North Peace Energy Announces Operations Update and 2008 Financial Results



    TSX-V: NPE

    CALGARY, April 21 /CNW/ - North Peace Energy Corp. ("North Peace" or the
"Company") releases operating and financial results for the year ended
December 31, 2008.

    
    Fourth Quarter Operations and Financial Update:

    -   Working capital of $10.3 million and no debt as at December 31, 2008
    -   Capital expenditures of $8.4 million in the fourth quarter and
        $22.0 million for the year ended December 31, 2008

    Cyclic Steam Stimulation ("CSS") Pilot Project Construction Update:

    -   Construction of the facility is complete
    -   Total pilot facility costs are expected to be approximately
        $15 million
    -   Post pilot construction the Company has approximately $6 million of
        working capital

    CSS Pilot Project Operations Update:

    -   Steaming on the first well (L1) is complete and steaming of the
        second well (L2) has been initiated
    -   L1 is currently soaking and will be placed on flowback in early May
    -   Conversion to pumping is expected later during the month
        -  Production is expected to last several months and will be to be
           characterized with initial high water cuts which will decrease
           throughout the production period
        -  Production and oil sales are dependent on spring ground conditions
    -   For this first steam cycle of L1, injection was terminated at
        75,000 bbls (cold water equivalent), 60% of the initially targeted
        slug size
        -  This reduced slug size was determined by management as sufficient
           to generate representative production information and not result
           in any material changes to steam oil ratios
        -  The steam injection rates were limited by the regulated pressure
           limitation of 9,000 kPa
        -  To date, steam injection pressures and rates confirm the absence
           of thief zones

    Future Development

    -   During the first half of 2009, the Company is focusing on pilot
        operations
    -   The operational data garnered from the pilot will be used to develop
        steaming and operational strategies as well as to validate the well
        models specific to the Red Earth asset
        -  Injection and production data will be collected over additional
           cycles on both pilot wells to properly advance commercial
           development
    -   The Company is investigating the possibility of adding additional
        wells to the existing pilot facility
        -  The decision to drill these additional wells will be based on the
           remaining capacity of the pilot facilities, the economic returns
           from the wells and obtaining the required regulatory approvals
    -   Capital has also been allocated to advance the front-end engineering
        work and the regulatory approval process for a 3,000 bbl/d pilot
        expansion
        -  The 3,000 bbl/d expansion is considered to be a more viable option
           than a 10,000 bbl/d first phase commercial project in the current
           economic conditions. However, the 3,000 bbl/d option would still
           require improvements commodity prices
        -  Vista Projects Limited has been engaged to advance engineering
           work on a 3,000 bbl/d pilot expansion

    An updated corporation presentation is available on the Company's website.
http://www.northpec.com/investor/event_presentations.html

    Louis Dufresne, President of North Peace, commented "In the current market
conditions, North Peace has balanced the need to preserve financial liquidity
with the execution of significant development milestones. We believe this
approach will put North Peace in an excellent position to benefit from a
recovery in the marketplace."

    Annual Meeting
    --------------

    The Company's Annual General Meeting of Shareholders is scheduled for
10:00 AM on Thursday May 28, 2009 in the Strand/Tivoli Room - Metropolitan
Centre, 333-4th Avenue SW, Calgary, AB.


                   Management's Discussion and Analysis of
                              Financial Results
    

    This Management's Discussion and Analysis for North Peace Energy Corp.
("North Peace" or the "Company") provides analysis of the Company's financial
results for the year ended December 31, 2008. The following information should
be read in conjunction with the unaudited financial statements for the year
ended December 31, 2008.
    Additional information about North Peace filed with Canadian securities
commissions is available on-line at www.sedar.com.

    
    Date of Report           April 21, 2009
    --------------

    Overview
    --------
    

    North Peace has an early stage in-situ oil sands play in northern Alberta
with an estimated 2 to 3.1 billion barrels of Discovered Petroleum
Initially-In-Place. The Company has a 100% working interest in 86,400 acres of
Crown oil sands leases in the Peace River area. The lands have the benefit of
over 300 legacy logs and are surrounded by accessible oil and gas production
infrastructure. The target Bluesky zone is a regional sand, deposited in a
near shore marine environment at approximately 400 metres in depth. The
initial focus area has approximately 22 sections with 10 to 16 metres of oil
bearing thickness, technically sufficient to advance a 30,000 bbl/d commercial
project. North Peace is currently advancing the development of its resource
using a robust and proven in-situ thermal recovery process, Cyclic Steam
Stimulation ("CSS"). A pilot project consisting initially of two horizontal
CSS wells has been built and the facility is currently steaming with first
production scheduled for May. The Company does not currently have any oil and
gas production.

    
    Company and Project Overview
    ----------------------------

    During the year ended December 31, 2008 the Company has completed the
following significant milestones:

    - Completed the winter drilling program which consisted of an additional
      five delineation wells to bring the total well count drilled by the
      Company to 17 delineation wells
    - Received Energy Resources Conservation Board ("ERCB") and Alberta
      Environment approval in June 2008 for a Cyclic Steam Stimulation
      ("CSS") pilot project at Red Earth
    - Completed a $26 million financing on August 7, 2008, issuing 13,333,300
      common shares, 6,666,650 warrants to purchase common shares and
      3,636,360 flow-through shares
    - Completed drilling of the two horizontal pilot wells in August 2008
    - Commenced construction on the pilot project in September 2008

    Subsequent to December 31, 2008 the Company has completed the following:

    - Completed construction on the pilot project, total costs are expected
      to be approximately $15 million.
      - Subsequent to the pilot construction the Company has approximately
        $6 million of working capital
    - Completed steam injection on the first horizontal well at the pilot
      project
      - First production response expected in May 2009
      - Commenced steam injection of the second horizontal well

    Financial Results
    -----------------

    Annual Financial Information

                                    As at and for the years ended December 31
                                          2008($)       2007($)       2006($)
    -------------------------------------------------------------------------
    Revenues                             397,941       343,621        42,810
    Net Loss and Comprehensive loss    1,488,297     1,228,325     1,572,433
    Basic and diluted Net Loss
     Per share                             0.032         0.040         0.157
    Total Assets                      74,609,635    43,140,812    12,482,723
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

    Over the last three years the Company has grown in size and assets. The
Company's only source of revenue has been interest income, which was generated
from the cash invested from the $20 million equity financing completed in June
2007 and the $26 million equity financing completed in August 2008. The
Company's assets have grown since 2006 through capital expenditures. In 2007
the Company drilled five vertical delineation wells and bought out its 30%
working interest partner. In 2008 the Company drilled an additional five
vertical delineation wells, two horizontal wells and completed the majority of
the construction on its pilot project.

