Guarantor, or of which it has notice, pending or threatened against the Company or such Guarantor, by any Governmental Authority with respect to any alleged violation of or non-compliance with any Environmental Laws or any permits, licenses or authorizations in connection with its ownership or use of its Properties or the operation of its business, except where any such alleged

Credit Agreement

45

violations or incidents of non-compliance would not, individually or in the aggregate, result in a penalty, assessment, fine or other cost or liability exceeding $100,000.

          (d) The Company and each Guarantor will promptly furnish to the Administrative Agent all requests for information, notices of claim, demand letters, and other notifications, received by the Company or such Guarantor in connection with its ownership or use of its Properties or the conduct of its business, relating to potential responsibility with respect to any investigation or clean-up of hazardous materials at any location, except where any such alleged responsibility would not, individually or in the aggregate, result in a penalty, assessment, fine or other cost or liability exceeding $100,000.

     7.14 New Subsidiary Guarantors. If, at any time after the date of this Agreement, any new Subsidiary of Ivanhoe Energy Holdings Inc. is acquired or created then the owner(s) of such Subsidiary shall execute and deliver a Security Agreement to the Administrative Agent, whereby such owner(s) pledge all of the Equity in such Subsidiary as security for the Obligations.

     7.15 Reserved.

     7.16 Use of Proceeds. The Company shall use the proceeds of the Loans (a) to refinance Indebtedness, (b) for standby letters of credit up to the sub-facility amount of $500,000, (c) for working capital purposes (including capital expenditures made for the exploration and development of Oil and Gas Properties) of the Company and the Guarantors, (d) for general company purposes of the Company, and (e) for acquisitions permitted under Section 8.04 and Restricted Payments permitted under Section 8.09.

     7.17 Operating Accounts. (i) Each of the Company and the Parent shall establish and maintain with Administrative Agent all of its primary operating and depository accounts and (ii) each member of the Borrower Group other than the Company shall establish and maintain with the Administrative Agent any of its operating or depository accounts to the extent any such account has an average collected balance for any month in excess of $100,000.00.

     7.18 Phase I Reports. As soon as available, and in any case within fifteen (15) days prior to closing any Acquisition of Oil and Gas Properties, the Company shall deliver to the Lenders a Phase I report covering such Oil and Gas Properties to be acquired in form and substance satisfactory to the Administrative Agent.

     7.19 Further Assurances.

          (a) The Company and the Guarantors will promptly cure any defects in the creation and issuance of the Notes and the execution and delivery of this Agreement, the Security Documents or any other instruments referred to or mentioned herein or therein. The Company and the Guarantors at their expense will promptly do all acts and things, and will execute and file or record, all instruments reasonably requested by the Administrative Agent, to establish, perfect, maintain and continue the perfected security interest of the Administrative Agent in or the Lien of the Administrative Agent on the Mortgaged Properties. Upon request by the Administrative Agent, the Company and the Guarantors shall promptly execute such additional Security Documents covering any new Oil and Gas Properties reflected on the Monthly Status Reports. The Company and the Guarantors will pay the reasonable costs and expenses of all filings and recordings and all searches deemed necessary by the Administrative Agent to establish and determine the validity and the priority of the Liens created or intended to be created by the Security Documents; and the Company and the Guarantors will satisfy all other claims and charges which in the reasonable opinion of the Administrative Agent might prejudice, impair or otherwise affect any of the Mortgaged Properties or any Liens thereon in favor of the Administrative Agent for the benefit of the Issuing Lender and the Lenders.

Credit Agreement

46

          (b) The Company and each Guarantor hereby authorizes the Administrative Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Mortgaged Property and/or the Collateral without the signature of the Company or any Guarantor where permitted by law. A carbon, photographic or other reproduction of the Security Documents or any financing statement covering the Mortgaged Property and/or the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. The Administrative Agent will promptly send the Company any financing or continuation statements it files without the signature of the Company or any Guarantor and the Administrative Agent will promptly send the Company the filing or recordation information with respect thereto.

     7.20 Derivative Contracts. The Borrower Group shall enter into and maintain such Derivative Contracts with respect to estimated production from their Oil and Gas Properties as the Administrative Agent and the Required Lenders may reasonably require, in form and substance, and with volumes, pricing, structure and other terms and conditions, as may be satisfactory to the Administrative Agent, including terms that each such Derivative Contract is fully assignable to the Administrative Agent, with each counterparty agreeing to provide the Administrative Agent with notice of and an opportunity to cure any defaults thereunder before declaring an early termination date or otherwise terminating such Derivative Contract or any transaction thereunder.

ARTICLE VIII.

NEGATIVE COVENANTS

     So long as any Lender shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Lenders waive compliance in writing:

     8.01 Limitation on Liens. Each of the Company and the Guarantors agrees that it shall not, directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its Property, whether now owned or hereafter acquired, other than the following (“Permitted Liens”):

          (a) any Lien created under any Loan Document;

          (b) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 7.09;

          (c) carriers’, warehousemen’s, mechanics’, landlords’, materialmen’s, repairmen’s or other similar Liens arising in the ordinary course of business (whether by law or by contract) which are not delinquent or remain payable without penalty or which are being contested in good faith and by appropriate proceedings, which proceedings have the effect of preventing the forfeiture or sale of the property subject thereto;

          (d) Liens consisting of pledges or deposits required in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other social security legislation;

          (e) Liens on the Property of the Company or any Guarantor securing (i) the non-delinquent performance of bids, trade contracts (other than for borrowed money), statutory obligations, (ii) contingent obligations on surety and appeal bonds, and (iii) other non-delinquent obligations of a like nature; in each case, incurred in the ordinary course of business;

Credit Agreement

47

          (f) easements, rights-of-way, restrictions, defects or other exceptions to title and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, are not incurred to secure Indebtedness, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the businesses of the Company or any Guarantor;

          (g) Liens arising solely by virtue of any statutory or common law provision relating to bankers’ liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; or under any deposit account agreement entered into in the ordinary course of business; provided that (i) such deposit account is not a dedicated cash collateral account and is not subject to restrictions against access by the Company or any Guarantor, (ii) the Company (or applicable Guarantor) maintains (subject to such right of set off) dominion and control over such account(s), and (iii) such deposit account is not intended by the Company or any Guarantor to provide cash collateral to the depository institution; and

          (h) Oil and Gas Liens.

     8.02 Disposition of Assets. Each of the Borrower Group agrees that it shall not, directly or indirectly, sell, assign, lease, convey, transfer or otherwise dispose of (whether in one or a series of transactions) (collectively, “Dispositions”) any Property used or useful by the Borrower Group (including accounts and notes receivable, with or without recourse) or enter into any agreement to do any of the foregoing, except:

          (a) as permitted under Sections 7.05, 8.03, 8.04, 8.09, or 8.10;

          (b) Dispositions of inventory including produced Oil and Gas in the ordinary course of business;

          (c) Dispositions by one member of the Borrower Group to another member of the Borrower Group;

          (d) used, worn-out or surplus equipment in the ordinary course of business; and

          (e) Dispositions not otherwise permitted under Subsections 8.02 (a) — (d) above which are made in the ordinary course of business; provided that, (i) no Event of Default shall exist at the time of such Disposition or result therefrom, and (ii) the aggregate value (as determined by the value assigned to such properties under the most recent Reserve Report) of all Dispositions of Oil and Gas Properties made by the Borrower Group, together, shall not exceed in any Borrowing Base Period five percent (5%) of the Borrowing Base then in effect; further provided that, the Borrowing Base shall be automatically reduced by an amount equal to the aggregate value of such Oil and Gas Properties and to the extent a Borrowing Base Deficiency results from such reduction, up to one-hundred percent (100%) of the proceeds of such Dispositions, net of usual and customary reasonable fees, expenses and taxes, shall be applied, as necessary, to cure such Borrowing Base Deficiency.

     8.03 Consolidations and Mergers. Each of the Company and the Guarantors agrees that it shall not consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except:

Credit Agreement

48

          (a) any member of the Borrower Group may merge with any other member of the Borrower Group, provided that with respect to any such merger involving the Company, the Company shall be the continuing or surviving entity;

          (b) any Subsidiary of the Parent (other than a member of the Borrower Group) may merge with the Parent, so long as the Parent shall be the continuing or surviving entity; and

          (c) Dispositions permitted under Subsection 8.02(c) or (e).

     8.04 Loans and Investments. Each member of the Borrower Group agrees that it shall not purchase or acquire or make any commitment therefor, any capital stock, equity interest, or any obligations or other securities of, or any interest in, any Person or make or commit to make any Acquisition, or make or commit to make any advance, loan, extension of credit or capital contribution to or any other investment in (collectively, “Investments”) any Person except for:

          (a) Investments in Cash Equivalents;

          (b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business;

          (c) Investments in Subsidiaries (other than HTL Technology Development Subsidiaries) that are or become Guarantors;

          (d) Investments permitted under Subsection 8.02(c);

          (e) Investments in Derivative Contracts required under this Agreement or permitted under Section 8.10;

          (f) Investments with third parties that are (i) customary in the oil and gas business, (ii) made in the ordinary course of the Company’s or such Guarantor’s business, and (iii) made in the form of or pursuant to Operating Agreements, processing agreements, farm-in agreements, farm-out agreements, development agreements, unitization agreements, pooling agreements, joint bidding agreements, service contracts and other similar agreements;

          (g) extensions of credit by the Borrower Group to any of their full time employees which do not exceed $250,000 at any time outstanding in the aggregate to all such employees;

          (h) Investments made after June 30, 2006 in HTL Technology Development Subsidiaries not to exceed $2,000,000 in the aggregate upon terms and conditions acceptable to the Administrative Agent; and

          (i) other Investments not to exceed $250,000 in the aggregate.

     8.05 Limitation on Indebtedness. Each member of the Borrower Group agrees that it shall not create, incur, assume, suffer to exist, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness, except:

          (a) Indebtedness incurred pursuant to this Agreement or the other Loan Documents;

          (b) Indebtedness consisting of Contingent Obligations permitted pursuant to Section 8.08;

Credit Agreement

49

          (c) Indebtedness incurred in connection with the issuance of Derivative Contracts required under this Agreement or permitted under Section 8.10 hereof;

          (d) specific Indebtedness outstanding on the date hereof and listed in Schedule 8.05 hereto;

          (e) Indebtedness not otherwise permitted under Subsections 8.05(a) — (d) above not exceeding $250,000 at any time outstanding.

     8.06 Transactions with Affiliates. Each of the Company and the Guarantors agrees that it shall not enter into any transaction with or make any payment or transfer to (collectively, "Transactions”) any Affiliate of the Company or any such Guarantor, except for Transactions between the Company and any Guarantor or between Guarantors, and for other Transactions entered into in the ordinary course of business and upon fair and reasonable terms no less favorable to the Company or such Guarantor than would obtain in a comparable arm’s-length transaction with a Person not an Affiliate of the Company or such Guarantor. Nothing in this Section 8.06 shall restrict the Borrower Group’s ability (a) to make Restricted Payments permitted under Section 8.09 or (b) to make Investments permitted under Subsections 8.04(c), 8.04(h) and 8.04(i).

     8.07 Margin Stock. Each of the Company and the Guarantors agrees that it shall not use any portion of the Loan proceeds, directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or otherwise refinance indebtedness of the Company or any Guarantor incurred to purchase or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (iv) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act. If requested by the Administrative Agent, the Company will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form U-1 or such other form referred to in Regulation U, Regulation T or Regulation X of the Board, as the case may be.

     8.08 Contingent Obligations. Each of the Borrower Group agrees that it shall not create, incur, assume or suffer to exist any Contingent Obligations except:

          (a) endorsements for collection or deposit in the ordinary course of business;

          (b) Derivative Contracts required under this Agreement or permitted under Section 8.10 hereof;

          (c) Contingent Obligations of the Borrower Group listed in Schedule 8.08 hereto;

          (d) plugging bonds, performance bonds and fidelity bonds issued for the account of any member of the Borrower Group, obligations to indemnify or make whole any surety and similar agreements incurred in the ordinary course of business, provided that such obligations shall not exceed $500,000 in the aggregate;

          (e) this Agreement and the Loan Documents; and

          (f) any other Contingent Obligations of the Borrower Group to the extent not described in Subsections 8.08 (a) — (e) not to exceed $250,000 in the aggregate.

     8.09 Restricted Payments; Restrictive Agreements. Each of (i) the Parent and (ii) each member of the Borrower Group agrees that it shall not purchase, redeem or otherwise acquire for value any

Credit Agreement

50

membership interests, partnership interests, capital accounts, shares of its capital stock or any warrants, rights or options to acquire such membership interest, partnership interest or shares, now or hereafter outstanding from its members, partners or stockholders and will not declare or pay any distribution, dividend or return capital to its members, partners or stockholders, or make any distribution of assets in cash or in kind to its members, partners or stockholders (collectively “Restricted Payments”), except any member of the Borrower Group may make Restricted Payments to any other member of the Borrower Group to the extent permitted under its Organization Documents, so long as (a) no Event of Default exists or would result therefrom and (b) after giving effect to such Restricted Payment, the Company and the Guarantors are in compliance with all terms and conditions of this Agreement. Each of the Company and the Guarantors agrees that it will not create, incur, assume or suffer to exist any contract, agreement or understanding (other than this Agreement and the Security Documents) that in any way prohibits or restricts the granting, conveying, creation or imposition of any Lien on any of its Property in favor of the Administrative Agent and the Lenders or restricts any Subsidiary from paying dividends or making distributions to the Company or any Guarantor, or which requires the consent of or notice to other Persons in connection therewith.

     8.10 Derivative Contracts. None of the Borrower Group shall enter into or in any manner be liable on any Derivative Contract except:

          (a) Derivative Contracts entered into by the any member of the Borrower Group with the purpose and effect of limiting or reducing the market price risk of Oil and Gas expected to be produced by the Borrower Group; provided that at all times: (i) the aggregate of all such Derivative Contracts limits or reduces such market price risk for a term of no more than thirty-six (36) months; (ii) no such contract, when aggregated with all Derivative Contracts permitted under this Subsection 8.10(a) (but excluding put option contracts that are not related to corresponding calls, collars or swaps) requires the Borrower Group to deliver more than 80% of the reasonably anticipated production for each month for the total Oil and Gas classified as “proved producing” on the most recent Reserve Report delivered to the Administrative Agent covering the Oil and Gas Properties, and (iii) each such contract (excluding Derivative Contracts offered by national commodity exchange) shall be between a member of the Borrower Group and the Administrative Agent, or any of the Lenders or its Affiliate, or with an unsecured counterparty or have a guarantor of the obligation of the unsecured counterparty who, at the time the contract is made, has long-term obligations rated BBB+ or Baal or better, respectively, by Standard & Poor’s Corporation or Moody’s Investors Services, Inc. (or a successor credit rating agency);

          (b) Derivative Contracts entered into by any member of the Borrower Group with the purpose and effect of fixing interest rates on a principal amount of Indebtedness of the Borrower Group that is accruing interest at a variable rate, provided that (i) the floating rate index of each such contract generally matches the index used to determine the floating rates of interest on the corresponding Indebtedness of the Borrower Group to be hedged by such contract, (ii) no such contract, except those with a Lender or its Affiliate, when aggregated with all Derivative Contracts permitted under Subsections 8.10(a) and (b), requires any member of the Borrower Group to put up money, assets, letters of credit, or other security against the event of its non-performance prior to actual default by it in performing obligations thereunder, and (iii) each such contract shall be with a Lender or its Affiliate, or with an unsecured counterparty or have a guarantor of the obligation of an unsecured counterparty who, at the time the contract is made, has long-term obligations rated A+ or A1 or better, respectively, by Standard & Poor’s Corporation or Moody’s Investors Services, Inc. (or a successor credit rating agency);

          (c) In the event of a Derivative Contract between any member of the Borrower Group and any of the Lenders or their respective Affiliates, the Contingent Obligation evidenced under such Derivative Contract shall not be applied against such Lender’s Commitment nor against the Effective Amount. Any Indebtedness to any Lender or its Affiliate incurred under any Derivative Contract shall be treated as an Obligation pari passu and secured pro rata under the Security Documents with all Obligations otherwise

Credit Agreement

51

incurred hereunder or under the other Loan Documents as more particularly provided under Section 11.11; and

          (d) No member of the Borrower Group shall modify or terminate any Derivative Contract to which it is currently a party or subsequently becomes a party without the consent of the Administrative Agent.

     8.11 Change in Business and Corporate Structure.

          (a) Neither the Company nor any other member of the Borrower Group shall (i) have any Subsidiaries other than wholly-owned Subsidiaries, (ii) enter into, or allow any Subsidiary to enter into, any joint ventures or (iii) have any other material equity investment, except as otherwise permitted hereunder.

          (b) Neither the Company nor any other member of the Borrower Group shall engage in any business or activity other than its Principal Business.

