CALGARY, Dec. 15 /CNW/ - Connacher Oil and Gas Limited (CLL - TSX) announced today that its cumulative bitumen production at Great Divide Pod One ("Pod One"), its first oil sands project located in northeastern Alberta, has surpassed the two million barrel milestone. This significant accomplishment has been achieved since March 1, 2008 when we determined our Pod One operation to be commercial and due to the successful and effective management and operation by both Connacher's head office and field staff of the facility and related 15 well pairs. Connacher's production ramp-up has proceeded very favorably throughout 2008 and associated unit operating costs have also been declining as higher consistent overall and per well production levels are achieved. All 15 of the company's steam-assisted gravity drainage ("SAGD") well pairs are now on stream and recent production has exceeded 9,000 barrels per day or over 90% of design capacity with increasing consistency. We had targeted to achieve 10,000 bbl/d of bitumen production by year end 2008 and in the absence of current market conditions anticipate this would have occurred.

Also, with the improved productivity and even with an increase in actual steam injection into the reservoir to effectively form and sustain the steam chamber, in a relatively short period of time the company has achieved a cumulative steam/oil ratio ("SOR") of less than four (4), a current project SOR of less than three (3) with SOR's at better wells in the project consistently closer to the two (2) level, which reflects not only the quality of the reservoir which is being exploited at Great Divide but also the effectiveness of the overall management of the project. Finally, it should be noted that better wells at Great Divide have achieved stable per well productivity in excess of 1,250 bbl/d of production.

Despite these results, Connacher advises that it has regrettably reached a decision to temporarily curtail production at Great Divide Pod One, initially to levels in the general 5,000 bbl/d range, due the rapid and recent deterioration in bitumen markets. This decision was not reached lightly, but has been taken in response to the emergence of lower crude oil prices, the seasonal widening of heavy oil differentials (both absolutely and as a percentage of the selling price for heavy oil) and the emergence of certain bottlenecks and other market factors which are adversely affecting bitumen pricing and field netbacks. The combination of all these factors has rendered production uneconomic in the short run, despite the aforementioned lowering of unit operating costs and increase in plant efficiency.

We do not expect this set of circumstances to persist for a protracted period of time. However, in the intervening period, which is currently of indeterminate length and until conditions are assessed to have improved sufficiently to restore operations to capacity, we intend to curtail our level of steam generation and injection and bitumen production and maintain operations at what we consider to be an appropriately reduced level. In particular, we will ensure maintenance of adequate steam injection, thereby avoiding the risk of any undue or adverse impact on prospective reservoir and well performance. The continuation of Pod One operations at a more modest level will also enable us to monitor and assess changes in market conditions as we will continue to have bitumen and dilbit sales. This would also allow us to react quickly to signals in the marketplace that bitumen production and sales can again provide adequate economic returns, following which we could restore operations to preferred levels. As required, normal maintenance capital programs and related activities at Pod One will be undertaken and completed.

Despite the much lower capital intensity for SAGD operations in the oil sands as compared to large scale integrated mining operations, due to this recent deterioration in bitumen markets and due to increasing lack of visibility for prospective economic conditions and crude oil markets, Connacher has also decided to temporarily suspend the construction program at Algar, its second 10,000 bbl/d SAGD project, which is situated approximately six miles east of Pod One. It will be recalled that following an approximate 17 month regulatory review period, Connacher recently received the necessary approvals to proceed with the Algar project. Over the past several months, we have been building long lead order equipment in quality controlled fabrication shops. This work will continue until completion. We will store these items until they are needed on location, once we reinstate our construction program. We have already completed the construction of the access road and have prepared the Algar plant site with an efficient, timely and cost effective civil program; this was accomplished since the approval was granted on November 6, 2008. We have not yet prepared the drilling pads for the proposed 15 SAGD well pairs which were planned for the project, as we have been awaiting certain regulatory assurances before this work can be done.