    
    Quarterly Financial Information

                              2008          2008          2008          2008
                              Q4($)         Q3($)         Q2($)         Q1($)
    -------------------------------------------------------------------------

    Revenues               150,963       120,028        39,045        87,905
    Net Loss                30,100       571,983       486,924       399,290
    Basic and diluted Loss
     Per share               0.001         0.012         0.013         0.010
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

                              2007          2007          2007          2007
                              Q4($)         Q3($)         Q2($)         Q1($)
    -------------------------------------------------------------------------

    Revenues               117,197       128,821        67,297        30,306
    Net Loss               448,481       282,614       363,906       133,324
    Basic and diluted Loss
     Per share               0.012         0.007         0.012         0.008
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Results of Operations
    ---------------------

    Interest Income
                                             Twelve months ended December 31,
                                                        2008($)       2007($)
    -------------------------------------------------------------------------
    Interest Income                                    397,941       343,621
    -------------------------------------------------------------------------

    Interest income was $397,941 for 2008, with the majority from redeemable
term deposits bearing interest between 0.50% and 3.75% and maturing at various
times throughout the year. Interest income was $343,621 in 2007. The increase
in interest income from 2007 is due to higher amounts of cash on deposit
throughout the year following the Company's equity raise in August and capital
spending schedule.

    Stock-based Compensation
                                             Twelve months ended December 31,
                                                        2008($)       2007($)
    -------------------------------------------------------------------------
    Stock-based Compensation                           776,133       451,430
    -------------------------------------------------------------------------
    

    Stock-based compensation for 2008 was $776,133. The amount in 2008
consists of additional option grants in the year as the Company was adding
full-time employees and recognition of the expense for existing stock options.
A recovery of $93,864 related to stock based compensation was capitalized
during the year relating to consultants working directly on the capital
program and pilot project. The average fair value of the options granted in
2008 is $0.82 per option assuming an average volatility of 80% on the
underlying shares, a weighted average exercise price of $1.46, a risk-free
interest rate of 3.10%, an expected life of 4 years and an expected dividend
rate of 0%.

    
    Administrative Expenses
                                             Twelve months ended December 31,
                                                        2008($)       2007($)
    -------------------------------------------------------------------------
    G&A expense
      Salaries, Benefits and Consulting Fees           937,058       467,544
      Legal, Accounting and Audit Fees                 123,965       113,073
      Office rent                                      109,471       106,189
      Other G&A                                        526,619       405,149
    -------------------------------------------------------------------------
    Total G&A expense                                1,697,113     1,091,955

    Salaries, Benefits and Consulting Fees

    The increase from 2007 is due to increased salaries attributable to
additional staff and salary increases for existing staff.

    Legal, Accounting and Audit Fees

    Legal accounting and audit fees for 2008 was consistent with 2007 as the
company had similar legal and audit requirements from year to year.

    Office Rent

    Office rent for 2008 was consistent with 2007 as the company had the same
office location for both years.

    Other G&A

    The increase in Other G&A for the year is due to increased insurance
expense for the pilot project construction and higher office expenses as the
size of the Company increases.

    Depreciation and Accretion
                                             Twelve months ended December 31,
                                                        2008($)       2007($)
    -------------------------------------------------------------------------
    Depreciation and Accretion                          41,662        28,561
    -------------------------------------------------------------------------
    

    The Company had depreciation expense during 2008 of $24,542 related to
office furniture and computer equipment. Accretion related to asset retirement
obligations during 2008 was $17,120. The increase is due to the passage of
time.

    Future Income Taxes

    During the year ended December 31, 2007 the Company recognized $915,900
as a future income tax liability related to the renunciation of expenses
associated with flow-through shares. A tax asset of $557,477 was recognized
for year ended December 31, 2008 as it is more likely than not that the asset
will be realized when the tax effect of the 2008 flow-through shares are
recorded in the first quarter of 2009.

    
    Liquidity and Capital Resources
    -------------------------------
    As at December 31, 2008 the Company had working capital of $10.3 million
and no debt.
    The Company has deferred the reminder of its capital budget including   $6
million of costs related to the delineation program. Subsequent to pilot
construction the working capital position is expected to be approximately   
$6 million which will be sufficient to fund pilot operations and G&A for 2009.
The Company will reassess the capital budget in the second half of 2009 and is
currently exploring various alternatives for obtaining funds to advance future
capital requirements.

    As at December 31, 2008, the payments due under the office lease
commitment are as follows:

    (Cdn $)
    -------------------------------------------------------------------------
    2009                                                              82,246
    2010                                                              82,246
    2011                                                              82,246
    Thereafter                                                           Nil
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    On January 1, 2009 the Company entered into a new lease agreement in a
larger office for $192,864 per year. The new lease will expire December 31,
2011.
    As at December 31, 2008 the Company had a flow through share commitment of
$6 million which is to be spent on Canadian Exploration Expenditures ("CEE")
prior to December 31, 2009. During the year ended December 31, 2008 the
Company spent $385,888 of CEE towards this commitment.

    Capital expenditures were as follows:

    (Cdn $)                                  Twelve months ended December 31
                                                        2008($)       2007($)
    -------------------------------------------------------------------------
    Property acquisition                                     -    20,187,456
    Land & Lease rentals                               319,635       160,114
    Drilling and Completion                          8,871,459     2,905,175
    Geological costs                                    74,411        51,828
    Pilot facilities
      Construction, equipment and engineering       11,982,697       450,000
      Capitalized plant overhead and operations        322,495             -
    Other                                              477,530        83,540
    -------------------------------------------------------------------------
    Total                                           22,048,227    23,838,113
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Capitalized stock-based compensation and asset retirement obligation
additions are not included in the above table.

    Additional Disclosure for Venture Issuers without Significant Revenues
    ----------------------------------------------------------------------
    The Company has no expensed exploration or research and development costs.
Capitalized exploration costs are related to the purchase of oil sands leases,
the drilling of 17 delineation wells and the related geological assessments.
Capitalized development costs relate to the construction of the Company's CSS
pilot project and the drilling of two horizontal production wells.

    Share Capitalization
    --------------------
    The following table shows the common shares, stock options, purchase
warrants and performance warrants issued and outstanding at December 31, 2008:

                                                           December 31, 2008
    -------------------------------------------------------------------------

    Common shares outstanding                                     55,070,800
    Weighted average number of shares outstanding
     during the year                                              47,219,898
    Stock options outstanding                                      4,060,000
    Performance warrants outstanding                               6,300,000
    $2.00 Warrants outstanding                                     6,666,650
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at April 21, 2009, there were 55,070,800 common shares , 4,110,000
stock options, 6,300,000 performance warrants  and 6,666,650 $2.00 warrants
outstanding.

    Off Balance Sheet Arrangements
    ------------------------------
    There were no off balance sheet arrangements, other than the office lease
commitment.

    Transactions with Related Parties
    ---------------------------------
    As at December 31, 2008, the Company accrued legal costs of $10,000
payable to a firm in which a director is a partner. During 2008 $146,354 of
legal costs were paid to the same law firm. These costs were for general legal
services and services related to the most recent equity financing.

    Critical Accounting Estimates
    -----------------------------
    
    The preparation of financial statements requires the Company to make
judgements, assumptions and estimates in the application of generally accepted
accounting principles that have a significant impact on the financial results
of the Company. Actual results could differ from those estimates.