          (c) Neither the Company nor any Guarantor shall alter, amend or modify in any manner materially adverse to the Lenders any of its Organization Documents.

     8.12 Accounting Changes. Except as expressly permitted by the Required Lenders, neither the Company nor any Guarantor shall make any significant change in accounting treatment or reporting practices, except as required by GAAP, or change its fiscal year.

     8.13 ERISA Compliance. Except as would not reasonably be expected to result in a Material Adverse Effect, each of the Company and the Guarantors will not at any time:

          (a) engage in, or permit any ERISA Affiliate to engage in, any transaction in connection with which the Company, any Guarantor or any ERISA Affiliate could be subjected to either a civil penalty assessed pursuant to subsections (c), (i) or (l) of section 502 of ERISA or a tax imposed by Chapter 43 of Subtitle D of the Code.

          (b) terminate, or permit any ERISA Affiliate to terminate, any Plan in a manner, or take any other action with respect to any Plan, which could result in any liability of the Company, any Guarantor or any ERISA Affiliate to the PBGC.

          (c) fail to make, or permit any ERISA Affiliate to fail to make, full payment when due of all amounts which, under the provisions of any Plan, agreement relating thereto or applicable law, the Company, any Guarantor or any ERISA Affiliate is required to pay as contributions thereto.

          (d) permit to exist, or allow any ERISA Affiliate to permit to exist, any accumulated funding deficiency within the meaning of section 302 of ERISA or section 412 of the Code, whether or not waived, with respect to any Plan.

          (e) permit, or allow any ERISA Affiliate to permit, the actuarial present value of the benefit liabilities under any Plan maintained by the Company, any Guarantor or any ERISA Affiliate which is regulated under Title IV of ERISA to exceed the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities. The term “actuarial present value of the benefit liabilities” shall have the meaning specified in section 4041 of ERISA.

          (f) incur, or permit any ERISA Affiliate to incur, any withdrawal liability pursuant to Section 4201 or 4202 of ERISA.

Credit Agreement

52

          (g) acquire, or permit any ERISA Affiliate to acquire, an interest in any Person that causes such Person to become an ERISA Affiliate with respect to the Company or any Guarantor or with respect to any ERISA Affiliate of the Company or any Guarantor if such Person sponsors, maintains or contributes to, or at any time in the six-year period preceding such acquisition has sponsored, maintained, or contributed to, (i) any Multiemployer Plan with respect to which such Person has an outstanding withdrawal liability under Section 4201 or 4202 of ERISA, or (ii) any other Plan that is subject to Title IV of ERISA under which the actuarial present value of the benefit liabilities under such Plan exceeds the current value of the assets (computed on a plan termination basis in accordance with Title IV of ERISA) of such Plan allocable to such benefit liabilities.

          (h) incur, or permit any ERISA Affiliate to incur, a liability to or on account of a Plan under sections 515, 4062, 4063, 4064, or 4204 of ERISA.

          (i) contribute to or assume an obligation to contribute to, or permit any ERISA Affiliate to contribute to or assume an obligation to contribute to, any employee welfare benefit plan, as defined in section 3(1) of ERISA, that provides retiree benefits to former employees of such entities (other than coverage mandated by applicable law), that may not be terminated by such entities in their sole discretion at any time without any material liability.

          (j) amend, or permit any ERISA Affiliate to amend, a Plan resulting in an increase in current liability such that the Company, any Guarantor or any ERISA Affiliate is required to provide security to such Plan under section 401(a)(29) of the Code.

     8.14 Financial Covenants. (a) The Company shall not permit, as of the last day of any fiscal quarter beginning with the fiscal quarter ended September 30, 2006, the ratio of the Company’s EBITDA to Consolidated Interest Expense, each calculated for the four consecutive fiscal quarters then ended, to be less than 3.00 to 1.00. The Company shall not permit, as of the last day of any fiscal quarter beginning with the fiscal quarter ended September 30, 2006, the ratio of the Parent’s EBITDA to Consolidated Interest Expense, each calculated for the four consecutive fiscal quarters then ended, to be less than 3.00 to 1.00.

     (b) The Company shall not permit , as of the last day of any fiscal quarter beginning with the fiscal quarter ended September 30, 2006, the ratio of the Company’s Total Indebtedness to EBITDA, the latter of which is to be calculated for the four consecutive fiscal quarters then ended, to exceed 2.50 to 1.00. The Company shall not permit, as of the last day of any fiscal quarter beginning with the fiscal quarter ended September 30, 2006, the ratio of the Parent’s Total Indebtedness to EBITDA, the latter of which is to be calculated for the four consecutive fiscal quarters then ended, to exceed 2.50 to 1.00.

     (c) The Company shall not permit the Company’s Capital Expenditures and General and Administrative Expenses for any fiscal quarter to exceed the amount reflected for such fiscal quarter on Schedule 8.14(c) hereto, as such schedule may be amended from time to time with the consent of the Required Lenders.

     (d) The Company will not permit, as of the last day of any fiscal quarter beginning with the fiscal quarter ended September 30, 2006, the ratio of the Company’s Current Assets to Current Liabilities to be less than 1.00 to 1.00. The Company will not permit, as of the last day of any fiscal quarter beginning with the fiscal quarter ended September 30, 2006, the ratio of the Parent’s Current Assets to Current Liabilities to be less than 1.00 to 1.00.

     (e) Neither the Company nor any other member of the Borrower Group will create, incur, assume or suffer to exist any obligation for the payment of rent or hire of Property of any kind whatsoever (real or

Credit Agreement

53

personal but excluding leases of Hydrocarbon Interests), under leases or lease agreements which would cause the aggregate amount of all payments made by the Borrower Group pursuant to all such leases or lease agreements, including, without limitation, any residual payments at the end of any lease, to exceed $500,000.00 in any period of twelve consecutive calendar months during the life of such leases.

ARTICLE IX.

EVENTS OF DEFAULT

     9.01 Event of Default. Any of the following shall constitute an “Event of Default”:

          (a) Non-Payment. The Company fails to pay, when and as required to be paid herein, any amount of principal or interest of any Loan, or fails to pay within two (2) Business Days of when due any fee or other amount payable hereunder or under any other Loan Document; or

          (b) Representation or Warranty. Any representation or warranty by the Company or any Guarantor made or deemed made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by the Company, any Guarantor, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect on or as of the date made or deemed made; or

          (c) Specific Defaults. The Company or any Guarantor fails to perform or observe any term, covenant or agreement contained in Subsection 7.03(a) or Article VIII; or

          (d) Other Defaults. The Company or any Guarantor fails to perform or observe any other term or covenant contained in this Agreement (other than as otherwise described in this Section 9.01) or any other Loan Document, and same shall continue unremedied for a period of 30 days after the earlier of (i) the date upon which a Responsible Officer knew or reasonably should have known of such default or (ii) the date upon which written notice thereof is given to the Company or such Guarantor by the Administrative Agent or any Lender; or

          (e) Cross-Default. (i) The Company or any Guarantor fails to make any payment in respect of any Indebtedness or Contingent Obligation having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $250,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or (ii) the Company or any Guarantor fails after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation having an aggregate principal amount of more than $250,000, if the effect of such failure, event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Indebtedness (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded; or (iii) any Indebtedness or Contingent Obligations of the Company or any Guarantor in excess of $250,000 shall be declared due and payable prior to its stated maturity or cash collateral is demanded in respect of such Contingent Obligations; or

          (f) Insolvency; Voluntary Proceedings. The Company or any Guarantor (i) generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace

Credit Agreement

54

periods, if any, whether at stated maturity or otherwise; (ii) commences any Insolvency Proceeding with respect to itself; or (iii) takes any action to effectuate or authorize any of the foregoing; or

          (g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Company or any Guarantor, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against all or a substantial part of the Company’s or any Guarantor’s properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Company or any Guarantor admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Company or any Guarantor acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business; or

          (h) Change of Control. There shall occur a Change of Control; or

          (i) Monetary Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Company or any Guarantor involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage) as to any single or related series of transactions, incidents or conditions, of $250,000 or more, and the same shall remain unsatisfied, unvacated and unstayed pending appeal for a period of 30 days after the entry thereof; or

          (j) Loss of Permit. Any Governmental Authority revokes or fails to renew any material license, permit or franchise of the Company or any Guarantor, or the Company or any Guarantor for any reason loses any material license, permit or franchise, or the Company or any Guarantor suffers the imposition of any restraining order, escrow, suspension or impounding of funds in connection with any proceeding (judicial or administrative) with respect to any material license, permit or franchise; and, in each case such revocation, failure or loss could reasonably be expected to have a Material Adverse Effect; and such default remains unremedied for a period of 30 days after the earlier of (i) the date upon which a Responsible Officer knew or reasonably should have known of such default or (ii) the date upon which written notice thereof is given to the Company or such Guarantor by the Administrative Agent or any Lender; or

          (k) Adverse Change. There occurs a Material Adverse Effect; or

          (l) Guaranty Default. A Guaranty is for any reason partially (including with respect to future advances) or wholly revoked or invalidated, or otherwise ceases to be in full force and effect, or any Guarantor or any other Person contests in any manner the validity or enforceability thereof or denies that it has any further liability or obligation thereunder; or

          (m) Material Agreements. Any member of the Borrower Group shall fail to observe, perform or comply with any material covenant, agreement, condition or provision of any material Contractual Obligation including without limitation the following: (i) Derivative Contracts required under this Agreement or permitted under Section 8.10, (ii) material leases associated with the Mortgaged Properties and (iii) material agreements governing the transportation of Oil and Gas from the Mortgaged Properties; or

          (n) ERISA. The occurrence of any of the following events: (i) the happening of a Reportable Event which has resulted or could reasonably be expected to result in a Material Adverse Effect (if not waived by the PBGC or by the Required Lenders, or if such event can be avoided by any corrective action of the Company or any Guarantor, such corrective action is not completed within ninety (90) days after the occurrence of such Reportable Event) with respect to any Pension Plan; (ii) the termination of any Pension

Credit Agreement

55

Plan in a “distress termination” under the provisions of Section 4041 of ERISA; (iii) the appointment of a trustee by an appropriate United States District Court to administer any Pension Plan; and (iv) the institution of any proceedings by the PBGC to terminate any Pension Plan or to appoint a trustee to administer any such plan; or

          (o) Environmental Claims. An Environmental Claim shall have been asserted against the Company or any Guarantor which could have a Material Adverse Effect;

     9.02 Remedies. If any Event of Default occurs and is continuing, the Administrative Agent shall, at the request of, or may, with the consent of, the Required Lenders:

          (a) declare the Commitment, if any, of each Lender to make Loans and issue Letters of Credit to be terminated, and/or declare all or any part of the unpaid principal of the Loans, all interest accrued and unpaid thereon and all other amounts payable under the Loan Documents to be immediately due and payable, whereupon the same shall become due and payable, without presentment, demand, protest, notice of intention to accelerate, notice of acceleration or any other notice of any kind, all of which are hereby expressly waived by the Company and each Guarantor.

          (b) exercise on behalf of itself and the Lenders all rights and remedies available to it and the Lenders under the Loan Documents or applicable law; provided, however, that upon the occurrence of any event specified in Subsection (f) or (g) of Section 9.01 (in the case of Clause (i) of Subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of each Lender to make Loans and issue Letters of Credit shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Administrative Agent, or any Lender and without presentment, demand, protest, notice of intention to accelerate, notice of acceleration or any other notice of any kind, all of which are hereby expressly waived by the Company and each Guarantor.

          (c) All proceeds realized from the liquidation or other disposition of Collateral or otherwise received after maturity of the Notes, whether by acceleration or otherwise, shall be applied: first, to reimbursement of expenses and indemnities provided for in this Agreement and the Security Documents; second, to accrued interest on the Notes; third, to fees owed to the Administrative Agent or any Lender; fourth, pro rata to principal outstanding on the Notes and the Indebtedness referred to in Clause (g) of the definition of “Indebtedness” owing to a Lender or an Affiliate of a Lender; fifth, to serve as cash collateral to be held by the Administrative Agent to secure the LC Obligation; sixth, to any other Indebtedness; and any excess shall be paid to the Company or as otherwise required by any Governmental Authority.

     9.03 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising.

ARTICLE X.

ADMINISTRATIVE AGENT

     10.01 Appointment and Authorization. Each of the Lenders and the Issuing Lender hereby irrevocably appoints the Administrative Agent as its agent and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof and the other Loan Documents, together with such actions and powers as are reasonably incidental thereto.

Credit Agreement

56

     10.02 Duties and Obligations of Administrative Agent. The Administrative Agent shall not have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the foregoing, (a) the Administrative Agent shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing (the use of the term “agent” herein and in the other Loan Documents with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law; rather, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties), (b) the Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except as provided in Section 10.03, and (c) except as expressly set forth herein, the Administrative Agent shall have no duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Company or any Guarantor that is communicated to or obtained by the Lender serving as Administrative Agent or any of its Affiliates in any capacity. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Company or any Guarantor or a Lender, and shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or under any other Loan Document or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or in any other Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document, (v) the satisfaction of any condition set forth in Article V or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent or as to those conditions precedent expressly required to be to the Administrative Agent’s satisfaction, (vi) the existence, value, perfection or priority of any collateral security or the financial or other condition of the Company or any Guarantor or any other obligor or guarantor, or (vii) any failure by the Company or any other Person (other than itself) to perform any of its obligations hereunder or under any other Loan Document or the performance or observance of any covenants, agreements or other terms or conditions set forth herein or therein.

     10.03 Action by Administrative Agent. The Administrative Agent shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby that the Administrative Agent is required to exercise in writing as directed by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided herein) and in all cases the Administrative Agent shall be fully justified in failing or refusing to act hereunder or under any other Loan Documents unless it shall (i) receive written instructions from the Required Lenders or the Lenders, as applicable, (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided herein) specifying the action to be taken and (ii) be indemnified to its satisfaction by the Lenders against any and all liability and expenses which may be incurred by it by reason of taking or continuing to take any such action. The instructions as aforesaid and any action taken or failure to act pursuant thereto by the Administrative Agent shall be binding on all of the Lenders. If a Default has occurred and is continuing, then the Administrative Agent shall take such action with respect to such Default as shall be directed by the Required Lenders in the written instructions (with indemnities) described in this Section 10.03, provided that, unless and until the Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default as it shall deem advisable in the best interests of the Lenders. In no event, however, shall the Administrative Agent be required to take any action which exposes the Administrative Agent to personal liability or which is contrary to this Agreement, the Loan Documents or applicable law. The Administrative Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders or the Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided herein), and otherwise the Administrative Agent shall not be liable for any action taken or not taken by it hereunder or under any other Loan Document

Credit Agreement

57

or under any other document or instrument referred to or provided for herein or therein or in connection herewith or therewith INCLUDING ITS OWN ORDINARY NEGLIGENCE, except for its own gross negligence or willful misconduct.

     10.04 Reliance by Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by it to be genuine and to have been signed or sent by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to be made by the proper Person, and shall not incur any liability for relying thereon and the Company, the Guarantors, the Lenders and the Issuing Lender hereby waive the right to dispute the Administrative Agent’s record of such statement, except in the case of gross negligence or willful misconduct by the Administrative Agent. The Administrative Agent may consult with legal counsel (who may be counsel for the Company or any Guarantor), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. The Administrative Agent may deem and treat the payee of any Note as the holder thereof for all purposes hereof unless and until a written notice of the assignment or transfer thereof permitted hereunder shall have been filed with the Administrative Agent.

     10.05 Sub-agents. The Administrative Agent may perform any and all its duties and exercise its rights and powers by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Agent-Related Persons. The exculpatory provisions of the preceding Sections of this Article X shall apply to any such sub-agent and to the Agent-Related Persons of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.

     10.06 Administrative Agent as Lender. Administrative Agent shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not Administrative Agent, and it and its Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Company or any Guarantor or Affiliate thereof as if it were not Administrative Agent hereunder.

     10.07 No Reliance. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and each other Loan Document to which it is a party. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document, any related agreement or any document furnished hereunder or thereunder. The Administrative Agent shall not be required to keep themselves informed as to the performance or observance by the Company or any Guarantor of this Agreement, the Loan Documents or any other document referred to or provided for herein or to inspect the Properties or books of the Company or any Guarantor. Except for notices, reports and other documents and information expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall have no duty or responsibility to provide any Lender with any credit or other information concerning the affairs, financial condition or business of the Company (or any of its Affiliates) which may come into the possession of the Administrative Agent or any of its Affiliates. In this regard, each Lender acknowledges that Haynes and Boone, LLP is acting in this transaction as special counsel to the Administrative Agent only, except to the extent otherwise expressly stated in any legal opinion or any Loan Document. Each other party hereto will consult with its own legal counsel to the extent that it deems necessary in connection with the Loan Documents and the matters contemplated therein.