Through December 10, 2008, we have incurred approximately $110 million of the $345 million amount budgeted for Algar, before contingencies. Of this amount, $77 million has been paid. Additionally, we have commitments for approximately $40 million of costs primarily to complete the building of the long lead order equipment items and we will incur a further $14 million for the cost to construct a fuel transfer line between Pod One and the Algar site. This element of our construction program will proceed despite our temporary suspension of other work to avoid the possibility of prolonged delays for this critical work, which if not completed now in turn would eventually adversely impact the project's overall timeline.

As mentioned, we have reached the decision to temporarily suspend further Algar field work at this time due to the lack of apparent visibility of what might be the prevailing economic conditions in existence around the end of 2009, which was the target date for the startup of operations for Algar. Our judgment is that it is exceedingly risky to deplete our cash balances, utilize our credit facilities and reduce our liquidity in the face of prevailing conditions with uncertainty about the economic outlook and future commodity prices. There will be some incremental costs arising from the decision related to contracts with service providers, but every immediate effort will be made to rearrange the timetable and cost of access to these suppliers. We view the risk of losing the availability of key service providers to be moderate at this stage, as we have an excellent business relationship with these individuals and firms. We also view the risk of prospective cost escalation as a result of this decision to be low. Based on our best judgment at this time, we currently estimate that there would be an approximate cost of $18 million associated with a six month delay to the Algar project, which estimated amount is exclusive of financial charges related to continuing interest payable on our long-term indebtedness. Accordingly, if the delay is of a six-month duration, the revised capital requirements for Algar would be $363 million, before adjustment to capitalized items and exclusive of contingencies and incremental interest charges incurred due to the delay.

Connacher wishes to advise that it currently holds restricted and unrestricted cash balances of approximately $300 million and, including available credit facilities, has approximately $500 million of available liquidity to meet its anticipated December 2008 and reduced fiscal 2009 capital budget and debt servicing (interest) requirements. The suspension of expenditures on the Algar project until there is more clarity and certainty to the economics of the project will allow Connacher to withstand a protracted period of economic weakness in a period of lower and uncertain oil prices. The company will retain the funds to complete Algar at a later date, while maintaining corporate financial strength and a high level of liquidity during an indeterminate period, anticipated to be characterized by uncertain and difficult economic conditions.

All of Connacher's credit facilities and indebtedness are long-term, with no principal repayments required until 2012 at the earliest. Additionally, the company anticipates positive net operating income from its conventional crude oil and natural gas operations and from its refinery in Great Falls, Montana during this period. The company is compliant with all of its financial covenants and as has been and is its custom, anticipates remaining so in the foreseeable future. We will continue to monitor and reassess all of our proposed capital projects throughout 2009, in light of the deterioration in industry conditions and exert every effort to preserve our assets, our financial strength and the integrity of our staff. Once there is clear evidence of a reduction in the unprecedented volatility and deterioration of the operating and financial environment, we envisage restoring normal operations.

While the decisions taken are regrettable and obviously not our preference as an operating oil company, they are considered to be financially responsible and appropriate until there is evidence of a recovery in the price of crude oil and reduction of heavy oil differentials. We anticipate this will emerge from the probability of an excess of supply destruction, with production cutbacks arising from very low crude oil prices, over worldwide demand destruction, resulting from the current economic downturn, ultimately leading to sharply higher crude oil prices.

We also anticipate that narrowing of current wide heavy crude oil differentials will accelerate as market conditions improve in the Spring of 2009. Factors we anticipate will contribute to this narrowing include the normal seasonal upturn in demand for heavy oil, the impact of undertaking the announced government-sponsored infrastructure programs (which should accelerate the demand for heavier crude oil) and also from the overall recovery of North American and worldwide economies, arising from the monetary stimuli which have been applied by applicable banking authorities.