    Impairment of Property and Equipment

    Property costs are reviewed at least annually to consider whether there
are conditions that may indicate impairment. The carrying values of petroleum
and natural gas properties are compared to their net recoverable amount as
estimated by quantifiable evidence of the market value of similar assets or
geological resources. If the carrying value is found to exceed the estimated
net recoverable amount a write down will be recorded.

    Asset Retirement Obligations

    The Company is required to provide for future removal and restoration
costs. The Company must estimate these costs in accordance with existing laws,
contracts or other policies. The fair value of the liability for the Company's
asset retirement obligations is recorded in the period in which it is expected
to be incurred, discounted to its present value using the Company's
risk-adjusted interest rate and expected inflation rate. The offset to the
liability is recorded in the carrying amount of property and equipment. The
liability amount is increased each reporting period due to the passage of time
and the amount of accretion is charged to earnings in the period. Revisions to
the estimated timing of cash flows or to the original estimated undiscounted
cost could also result in an increase or decrease to the obligation. Actual
costs incurred upon settlement of the retirement obligation are charged
against the obligation to the extent of the liability recorded.

    Income Tax Accounting

    The determination of the Company's income and other tax liabilities
requires interpretation of complex laws and regulations. All tax filings are
subject to audit and potential reassessment after the lapse of considerable
time.

    Stock-Based Compensation

    The Company uses the fair value method for valuing stock option grants.
The fair value of each option grant is estimated on the date of the grant
using the Black-Scholes option-pricing model. This model requires the
Company's management to make estimates and assumptions for the following:
dividend yield; expected volatility and risk-free rate. A zero dividend yield
is used as the Company does not pay dividends; the volatility is a calculation
based on a peer company comparison because of our lack of trading history and
the risk-free rate is obtained from the Bank of Canada.

    
    Changes in Accounting Policies (including initial adoption)
    -----------------------------------------------------------
    
    Effective January 1, 2008 the Company adopted Section 1535, Capital
Disclosures, Section 3862, Financial Instruments - Disclosures, and Section
3863, Financial Instruments - Presentation. Section 1535 specifies the
disclosure of an entity's objectives, policies and processes for managing
capital, quantitative data about what the entity regards as capital, whether
the entity has complied with all capital requirements, and if it has not
complied, the consequences of such non-compliance.
    Sections 3862 and 3863 specify standards of presentation and enhanced
disclosures on financial instruments. These Sections will require the Company
to increase disclosure on the nature and extent of risks arising from
financial instruments and how the entity manages those risks.
    The adoption of these new accounting standards did not impact the amounts
reported in the Company's financial statements; however, it did result in
expanded note disclosure (see Note 14 & 15).
    The CICA has amended Section 1400, "General Standards of Financial
Statement Presentation", which is effective for interim periods beginning on
or after January 1, 2008, to include requirements to assess and disclose the
Company's ability to continue as a going concern (note 1).
    In February 2008, the CICA issued Section 3064, Goodwill and Intangible
Assets, replacing Section 3062, Goodwill and Other Intangible Assets and
Section 3450, Research and Development Costs. The new Section will be
effective on January 1, 2009. Section 3064 establishes standards for the
recognition, measurement, presentation and disclosure of goodwill and
intangible assets subsequent to its initial recognition. Standards concerning
goodwill are unchanged from the standards included in the previous Section
3062.
    In February 2008, the CICA's Accounting Standards Board ("AcSB")
confirmed the changeover to IFRS from Canadian GAAP will be required for
publicly accountable enterprises for interim and annual financial statements
for fiscal years beginning on or after January 1, 2011, including comparable
figures for 2010.
    The International Accounting Standards Board ("IASB") has issued an
exposure draft relating to certain amendments to IFRS. One such exemption
relating to full cost oil and gas accounting is expected to result in a
reduced administrative transition from the current AcG-16 to IFRS. The
amendment, if implemented, will permit the Company to apply IFRS prospectively
to its full cost pool, rather than the retrospective assessment of capitalized
exploration and development expenses, with the provision that the ceiling
test, under IFRS standards, is conducted at the transition date. It is
anticipated that this exposure draft will not result in an amended IFRS 1
standard until late 2009.

    
    Financial Instruments and Other Instruments
    -------------------------------------------
    The Company's carrying value of cash and cash equivalents, accounts
receivable and accounts payable and accruals approximates its fair value due
to the immediate or short-term maturity of these instruments.

    Risks and Uncertainties
    -----------------------
    
    North Peace is exposed to operational and regulatory risks and
uncertainties in the normal course of business that can influence its future
financial performance. A summary of certain of these risks is set out below
under "Forward-Looking Statements". Readers are cautioned that these
descriptions are not exhaustive. Certain additional risks and uncertainties
are discussed below.

    Capital Markets

    Based on the current working capital balance the Company currently has
sufficient capital to fund corporate and operational expenses until the end of
2009. However, the recent downturn in the capital markets may limit the
Company's ability to raise the capital necessary to undertake or complete
projects capital expenditures during 2009 or undertake expanded operations in
2009 if the capital market conditions do not improve. If debt or equity
financing is available, there is no assurance that it will be on terms
acceptable to the Company. In the second half of 2009, the Company will make
an assessment on its future capital planning, taking into account, among other
factors, capital market conditions at that time. The Company has flexibility
in timing of future capital expenditures and will investigate all options to
obtain the required funds to grow the Company.

    Oil & Gas Prices

    World prices for crude oil and natural gas have decreased significantly.
The Company's CSS pilot project is proceeding notwithstanding the prevailing
commodity price environment as its purpose is to validate the economic and
technical parameters of the commercial project.
    Crude oil prices, while a significant factor, are one of many factors in
the Company's decision to advance a commercial project. The Company will
monitor commodity prices as it is evaluating cyclic steam stimulation and
production performance data from the pilot project. The Company will utilize
this data and then current and anticipated crude oil and natural gas prices in
evaluating the feasibility of a commercial project.

    New Alberta Royalty Regime

    The Province of Alberta has set January 1, 2009 for the implementation of
the New Royalty Framework ("NRF"). In the current pricing environment, the
implementation of the NRF is not materially adverse to the economics of the
Company's proposed commercial project. As the commodity price increases, the
payments made to the Province of Alberta under the NRF increase, however, this
is partially offset as the economics of the commercial project also improve
with increased commodity prices.

    
    Fourth-Quarter 2008 Activities
    ------------------------------
    
    During the three months ended December 31, 2008 the Company had interest
income of $150,963 compared to interest income of $120,028 in the three months
ended September 30, 2008. The increase is due to increased cash as the Company
completed its $26 million equity raise in August.
    General and Administrative expenses for the fourth quarter were $556,853
compared to $464,259 in the third quarter of 2008. The increase is due to
year-end bonuses in the fourth quarter and investor relations costs during the
period.
    Capital expenditures of $8,549,690 in the fourth quarter of 2008 related
to pilot construction.