Credit Agreement

58

     10.08 Administrative Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any Guarantor, the Administrative Agent (irrespective of whether the principal of any Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Company or any Guarantor) shall be entitled and empowered, by intervention in such proceeding or otherwise:

          (a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans and all other Indebtedness that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders and the Administrative Agent under Section 11.04) allowed in such judicial proceeding; and

          (b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Section 11.04.

Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Indebtedness or the rights of any Lender or to authorize the Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

     10.09 Authority of Administrative Agent to Release Collateral and Liens. Each Lender and Issuing Lender hereby authorizes the Administrative Agent to release any Collateral that is permitted to be sold or released pursuant to the terms of the Loan Documents. Each Lender and Issuing Lender hereby authorizes the Administrative Agent to execute and deliver to the Company or any Guarantor, at the Company’s or such Guarantor’s sole cost and expense, any and all releases of Liens, termination statements, assignments, or other documents reasonably requested by the Company or such Guarantor in connection with any sale or other disposition of property to the extent such sale or other disposition is permitted by the terms of Section 8.02 or is otherwise authorized by the terms of the Loan Documents.

     10.10 Reserved.

     10.11 Successor Administrative Agent. The Administrative Agent may resign as the Administrative Agent upon 30 days’ notice to the Lenders. If the Administrative Agent resigns under this Agreement, the Required Lenders shall appoint from among the Lenders a successor administrative agent reasonably satisfactory to the Company in the same capacity as the retiring Administrative Agent for the Lenders. If no successor administrative agent is appointed prior to the effective date of the resignation of such retiring Administrative Agent, such retiring Administrative Agent may appoint, after consulting with the Lenders, a successor administrative agent from among the Lenders. Upon the acceptance of its appointment as successor administrative agent hereunder, such successor administrative agent shall succeed to all the rights, powers and duties of the retiring Administrative Agent and the term “Administrative Agent” shall mean such successor administrative agent and the retiring Administrative Agent’s appointment, powers and duties as the Administrative Agent shall be terminated. After any retiring Administrative Agent’s resignation hereunder as the Administrative Agent, the provisions of this Article X and Sections 11.04 and 11.05 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Agent

Credit Agreement

59

under this Agreement. If no successor administrative agent has accepted appointment as the Administrative Agent in the same capacity as the retiring Administrative Agent by the date which is 30 days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent shall either withdraw its resignation or may appoint as a successor administrative agent a commercial Lender organized under the laws of the United States of America or of any State thereof having a commercial capital surplus of at least $500,000,000.

     10.12 Withholding Tax.

          (a) If any Lender is a not a “United States person” within the meaning of Section 7701(a)(3) of the Code (a “Foreign Lender”), such Foreign Lender agrees with and in favor of the Administrative Agent, to deliver to the Administrative Agent prior to receipt of any payment subject to withholding under the Code (or upon accepting an assignment or participation of an interest herein), two duly signed completed copies of either IRS Form W-8BEN or any successor thereto (relating to such Foreign Lender and entitling it to a complete exemption from withholding tax on all payments to be made to such Foreign Lender by the Company pursuant to this Agreement) or IRS Form W-8ECI or any successor thereto (relating to all payments to be made to such Foreign Lender by the Company pursuant to this Agreement) or such other evidence satisfactory to the Company that such Foreign Lender is entitled to a complete exemption from U.S. withholding tax, including any exemption pursuant to Section 881(c) of the Code. Thereafter and from time to time, each such Foreign Lender shall (i) promptly submit to the Company such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may then be available under then current United States laws and regulations to avoid, or such evidence as is satisfactory to the Company of any available complete exemption from United States withholding taxes in respect of all payments to be made to such Foreign Lender by the Company pursuant to this Agreement, and (ii) promptly notify the Administrative Agent and the Company of any change in circumstances which would modify or render invalid any claimed exemption.

          (b) Each Foreign Lender, to the extent it does not act or ceases to act for its own account with respect to any portion of any sums paid or payable to that Lender under any of the Loan Documents (for example, in the case of a typical participation by that Lender), shall deliver to the Administrative Agent on the date when such Foreign Lender ceases to act for its own account with respect to any portion of any such sums paid or payable, and at such other times as may be necessary in the determination of the Administrative Agent (in the reasonable exercise of its discretion), (i) two duly signed completed copies of the forms or statements required to be provided by that Lender as set forth above, to establish the portion of any such sums paid or payable with respect to which that Lender acts for its own account that is not subject to U.S. withholding tax, and (ii) two duly signed completed copies of IRS Form W-8IMY (or any successor thereto), together with any information that is required by the Code and Treasury regulations promulgated thereunder and any additional information that Lender chooses to transmit with such form, and any other certificate or statement of exemption required under the Code, to establish that that Lender is not acting for its own account with respect to a portion of any such sums payable to that Lender.

          (c) The Company shall not be required to pay any additional amount to any Foreign Lender under Section 3.01: (i) with respect to any Taxes or Other Taxes required to be deducted or withheld on the basis of the information, certificates or statements of exemption that Foreign Lender transmits with an IRS Form W-8IMY pursuant to Subsection 10.12(b) or (ii) if that Foreign Lender shall have failed to satisfy the foregoing provisions of this Section 10.12.

          (d) Each Lender that is a “United States person” within the meaning of Section 7701(a)(30) of the Code (“Domestic Lender”) shall deliver to the Administrative Agent two duly signed completed copies of IRS Form W-9. If that Domestic Lender fails to deliver such forms, then the Company may withhold from

Credit Agreement

60

any interest payment to that Domestic Lender an amount equivalent to the applicable back-up withholding tax imposed by the Code, without reduction. Thereafter and from time to time, each such Domestic Lender shall (i) promptly submit to the Company such additional duly completed and signed copies of one of such forms (or such successor forms as shall be adopted from time to time by the relevant United States taxing authorities) as may then be available under then current United States laws and regulations to avoid, or such evidence as is satisfactory to the Company of any available exemption from United States withholding taxes in respect of all payments to be made to such Domestic Lender by the Company pursuant to this Agreement, and (ii) promptly notify the Company of any change in circumstances which would modify or render invalid any claimed exemption.

          (e) No Assignee shall be entitled to the benefits of Section 3.01 unless the Company is notified of the assignment and such Assignee has complied with the requirements of this Section 10.12.

          (f) If any Lender is entitled to a reduction in the applicable withholding tax, the Administrative Agent may withhold from any payment to such Lender an amount equivalent to the applicable withholding tax after taking into account such reduction. If (i) a Lender does not deliver the forms or other documentation required this Section 10.12 to the Administrative Agent, or (ii) the Company is required by law to deduct and withhold from or in respect of any amounts payable under any Loan Document to a Lender but is not required to pay additional amounts under Section 3.01 with respect to such payment, then the Administrative Agent may deduct from any payment to such Lender an amount equivalent to the applicable withholding tax.

          (g) If the IRS or any other Governmental Authority of the United States or other jurisdiction asserts a claim that the Administrative Agent did not properly withhold tax from amounts paid to or for the account of any Lender (because the appropriate form was not delivered, was not properly executed, or because such Lender failed to notify the Administrative Agent of a change in circumstances which rendered the exemption from, or reduction of, withholding tax ineffective, or for any other reason) such Lender shall indemnify the Administrative Agent fully for all amounts paid, directly or indirectly, by the Administrative Agent as tax or otherwise, including penalties and interest, and including any taxes imposed by any jurisdiction on the amounts payable to the Administrative Agent under this Section, together with all costs and expenses (including Attorney Costs). The obligation of the Lenders under this subsection shall survive the payment of all Obligations and the resignation or replacement of the Administrative Agent.

ARTICLE XI.

MISCELLANEOUS

     11.01 Amendments and Waivers. No amendment, modification, termination or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company or any applicable Subsidiary therefrom, shall be effective unless the same shall be in writing and signed by the Required Lenders (or by the Administrative Agent at the written request of the Required Lenders) and the Company and acknowledged by the Administrative Agent, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided, however, that no such waiver, amendment, modification, termination or consent shall, unless in writing and signed by all the Lenders and the Company and acknowledged by the Administrative Agent, do any of the following:

          (a) increase or extend the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 9.02), or increase the maximum amount of Letters of Credit;

Credit Agreement

61

          (b) postpone the final maturity date of any Loan, or postpone or delay any date fixed by this Agreement or any other Loan Document for any payment of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document;

          (c) reduce the principal of, or the rate of interest specified herein on any Loan, or any fees or other amounts payable hereunder or under any other Loan Document;

          (d) change the Pro Rata Shares or change in any manner the definition of “Super-Majority Lenders” or “Required Lenders”;

          (e) amend this Section 11.01 or any provision of this Agreement which, by its terms, expressly requires the approval or concurrence of all Lenders;

          (f) release all, substantially all, or any material portion of the Collateral (except for releases in connection with dispositions of assets which are permitted hereunder or under any Loan Document), or release any Guarantor from any Guaranty, except in releases in connection with sales of Guarantors permitted hereunder;

          (g) reduce the amount or postpone the due date of any amount payable in respect of, or extends the required expiration date of, any Letter of Credit, or change in any manner the obligations of Lenders relating to the purchase of participations in Letters of Credit; or

          (h) increase the Borrowing Base or decrease the Borrowing Base Reduction Amount pursuant to Section 2.05, provided, the Required Lenders may maintain or decrease the Borrowing Base or maintain or increase the Borrowing Base Reduction Amount pursuant to Section 2.05;

and; provided further, that (i) any amendment, modification, termination or waiver of any of the provisions contained in Article V shall be effective only if evidenced by a writing signed by or on behalf of the Administrative Agent and the Required Lenders, (ii) no amendment, waiver or consent shall, unless in writing and signed by the Issuing Lender in addition to the Required Lenders or all the Lenders, as the case may be, affect the rights or duties of the Issuing Lender under this Agreement or any LC Related Document relating to any Letter of Credit Issued or to be Issued by it, and (iii) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Required Lenders or all the Lenders, as the case may be, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document.

     11.02 Notices.

          (a) All notices, requests and other communications shall be in writing and mailed, faxed or delivered, to the address or facsimile number specified for notices on Schedule 11.02; or, as directed by the Company, any Guarantor or the Administrative Agent, to such other address as shall be designated by such party in a written notice to the other parties, and as directed to any other party, at such other address as shall be designated by such party in a written notice to the Company and the Administrative Agent.

          (b) All such notices, requests and communications shall, when transmitted by overnight delivery, or faxed, be effective when delivered for overnight (next-day) delivery, or transmitted in legible form by facsimile machine, respectively, or if mailed, upon the third Business Day after the date deposited into the U.S. mail, or if delivered, upon delivery; except that notices pursuant to Article II or IX shall not be effective until actually received.

Credit Agreement

62

          (c) Any agreement of the Administrative Agent and the Lenders herein to receive certain notices by telephone or facsimile is solely for the convenience and at the request of the Company and the Guarantors. The Administrative Agent and the Lenders shall be entitled to rely on the authority of any Person purporting to be a Person authorized by the Company or any Guarantor to give such notice and the Administrative Agent and the Lenders shall not have any liability to the Company or any Guarantor or other Person on account of any action taken or not taken by the Administrative Agent or the Lenders in reliance upon such telephonic or facsimile notice. The obligation of the Company to repay the Loans shall not be affected in any way or to any extent by any failure by the Administrative Agent and the Lenders to receive written confirmation of any telephonic or facsimile notice or the receipt by the Administrative Agent and the Lenders of a confirmation which is at variance with the terms understood by the Administrative Agent and the Lenders to be contained in the telephonic or facsimile notice.

     11.03 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.

     11.04 Costs and Expenses. The Company and the Guarantors shall:

          (a) whether or not the transactions contemplated hereby are consummated, pay or reimburse the Administrative Agent within five (5) Business Days after demand (subject to Subsection 5.01(c)) for all reasonable costs and expenses incurred by the Administrative Agent in connection with the development, preparation, delivery, administration and execution of, and any amendment, supplement, waiver or modification to (in each case, whether or not consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation of the transactions contemplated hereby and thereby, including Attorney Costs incurred by the Administrative Agent with respect thereto except such costs and expenses as may be incurred by the assignor Lenders or Assignee under Subsection 11.08(c); and

          (b) pay or reimburse the Administrative Agent and each Lender within five (5) Business Days after demand (subject to Subsection 5.01(c)) for all costs and expenses (including Attorney Costs) incurred by each of them in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document during the existence of an Event of Default or after acceleration of the Loans (including in connection with any “workout” or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding).

     11.05 Indemnity. Whether or not the transactions contemplated hereby are consummated, the Company and the Guarantors shall indemnify and hold the Agent-Related Persons, and each Lender and each of their respective officers, directors, employees, counsel, agents and attorneys-in-fact (each, an “Indemnified Person”) harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans, and the termination, resignation or replacement of the Administrative Agent or replacement of any Lender) be imposed on, incurred by or asserted against any such Person in any way relating to or arising out of this Agreement or any document contemplated by or referred to herein, or the transactions contemplated hereby, or any action taken or omitted by any such Person under or in connection with any of the foregoing, including with respect to any investigation, litigation or proceeding (including any Insolvency Proceeding or appellate proceeding) related to or arising out of this Agreement or the Loans or the use of the proceeds thereof, whether or not any Indemnified Person is a party thereto (all the foregoing, collectively, the “Indemnified Liabilities”) WHETHER OR NOT SUCH INDEMNIFIED LIABILITIES ARISE OUT OF OR AS A RESULT OF ANY INDEMNIFIED PARTY’S NEGLIGENCE IN WHOLE OR IN PART, INCLUDING,

Credit Agreement

63

WITHOUT LIMITATION, THOSE CLAIMS WHICH RESULT FROM THE SOLE, JOINT, CONCURRENT OR COMPARATIVE NEGLIGENCE OF THE INDEMNIFIED PARTY, OR ANY ONE OR MORE OF THEM; provided, that neither the Company nor any Guarantor shall have any obligation hereunder to any Indemnified Person with respect to Indemnified Liabilities to the extent same arise from (i) the gross negligence or willful misconduct of any Indemnified Person or (ii) a claim or action asserted by one or more other Indemnified Persons. The agreements in this Section shall survive payment of all other Obligations.

     11.06 Payments Set Aside. To the extent that the Company or any Guarantor makes a payment to the Administrative Agent or the Lenders, or the Administrative Agent or the Lenders exercise their right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then (a) to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred, and (b) each Lender severally agrees to pay to the Administrative Agent upon demand its pro rata share of any amount so recovered from or repaid by the Administrative Agent.

     11.07 Successors and Assigns. Except for all provisions in Section 11.08, the provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that, neither the Company nor any Guarantor may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent and each Lender except in connection with a merger permitted hereunder.

     11.08 Assignments, Participations, etc.

          (a) Any Lender may upon written consent of the Administrative Agent, the Issuing Lender and the Company, which consent shall not be unreasonably withheld (provided at any time that an Event of Default has occurred and is continuing, no approval from the Company shall be required), at any time, assign and delegate to one or more Eligible Assignees (provided that no written consent of the Administrative Agent or the Issuing Lender shall be required in connection with any assignment and delegation by the Lender to an Eligible Assignee that is an Affiliate of such Lender) (each an “Assignee”) all, or any ratable part of all in a minimum commitment amount at least equal to $2,500,000, of the Loans, the Commitments, and the other rights and obligations of such Lender hereunder; provided, however, that the Company and the Administrative Agent may continue to deal solely and directly with such Lender in connection with the interest so assigned to an Assignee until (i) written notice of such assignment, together with payment instructions, addresses and related information with respect to the Assignee, shall have been given to the Company and the Administrative Agent by such Lender and the Assignee; (ii) such Lender and its Assignee shall have delivered to the Company and the Administrative Agent an Assignment and Acceptance in the form of Exhibit D (“Assignment and Acceptance”) together with any Note or Notes subject to such assignment and (iii) the assignor Lender or Assignee has paid to the Administrative Agent a processing fee in the amount of $3,500.00.

          (b) From and after the date that the Administrative Agent notifies the assignor Lender that it has received an executed Assignment and Acceptance and payment of the above-referenced processing fee, (i) the Assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned to it pursuant to such Assignment and Acceptance, shall have the rights and obligations of a Lender under the Loan Documents, and (ii) the assignor Lender shall, to the extent that rights and obligations hereunder and under the other Loan Documents have been assigned by it pursuant to such

Credit Agreement

64

Assignment and Acceptance, relinquish its rights and be released from its obligations under the Loan Documents.