Our decision to resume activity at Algar will be taken after an appropriate assessment of the critical factors which influence our SAGD oil sands business, which by its nature is long-term and capital intensive. Our focus now is on maintaining our financial strength, integrity and liquidity, while remaining positioned to realize the significant long term value of our assets with the timely deployment of our available cash and efficient use of our established credit in a more buoyant environment. We have not lost sight of our long term goal of achieving a target output of 50,000 bbl/d of bitumen by 2015, which we intend to pursue once economic and industry conditions improve.

This press release will be the subject of a Conference Call at 9:30 a.m. MST on December 15, 2008. To listen to or participate in the live conference call please dial either (416) 644.3416 or (800) 595.8550. A replay of the event will be available from Monday, December 15, 2008 at 11:30 a.m. MST until 23:59 (11:59 p.m.) MST on Wednesday, December 17, 2008. To listen to the replay please dial either (416) 640-1917 or Toll Free at (877) 289-8525 and enter the passcode 21292399 followed by the number sign.

Connacher Oil and Gas Limited is a Calgary-based bitumen, crude oil and natural gas company. It is primarily an oil sands company, with operations at its 10,000 bbl/d Great Divide Pod One SAGD plant in northeastern Alberta and with plans to construct its second similar plant at Algar. It owns conventional Canadian production and reserves and Connacher also owns a 9,500 bbl/d heavy oil refinery in Great Falls, Montana and a 24 percent equity stake in Petrolifera Petroleum Limited (PDP-TSX), a successful production and exploration company active in Argentina, Colombia and Peru in South America. Connacher's shares and convertible debentures are listed for trading on the Toronto Stock Exchange.

Forward Looking Information

This press release contains forward-looking information including the planned curtailment of production at Great Divide Pod One (including anticipated production levels during this curtailment), suspension of the current construction program at Algar, estimated costs of construction of Algar and incremental costs of suspending construction at Algar, future capital expenditures relating to maintenance and continuing Pod One and Algar activities, anticipated compliance with financial covenants relating to credit facilities and long term indebtedness, expectations regarding timing of and factors influencing the recovery of commodity prices and general economic conditions, the implications of reinstating production levels from curtailed levels in respect of Great Divide Pod One and resuming construction activities at Algar and future production goals. Forward looking information is based on management's expectations regarding future economic conditions, commodity prices and differentials, results of operation, production, future capital and other expenditures (including the amount, nature and sources of funding thereof), plans for and results of drilling activity, environmental matters, business prospects and opportunities. Forward-looking information involves significant known and unknown risks and uncertainties, which could cause actual results to differ materially from those anticipated. These risks include, but are not limited to: the risks associated with the oil and gas industry (e.g., operational risks in development, exploration and production; delays or changes in plans with respect to exploration or development projects or capital expenditures; the uncertainty of reserve and resource estimates; the uncertainty of estimates and projections relating to production, costs and expenses, and health, safety and environmental risks), the risk of commodity price and foreign exchange rate fluctuations, risks and uncertainties associated with securing and maintaining the necessary regulatory approvals and financing to proceed with the continued expansion of the Great Divide project. In addition, the current financial crisis has resulted in severe economic uncertainty and resulting illiquidity in capital markets which increases the risk that actual results will vary from forward looking expectations in this press release and these variations may be material. These and other risks and uncertainties are described in detail in Connacher's Annual Information Form for the year ended December 31, 2007, which is available at www.sedar.com. Although Connacher believes that the expectations in such forward-looking information are reasonable, there can be no assurance that such expectations shall prove to be correct. The forward-looking information included in this press release is expressly qualified in their entirety by this cautionary statement. The forward-looking information included in this press release is made as of the date hereof and Connacher assumes no obligation to update or revise any forward-looking information to reflect new events or circumstances, except as required by law.

For further information: Richard A. Gusella, President and Chief Executive Officer, Connacher Oil and Gas Limited; Or Grant D. Ukrainetz, Vice President, Corporate Development, Connacher Oil and Gas Limited, Phone: (403) 538-6201, Fax: (403) 538-6225, Email: Inquiries@Connacheroil.com, www.connacheroil.com