    
    Project and Company Outlook
    ---------------------------
    
    During the first half of 2009 the Company will focus on pilot operations.
The Company will utilize the data from the pilot in evaluating the feasibility
of commercial operations. The Company is also investigating the possibility of
adding additional wells to the existing pilot. The decision to drill these
additional wells will be based on the remaining capacity of the pilot
facilities, the economic returns from the wells and obtaining the required
regulatory approvals. Capital has also been allocated to advance the front-end
engineering work and the regulatory approval process for a 3,000 bbl/d pilot
expansion. The 3,000 bbl/d expansion is considered to be a more viable option
than a 10,000 bbl/d first phase commercial project in the current economic
conditions. However the 3,000 bbl/d option will still require improvements in
the current commodity price environment to generate sufficient returns to
justify the up-front construction costs. Cash flow from the 3,000 bbl/d
expansion can then be used to fund additional commercial phases.
    Subsequent to initial pilot production from the pilot project the Company
will reassess the capital budget for the remainder of 2009. The revised
capital budget will be tailored to the prevailing economic conditions at that
time.

    
    International Financial Reporting Standards ("IFRS")
    ----------------------------------------------------
    
    In February 2008, the CICA Accounting Standards Board ("AcSB") confirmed
that the changeover to IFRS from Canadian GAAP will be required for publicly
accountable enterprises effective for the interim and annual financial
statements relating to fiscal years beginning on or after January 1, 2011. The
AcSB issued the "omnibus" exposure draft of IFRS with comments due July 31,
2008, wherein early adoption by Canadian entities is also permitted. The
Canadian Securities Administrators ("CSA") has also issued Concept Paper
52-402, which requested feedback on the early adoption of IFRS as well as the
use of US GAAP by domestic issuers.
    The transition from current Canadian GAAP to IFRS is a significant
undertaking that may materially affect the Company's reported financial
position and results of operations.
    The Company has not completed development of its IFRS changeover plan,
which will include project structure governance, resourcing and training,
analysis of key GAAP differences and a phase plan to assess accounting
policies under IFRS as well as potential IFRS 1 ("First Time Adoption of
IFRS") exemptions. The Company will complete its project scoping, which will
include a timetable for assessing the impact on data systems, internal
controls over financial reporting and business activities, such as financing
and compensation arrangements during 2009.

    
    Discovered Petroleum Initially-In-Place
    ---------------------------------------
    Discovered Petroleum Initially-In-Place (equivalent to Discovered
Resources) is that quantity of petroleum that is estimated, as of a given
date, to be contained in known accumulations prior to production. The
recoverable portion of Discovered Petroleum Initially-In-Place includes
production, reserves, and contingent resources. There is no certainty that the
Discovered Petroleum Initially-In-Place will ever be produced.

    Forward-Looking Statements
    --------------------------
    
    Certain statements contained in this MD&A constitute forward-looking
statements that involve known and unknown risks, uncertainties and other
factors that may cause actual results or events to differ materially from
those anticipated in such forward-looking statements.
    In particular, this MD&A contains forward-looking statements pertaining,
directly or indirectly, to the following: business and operations strategies
including the operations at North Peace's pilot project and potential
commencement of a subsequent commercial project.
    The forward-looking statements contained in this MD&A are based on a
number of expectations and assumptions that may prove to be incorrect. In
addition to other assumptions identified in this MD&A, assumptions have been
made regarding, among other things: that North Peace will continue to conduct
its operations in a manner consistent with past operations; the continuance of
existing (and in certain circumstances, proposed) tax and royalty regimes; the
general continuance of current industry conditions; the accuracy of the
estimates of North Peace's resource volumes; the ability of North Peace to
obtain equipment, services and supplies in a timely manner and within budget
to carry out its activities; the timely receipt of required regulatory
approvals; the ability of North Peace to obtain financing on acceptable terms;
future oil and gas prices and future cost assumptions.
    No assurance can be given that these expectations will prove to be
correct and such forward-looking statements included in this MD&A should not
be unduly relied upon. Actual results could differ materially as a result of
changes in North Peace's plans, changes in commodity prices, regulatory
changes, general economic, market and business conditions as well as
production, development and operating performance and other risks associated
with oil and gas operations including anticipated success of resource
prospects and the expected characteristics of resource prospects; anticipated
capital requirements, project rates of return and estimated project life;
estimates of original discovered resource; estimates of recovery factors; lack
of diversification; and overall technical and economic feasibility of the
Company's project. These statements speak only as of the date of this MD&A or
as of the date specified in the documents accompanying this MD&A, as the case
may be.
    The Company undertakes no obligation to publicly update or revise any
forward-looking statements except as expressly required by applicable
securities laws.

    
    North Peace Energy Corp.
    (A Development Stage Company)

    Balance Sheets, as at
    (unaudited)
    -------------------------------------------------------------------------
                                                   December 31,  December 31,
                                                          2008          2007
    (Cdn $)
    -------------------------------------------------------------------------
    Assets

    Current assets
      Cash and cash equivalents (note 6)          $ 18,119,752  $  9,964,393
      Accounts receivable                              922,537       363,600
      Prepaid expenses                                  86,290        46,360
    -------------------------------------------------------------------------
                                                    19,128,579    10,374,353

    Oil and gas properties (note 7)                 54,875,482    32,711,756
    Other assets                                        48,097        54,703
    Future income tax asset (note 9)                   557,477             -
    -------------------------------------------------------------------------
                                                  $ 74,609,635  $ 43,140,812
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity

    Current liabilities
      Accounts payable and accruals               $  8,788,438  $    944,654

    Asset retirement obligations (note 8)              442,303       215,820
    Future income tax liability (note 9)                     -       915,900
    -------------------------------------------------------------------------
                                                     9,230,741     2,076,374
    -------------------------------------------------------------------------

    Shareholders' equity
      Equity Instruments (note 10)                  67,158,445    42,037,961
      Contributed surplus (note 11)                  2,813,922     2,131,653
      Deficit                                       (4,593,473)   (3,105,176)
    -------------------------------------------------------------------------
                                                    65,378,894    41,064,438

    -------------------------------------------------------------------------
                                                  $ 74,609,635  $ 43,140,812
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Future Operations (note 1)
    Commitments (note 13)
    Financial Instruments (note 14)

    Signed on behalf of the Board:

    "Ian Robertson", Director

    "Don Garner", Director



    North Peace Energy Corp.
    (A Development Stage Company)

    Statements of Loss, Comprehensive Loss and Deficit
    (unaudited)
    -------------------------------------------------------------------------

                              Three months ended                  Year ended
                                     December 31,                December 31,
    (Cdn $)                   2008          2007          2008          2007
    -------------------------------------------------------------------------

    Revenue
      Interest income $    150,963  $    117,197  $    397,941  $    343,621
    -------------------------------------------------------------------------
                           150,963       117,197       397,941       343,621
    -------------------------------------------------------------------------

    Operating expenses
      General and
       administrative      556,853       413,467     1,697,113     1,091,955
      Stock-based
       compensation        241,945       144,168       776,133       451,430
      Depletion,
       depreciation and
       accretion            10,935         8,043        41,662        28,561
    -------------------------------------------------------------------------
                           809,733       565,678     2,514,908     1,571,946
    -------------------------------------------------------------------------

    Net Loss before taxes  658,770       448,481     2,116,967     1,228,325

    Future Income Tax
     Recovery              628,670             -       628,670             -
    -------------------------------------------------------------------------