          (c) Within five (5) Business Days after its receipt of notice by the Administrative Agent that it has received an executed Assignment and Acceptance and payment of the processing fee, (and provided that it consents to such assignment in accordance with Subsection 11.08(a)) the Company shall execute and deliver to the Administrative Agent, new Notes evidencing such Assignee’s assigned Loans and Commitment and, if the assignor Lender has retained a portion of its Loans and its Commitment, replacement Notes in the principal amount of the Loans retained by the assignor Lender (such Notes to be in exchange for, but not in payment of, the Notes held by such Lender, which shall be cancelled upon receipt of the new or replacement Notes). Immediately upon each Assignee’s making its processing fee payment under the Assignment and Acceptance, this Agreement shall be deemed to be amended to the extent, but only to the extent, necessary to reflect the addition of the Assignee and the resulting adjustment of the Commitments arising therefrom. The Commitment allocated to each Assignee shall reduce such Commitments of the assigning Lender pro tanto.

          (d) Any Lender may at any time sell to one or more commercial Lenders or other Persons not Affiliates of the Company or any Guarantor (a “Participant”) participating interests in any Loans, the Commitment of that Lender and the other interests of that Lender (the “originating Lender”) hereunder and under the other Loan Documents; provided, however, that (i) the originating Lender’s obligations under this Agreement shall remain unchanged, the originating Lender shall remain a Lender for all purposes hereof and the other Loan Documents to which such originating Lender is a party, and the Participant may not become a Lender for purposes hereof or for any other of the Loan Documents, (ii) the originating Lender shall remain solely responsible for the performance of such obligations, (iii) the Company, the Guarantors and the Administrative Agent shall continue to deal solely and directly with the originating Lender in connection with the originating Lender’s rights and obligations under this Agreement and the other Loan Documents, and (iv) no Lender shall transfer or grant any participating interest under which the Participant has rights to approve any amendment to, or any consent or waiver with respect to, this Agreement or any other Loan Document, except to the extent such amendment, consent or waiver would require unanimous consent of the Lenders. In the case of any such participation, the Participant shall not have any rights under this Agreement, or any of the other Loan Documents (the Participant’s rights against the granting Lender in respect of such participation being those set forth in the agreement creating or evidencing such participation with such Lender), and all amounts payable by the Company or any Guarantor hereunder shall be determined as if such Lender had not sold such participation; except that, if amounts outstanding under this Agreement are due and unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement.

          (e) Each Lender agrees to take normal and reasonable precautions and exercise due care to maintain the confidentiality of all information identified as “confidential” or “secret” by the Company or any Guarantor and provided to it by the Company or any Guarantor, or by the Administrative Agent on Company’s or any Guarantor’s behalf, under or in connection with this Agreement or any other Loan Document, and neither it nor any of its Affiliates shall use any such information other than in connection with or in enforcement of this Agreement and the other Loan Documents; except to the extent such information (i) was or becomes generally available to the public other than as a result of disclosure by any Lender or the Administrative Agent or any Guarantor, or (ii) was or becomes available on a non-confidential basis from a source other than the Company or any Guarantor, provided that such source is not bound by a confidentiality agreement with the Company or any Guarantor known to the Lender; provided, however, that any Lender may disclose such information (A) at the request or pursuant to any requirement of any Governmental Authority to which the Lender is subject or in connection with an examination of such Lender by any such authority; (B) pursuant to subpoena or other court process; (C) when required to do so in accordance with the

Credit Agreement

65

provisions of any applicable Requirement of Law; (D) to the extent reasonably required in connection with any litigation or proceeding to which the Administrative Agent, any Lender or their respective Affiliates may be party; (E) to the extent reasonably required in connection with the exercise of any remedy hereunder or under any other Loan Document; (F) to such Lender’s independent auditors and other professional advisors; (G) to any Affiliate of such Lender, or to any Participant or Assignee, actual or potential, provided that such Affiliate, Participant or Assignee agrees to keep such information confidential to the same extent required of the Lenders hereunder, and (H) as to any Lender, as expressly permitted under the terms of any other document or agreement regarding confidentiality to which the Company or any Guarantor is party or is deemed party with such Lender.

          (f) Notwithstanding any other provision in this Agreement, any Lender may at any time create a security interest in, or pledge, all or any portion of its rights under and interest in this Agreement and the Notes held by it in favor of any Federal Reserve Lender in accordance with Regulation A of the FRB or U.S. Treasury Regulation 31 CFR §203.14, and such Federal Reserve Lender may enforce such pledge or security interest in any manner permitted under applicable law.

     11.09 Interest.

          (a) It is the intention of the parties hereto to comply with applicable usury laws, if any; accordingly, notwithstanding any provision to the contrary in this Agreement, the Notes or in any of the other Loan Documents securing the payment hereof or otherwise relating hereto, in no event shall this Agreement, the Notes or such other Loan Documents require or permit the payment, taking, reserving, receiving, collection, or charging of any sums constituting interest under applicable laws which exceed the maximum amount permitted by such laws. If any such excess interest is called for, contracted for, charged, taken, reserved, or received in connection with the Loans evidenced by the Notes or in any of the Loan Documents securing the payment thereof or otherwise relating thereto, or in any communication by the Administrative Agent, the Issuing Lender or the Lenders or any other Person to the Company or any other Person, or in the event all or part of the principal or interest thereof shall be prepaid or accelerated, so that under any of such circumstances or under any other circumstance whatsoever the amount of interest contracted for, charged, taken, reserved, or received on the amount of principal actually outstanding from time to time under the Notes or any other Loan Document shall exceed the maximum amount of interest permitted by applicable usury laws, then in any such event it is agreed as follows: (i) the provisions of this paragraph shall govern and control, (ii) neither any Company nor any other Person now or hereafter liable for the payment of the Notes or any Obligation shall be obligated to pay the amount of such interest to the extent such interest is in excess of the maximum amount of interest permitted by applicable usury laws, (iii) any such excess which is or has been received notwithstanding this paragraph shall be credited against the then unpaid principal balance of the Notes or other Obligations, as applicable, or, if the Notes or other Obligations, as applicable, have been or would be paid in full, refunded to the Company, and (iv) the provisions of this Agreement, the Notes and the other Loan Documents securing the payment thereof and otherwise relating thereto, and any communication to the Company or any other person, shall immediately be deemed reformed and such excess interest reduced, without the necessity of executing any other document, to the maximum lawful rate allowed under applicable laws as now or hereafter construed by courts having jurisdiction hereof or thereof. Without limiting the foregoing, all calculations of the rate of the interest contracted for, charged, collected, taken, reserved, or received in connection with the Notes, this Agreement or any other Loan Document which are made for the purpose of determining whether such rate exceeds the maximum lawful rate shall be made to the extent permitted by applicable laws by amortizing, prorating, allocating and spreading during the period of the full term of the Loans or other Obligations, as applicable, including all prior and subsequent renewals and extensions, all interest at any time contracted for, charged, taken, collected, reserved, or received. The terms of this paragraph shall be deemed to be incorporated in every document and communication relating to the Notes, the Loans or any other Loan Document.

Credit Agreement

66

     11.10 Indemnity and Subrogation. In addition to all such rights of indemnity and subrogation as any Guarantor may have under applicable law, the Company agrees that in the event a payment shall be made by any Guarantor under a Guaranty in respect of a Loan to the Company, the Company shall indemnify such Guarantor for the full amount of such payment and such Guarantor shall be subrogated to the rights of the person to whom such payment shall have been made to the extent of such payment subject to the provisions of the Guaranty executed by such Guarantor. Notwithstanding any provision of this Agreement to the contrary, all rights of any Guarantor under this Section 11.10 and all other rights of indemnity, contribution or subrogation under applicable law or otherwise shall be fully subordinated to the indefeasible payment in full of the Obligations, and no payments may be made in respect of such rights of indemnity, contribution or subrogation until all the Obligations have been paid in full and all Commitments have expired. No failure on the part of the Company to make the payments required by this Section (or any other payments required under applicable law or otherwise) shall in any respect limited the obligations and liabilities required under applicable law or otherwise) shall in any respect limit the obligations and liability of any Guarantor with respect to any Guaranty, and such Guarantor shall remain liable for the full amount of the obligation of such Guarantor under each such Guaranty in accordance therewith.

     11.11 Collateral Matters; Derivative Contracts. The benefit of the Security Documents and of the provisions of this Agreement relating to any Collateral securing the Indebtedness shall also extend to and be available to any Lender or any Affiliate of a Lender that is counterparty to any Derivative Contract with the Company or any Guarantor (including any Derivative Contract between such Persons in existence prior to the Effective Date) on a pro rata basis in respect of any obligations of the Company or any Guarantor which arise under any such Derivative Contract; provided that the applicable counterparty must have provided Administrative Agent written notice of the existence thereof (such notice to include a summary of the contract date, price, volumes and other terms of such Derivative Contracts as the Administrative Agent may reasonably request) and such transaction must not otherwise be prohibited under this Agreement at the time it was entered into and provided further that if such Lender or Affiliate ceases to be a Lender (a) its Derivative Contract obligations shall be secured pari passu with the Lenders’ Obligations but only to the extent such counterparty’s obligations arise from transactions entered into at the time such counterparty was a Lender hereunder or an Affiliate of a Lender hereunder, and (b) such counterparty shall have no voting rights under any Loan Documents as a result of the existence of obligations owed to it under any such Derivative Contract. For the avoidance of doubt, a Person ceases to be a Lender hereunder if (i) pursuant to an assignment, such Person ceases to have any Commitment, Loans and LC Obligation hereunder or (ii) the Commitments of all of the Lenders hereunder have been terminated and all principal, interest and other amounts outstanding under this Agreement have been paid in full in cash (whether as a result of repayment at maturity, prepayment in connection with the refinancing of this Agreement or otherwise).

     11.12 USA Patriot Act Notice. Each Lender hereby notifies the Company and the Guarantors that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Act”), it is required to obtain, verify and record information that identifies the Company and the Guarantors, which information includes the name and address of the Company and the Guarantors and other information that will allow such Lender to identify the Company and the Guarantors, insofar as it is needed to comply with the Act, in accordance with the Act. The Company and the Guarantors hereby represent and warrant to Administrative Agent and each Lender that neither the Company, any Guarantor nor any of their Affiliates is a country, individual or entity named on the “Specifically Designated National and Blocked Persons” list issued by the Office of Foreign Asset Control of the Department of the Treasury of the United States of America.

     11.13 Automatic Debits of Fees. With respect to any commitment fee, arrangement fee, letter of credit fee or other fee, or any other cost or expense (including Attorney Costs) due and payable to the Administrative Agent or any Lender under the Loan Documents, each of the Company and the Guarantors hereby irrevocably authorizes the Administrative Agent, after giving reasonable prior notice to the Company

Credit Agreement

67

or the applicable Guarantor, to debit any deposit account of the Company or such Guarantor with the Administrative Agent in an amount such that the aggregate amount debited from all such deposit accounts does not exceed such fee or other cost or expense. If there are insufficient funds in such deposit accounts to cover the amount of the fee or other cost or expense then due, such debits will be reversed (in whole or in part, in the Administrative Agent’s sole discretion) and such amount not debited shall be deemed to be unpaid. No such debit under this Section shall be deemed a set-off.

     11.14 Notification of Addresses, Lending Offices, Etc. Each Lender shall notify the Administrative Agent in writing of any changes in the address to which notices to the Lender should be directed, of addresses of any Lending Office, of payment instructions in respect of all payments to be made to it hereunder and of such other administrative information as the Administrative Agent shall reasonably request.

     11.15 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument.

     11.16 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder.

     11.17 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company, the Guarantors, the Lenders, the Administrative Agent and the Agent-Related Persons, and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents.

     11.18 Governing Law, Jurisdiction and Waiver of Jury Trial. The provisions of Section 11.19 hereof shall govern the resolution of any Dispute (as such term is defined in such Section 11.19). If, however, the provisions of Section 11.19 are not invoked as therein provided, the following provisions shall apply:

          (a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK AND APPLICABLE FEDERAL LAW; AND THE ADMINISTRATIVE AGENT AND THE LENDERS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.

          (b) THE COMPANY AND EACH OF THE GUARANTORS IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT ITS ADDRESS SET FORTH IN SCHEDULE 11.02. SUCH SERVICE TO BECOME EFFECTIVE TEN DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.

          (c) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY AND EACH GUARANTOR CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. THE COMPANY AND EACH GUARANTOR

Credit Agreement

68

IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY AND EACH GUARANTOR WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, AND CONSENTS TO THE SERVICE OF PROCESS IN ANY SUCH LEGAL ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO IT AT ITS ADDRESS FOR NOTICES SET FORTH HEREIN, SUCH SERVICE TO BECOME EFFECTIVE TEN DAYS AFTER SUCH MAILING. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE ADMINISTRATIVE AGENT OR ANY LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.

          (d) THE COMPANY, EACH GUARANTOR, THE LENDERS AND THE ADMINISTRATIVE AGENT EACH WAIVES ITS RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, EACH GUARANTOR, THE LENDERS AND THE ADMINISTRATIVE AGENT EACH AGREES THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

     11.19 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company, the Guarantors, the Lenders and the Administrative Agent, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof.

     11.20 NO ORAL AGREEMENTS. THIS WRITTEN LOAN AGREEMENT, TOGETHER WITH THE OTHER WRITTEN LOAN DOCUMENTS EXECUTED IN CONNECTION HEREWITH, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.

     THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

Credit Agreement

69

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

THE COMPANY:
IVANHOE ENERGY (USA) INC., a Nevada corporation
By:	/s/Gordon Lancaster
Name:	Gordon Lancaster
Title:	Chief Financial Officer
GUARANTORS:
IVANHOE ENERGY INC., a Yukon corporation
By:	/s/Gordon Lancaster
Name:	Gordon Lancaster
Title:	Chief Financial Officer
IVANHOE ENERGY HOLDINGS INC., a Nevada corporation
By:	/s/E. Leon Daniel
Name:	E. Leon Daniel
Title:	President
IVANHOE ENERGY ROYALTY INC., a Nevada corporation
By:	/s/E. Leon Daniel
Name:	E. Leon Daniel
Title:	President

Signature Page Credit Agreement

\

IVANHOE ENERGY PETROLEUM PROJECTS INC., a Nevada corporation
By:	/s/Gordon Lancaster
Name:	Gordon Lancaster
Title:	Treasurer
IVANHOE ENERGY HTL INC., a Nevada corporation
By:	/s/Gordon Lancaster
Name:	Gordon Lancaster
Title:	Chief Financial Officer
IVANHOE HTL PETROLEUM LTD., a Nevada corporation
By:	/s/Gordon Lancaster
Name:	Gordon Lancaster
Title:	Chief Financial Officer
IVANHOE ENERGY HTL (USA) INC., a Nevada corporation
By:	/s/E. Leon Daniel
Name:	E. Leon Daniel
Title:	President

Signature Page Credit Agreement

ADMINISTRATIVE AGENT:
LASALLE BANK, NATIONAL ASSOCIATION
By:	/s/F. Ward Nixon
Name:	F. Ward Nixon
Title:	Senior Vice President
ISSUING LENDER:
LASALLE BANK, NATIONAL ASSOCIATION
By:	/s/F. Ward Nixon
Name:	F. Ward Nixon
Title:	Senior Vice President

Signature Page Credit Agreement

LENDERS:
LASALLE BANK, NATIONAL ASSOCIATION
By:	/s/F. Ward Nixon
Name:	F. Ward Nixon
Title:	Senior Vice President

Signature Page Credit Agreement

EX-10.16

Exhibit 10.16

INDEMNIFICATION AGREEMENT

     THIS AGREEMENT is made as of the 1^st day of February, 2008,

BETWEEN:

IVANHOE ENERGY INC., a corporation governed by the Yukon Business Corporations Act and having its corporate offices at Suite 654 – 999 Canada Place, Vancouver, B.C. V6C 3E1

(the “Corporation”)

- and -

[Name of Director/Officer], whose address is [Address of Director/Officer]

(the “Indemnified Party”)

RECITALS:

A.	The Yukon Business Corporations Act (the “YBCA”) permits the Corporation to indemnify individuals who are or were directors and officers of the Corporation, or who act or acted at the Corporation’s request as directors or officers or in a similar capacity of an Other Entity (as defined herein);
B.	It is generally agreed that, because of the uncertainties in relying upon an indemnity in a corporation’s bylaws and because liability insurance may afford the parties inadequate protection, it is desirable for directors and officers to obtain a contractual indemnity from the corporations they serve;
C.	It is in the best interests of the Corporation to attract and retain responsible and capable directors and officers, and the entering into of an agreement containing broad indemnification provisions of the kind contained in this Agreement is of vital importance to achieving these goals. Accordingly, the Corporation and the Indemnified Party wish to enter into this Agreement, and in so doing affirm that they intend that all the provisions of this Agreement be given legal effect to the full extent not prohibited by applicable law; and
D.	The Corporation has obtained policies of insurance for the benefit of the Indemnified Party, which, subject to section 12.3, will be maintained in full force and effect.

              NOW THEREFORE in consideration of the sum of $1.00 now given by the Indemnified Party to the Corporation, the Indemnified Party’s agreement to become or continue as a Director or Officer of the Corporation, the mutual covenants and agreements contained in this Agreement and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties agree as follows:

1. For the purposes of this Agreement:

1.1 “Agreement” means this Indemnification Agreement;

- 2 -

1.2

“Director” and “Officer”, respectively, means an individual who is or was a director or an officer of the Corporation, as the case may be, or who acts or acted, at the Corporation’s request, as a director or an officer of or in a similar capacity in respect of one or more Other Entities, and the phrase “Director and Officer” means an individual who is or was either a Director or an Officer, or both. For greater certainty, serving as a director includes serving as a member of one or more committees of the board of directors;

1.3

“Costs” shall include:

1.3.1	subject to section 11, an amount paid to settle an action or satisfy a judgment, except in respect of an action to which section 6 is applicable unless and until approval of the Supreme Court of the Yukon Territory has been obtained;
1.3.2	a fine, penalty, levy, charge, award, damages, settlement payment, compensation or financial imposition paid to or imposed by any domestic or foreign government (federal, provincial, municipal or otherwise) or to any regulatory authority, agency, commission or board of any domestic or foreign government, or imposed by any court or any other law, regulation or rule-making entity having jurisdiction in the relevant circumstances (collectively, a “Governmental Authority”), including as a result of a breach or alleged breach of any statutory or common law duty imposed on directors or officers or of any law, statute, rule or regulation or any provision of the articles, by-laws or any resolution of the Corporation or an Other Entity;
1.3.3	an amount paid to satisfy a liability arising as a result of the failure of the Corporation or an Other Entity to pay wages, vacation pay and any other amounts that may be owing to employees or to make contributions that may be required to be made to any pension plan, retirement income plan or other benefit plan for employees or to remit to any Governmental Authority payroll deductions, income taxes or other taxes, or any other amounts payable by the Corporation or an Other Entity; and
1.3.4	an amount equal to the per diem meeting fee paid by the Corporation to its directors at such time, for each day spent by the Indemnified Party in dealing with, responding to or assisting the Corporation with the resolution of any Proceeding relating to the Indemnified Party. The amount of the fee shall be pro rated for less than any full day spent, and shall not be paid in respect of meetings of the Board of Directors or a committee thereof attended by the Indemnified Party for which he is so compensated by the Corporation;

1.4 “Expenses” shall include all expenses incurred by or on behalf of the Indemnified Party in connection with any Proceeding, and shall include, without limiting the generality of the foregoing, legal costs on a solicitor and his own client basis, together with retainers, court costs, transcripts, fees of experts, witness fees, travel

- 3 -

	expenses, duplicating costs, printing and binding costs, telephone and facsimile charges, postage, delivery service fees and all other disbursements, costs, charges and expenses incurred by or on behalf of the Indemnified Party in connection with such Proceeding, including those incurred in interpreting, applying and enforcing the Indemnified Party’s rights under this Agreement;
1.5	The Indemnified Party shall be considered to be “involved” in any Proceeding if the Indemnified Party has any participation whatsoever in such Proceeding, including merely as a witness or a person providing information;
1.6	“Other Entity” shall include a body corporate, partnership, joint venture, association, employee benefit plan, trust or other enterprise or organization of which the Corporation is or was a shareholder or creditor and for which an individual acts or acted as a director or officer or in a similar capacity at the request of the Corporation, and includes an entity that becomes an Other Entity subsequent to the date hereof;
1.7	“Proceeding” shall include a claim, demand, suit, action, proceeding or investigation (civil, criminal, regulatory, administrative, arbitral or other), whether anticipated, threatened, pending, commenced, continuing or completed, and any appeal or appeals therefrom, and any other circumstance or situation, in respect of which the Indemnified Party reasonably requires legal advice or representation concerning the actual, possible or anticipated imposition of Costs or Expenses upon the Indemnified Party and arising at any time in whole or in part, directly or indirectly, from the Indemnified Party being or having been a Director or Officer, notwithstanding that the Indemnified Party denies liability for the possible Costs or Expenses or that the possible attempt to impose such Costs or Expenses is without merit;
1.8	Unless the context otherwise requires, words importing the singular include the plural and vice versa and words importing gender include all genders; and
1.9	Unless otherwise indicated, references to sections are to sections in this Agreement.

2. Subject to sections 3 and 4, the Corporation agrees to the fullest extent not prohibited by law, promptly upon demand, to indemnify and save harmless the Indemnified Party and his heirs and legal representatives:

2.1	from and against all Costs, charges and Expenses incurred by the Indemnified Party in respect of any Proceeding in which the Indemnified Party is involved or is subject by reason of being or having been a Director and Officer; and
2.2	from and against all liabilities, damages, Costs, charges and Expenses whatsoever that the Indemnified Party may sustain or incur as a result of serving as a Director and Officer in respect of any act, matter, deed or thing whatsoever made, done, committed, permitted or acquiesced in by the Indemnified Party as a Director and Officer, whether before or after the effective date of this Agreement.

- 4 -

3. The Corporation will indemnify the Indemnified Party under section 2 in all circumstances in which indemnification of a director or officer is permitted by the YBCA, which at the date hereof provides that the Corporation may indemnify the Indemnified Party if the Indemnified Party:

3.1	acted honestly and in good faith with a view to the best interests of the Corporation; and
3.2	in the case of a criminal or administrative Proceeding that is enforced by a monetary penalty, the Indemnified Party had reasonable grounds for believing that the Indemnified Party’s conduct was lawful.

	The applicable provisions of the YBCA permitting indemnification are referred to in this Agreement as the “Standards of Conduct”.
4.	Upon the Indemnified Party becoming aware of any Proceeding which may give rise to indemnification under this Agreement, the Indemnified Party shall give written notice to the Corporation, directed to its Chief Executive Officer or President or Chief Financial Officer, as soon as is practicable, provided however that failure to give notice in a timely fashion shall not disentitle the Indemnified Party to indemnification unless, and then only to the extent that, the Corporation suffers actual prejudice by reason of the delay.
5.	The Corporation may conduct any investigation it considers appropriate of any Proceeding of which it receives notice under section 4, and shall pay all costs of that investigation.
6.	In respect of an action by or on behalf of the Corporation or an Other Entity to procure a judgment in its favour to which the Indemnified Party is made a party by reason of being or having been a Director and Officer of the Corporation or the Other Entity, the Corporation shall:

(a)	first determine, acting reasonably, whether the Director or Officer seeking indemnification has met the Standards of Conduct;
(b)	if satisfied that the Standards of Conduct have been met in accordance with (a) above, apply forthwith to the Supreme Court of the Yukon Territory pursuant to section 126(2) of the YBCA for the approval of the court to indemnify such Director or Officer under this Agreement in connection with such action, including the making of Expense Advances under section 7; and
(c)	notwithstanding the foregoing, indemnify the Director or Officer seeking indemnification only after such Director or Officer has applied to and received an order approving such indemnification from the Supreme Court of the Yukon Territory under section 126(3) of the YBCA.

7. The parties wish to facilitate the payment by the Indemnified Party of ongoing costs in connection with matters for which indemnification under this Agreement is provided. Accordingly, the parties agree as follows:

- 5 -

7.1	the Indemnified Party has the right to incur Expenses for the purpose of protecting his interests fully and effectively in any Proceeding;
7.2	the Corporation shall, promptly upon demand, make advances (“Expense Advances”) to the Indemnified Party for any Costs and Expenses for which the Indemnified Party seeks indemnification under this Agreement at any time after the inception of Proceedings and up to the final disposition of the relevant Proceeding. In connection with such demand, the Indemnified Party shall provide the Corporation with: (a) a written affirmation of the Indemnified Party’s good faith belief that the Indemnified Party is entitled to indemnification hereunder, together with particulars of the Costs and Expenses to be covered by the proposed Expense Advance; and (b) a written undertaking to repay Expense Advances in the circumstances set forth in section 7.3 hereof; and
7.3	the Indemnified Party shall repay to the Corporation, upon demand, Expense Advances (a) if and to the extent that it is determined by a court of competent jurisdiction that the Indemnified Party is not entitled to indemnification hereunder, (b) if and to the extent that the Corporation has fully performed its obligations to the Indemnified Party under this Agreement with respect to the advancement of Expense Advances and other matters bearing on the ability of the Indemnified Party to protect his interests fully and effectively in the Proceeding, and (c) subject to any right of counterclaim or set off in favour of the Indemnified Party.

8.

Subject to section 9, the Indemnified Party has the right to appoint and instruct independent counsel to act on his behalf with respect to a Proceeding and all Expenses incurred by or in connection with such appointment and engagement shall be indemnified, advanced, paid or reimbursed, as the case may be by the Corporation as contemplated by sections 2 and 7.

9.

The Corporation shall be entitled to participate, at its own expense, in the defence of the Indemnified Party in any Proceeding. If the Corporation so elects after receipt of notice of a Proceeding, or the Indemnified Party in that notice so directs, the Corporation shall assume control of the negotiation, settlement or defence of the Proceeding, in which case the defence shall be conducted by experienced and competent counsel chosen by the Corporation and reasonably satisfactory to the Indemnified Party. If the Corporation elects to assume control of the defence, the Indemnified Party shall have the right to participate in the negotiation, settlement or defence of the Proceeding and to retain counsel to act on the Indemnified Party’s behalf, and the fees and disbursements of that counsel shall be paid by the Corporation. Notwithstanding the foregoing provisions, the Indemnified Party shall have the right, at the Corporation’s expense, to separately retain counsel of such Indemnified Party’s choice, in respect of the defence of any Proceeding in respect of which the Corporation has elected to assume control if: (i) the employment of such counsel has been authorized by the Corporation; (ii) the Corporation has not assumed the defence and employed competent and experienced counsel therefor promptly after receiving notice of such Proceeding; or (iii) counsel retained by the Corporation or the Indemnified Party has advised the Indemnified Party that representation of both parties by the same counsel would be inappropriate for any reason, including for the

- 6 -

reason that there may be legal defences available to the Indemnified Party which are different from or in addition to those available to the Corporation (in which event and to that extent, the Corporation shall not have the right to assume or direct the defence on such Indemnified Party’s behalf) or that there is a conflict of interest between the Corporation and the Indemnified Party or the subject matter of the Proceeding may not fall within the indemnity set forth herein (in any of which events the Corporation shall not have the right to assume or direct the defence on such Indemnified Party’s behalf), provided that the Corporation shall not be responsible for the fees or expenses of more than one legal firm acting on behalf of the Indemnified Party in any single jurisdiction at any one time. The Indemnified Party and the Corporation shall cooperate fully with each other and their respective counsel in the investigation related to, and defence of, any Proceeding and shall make available to each other all relevant books, records, documents and files and shall otherwise use their best efforts to assist each other’s counsel to conduct a proper and adequate defence.

10.

The indemnities in section 2 shall not apply in respect of any Proceeding initiated by the Indemnified Party:

10.1	against the Corporation or an Other Entity, unless it is brought to establish or enforce any right under this Agreement;
10.2	against any Director or Officer unless the Corporation or the Other Entity, as the case may be, has joined in or consented to the initiation of such Proceeding; or
10.3	against any other corporation, partnership, trust, joint venture, unincorporated entity or person, unless it is a counterclaim in such Proceeding.

11. The parties wish to encourage the settlement of any Proceeding. Accordingly, the parties agree as follows:

11.1	the Corporation may, with the prior written consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed), enter into an agreement to settle any Proceeding;
11.2	no admission of liability and no settlement of any Proceeding shall be made by the Corporation without the prior written consent of the Indemnified Party affected (which consent shall not be unreasonably withheld or delayed) unless such settlement includes an unconditional general release of the Indemnified Party from any and all liabilities arising out of such Proceeding without any admission of negligence, misconduct, liability or responsibility by the Indemnified Party;
11.3	the Corporation shall not be liable for any settlement of any Proceeding effected without its prior written consent (which consent shall not be unreasonably withheld or delayed);
11.4	the Indemnified Party shall have the right to negotiate a settlement in respect of any Proceeding, provided that if the Corporation, acting reasonably, declines to approve the settlement, the Indemnified Party shall pay any compensation or other

- 7 -

	payment to be made under the settlement and the costs of negotiating and implementing the settlement, and shall not seek indemnity from the Corporation in respect of such compensation, payment or costs; and
11.5	the settlement of a Proceeding shall not create a presumption that the Indemnified Party did not meet or would not have met the Standards of Conduct.

12. The Corporation shall ensure that all liabilities of the Corporation under this Agreement and all of the actions of the Indemnified Party which fall within the Standards of Conduct are at all times covered by directors’ and officers’ liability insurance maintained by the Corporation in favour of the Corporation and the Indemnified Party with a responsible insurer. In this regard, the parties agree that:

12.1	the responsibility for obtaining, maintaining and obtaining for the benefit of the Indemnified Party such directors’ and officers’ liability insurance shall rest with the Corporation and shall be implemented by a senior manager of the Corporation who shall involve an insurance broker or other person having expertise and experience in directors’ and officers’ liability insurance;
12.2	the Corporation shall provide to the Indemnified Party a summary of the material terms of each policy of insurance providing the coverages contemplated by this section 12 promptly after such coverage is obtained, and shall promptly notify the Indemnified Party if the insurer cancels or refuses to renew such coverage (or any part of such coverage);
12.3	such insurance coverage need not be obtained by the Corporation only if the coverage is not available from responsible insurers, or is available from one or more responsible insurers but at a cost which, in the opinion of the Corporation, acting reasonably and taking into account the financial condition and size of the Corporation, the nature of its business and the extent of the risks of personal liability to which the Indemnified Party is or may be subject, is grossly excessive, in which case the Indemnified Party may elect to terminate his position as a Director of the Corporation but the provisions of this Agreement shall remain in full force and effect for his benefit following such termination;
12.4	the Corporation shall not do any act or thing (including changing insurers), or fail to do any act or thing, that could cause or result in a denial of insurance coverage or of any claim under such coverage;
12.5	the Corporation shall give prompt notice of the commencement of any Proceeding to the insurers on the directors’ and officers’ liability insurance maintained by the Corporation, if any, in accordance with the procedures set forth in the respective policies. The Corporation shall thereafter take all necessary action to cause such insurers to pay, on behalf of the Indemnified Party, all amounts payable as a result of such Proceedings in accordance with the terms of such policies; and
12.6	in the event of any reduction in, or cancellation of, the directors’ and officers’ liability insurance maintained by the Corporation, the Indemnified Party’s rights

- 8 -

to Expense Advances and indemnification shall not be affected by such reduction or cancellation.

13.	Should any payment made pursuant to this Agreement, including the payment of insurance premiums or any payment made by an insurer under an insurance policy, be deemed to constitute a taxable benefit or otherwise be or become subject to any tax or levy, then the Corporation shall pay any amount as may be necessary to ensure that the amount received by or on behalf of the Indemnified Party, after the payment of or withholding for such tax, fully reimburses the Indemnified Party for the actual cost, expense or liability incurred by or on behalf of the Indemnified Party.
14.	Notwithstanding the date of execution of this Agreement, this Agreement shall be effective as of the date on which the Indemnified Party first became a Director or Officer, except that the rights of the Indemnified Party with respect of insurance coverage are as stated in Section 12 of this Agreement.
15.	This Agreement is to be interpreted broadly and purposively so as to provide the Indemnified Party with the broadest possible entitlement to Expense Advances and to indemnification except as and to the extent prohibited by applicable law as presently in effect or as changed after the date of this Agreement, whether by statute or judicial decision.
16.	Each of the provisions contained in this Agreement is distinct and severable and a declaration of invalidity or unenforceability of any such provision or part thereof by a court of competent jurisdiction shall not affect the validity or enforceability of any other provision hereof. Should the content, or the application sought by the Indemnified Party of any of the provisions of this Agreement, be found to exceed the scope of indemnification lawfully available to the Indemnified Party from the Corporation, the affected provision is to be read down so as to be interpreted or applied with the smallest reduction in scope consistent with the applicable law and with the purpose of this Agreement, including this section 16. To the extent permitted by applicable law, the parties waive any provision of applicable law which renders any provision of this Agreement invalid or unenforceable in any respect.
17.	The Indemnified Party’s right to indemnification under this Agreement is in addition to, and not in substitution for, any rights of indemnification in favour of the Indemnified Party pursuant to any provision of the Articles of Incorporation or Bylaws of the Corporation, any agreement, vote of stockholders or disinterested directors, applicable law or otherwise. No amendment, termination or repeal of any provision of the Articles of Incorporation or Bylaws of the Corporation, or any respective successors thereto, shall affect or diminish in any way the rights of the Indemnified Party to indemnification, or the obligations of the Corporation, arising under this Agreement, whether the alleged actions or conduct of the Indemnified Party giving rise to the necessity of such indemnification arose before or after any such amendment, termination or repeal.
18.	It being the desire of the parties, notwithstanding the restrictive provisions of the Limitation of Actions Act (Yukon Territory), the Limitation Act, 1996 (British Columbia) or any successor legislation, or any similar legislation of any other jurisdiction which

- 9 -

may be applicable in any action brought by a Director or Officer pursuant to this Agreement (the “Limitation Acts”), to provide for the equivalent of a limitation period of six years from the conclusion of a Proceeding, the parties:

(a)	acknowledge that, in the Limitation Acts, the limitation period currently prescribed for certain Proceedings under this Agreement by an Indemnified Party or the Corporation, or any person claiming in right thereof, may be two years from the day on which the claim was discovered within the meaning of the Limitation Acts; and
(b)	agree that if and when:

(i)	it is lawful for the parties to enter into an agreement to vary, exclude or waive the limitation period otherwise applicable under a Limitation Act, or
(ii)	a Limitation Act is amended to prescribe a longer limitation period, then:

this Agreement will be deemed to have been amended, with effect from the date of the relevant change, clarification, or amendment, to provide that any Proceeding in respect of a claim under this Agreement must be commenced within six years from the conclusion of the pertinent Proceeding, or such longer period as may be prescribed or permitted by statute. For greater certainty, this provision shall apply to any claim which would, prior to such date, have been statute-barred but where the pertinent Proceeding was concluded less than six years before such date, and for that purpose the parties agree that in such circumstances the Corporation shall not plead and does hereby waive any limitation defence which would otherwise have been available to it in an action brought by a Director or Officer under this Agreement.