    Net Loss and
     Comprehensive
     Loss             $     30,100  $    448,481  $  1,488,297  $  1,228,325

    Deficit at
     beginning of
     period              4,563,373     2,656,695     3,105,176     1,572,433
      Costs relating to
       Juno transaction
       (note 4)                  -             -             -      (304,418)
    -------------------------------------------------------------------------

    Deficit at end of
     period           $  4,593,473  $  3,105,176  $  4,593,473  $  3,105,176
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net Loss per share
     (note 16)
      Basic           $      0.001  $      0.012  $      0.032  $      0.040
      Diluted         $      0.001  $      0.012  $      0.032  $      0.040
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    North Peace Energy Corp.
    (A Development Stage Company)

    Statements of Cash Flows
    (unaudited)
    -------------------------------------------------------------------------

                              Three months ended                  Year ended
                                     December 31,                December 31,
    (Cdn $)                   2008          2007          2008          2007
    -------------------------------------------------------------------------

    Cash provided by (used in):

    Operating Activities
      Net Loss         $   (30,100) $   (448,481) $ (1,488,297) $ (1,228,325)
      Non-cash charges
       to earnings
        Depletion,
         depreciation and
         accretion          10,935         8,043        41,662        28,561
        Stock-based
         compensation      241,945       144,168       776,133       451,430
        Future income
         tax recovery     (628,670)            -      (628,670)            -
    -------------------------------------------------------------------------
                          (405,890)     (296,270)   (1,299,172)     (748,334)

      Net change in non
       cash working capital
        Accounts
         receivable       (387,227)      (48,552)     (363,437)     (300,109)
        Prepaid expenses    18,659       (16,473)      (39,930)      (10,360)
        Accounts payable
         and accruals        4,460       (73,166)      (25,109)     (206,231)
    -------------------------------------------------------------------------
                          (769,998)     (434,461)   (1,727,648)   (1,265,034)
    -------------------------------------------------------------------------
    Investing Activities
      Additions to oil
       and gas
       properties       (8,549,690)   (2,409,987)  (22,048,227)  (23,838,113)
      Other assets          (4,570)       (3,238)      (17,936)      (70,643)
      Net change in
       non cash working
       capital
        Accounts
         receivable        (71,451)            -      (195,500)      323,232
        Accounts payable
         and accruals    1,947,199       699,468     7,788,893       796,478
    -------------------------------------------------------------------------
                        (6,678,512)   (1,713,757)  (14,472,770)  (22,789,046)
    -------------------------------------------------------------------------
    Financing Activities
      Net Proceeds on
       issue of common
       shares               (1,641)            -    24,275,777    30,514,779
      Cash acquired from
       Juno Capital Corp.
       (note 4)                  -             -             -       261,845
      Deferred financing
       charges                   -             -             -        24,353
      Net change in
       non cash working
       capital
        Accounts payable
         and accruals            -      (104,274)       80,000       (64,925)
    -------------------------------------------------------------------------
                            (1,641)     (104,274)   24,355,777    30,736,052
    -------------------------------------------------------------------------

    Increase in cash and
     cash equivalents   (7,450,151)   (2,252,492)    8,155,359     6,681,972

    Cash and cash
     equivalents,
     beginning of
     period             25,569,903    12,216,885     9,964,393     3,282,421
    -------------------------------------------------------------------------
    Cash and cash
     equivalents, end
     of period        $ 18,119,752  $  9,964,393  $ 18,119,752  $  9,964,393
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    Supplemental
     disclosure:
      Interest
       received       $     58,848  $     26,729  $    380,329  $    160,611
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------




    North Peace Energy Corp.
    (A Development Stage Company)

    Notes to Financial Statements
    As at December 31, 2008, as at December 31, 2007
    (unaudited)
    -------------------------------------------------------------------------

    1.  Nature of operations and future operation

        North Peace Energy Corp. (the "Company" or "North Peace") resulted
        from the amalgamation of Juno Capital Corp. and North Peace Energy
        Inc. pursuant to the provisions of the Business Corporations Act
        (Alberta) on February 6, 2007 (note 4). The Company's principal
        business activity is the exploration, exploitation and development
        and production of petroleum and natural gas resources in the Province
        of Alberta.

        North Peace is a development stage enterprise whose principle focus
        is the creation of shareholder value through the production of heavy
        oil from its oil sands leases at its Red Earth project. The Company
        does not currently have any production revenue. Production from its
        pilot project is expected to commence in the first half of 2009,
        however production of commercial quantities is not expected for 2 to
        3 years.

        The Company's Red Earth project contains of a 100% working interest
        in 86,400 acres of Crown oil sands leases in the Peace River area.
        The target geological zone is the Bluesky formation which is a
        regional sand, deposited in a near shore marine environment at
        approximately 400 metres depth. North Peace is currently advancing
        the development of its resource using Cyclic Steam Stimulation
        ("CSS"). A pilot project consisting initially of two horizontal CSS
        wells has been built and the facility is currently steaming.

        These financial statements are prepared on the assumption that the
        Company will continue as a going concern and realize its assets and
        discharge its liabilities in the normal course of business.

        The recoverability of the amounts shown for petroleum and natural gas
        assets is dependent upon the discovery of economically recoverable
        oil and gas resources and the ability of the Company to obtain
        financing necessary to complete the exploration and development and
        the success of future operations. Recent market events, including
        disruption of credit markets and other financial systems and the
        deterioration of global economic conditions have resulted in
        significant declines in commodity prices and made completing
        financings more difficult. As at December 31, 2008 the Company had
        working capital of $10.3 million and no debt. In an effort to
        conserve working capital the Company has deferred the remainder of
        the capital budget, other than completion of the pilot project,
        including $6 million of costs related to the delineation program.
        Subsequent to pilot construction the working capital position is
        expected to be approximately $6 million which will be sufficient to
        fund pilot operations, general & administration expenses and retain
        all oil and gas assets for 2009. The Company is currently exploring
        various alternatives for raising funds to advance future capital
        requirements but has flexibility in the timing of any future
        expenditures. See Note 14 for additional information on liquidity
        risk.

    2.  Adoption of new accounting policies

        Effective January 1, 2008 the Company adopted Section 1535, Capital
        Disclosures, Section 3862, Financial Instruments - Disclosures, and
        Section 3863, Financial Instruments - Presentation. Section 1535
        specifies the disclosure of an entity's objectives, policies and
        processes for managing capital, quantitative data about what the
        entity regards as capital, whether the entity has complied with all
        capital requirements, and if it has not complied, the consequences of
        such non-compliance.

        Sections 3862 and 3863 specify standards of presentation and enhanced
        disclosures on financial instruments. These Sections will require the
        Company to increase disclosure on the nature and extent of risks
        arising from financial instruments and how the entity manages those
        risks.

        The adoption of these new accounting standards did not impact the
        amounts reported in the Company's financial statements; however, it
        did result in expanded note disclosure (see Note 14 & 15).

        The CICA has amended Section 1400, "General Standards of Financial
        Statement Presentation", which is effective for interim periods
        beginning on or after January 1, 2008, to include requirements to
        assess and disclose the Company's ability to continue as a going
        concern (note 1).

        In February 2008, the CICA issued Section 3064, Goodwill and
        Intangible Assets, replacing Section 3062, Goodwill and Other
        Intangible Assets and Section 3450, Research and Development Costs.
        The new Section will be effective on January 1, 2009. Section 3064
        establishes standards for the recognition, measurement, presentation
        and disclosure of goodwill and intangible assets subsequent to its
        initial recognition. Standards concerning goodwill are unchanged from
        the standards included in the previous Section 3062.

        In February 2008, the CICA's Accounting Standards Board confirmed
        that Canadian publicly accountable entities will be required to adopt
        International Financial Reporting Standards ("IFRS") as promulgated
        by the International Accounting Standards Board in place of generally
        accepted accounting principles in Canada ("GAAP") effective
        January 1, 2011.

        The International Accounting Standards Board ("IASB") has issued an
        exposure draft relating to certain amendments to IFRS. One such
        exemption relating to full cost oil and gas accounting is expected to
        result in a reduced administrative transition from the current AcG-16
        to IFRS. The amendment, if implemented, will permit the Company to
        apply IFRS prospectively to its full cost pool, rather than the
        retrospective assessment of capitalized exploration and development
        expenses, with the provision that the ceiling test, under IFRS
        standards, is conducted at the transition date. It is anticipated
        that this exposure draft will not result in an amended IFRS 1
        standard until late 2009.

        The Company is currently assessing which accounting policies will be
        affected by the change to IFRS and the potential impact of these
        changes on its financial position and results of operations.

    3.  Significant accounting policies

        These financial statements are prepared in accordance with Canadian
        generally accepted accounting principles ("GAAP"). The significant
        policies are detailed as follows:

    (a) Use of estimates

        The preparation of financial statements in conformity with Canadian
        GAAP requires management to make estimates and assumptions that
        affect the reported amounts of assets and liabilities and disclosure
        of contingent assets and liabilities at the balance sheet date and
        the reported amounts of revenues and expenses during the year. The
        calculation of asset retirement obligations includes estimates of the
        future costs to settle the asset retirement obligation, the timing of
        the cash flows to settle the obligation, and the future inflation
        rates. The calculation of future income taxes requires judgement in
        applying tax laws and regulations, estimating the timing of temporary
        difference reversals, and estimating the realizability of future tax
        assets. Actual results could differ from those estimates. The fair
        values of stock options are based on estimates using the
        Black-Scholes option pricing model and the total value of such stock
        options is recorded as stock based compensation expense on the
        financial statements. The impairment calculation includes estimates
        of market values of similar assets or geological resources.

    (b) Cash and cash equivalents

        Cash includes cash balances with banks and those short-term money
        market instruments which are redeemable in three months or less.

    (c) Petroleum and natural gas properties

        Capitalized costs

        The Company follows the full cost method of accounting for
        exploration and development expenditures, wherein all costs related
        to the acquisition, exploration and development of petroleum and
        natural gas reserves are capitalized in a Canadian cost centre. Such
        costs include lease acquisition costs, geological and geophysical
        expenditures, lease rentals on non-productive properties, cost of
        drilling both productive and non-productive wells and related
        production equipment costs, and that portion of general and
        administrative expenses directly attributable to exploration and
        development activities.

        Proceeds from the disposition of petroleum and natural gas properties
        are applied to reduce the capitalized costs and no gain or loss is
        recognized on the disposal of petroleum and natural gas properties
        unless such disposition would alter the depletion and amortization
        rate by 20 percent or more.


        Depletion/Depreciation

        Capitalized costs, together with estimated future capital costs
        associated with proved undeveloped reserves and amounts related to
        asset retirement obligations will be depleted and depreciated using
        the unit-of-production method based on total estimated proved
        petroleum and natural gas reserves, before royalties, as determined
        by independent engineers. The relative volumes of petroleum and
        natural gas reserves and production are converted to equivalent units
        of oil based on relative energy content of six thousand cubic feet of
        natural gas to one barrel of oil. Costs of undeveloped and unproved
        properties are initially excluded from depletion calculations. When
        proved reserves are assigned or the property is considered to be
        impaired, the cost of the property or the amount of the impairment is
        added to the capitalized costs subject to depletion.

        Steaming facilities, such as the steam generator at the pilot
        project, will be depreciated on a straight line basis using their
        useful life of 15 years.

        Office equipment is recorded at cost and depreciation is provided on
        a declining balance basis at 30%.

        Impairment

        Property costs are reviewed at least annually to consider whether
        there are conditions that may indicate impairment. The carrying
        values of petroleum and natural gas properties are compared to their
        net recoverable amount as estimated by quantifiable evidence of the
        market value of similar assets or geological resources. If the
        carrying value is found to exceed the estimated net recoverable
        amount a write down will be recorded.

    (d) Joint interests

        The Company's exploration, development and production activities may
        be conducted jointly with others and, accordingly, these financial
        statements reflect only the Company's proportionate interest in such
        activities.

    (e) Asset retirement obligations

        Asset retirement obligations reflect the liability associated with
        retirement and reclamation of long-lived assets such as petroleum and
        gas wells and related equipment. An asset retirement obligation is
        recognized in the period it is incurred and a reasonable estimate of
        the fair value can be made. Fair value is estimated based on the
        present value of the estimated future cash outflows to abandon the
        asset, discounted at the Company's credit-adjusted risk-free interest
        rate. The asset retirement cost, equal to the fair value of the
        retirement obligation at the time the obligation is incurred, is
        capitalized as part of the cost of the related long-lived asset and
        depleted using the unit-of-production method.

        Subsequent to the initial measurement of the asset retirement
        obligation, the obligation is adjusted at the end of each period to
        reflect the passage of time as accretion and changes in estimated
        future cash flows underlying the obligation. Actual costs incurred to
        abandon the asset reduce the asset retirement obligation.

    (f) Income taxes

        Income taxes are calculated using the liability method of tax
        allocation accounting. Temporary differences arising from the
        difference between the tax basis of an asset or liability and its
        carrying value on the balance sheet are used to calculate future
        income tax liabilities or assets. Future income tax liabilities or
        assets are calculated using tax rates anticipated to apply in the
        periods that the temporary differences are expected to reverse.

        The effect on future tax assets and liabilities of a change in tax
        rates is recognized in income in the period that substantive
        enactment occurs. To the extent that the Company does not consider it
        to be more likely than not that a future tax asset will be recovered,
        it provides a valuation allowance against the excess.

    (g) Stock-based compensation

        Stock options and performance warrants issued by the Company are
        accounted for in accordance with the fair-value based method of
        accounting. The fair value of options and performance warrants issued
        to directors, officers, employees, consultants and service providers
        to the Company is charged to income with an offsetting amount
        recorded to contributed surplus. Fair value is measured using the
        Black-Scholes options pricing model. Consideration paid upon the
        exercise of stock options or performance warrants, together with
        corresponding amounts previously recognized in contributed surplus,
        is recorded as an increase to share capital. Unvested stock options
        issued to consultants and service providers are revalued each
        reporting period. Forfeitures of stock options are accounted for as
        they occur.