19.	Except as expressly provided in this Agreement, no amendment or waiver of this Agreement shall be binding unless executed in writing by the party to be bound thereby. No waiver of any provision of this Agreement shall constitute a waiver of any other provision hereof (whether or not similar), nor shall any waiver of any provision of this Agreement constitute a continuing waiver unless otherwise expressly provided.
20.	The obligations of the Corporation under this Agreement shall survive its termination and continue in full force after the Indemnified Party ceases to be a Director or Officer of the Corporation.
21.	This Agreement shall enure to the benefit of the Indemnified Party and the Indemnified Party’s heirs, personal and legal representatives, executors and administrators and shall be binding upon the Corporation and its successors (including any direct or indirect successor by merger, consolidation or operation of law). This Agreement shall not otherwise be assignable by the Corporation or the Indemnified Party.
22.	This Agreement shall be governed by and construed in accordance with the laws of the Yukon Territory and the laws of Canada applicable therein.

- 10 -

IN WITNESS WHEREOF, the parties hereto have executed this Agreement.

IVANHOE ENERGY INC.
By:	/s/ Gordon Lancaster Name: Gordon Lancaster
	Title: Chief Financial Officer
“Signature of Director/Officer”
[Name of Director/Officer]

EX-10.17

Exhibit 10.17

EMPLOYMENT AGREEMENT

THIS AGREEMENT made as of the 2nd day of May, 2007

BETWEEN:

IVANHOE ENERGY INC., a corporation continued under the laws of the Yukon Territory, having its principal executive office at Suite 654 – 999 Canada Place, Vancouver, British Columbia, V6C 3E1 and its operations headquarters at 5060 California Avenue, Suite 400, Bakersfield, California 93309

(the “Company”)

AND:

MICHAEL SILVERMAN of 1327 Ashland Street, Houston, Texas 77008

(the “Executive”)

WHEREAS:

A.	the Company is an international oil and gas company;
B.	the Executive has extensive experience in heavy oil technologies and technology development and project management;
C.	the Company wishes to have the Executive serve as the Vice President, Technology of the Company; and
D.	the parties hereto wish to enter into this agreement to set forth the terms and conditions applicable to the employment of the Executive in such capacity.

NOW THEREFORE THIS AGREEMENT WITNESSES that the parties hereto, in consideration of the premises and of the respective covenants and agreements on the part of those herein contained, do hereby covenant each with the other as follows:

PART 1
DEFINITIONS AND INTERPRETATION

Definitions

1.1 In this Agreement, the following terms shall have the meanings ascribed thereto:

“Agreement” means this agreement and all amendments made to it by written agreement between the Company and the Executive;

“Board” means the Board of Directors of the Company;

- 2 -

“Business Day” means a day other than Saturday, Sunday or statutory holiday in British Columbia;

“Change of Control” means an event occurring after the Commencement Date pursuant to which:

(a)	a merger, amalgamation, arrangement, consolidation, reorganization or transfer takes place in which securities of the Company having more than 50% of the total combined voting power of the Company’s outstanding voting securities are acquired by a person or persons different from the persons holding those voting securities immediately prior to such event, and the composition of the Board following such event is such that the directors of the Company prior to the transaction constitute less than 50% of the Board membership following the event;
(b)	any person, or any combination of persons acting jointly or in concert by virtue of an agreement, arrangement, commitment or understanding acquires, directly or indirectly, 50% or more of the voting rights attached to all outstanding voting securities; or
(c)	any person, or any combination of persons acting jointly or in concert by virtue of an agreement, arrangement, commitment or understanding acquires, directly or indirectly, the right to appoint a majority of the directors of the Company; or
(d)	the Company sells, transfers or otherwise disposes of all or substantially all of its assets, except that no Change of Control will be deemed to occur if such sale or disposition is made to a subsidiary or subsidiaries of the Company.

“Disability” means a physical or mental incapacity of the Executive that has prevented the Executive from performing the duties customarily assigned to the Executive for one hundred and eighty (180) days, whether or not consecutive, out of any twelve (12) consecutive months and that in the opinion of the Board is likely to continue.

Interpretation

1.2 For the purposes of this Agreement, except as otherwise expressly provided:

(a)	“this Agreement” means this Agreement, including the schedules hereto, and not any particular part, section or other portion hereof, and includes any agreement, document or instrument entered into, made or delivered pursuant to the terms hereof, as the same may, from time to time, be supplemented or amended and in effect;
(b)	all references in this Agreement to a designated “part”, “section” or other subdivision or to a schedule are references to the designated part, section, or other subdivision of, or schedule to, this Agreement;

- 3 -

(c)	the words “hereof”, “herein”, “hereto” and “hereunder” and other words of similar import refer to this Agreement as a whole and not to any particular part, section or other subdivision or schedule unless the context or subject matter otherwise requires;
(d)	the division of this Agreement into parts, sections and other portions and the insertion of headings are for convenience of reference only and are not intended to interpret, define or limit the scope, extent or intent of this Agreement or any provision hereof;
(e)	unless otherwise provided herein, all references to currency in this Agreement are to lawful money of the United States of America and all amounts to be calculated or paid pursuant to this Agreement are to be calculated in lawful money of the United States of America;
(f)	the singular of any term includes the plural, and vice versa, and the use of any term is generally applicable to any gender and, where applicable, a body corporate, firm or other entity, and the word “or” is not exclusive and the word “including” is not limiting whether or not non-limiting language (such as “without limitation” or “but not limited to” or words of similar import) is used with reference thereto; and
(g)	all references to “approval”, “authorization”, “consent” or “direction” in this Agreement means written approval, authorization, consent or direction.

PART 2
EMPLOYMENT

Employment

2.1 The Company shall employ the Executive and the Executive shall perform services on behalf of the Company as its employee as provided herein during the Period of Active Employment (as hereinafter defined).

Period of Active Employment

2.2 In this Employment Agreement, “Period of Active Employment” shall mean the period beginning on the first date on which the Executive reports to work in Bakersfield, California, or at such other location as agreed by the President and CEO but in any case no later than May 31, 2007 (the “Commencement Date”) and terminating on the date on which the first of the following occurs:

(a)	the termination of the Executive’s employment by the Company for cause as provided in Section 6.1 hereof;
(b)	the resignation of employment by the Executive pursuant to Section 6.2;
(c)	the termination of this Employment Agreement pursuant to Section 6.3;
(d)	the Disability of the Executive; or
(e)	the death of the Executive.

- 4 -

PART 3
POSITION

Capacity and Services

3.1 The Company shall employ the Executive as Vice President, Technology of the Company. As such, the Executive shall be subject to the supervision of the President and CEO and shall perform such duties and have such authority as may from time to time be assigned, delegated or limited by the President and CEO. The Executive shall perform these duties in accordance with the charter documents and by-laws of the Company, the instructions of the President and CEO, Company policy, applicable law and the rules and policies of each stock exchange upon which securities of the Company may be listed from time to time.

Place of Employment

3.2 The Executive’s place of work will be the Company’s offices in Bakersfield, California or other such location as approved by the President and CEO, but the Company may require the Executive to work at any place throughout the world on a temporary basis.

Full Time and Attention

3.3 The Executive shall devote one hundred percent (100%) of the Executive’s business time to the Executive’s duties hereunder. The Executive may, however, serve as a member of the board of directors of another company if the Board determines in its sole discretion that such membership is not adverse to the interests of the Company.

Conflicts of Interest

3.4 The Executive agrees that as an executive officer of the Company, he shall refer to the President and CEO all matters and transactions in which a potential conflict of interest between the Executive and the Company may arise and shall not proceed with such matters or transactions until the Board’s express approval thereof is obtained. For purposes of clarification, this Section 3.4 is not intended to limit in any way the Executive’s other fiduciary obligations to the Company which may arise in law or equity.

PART 4
COMPENSATION AND BENEFITS

Compensation

4.1 The base salary rate (“Base Salary”) of the Executive shall be $225,000.00 per year, payable monthly on the last business day of each month.

Benefits

4.2 The Company shall provide the Executive and his dependent immediate family members with the same comprehensive medical, dental, life, disability and related insurance coverage as are available to the other executive officers of the Company.

Long Term Incentive Plan

4.3 Subject to Board approval, the Executive will receive incentive stock options exercisable to purchase up to 80,000 common shares of the Company pursuant to the

- 5 -

Company’s Employees’ and Directors’ Equity Incentive Plan (the “Plan”) at a price per common share determined in accordance with the terms of the Plan. The Executive’s incentive stock options will vest and become exercisable in accordance with the following schedule:

(a)	options in respect of an initial 20,000 common shares will become exercisable as of the first (1st) anniversary of the Commencement Date;
(b)	options in respect of an additional 20,000 common shares will become exercisable as of the second (2nd) anniversary of the Commencement Date; and
(c)	options in respect of the remaining 20,000 common shares will become exercisable as of the third (3rd) anniversary of the Commencement Date.
(d)	options in respect of the remaining 20,000 common shares will become exercisable as of the fourth (4th) anniversary of the Commencement Date.

Subject to earlier termination pursuant to the terms of the Plan, any of the Executive’s incentive stock options remaining unexercised as of the fifth (5^th) anniversary of the Commencement Date will, as of that date, expire and cease to be exercisable. In addition to the incentive stock options referred to above, the Executive will be eligible to receive additional incentive stock option grants annually pursuant the Company’s Compensation Programme subject to approval and ratification by the Board. All such grants will be made pursuant to, and in accordance with the terms of, the Plan.

Short Term Incentive Plan

4.4 The Executive shall be eligible for an annual bonus award pursuant to the Company’s Compensation Programme and payable after the end of the Company’s fiscal year. The annual bonus award will be based on an overall performance rating and job specific criteria. The bonus award will be a combination of unrestricted shares of the Company and cash. Award levels are outlined in the Company’s Compensation Programme.

Vacation

4.5 The Executive is entitled to take four (4) weeks vacation per calendar year in accordance with the Company’s policies and practices in effect at the relevant time for senior executives and subject to the needs of the Company. Notwithstanding the foregoing, any vacation of greater than 10 consecutive Business Days in length shall require the approval of the President and CEO.

Expenses Incidental to Employment

4.6 The Company shall reimburse the Executive in accordance with its normal policies and practices for the Executive’s travel and other expenses or disbursements reasonably and necessarily incurred or made in connection with the Company’s business. The Executive will furnish the Company with an itemized account of his expenses in such form or forms as may reasonably be required by the Company and at such times or intervals as may be required by the Company.

- 6 -

Relocation Allowance

4.7 If required and as full reimbursement for the Executive relocating to Bakersfield, California, the Company will pay to the Executive a reasonable amount, to be determined by the President & CEO, towards his out-of-pocket relocation costs, such as housing related expenses, shipping, storage, temporary living expenses and incidental expenses.

PART 5
CONFIDENTIALITY AND NON-COMPETITION

Non-Competition

5.1 The Executive acknowledges that the Executive’s services are unique and extraordinary. The Executive also acknowledges that the Executive’s position will give the Executive access to confidential information of substantial importance to the Company and its business. During the Non-Competition Period (as hereinafter defined), the Executive shall not, either individually or in partnership or jointly or in conjunction with any other person, entity or organization, as principal, agent, consultant, lender, contractor, employer, employee, investor, shareholder or in any other manner, directly or indirectly, advise, manage, carry on, establish, control, engage in, invest in, offer financial assistance or services to, or permit the Executive’s name or any part thereof to be used by any business in any jurisdiction in which Executive knows or ought reasonably to have known that the Company is conducting business, that competes with the business of the Company, its parent, affiliated or subsidiary companies, or any business in which the Company, its parent, affiliated or subsidiary companies is engaged (the “Business”). For purposes of this Agreement, “Non-Competition Period” means a period beginning on the date hereof and ending at the
later of:

(a)	six (6) months after the end of the Period of Active Employment; or
(b)	the date on which the Executive no longer is receiving compensation pursuant to any of the terms of this Agreement.

Other Executives

5.2 The Executive agrees that during the period beginning on the date hereof and ending twelve (12) months after the Period of Active Employment, neither the Executive nor any entity with whom the Executive is at the time associated, related or affiliated shall, directly or indirectly, hire or offer to hire or entice away or in any other manner persuade or attempt to persuade any officer, employee or agent of the Business to discontinue or alter any one of their or its relationships with the Company.

Confidentiality

5.3 Except in the normal and proper course of the Executive’s duties hereunder, the Executive will not use for the Executive’s own account or disclose to anyone else, during or for a period of three (3) years after the Period of Active Employment, any confidential or proprietary information or material relating to the Company’s operations or business which the Executive obtains from the Company or its officers or employees, agents, suppliers or customers or otherwise by virtue of the Executive’s employment by the Company or by the Company’s predecessor. Confidential or proprietary information or material includes, without limitation, the following types of information or material, both existing and contemplated, regarding the Company or its parent, affiliated or subsidiary companies: corporate information,

- 7 -

plans, strategies, tactics, policies, resolutions, litigation or negotiations, financial information, including debt arrangements, equity structure, investors and holdings; operational and scientific information, technical information, and personnel information, including personnel lists, resumes, personnel data, organizational structure and performance evaluations (the “Confidential Information

Notwithstanding the preceding, “Confidential Information” shall; not include information which (a) was in the Executive’s possession prior to the Commencement Date, (b) is or becomes publicly known, except for any such information that becomes publicly known because of disclosure by the Executive in violation of this Agreement, or (c) is required to be disclosed pursuant to judicial or regulatory action, law or similar process.

Return of Documents

5.4 The Executive agrees that all documents of any nature pertaining to activities of the Company and to its parent and their respective affiliated, related, associated or subsidiary companies, including Confidential Information, in the Executive’s possession now or at any time during the Period of Active Employment, are and shall be the property of the Company and its parent, and their respective affiliated, related, associated or subsidiary companies, and that all such documents and all copies of them shall be surrendered to the Company whenever requested by the Company.

Invalidity

5.5 If any court determines that any provision contained in this Agreement including, without limitation, a restrictive covenant or any part thereof is unenforceable because of the duration or geographical scope of the provision or for any other reason, the duration or scope of the provision, as the case may be, shall be reduced so that the provision becomes enforceable and, in its reduced form, the provision shall then be enforceable and shall be enforced.

Acknowledgement

5.6 The Executive acknowledges that, in connection with the Executive’s employment by the Company, the Executive will receive or will become eligible to receive substantial benefits and compensation. The Executive acknowledges that the Executive’s employment by the Company and all compensation and benefits and potential compensation and benefits to the Executive from such employment shall be conferred by the Company upon the Executive only because and on condition of the Executive’s willingness to commit the Executive’s best efforts and loyalty to the Company, including protecting the Company’s right to have its Confidential Information protected and abiding by the confidentiality, non-competition and other provisions herein. The Executive understands the Executive’s duties and obligations as set forth in this Agreement and agrees that such duties and obligations would not unduly restrict or curtail the Executive’s legitimate efforts to earn a livelihood following any termination of the Executive’s employment with the Company. The Executive agrees that the restrictions contained in this Part 5 are reasonable and valid and all defences to the strict enforcement thereof by the Company are waived by the Executive. The Executive further acknowledges that irreparable damage would result to the Company if the provisions of Sections 5.1 through 5.4 are not specifically enforced, and agrees that the Company shall be entitled to any appropriate legal, equitable, or other remedy, including injunctive relief, in respect of any failure or continuing failure to comply with the provisions of Sections 5.1 through 5.4.

- 8 -

Corporate Opportunities

5.7 Any business opportunities related to the business of the Company which become known to the Executive during the period of his employment hereunder must be fully disclosed and made available to the Board by the Executive and the Executive agrees not to take or omit to take any action if the result would be to divert from the Company any opportunity which is within the scope of its Business as known to the Executive from time to time.

Ivanhoe Related Developments. Executive will promptly disclose and assign, in writing, to Ivanhoe any inventions, improvements, or discoveries, methods, developments, software, and works of authorship, whether patentable or not, which are made, conceived, or improved by Executive, solely or jointly with others, during Consultant’s engagement by Ivanhoe hereunder or while providing Services to an Ivanhoe Affiliate, either during or outside the regular hours of Executive’s engagement (“Ivanhoe Related Developments”) that (A) use equipment, supplies, facilities, trade secret information, or other Confidential Information of Ivanhoe or any Affiliate of Ivanhoe, or (B) directly relate, at the time of conception, development, reduction to practice, or use, to the RTP™ technology of Ivanhoe or one or more Affiliates of Ivanhoe (the “Technology”), or to actual research or development related to the Technology, or one or more Affiliates of Ivanhoe, or (C) that result directly from any work performed by Executive for Ivanhoe or any Affiliate of Ivanhoe.

     Upon request, Executive will assist Ivanhoe and its nominees in every proper way at Ivanhoe’s expense (and without additional compensation to Executive), both during Executive’s engagement by Ivanhoe and thereafter, to obtain and retain for Ivanhoe’s sole benefit patent protection for any and all Ivanhoe Related Developments, which will remain the property of Ivanhoe, its successors, assigns, or nominees, whether patented or not, and, for that purpose, upon written request by and at the expense of Ivanhoe, Executive will within thirty (30) days following a request therefore execute any and all documents relating thereto that are deemed necessary by Ivanhoe to the extent such request is reasonable. All such Ivanhoe Related Developments will be subject to the provision of this Agreement (regarding Confidential Information). Notwithstanding the foregoing, in the event that, after termination of Executive’s engagement, Executive incurs expenses, provides Services, or otherwise assists Ivanhoe or its nominees at such party’s request, Ivanhoe shall compensate Executive therefor, with such compensation to be reasonably agreed upon by Executive and Ivanhoe. The obligations of Executive and Ivanhoe under this section 5.3 will survive the termination of Executive’s engagement for any reason or no reason, will be applicable regardless of any actual or alleged breach of this Agreement by Ivanhoe, and will continue indefinitely.

Passive Investment

5.8 Notwithstanding anything in this Article, nothing in this Agreement shall be deemed to prevent or prohibit the Executive from owning shares in a publicly listed company as a passive investment, so long as the Executive does not own more than five per cent (5%) of the shares thereof.

- 9 -

PART 6
TERMINATION AND RESIGNATION

Termination for Cause

6.1 The Company may immediately terminate this Agreement at any time for cause by written notice to the Executive. Without limiting the foregoing, any one or more of the following events shall constitute cause:

(a)	the Executive’s appropriation of corporate opportunities for his direct or indirect benefit or his failure to disclose any material conflict of interest;
(b)	the Executive’s failure to disclose material facts concerning his business interests or employment by other than the Company;
(c)	any of the following acts or circumstances of the Executive: fraud, illegality, breach of statute or regulation, or gross incompetence;
(d)	the Executive’s breach of fiduciary duty to the Company;
(e)	the Executive’s material breach of this Agreement or gross negligence in carrying out his duties under this Agreement;
(f)	the failure of or refusal by the Executive to follow the reasonable and lawful directions of the Board or to comply with the policies, rules and regulations of the Company (except to the extent that such policies, rules and regulations expressly conflict with the provisions of this Agreement);
(g)	any conduct which would materially impair or prevent the Executive from continuing as an officer or director of the Company under applicable corporate or securities laws, or the rules and policies of any stock exchange or securities market upon which the Company’s shares are listed from time to time; or
(h)	the Executive’s plea of guilty to or conviction of an offence punishable by imprisonment.

If the Company terminates this Agreement for cause under this Section 6.1, the Company shall not be obligated to make any further payments under this Agreement, except for the payment of any Base Salary due and owing pursuant to Section 4.1 at the time of termination and reasonable expenses due and owing pursuant to Section 4.5 at the time of the termination. If the Company terminates this Agreement for cause under this Section 6.1, all vested incentive stock options will remain exercisable for a period of one month from the date of termination and all unvested incentive stock options will immediately terminate.

Resignation by Executive

6.2 The Executive shall give the Company not less than three (3) months notice of the resignation of the Executive’s employment hereunder. The Company may waive or abridge any notice period specified in such notice, in its absolute discretion. If the Executive resigns the Executive’s employment and terminates this Agreement for any reason, the Company shall have no further obligations or responsibilities hereunder to the Executive, and nothing herein

- 10 -

contained shall be construed to limit or restrict in any way the Company’s ability to pursue any remedies it may have at law or equity pursuant to the provisions of this Agreement. Notwithstanding the foregoing, all of the Executive’s vested incentive stock options will remain exercisable for a period of three (3) months from the date that the Executive’s employment terminates.

Termination Without Cause

6.3 The Company may terminate this Agreement at any time without cause or upon the Disability of the Executive. Should the Company terminate the Executive without cause during the first three years of employment; the Company will provide the Executive with a lump sum payment of an amount equal to twelve (12) monthly payments of the Executive’s Base Salary. Should the Company terminate the executive without cause during the fourth or fifth years of employment; the Company will provide the Executive with a lump sum payment of an amount equal to six (6) monthly payments of the Executive’s Base Salary. Should this occur after the fifth anniversary of the Executive’s employment date, the Company will provide the Executive with a lump sum payment of an amount equal to three (3) monthly payments of the Executive’s Base Salary. The payments provided for in this Section 6.3 shall be inclusive of the Executive’s entitlement to notice and severance pay at common law or by statute. Notwithstanding the foregoing, those of the Executive’s unvested stock options that would have vested within one (1) year from the date that the Executive’s employment terminates will be deemed to have vested, and all of the Executive’s unexercised stock options that have vested or are deemed to have vested will remain exercisable for a period of six (6) months from the date that the Executive’s employment terminates.

Termination of Employment after Change of Control

6.4 If a Change of Control occurs and this Agreement is terminated by the Company within twelve (12) months of such Change of Control, the Executive shall be entitled to receive a lump sum payment in an amount equal to twelve (12) monthly payments of the Executive’s Base Salary. The Company shall not be obligated to make any further payments under this Agreement, except for the payment of any reasonable expenses due and owing pursuant to Section 4.7. Notwithstanding the foregoing, all of the Executive’s unexercised stock options, vested or unvested, will be deemed to have vested and will remain exercisable for a period of six (6) months from the date that the Executive’s employment terminates.

Benefits on Termination

6.5 If this Agreement is terminated in accordance with Section 6.3 or Section 6.4, the benefits provided to the Executive pursuant to Section 4.2 shall continue for the amount of months of Base Salary the Executive is entitled to following the termination of this Agreement pursuant to this Part or until the Executive commences alternative employment, whichever occurs first.

Results of Termination

6.6 Upon termination or resignation of the Executive’s employment pursuant to this Part, this Agreement and the employment of the Executive shall be wholly terminated with the exception of the clauses specifically contemplated to continue in full force and effect beyond the termination of this Agreement, including those set out in Part 5.

- 11 -

PART 7
REPRESENTATIONS AND WARRANTIES

No Breach

7.1 The Executive represents and warrants to the Company that the execution and performance of this Agreement will not result in or constitute a default, breach, violation or event that, with notice or lapse of time or both, would be a default, breach or violation of any understanding, agreement or commitment, written or oral, express or implied, to which the Executive is currently a party or by which the Executive or the Executive’s property is currently bound.

Indemnity

7.2 The Executive shall defend, indemnify and hold the Company harmless from any liability, expense or claim (including solicitor’s fees incurred in respect thereof) by any person in any way arising out of, relating to, or in connection with any incorrectness or breach of the representations and warranties in Section 7.1.

Right of Termination

7.3 The Executive acknowledges that a breach of this Part by the Executive shall entitle the Company to terminate the Executive’s employment and this Agreement for cause.

Company Indemnity and Insurance

7.4 The Company shall defend, indemnify and hold the Executive harmless from any liability, expense or claim (including solicitor’s fees incurred in respect thereof) in any way arising out of, relating to, or in connection with his performance of services for the Company, to the fullest extent permitted by applicable law. The Company shall make reasonable efforts to ensure that the Executive shall fully participate as a covered insured under the Company’s directors’ and officers’ liability insurance policy with respect to the Period of Active Employment.

PART 8
MISCELLANEOUS PROVISIONS

Rights and Waivers

8.1 All rights and remedies of the parties are separate and cumulative, and none of them, whether exercised or not, shall be deemed to be to the exclusion of any other rights or remedies or shall be deemed to limit or prejudice any other legal or equitable rights or remedies which either of the parties may have.

Waiver

8.2 Any purported waiver of any default, breach or non-compliance under this Agreement is not effective unless in writing and signed by the party to be bound by the waiver. No waiver shall be inferred from or implied by any failure to act or delay in acting by a party in respect of any default, breach or non-observance or by anything done or omitted to be done by the other party. The waiver by a party of any default, breach or non-compliance under this Agreement shall not operate as a waiver of that party’s rights under this Agreement in respect of

- 12 -

any continuing or subsequent default, breach or non-observance (whether of the same or any other nature).

Severability

8.3 Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent of the prohibition or unenforceability and shall be severed from the balance of this Agreement, all without affecting the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction.

Notices

8.4 Any notice, certificate, consent, determination or other communication required or permitted to be given or made under this Agreement shall be in writing and shall be effectively given and made if (i) delivered personally, (ii) sent by prepaid same day courier service, or (iii) sent by fax or other similar means of electronic communication, in each case to the applicable address set out below:

if to the Company, to:

Suite 654
999 Canada Place
Vancouver, British Columbia
V6C 3E1

Attention: Vice President & Corporate Secretary
Fax: (604) 682-2060
E-M: beverlyb@ivancorp.com

if to the Executive, to:

Michael Silverman
1327 Ashland Street
Houston, Texas 77008

Fax: l
E-M: Michael_silverman@sbcglobal.net

Any such communication so given or made shall be deemed to have been given or made and to have been received on the day of delivery if delivered personally or by courier service, or on the day of faxing or sending by other means of recorded electronic communication, provided that the day in either event is a Business Day and the communication is so delivered, faxed or sent prior to 4:30 p.m. (local time at destination) on that day. Otherwise, the communication shall be deemed to have been given and made and to have been received on the next following Business Day. Any such communication given or made in any other manner shall be deemed to have been given or made and to have been received only upon actual receipt. Any party may from time to time change its address under this Section 8.4 by notice to the other party given in the manner provided by this Section 8.4.

- 13 -

Time of Essence

8.5 Time shall be of the essence of this Agreement in all respects.

Successors and Assigns

8.6 This Agreement shall enure to the benefit of, and be binding on, the parties and their respective heirs, administrators, executors, successors and permitted assigns. The Company shall have the right to assign this Agreement to any successor (whether direct or indirect, by purchase, amalgamation, arrangement, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company provided only that the Company must first require the successor to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. The Executive by the Executive’s signature hereto expressly consents to such assignment. The Executive shall not assign or transfer, whether absolutely, by way of security or otherwise, all or any part of the Executive’s rights or obligations under this Agreement without the prior consent of the Company, which may be arbitrarily withheld.

Amendment

8.7 No amendment of this Agreement will be effective unless made in writing and signed by the parties.

Entire Agreement

8.8 This Agreement constitutes the entire agreement between the parties pertaining to the subject matter of this Agreement and supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written. There are no conditions, warranties, representations or other agreements between the parties in connection with the subject matter of this Agreement (whether oral or written, express or implied, statutory or otherwise) except as specifically set out in this Agreement.

Governing Law

8.9 This Agreement shall be governed by and construed in accordance with the laws of the State of California, without regard to rules that would refer the matter to the laws of another jurisdiction. .

Headings

8.10 The division of this Agreement into Parts and Sections and the insertion of headings are for convenience or reference only and shall not affect the construction or interpretation of this Agreement.

Full Satisfaction

8.11 The terms set out in this Agreement, provided that such terms are satisfied by the Company, are in lieu of (and not in addition to) and in full satisfaction of any and all other claims or entitlements which the Executive has or may have upon the termination of the Executive’s employment pursuant to Part 6 and the compliance by the Company with these terms will affect a full and complete release of the Company and its parent and their respective affiliates, associates, subsidiaries and related companies from any and all claims which the Executive may have for whatever reason or cause in connection with the Executive’s

- 14 -

employment and the termination of it, other than those obligations specifically set out in this Agreement. In agreeing to the terms set out in this Agreement, the Executive specifically agrees to execute a formal release document to that effect and will deliver upon request appropriate resignations from all offices and positions with the Company and its parent and their respective affiliated, associated subsidiary or affiliated companies if, as and when requested by the Company upon termination of the Executive’s employment within the circumstances contemplated by this Agreement.

Executive Acknowledgements

8.12 The Executive acknowledges that:

(a)	the Executive has had sufficient time to review this Agreement thoroughly;
(b)	the Executive has read and understands the terms of this Agreement and the obligations hereunder;
(c)	the Executive has been given an opportunity to obtain independent legal advice concerning the interpretation and effect of this Agreement; and
(d)	the Executive has received a fully executed counterpart copy of this Agreement.

          IN WITNESS WHEREOF the parties have executed counterpart copies of this Agreement the date first set forth above.

	MICHAEL SILVERMAN
Hope M. Basralian Witness: Hope M. Basralian	Michael A. Silverman

	IVANHOE ENERGY INC.
Per:	Joseph Gasca Name: Joseph Gasca
	Title: President & Chief Executive Officer

EX-14.1

Exhibit 14.1

IVANHOE ENERGY INC.
CODE OF BUSINESS CONDUCT AND ETHICS

Introduction

This code of conduct (the “Code”) applies to everyone at Ivanhoe Energy Inc. (the “Company”), including employees, officers and board members regardless of their position in our organization, at all times and everywhere we do business. References in this Code to the Company mean the Company and any of its subsidiaries.

This Code reflects our commitment to a culture of honesty, integrity and accountability and outlines the basic principles and policies with which everyone at the Company is expected to comply.

We require the highest standards of professional and ethical conduct from our employees, officers and directors. Our reputation for honesty and integrity is important for the success of our business. No one at the Company will be permitted to achieve results through violations of laws or regulations, or through unscrupulous dealings.

We aim for our business practices to be compatible with, and sensitive to, the economic and social priorities of each location in which we operate. Although customs vary from country to country and standards of ethics may vary in different business environments, honesty and integrity must always characterize our business activity.

In addition to following this Code, you are expected to seek guidance in any case where there is a question about compliance with both the letter and spirit of our policies and applicable laws. This Code is not a complete code of conduct. It sets forth general principles and does not supersede the specific policies and procedures that are in effect, such as the Company’s Corporate Disclosure, Confidentiality and Securities Trading Policy or other policies that are in effect from time to time.

This Code will be reviewed periodically by the Board of Directors of the Company and supplemented as required from time to time.

SPECIFICS OF CODE

I. Compliance with Laws, Rules and Regulations

We have a responsibility to monitor all legal boundaries and comply with all applicable laws and regulations in all of our activities worldwide. Compliance with both the letter and spirit of all laws, rules and regulations applicable to our business is important for our reputation and continued success. We must respect and obey the laws of the cities, states and countries in which we operate and avoid even the appearance of impropriety.

2

Individuals who fail to comply with this Code and applicable laws will be subject to disciplinary measures, up to and including discharge from the Company.

II. Conflicts of Interest

A conflict of interest occurs when an individual’s private interest interferes, or appears to interfere, in any way with the interests of the Company. A conflict of interest could arise where:

• an individual’s personal interests interfere, or appear to interfere, in any way, with the interests of the Company;

• an individual takes action for his or her direct or indirect benefit or the direct or indirect benefit of a third party that is inconsistent with the interests of the Company; or

• an individual, or a member of his or her family, receives improper personal benefits as a result of his or her position in the Company.

Activities that could give rise to conflicts of interest are prohibited unless specifically approved in advance by the Board of Directors. Where a conflict involves a Board member (i.e. where a Board member has an interest in a material contract or material transaction involving the Company), the Board member involved will be required to disclose his or her interest to the Board and refrain from voting at the board meeting of the Company considering such contract or transaction in accordance with applicable law.

It is not always easy to determine whether a conflict of interest exists, so any potential conflicts of interest should be reported immediately to the Chief Executive Officer, Vice President & Corporate Secretary or the Ethics & Compliance Officer. For unresolved potential conflicts involving any employee or where a member of senior management or a board member is involved in a potential conflict, the issue should be referred to the Board of Directors (assisted by the Nominating and Corporate Governance Committee and legal counsel as necessary).