    (h) Per share information

        Per share information is calculated using the weighted average number
        of shares outstanding during the period. The treasury stock method is
        used to calculate diluted per share amounts, whereby proceeds from
        the exercise of in-the-money stock options and share purchase
        warrants are used to purchase the Company's common shares at the
        average market price during the period. Diluted per share amounts
        reflect the potential dilution that could occur if stock options or
        share purchase warrants were exercised and converted to common
        shares.

    (i) Flow-through shares

        The resource expenditure deductions for income tax purposes related
        to exploration and development activities funded by flow-through
        share arrangements are renounced to investors in accordance with
        income tax legislation. The carrying value of the shares issued is
        reduced by the income tax effect of the renunciation when the
        corresponding exploration and development expenditures are renounced.

    4.  Reverse Takeover

        On February 6, 2007, Juno Capital Corp. ("Juno") completed its
        qualifying transaction (the "Transaction") with North Peace Energy
        Inc. to acquire all of the issued and outstanding common shares of
        North Peace Energy Inc. in exchange for ten common shares of Juno for
        each issued and outstanding common share of North Peace Energy Inc.
        All outstanding and unexercised stock options and warrants of North
        Peace Energy Inc. were exchanged for equivalent stock options and
        warrants of Juno having regard for the foregoing ten for one ratio.

        Upon completion of the Transaction, Juno consolidated its common
        shares on the basis of one consolidated common share for each five
        issued and outstanding common shares, and amalgamated with North
        Peace Energy Inc. to form the Company under the name "North Peace
        Energy Corp."

        The Transaction has been accounted for as a reverse take-over of Juno
        by North Peace Energy Inc. For accounting purposes, North Peace
        Energy Inc. is the acquirer and the combined entity is considered to
        be the continuation of North Peace Energy Inc., except for the
        authorized and issued share capital which is that of Juno.

        The net assets of Juno were recorded on the balance sheet, as
        follows:

                                                        Number
        (Cdn $)                                      of Shares        Amount
        ---------------------------------------------------------------------
        Assets acquired                                         $    271,016
        Liabilities assumed                                          123,986
        ---------------------------------------------------------------------
        Net assets acquired                                     $    147,030
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Consideration
          Common shares (2,525,000 Juno common
           shares)                                     505,000  $    134,422
          Stock options at fair value (252,500 Juno
           stock options)                               50,500        12,608
        ---------------------------------------------------------------------
        Total share capital                                     $    147,030
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The fair value of the net assets of the Company deemed to have been
        acquired by North Peace Energy Inc. was $147,030, consisting of cash
        of $261,845, accounts receivable and prepaid expenses of $9,171 and
        accounts payable of $123,986. Transaction costs were $304,418 at the
        date of the transaction they were recognized in the deficit.

    5.  Basis of presentation

        The accompanying financial statements have been prepared without
        audit. These interim financial statements have been prepared
        following the same accounting policies and methods used in the
        financial statements for the year ended December 31, 2007. These
        financial statements should be read in conjunction with the audited
        year-end financial statements for North Peace Energy Corp.

        Certain prior year figures have been reclassified to conform to the
        presentation adopted in 2008.

        All common shares, stock options and warrants have been adjusted for
        the effects of the 10:1 share exchange and the 1:5 consolidation that
        occurred in 2007 (note 4).

    6.  Cash and cash equivalents

        Included in cash and cash equivalents is a redeemable term variable
        rate deposit totaling $17,500,000 which currently bears interest at
        0.50 % and matures on August 7, 2009. The term deposits are fully
        redeemable, without penalty, 30 days after the date of investment and
        therefore classified as cash and cash equivalents.

    7.  Oil and gas properties

                                                   December 31,  December 31,
        (Cdn $)                                           2008          2007
        ---------------------------------------------------------------------

        Oil and gas interests                     $ 42,442,785  $ 32,261,756
        Pilot facilities                            12,432,697       450,000
        Accumulated depletion and depreciation               -             -
        ---------------------------------------------------------------------
                                                  $ 54,875,482  $ 32,711,756
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company is advancing a Cyclic Steam Stimulation ("CSS") project
        on its land holdings. A pilot project consisting initially of two
        horizontal CSS wells has been built and is currently steaming. At
        December 31, 2008, the Company has no reserves or production.
        Accordingly, no provision for depletion expense has been made.

        As at December 31, 2008, the pilot facilities were not yet complete
        and available for use.

        In 2007, the Company completed a property acquisition of the
        remaining 30 percent ownership in its land holdings in the Red Earth
        area of northern Alberta. Consideration for the acquisition consisted
        of $15,000,000 in cash and $4,994,947 in common shares of North Peace
        (2,270,430 common shares at a deemed price of $2.20 per share).

        A stock-based compensation recovery of $93,864 was capitalized during
        the year ended December 31, 2008 (2007 - $180,173).

        Deposits with the Energy Resources and Conservation Board of $126,782
        (2007 - nil) were included in oil and gas properties as at December
        31, 2008.

    8.  Asset retirement obligations

        The following table represents the reconciliation of the carrying
        amount of the obligation associated with the retirement of the
        Company's petroleum and gas interests.

                                                   December 31,  December 31,
        (Cdn $)                                           2008          2007
        ---------------------------------------------------------------------

        Asset retirement obligations, beginning
         of year                                  $    215,820  $    167,971
        Increase in liabilities                        212,296       206,509
        Accretion                                       17,120        12,621
        Change in estimates                             (2,933)     (171,281)
        ---------------------------------------------------------------------

        Asset retirement obligations, end of year $    442,303  $    215,820
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The total undiscounted amount of cash flows required to settle the
        obligations as measured at December 31, 2008 is estimated to be
        $1,121,365 (2007 - $220,860). These obligations will be settled based
        on the useful lives of the underlying assets, which ranges from one
        to ten years. The credit-adjusted risk free rate at which the
        estimated cash flows were discounted was 8% (2007 - 8%) and the
        estimated inflation rate used to project future costs was 2%
        (2007 - 2%).

    9.  Income Taxes

        Future income tax components are as follows:

                                                   December 31,  December 31,
        (Cdn $)                                           2008          2007
        ---------------------------------------------------------------------
        Future income tax asset
          Share issuance costs                    $    590,471  $    329,100
          Non-capital losses carried forward           918,645       333,400
          Asset retirement obligations                 110,576             -
        ---------------------------------------------------------------------
                                                     1,619,692       662,500

        Future income tax liability
          Carrying value of oil and gas properties
         in excess of tax basis                   $ (1,062,215) $   (915,900)
        ---------------------------------------------------------------------
        Net future income tax asset (liability)        557,477      (253,400)
        ---------------------------------------------------------------------
        Valuation allowance                                  -      (662,500)
        ---------------------------------------------------------------------
                                                  $    557,477  $   (915,900)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The provision for income taxes recorded in the financial statements
        differs from the amount which would be obtained by applying the
        statutory income tax rate of 29.50% (2007 - 32.12%), as follows:

                                                   December 31,  December 31,
        (Cdn $)                                           2008          2007
        ---------------------------------------------------------------------

        Loss for the year before income tax       $ (2,116,969) $ (1,228,325)
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Anticipated income tax recovery           $   (624,506) $   (394,500)
        Non deductable expenses
          Stock based compensation                     201,393       147,300
          Share issuance costs                               -      (450,200)
        Change in income tax rate                       91,972        71,200
        ---------------------------------------------------------------------
                                                      (331,141)     (626,200)
        Change in valuation allowance                 (297,529)      626,200
        ---------------------------------------------------------------------
        Total future tax recovery                 $   (628,670) $          -
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The company has non capital losses of $3.7 million as at December 31,
        2008

        The non-capital losses carried-forward expire in years up to 2028.