III. Corporate Opportunities

Directors, officers and employees owe a duty to the Company to advance its legitimate interests when the opportunity to do so arises and are prohibited from taking, for themselves personally, opportunities that arise through the use of corporate property, information or position and from using corporate property, information or position for personal gain, except where the Board has, after receiving the necessary information concerning such opportunity and receiving advice of legal counsel if required, relinquished its interest in an opportunity in compliance with applicable corporate law. A director interested in a corporate opportunity being considered by the Board shall refrain from voting at the board meeting considering such opportunity.

3

If an employee has any doubt as to the whether any activity they are contemplating violates this requirement, they must refer the issue to the Chief Executive Officer, Vice President & Corporate Secretary or the Ethics & Compliance Officer.

IV. Confidentiality

Directors, officers and employees of the Company must maintain the confidentiality of information entrusted to them by the Company or that otherwise comes into their possession in the course of their employment, except when disclosure is authorized or legally mandated.

The obligation to preserve confidential information continues even after you leave the Company. The Company’s Corporate Disclosure, Confidentiality and Securities Trading Policy sets forth certain specific Policy obligations in respect of confidentiality.

Confidential information includes all non-public information that may be of use to competitors or harmful to the Company or its customers, if disclosed. It also includes information that suppliers and customers have entrusted to us.

V. Protection and Proper Use of Company Assets

We should all endeavor to protect the Company’s assets and ensure their efficient use. Theft, carelessness and waste have a direct impact on the Company’s profitability. Any suspected incidents of fraud or theft should be immediately reported to a supervisor or a member of the Company’s management for investigation.

Company assets, such as funds, products or computers, may only be used for legitimate business purposes or other purposes approved by management. Company assets may never be used for illegal purposes.

The obligation to protect Company assets includes proprietary information. Proprietary information includes any information that is not generally known to the public or would be helpful to our competitors. Examples of proprietary information are intellectual property, business and marketing plans and employee information. The obligation to preserve proprietary information continues even after you leave the Company.

VI. Insider Trading

Insider trading is unethical and illegal. We are not allowed to trade in securities of any company while in possession of material non-public information regarding that company. This includes the Company or any other company. It is also illegal to “tip” or pass on inside information to any other person who might make an investment decision based on that information or pass the information on further. The Company’s Corporate Disclosure, Confidentiality and Securities Trading Policy, sets forth your obligations in respect of trading in the Company’s securities.

4

VII. Fair Dealing

We should all endeavor to deal fairly with the Company’s customers, suppliers, competitors and employees. No one at the Company should take unfair advantage of anyone through illegal conduct, concealment, manipulation, abuse of privileged information, misrepresentation of material facts or any other unfair-dealing practice.

VIII. Compliance with Environmental Laws

The Company is sensitive to the environmental, health and safety consequences of its operations. Accordingly, the Company’s policy is to comply with all applicable environmental laws and regulations within all jurisdictions in which it operates. If any employee has any doubt as to the applicability or meaning of a particular environmental, health or safety regulation, he or she should discuss the matter with his or her supervisor or with the Chief Executive Officer, Vice President & Corporate Secretary or the Ethics & Compliance Officer.

IX. Equal Opportunity

We value the diversity of our employees and are committed to providing equal opportunity in all aspects of employment.

X. Safety and Health

We are all responsible for maintaining a safe workplace by following safety and health rules and practices. The Company is committed to keeping its workplaces free from hazards. Please report any accidents, injuries, unsafe equipment, practices or conditions immediately to a supervisor or other designated person. In order to protect the safety of all employees, employees must report to work free from the influence of any substance that could prevent them from conducting work activities safely and effectively.

XI. Financial and Business Disclosure and Accuracy of Company Records and Reporting

Honest and accurate recording and reporting of information is critical to our ability to make responsible business decisions and to meet our reporting obligations to our stakeholders. This includes both the Company’s financial reporting and ongoing disclosure requirements under applicable securities and stock exchange requirements. The Company’s accounting and other records are relied upon to produce reports for the Company’s management, shareholders, creditors, governmental agencies and others.

Full, fair, accurate, timely and understandable disclosure in the reports and other documents that we file with, or submit to, securities regulators and stock exchanges and in our other public communications is critical for us to maintain our good reputation, to comply with our obligations under the securities laws and to meet the expectations of our shareholders and other members of the investment community. In preparing such reports and documents and other public communications, the following guidelines should be adhered to:

5

• all accounting records, and the reports produced from such records, must be in accordance with all applicable laws;

• all accounting records must fairly and accurately reflect the transactions or occurrences to which they relate;

• all accounting records must fairly and accurately reflect in reasonable detail the Company’s assets, liabilities, revenues and expenses;

• no accounting records should contain any false or intentionally misleading entries;

• no transactions should be intentionally misclassified as to accounts, departments or accounting periods;

• all transactions must be supported by accurate documentation in reasonable detail and recorded in the proper account and in the proper accounting period;

• no information should be concealed from the internal auditors or the independent auditors; and

• compliance with the Company’s system of internal controls is required.

If any employee, officer or director of the Company has concerns or complaints regarding accounting or auditing issues, he or she is encouraged to submit those concerns to a member of the Audit Committee of the Board or through the Company’s confidential whistleblower mechanism.

Business records and communications often become public through legal or regulatory investigations or the media. We should avoid exaggeration, derogatory remarks, legal conclusions or inappropriate characterizations of people and companies. This applies to communications of all kinds, including e-mail and informal notes or interoffice memos. Records should be retained and destroyed in accordance with the Company’s records retention policy.

XII. Use of E-Mail and Internet Services

E-Mail systems and Internet services are provided to help us do work. Incidental and occasional personal use is permitted, but never for personal gain or any improper purpose. You should not access, send or download any information that could be insulting or offensive to another person, such as sexually explicit messages, ethnic or racial slurs, or other messages that could be viewed as harassment.

Your messages (including voice mail) and computer information are considered the property of the Company and you should not have any expectation of privacy. Unless prohibited by law, the Company reserves the right to access and disclose this information as necessary for business purposes. Use good judgment, and do not access, send messages or store any information that you would not want to be seen or heard by other individuals.

6

Violation of these policies may result in disciplinary actions up to and including discharge from the Company.

XIII. Gifts and Entertainment

Business gifts and entertainment are customary courtesies designed to build goodwill among business partners. These courtesies include such things as meals and beverages, tickets to sporting or cultural events, discounts not available to the general public, travel, accommodation and other merchandise or services. In some cultures they play an important role in business relationships. However, a problem may arise when such courtesies compromise, or appear to compromise, our ability to make objective and fair business decisions. The same rules apply to employees offering gifts and entertainment to our business associates.

Offering or receiving any gift, gratuity or entertainment that might be perceived to unfairly influence a business relationship should be avoided.

The value of gifts should be nominal, both with respect to frequency and amount. Gifts that are repetitive (no matter how small) may be perceived as an attempt to create an obligation to the giver and are therefore inappropriate. Likewise, business entertainment should be moderately scaled and intended only to facilitate business goals. If you are having difficulty determining whether a specific gift or entertainment item lies within the bounds of acceptable business practice, consult your supervisor and ask yourself whether or not the gift or item is legal, business related, moderate and reasonable, whether or not public disclosure would embarrass the Company, and whether or not there is any pressure to reciprocate or grant special favors.

XIV. Payments to Domestic and Foreign Officials

Employees and officers of the Company must comply with all applicable laws prohibiting improper payments to domestic and foreign officials, including the Corruption of Foreign Public Officials Act (Canada) and the Foreign Corrupt Practices Act of 1997 (United States) (collectively, the “Acts”).

While the Acts are not identical, the Acts generally make it illegal for a person, in order to obtain or retain business, directly or indirectly, to offer or agree to give or offer loans, rewards, payments or benefits of any kind to foreign public officials or to any person for the benefit of public officials. Foreign public officials include persons holding a legislative, administrative or judicial position of a foreign state, persons who perform public duties or functions for a foreign state (such as persons employed by board, commissions or government corporations), officials and agents of international organizations, foreign political parties and candidates for office.

Although “facilitated payments” or certain other transactions may be exempted or not illegal under applicable law, the Company’s policy is to avoid them. If any employee or officer has any questions about the application of this policy to any particular situation, please report to the Chief Executive Officer, Vice President & Corporate Secretary or the

7

Ethics & Compliance Officer who, with the advice of counsel as necessary, will determine acceptability from both a legal and a corporate policy point of view, and any appropriate accounting treatment and disclosures which are applicable to the particular situation.

Violation of either of the Acts is a criminal offence, subjecting the Company to substantial fines and penalties and any officer, director or employee acting on behalf of the Company to imprisonment and fines. Violation of this policy may result in disciplinary actions up to and including discharge from the Company.

XV. Reporting of any Illegal or Unethical behavior

We have a strong commitment to conduct our business in a lawful and ethical manner. Employees are encouraged to report violations of laws, rules, regulations or this Code to their supervisor, to the Chief Executive Officer, the Ethics & Compliance Officer or through the confidential whistleblower mechanism. We prohibit retaliatory action against any employee who, in good faith, reports a possible violation. It is unacceptable to file a report knowing it to be false.

XVI. Amendment, Modification and Waivers of the Code of Business Conduct and Ethics

The Code may be amended or modified by the Board of Directors and waivers may be granted by the Nominating and Corporate Governance Committee or a vote of the independent directors of the Board, subject to disclosure and other provisions of applicable securities legislation and stock exchange requirements.

XVII. Compliance Procedures

This Code cannot, and is not intended to, address all of the situations you may encounter. There will be occasions where you are confronted by circumstances not covered by policy or procedure and where you must make a judgment as to the appropriate course of action. In those circumstances, or if you have any questions concerning your obligations under this Code, we encourage you to use your common sense, and to contact your supervisor or a member of senior management for guidance. Senior management or directors are encouraged to consult with the Chief Executive Officer, Vice President & Corporate Secretary, Ethics & Compliance Officer or such other senior officer who may be designated by the Corporation from time to time.

If you fail to comply with this Code of Ethics or applicable laws, rules or regulations you will be subject to disciplinary measures, up to and including discharge from the Company. Violations of this Code may also constitute violations of law and may result in civil or criminal penalties for you, your supervisors and/or the Company.

You are expected to report all violations of this Code of Ethics promptly by one of the following methods: to your supervisor, the Chief Executive Officer, the Vice President & Corporate Secretary or the Ethics & Compliance Officer or confidentially through the

8

Company’s confidential whistleblowing mechanism. You may choose to remain anonymous in reporting any possible violation of this Code and all reports will remain confidential.

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF REGISTRANT

Name of Subsidiary (Jurisdiction)	Ownership
IVANHOE ENERGY INTERNATIONAL INC. (B.V.I.)	100%
IVANHOE ENERGY HOLDINGS INC. (NEVADA)	100%
Ivanhoe Energy (USA) Inc. (Nevada)	100% (indirect)
Ivanhoe Energy Petroleum Projects Inc. (Nevada)	100% (indirect)
Ivanhoe Energy HTL Inc (Nevada)	100% (indirect)
Ivanhoe HTL Petroleum Ltd (Nevada)	100% (indirect)
Ivanhoe Energy HTL (USA) Inc. (Nevada & California)	100% (indirect)
IVANHOE ENERGY INTERNATIONAL VENTURES INC. (BVI)	100%
Ivanhoe Energy (Middle East) Inc. (BVI)	100% (indirect)
Energy Resources Development Japan Corporation (Japan)	100% (indirect)
Ivanhoe Energy (Latin America) Inc. (BVI)	100% (indirect)
SUNWING HOLDING CORPORATION (Barbados)	100%
Sunwing Energy Ltd. (Bermuda)	100% (indirect
Sunwing Zitong Energy Ltd. (BVI)	100% (indirect)
Sunwing Management Limited (Hong Kong)	100% (indirect)
Pan-China Resources Ltd. (BVI)	100% (indirect)
Dagang Resources Ltd. (BVI)	100% (indirect)
China Ivanhoe Energy Ltd. (BVI)	100% (indirect)
IVANHOE ENERGY ADVISORY INC. (BVI)	100%
IVANHOE ENERGY ECUADOR INC. (BC)	100%

EX-23.1

Exhibit 23.1

	GLJ	Petroleum   Consulants	Principal Officers
			Harry Jung, P. Eng.
			President, C.E.O.
			Dana B. Laustsen, P. Eng.
			Executive V.P., C.O.O.
			Keith M. Braaten, P. Eng.
			Executive V.P.
			Officers / Vice Presidents:
			Terry L. Aarsby, P. Eng.
			Jodi L. Anhorn, P. Eng.
			Neil I. Dell, P. Eng.
			David G. Harris, P. Geol.
			Myron J. Hladyshevsky, P. Eng.
			Bryan M. Joa, P. Eng.
			John H. Stilling, P. Eng.
			Douglas R. Sutton, P. Eng.
			James H. Willmon, P. Eng.

LETTER OF CONSENT

TO: Ivanhoe Energy Inc.

Dear Sir:

We hereby consent to the inclusion of the Form 10-K of Ivanhoe Energy Inc. for 2007, of our report dated February 5, 2008 on oil and gas reserves of Ivanhoe Energy Inc. and its subsidiaries.

Yours very truly,

GLJ PETROLEUM CONSULTANTS LTD.

“ORIGINALLY SIGNED BY”

Bryan M. Joa, P. Eng.

Vice-President

Dated: March 5, 2008
Calgary, Alberta
CANADA

EX-23.2

Exhibit 23.2

CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS

We hereby consent to the inclusion in the Form 10-K of Ivanhoe Energy, Inc. for 2007, of our report dated January 31, 2008, on oil and gas reserves of Ivanhoe Energy, Inc. and its subsidiaries.

NETHERLAND, SEWELL & ASSOCIATES, INC.
By:	/s/ Danny D. Simmons
	Danny D. Simmons, P.E.
	President and Chief Operating Officer

Houston, Texas
March 12, 2008

Please be advised that the digital document you are viewing is provided by Netherland, Sewell & Associates Inc. (NSAI) as a convenience to our clients. The
digital document is intended to be substantively the same as the original signed document maintained by NSAI. The digital document is subject to the
parameters, limitions, and conditions stated in the original document. In the event of any differences between the digital document and the original
document, the original document shall control and supersede the digital document.

EX-23.3

Exhibit 23.3

CONSENT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS

We consent to the incorporation by reference in Registration Statements No. 333-113054 and 333-143029 on Form S-8 of our reports dated February 11, 2008 relating to the financial statements of Ivanhoe Energy Inc. (which audit report expresses an unqualified opinion on the financial statements and includes a separate report titled Comments by Independent Registered Chartered Accountants on Canada — United States of America Reporting Differences referring to conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern and changes in accounting principles that have a material effect on the comparability of the Company’s financial statements) and the effectiveness of internal control over financial reporting, appearing in this Annual Report on Form 10-K of Ivanhoe Energy Inc. for the year ended December 31, 2007.

(signed) “Deloitte & Touche LLP”

Independent Registered Chartered Accountants
Calgary, Canada
March 17, 2008

EX-31.1

EXHIBIT 31.1

CERTIFICATION BY THE CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph I. Gasca, certify that:

1. I have reviewed this Annual Report on Form 10-K of Ivanhoe Energy Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d — 15(f)) for the registrant and have:

a.) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a.) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

* * *

By:  /s/  Joseph I. Gasca

Joseph I. Gasca

Chief Executive Officer

Date: March 5, 2008

124

EX-31.2

EXHIBIT 31.2

CERTIFICATION BY THE CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, W. Gordon Lancaster, certify that:

1. I have reviewed this Annual Report on Form 10-K of Ivanhoe Energy Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a — 15(f) and 15d — 15(f)) for the registrant and have:

a.) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c.) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d.) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors:

a.) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b.) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

* * *

By:  /s/  W. Gordon Lancaster

W. Gordon Lancaster

Chief Financial Officer

Date: March 5, 2008

125

EX-32.1

EXHIBIT 32.1

CERTIFICATION BY THE
CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002

I, Joseph I. Gasca, Chief Executive Officer, of Ivanhoe Energy Inc, hereby certify that:

(a) our periodic report on Form 10-K for the year ended December 31, 2007 (the “Form 10-K”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and related interpretations; and

(b) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and our results of operations.

* * *

By:  /s/  Joseph I. Gasca

Joseph I. Gasca

Chief Executive Officer

March 5, 2008

126

EX-32.2

EXHIBIT 32.2

CERTIFICATION BY THE
CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002

I, W. Gordon Lancaster, Chief Financial Officer, of Ivanhoe Energy Inc., hereby certify that:

(a) our periodic report on Form 10-K for the year ended December 31, 2007 (the “Form 10-K”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended, and related interpretations; and

(b) the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and our results of operations.

* * *

By:  /s/  W. Gordon Lancaster

W. Gordon Lancaster

Chief Financial Officer

Date: March 5, 2008

127