    10. Share Capital

    (a) Authorized

        Unlimited number of common shares
        Unlimited number of first preferred shares issuable in series
        Unlimited number of second preferred shares issuable in series

    (b) Issued

                                                        Number
                                                     of Shares        Amount
        ---------------------------------------------------------------------
        Common Shares

        Balance, December 31, 2006                  16,555,400  $ 12,292,052
        Juno shares (note 3)                           505,000       147,030
        Tax effect of flow-through share
         renouncement                                        -      (915,900)
        Warrants exercised (i)                       9,196,000     6,897,000
        Equity financing (ii)                        9,523,810    20,000,001
        Property acquisition (iii)                   2,270,430     4,994,947
        Share issue costs (iv)                               -    (1,377,169)
        ---------------------------------------------------------------------
        Balance December 31, 2007                   38,050,640    42,037,961
        Tax effect on previously incurred share
         issue costs                                         -       364,971
        Stock Options exercised                         50,500        50,500
        Equity financing (v)                        16,969,660    22,999,951
        Share issue costs (vi)                               -    (1,774,667)
        Tax effect of share issue costs                      -       479,736
        ---------------------------------------------------------------------
        Balance December 31, 2008                   55,070,800  $ 64,158,452

                                                        Number
                                                   of Warrants        Amount
        $2.00 Share Purchase Warrants

        Balance December 31, 2007                            -  $          -
        Equity financing (v)                         6,666,650     2,999,993
        ---------------------------------------------------------------------
        Balance December 31, 2008                    6,666,650  $  2,999,993

        ---------------------------------------------------------------------
        Total Equity Instruments                                $ 67,158,445
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        i.   In 2007, 9,196,000 warrants were exercised for common shares at
             $0.75 per warrant for gross proceeds of $6,897,000.

        ii.  On June 28, 2007, the Company issued 9,523,810 subscription
             receipts for common shares of the Corporation at an issue price
             of $2.10 per subscription receipt for gross proceeds of
             $20,000,001.

        iii. On June 28, 2007 2,270,430 common shares at a deemed price of
             $2.20 per share were issued as partial consideration for a
             property acquisition (see note 7).

        iv.  Share issue costs relate to the costs incurred for the equity
             issuance of 9,523,810 subscription receipts and the issuance of
             2,270,430 common shares as partial payment for the property
             acquisition.

        v.   On August 7, 2008 the Company completed a private placement
             equity offering, issuing a total of 13,333,300 units ("Units"),
             at a price of $1.50 per Unit and 3,636,360 flow-through common
             shares ("Flow-Through Shares"), at a price of $1.65 per
             Flow-Through Share for gross proceeds of approximately
             $26 million. Each Unit consists of one common share and half of
             one common share purchase warrant. Each full warrant entitles
             the holder to acquire one common share at an exercise price of
             $2.00 per share until February 7, 2010.
             The fair value of the warrants is $0.45 per warrant assuming a
             volatility of 80% on the underlying shares, a risk-free interest
             rate of 2.75%, an expected life of 1.5 years and an expected
             dividend rate of 0%.

        vi.  Share issue costs relate to the costs incurred for the equity
             issuance on August 7, 2008.

    (c) Stock options

        Changes in the number of shares issuable under outstanding options
        were as follows:
                                                                    Weighted
                                                      Range of       Average
                                          Number      Exercise      Exercise
                                      of options        Prices         Price
        ---------------------------------------------------------------------
        Balance, December 31, 2006       840,000  $       1.00  $       1.00
        Juno options (note 3)             50,500          1.00          1.00
        Options granted                1,390,000   1.00 - 2.62          1.71
        Options exercised                      -             -             -
        ---------------------------------------------------------------------
        Balance, December 31, 2007     2,280,500  $1.00 - 2.62  $       1.43
        Options exercised                (50,500)         1.00          1.00
        Option Granted                 1,830,000   1.18 - 1.50          1.46
        ---------------------------------------------------------------------
        Balance, December 31, 2008     4,060,000  $1.00 - 2.62  $       1.45
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The average fair value of the options granted during 2008 was $0.82
        per option (2007 - $1.03) assuming an average volatility of 80%
        (2007 - 90%) on the underlying shares, a weighted average exercise
        price of $1.46 (2007 - $1.71), a risk-free interest rate of 2.81% -
        3.35% (2007 - 3.89% - 4.58%), an expected life of 4 years (2007 -
        5 years), and an expected dividend rate of 0% (2007 - 0%).

        The majority of the options vest 1/3 per year on the first, second
        and third anniversary of the date of the grant. Options issued to
        consultants vest at equal amounts at 6 months, 18 months and
        30 months after the date of grant. All options expire 5 years after
        the initial grant date.

        The Company has recognized stock-based compensation of $776,133
        during the year ended December 31, 2008. A recovery of $93,864 was
        capitalized to oil and gas properties.

        In 2007, 500,000 options issued to consultants contingent on them
        joining as employees were canceled and 250,000 of these contingent
        options were retained by the consultants as part of an engagement to
        support the Company. In addition 1,140,000 options were issued by the
        Company to management, employees, consultants and directors during
        2007.

        In 2008, the Company granted 1,830,000 stock options at a weighted
        average exercise price of $1.46 per share to management, employees,
        consultants and directors. 475,000 of the stock options granted to
        management will be exercisable only when the Company's previously
        announced cyclic steam pilot project demonstrates first oil
        production, these options have the same vesting terms as existing
        options and vest 1/3 per year on the first, second and third
        anniversary of the date of the grant.

        The following table sets forth information about stock options
        outstanding as at December 31, 2008.

                                      Options                        Options
                                  Outstanding                    Exercisable
                                     Weighted Remaining             Weighted
                                      Average Contract-              Average
                                        Price      ual                 Price
        Range of          Number of       Per     Life     Options       Per
        Exercise Price      Options     Share     (yrs) Exercisable    Share
        ---------------------------------------------------------------------
        $1.00             1,415,000     $1.00     2.98     818,335     $1.00
        $1.01 - $2.00     2,245,000     $1.53     4.43     138,333     $1.81
        $2.00 - $3.00       400,000     $2.62     3.42     150,001     $2.62
        ---------------------------------------------------------------------
                          4,060,000     $1.45     3.78   1,106,669     $1.32
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    (d) Purchase Warrants

                                                     Number of      Exercise
                                                      Warrants         Price
        ---------------------------------------------------------------------
        Balance, December 31, 2006                   9,196,000  $       0.75
        Warrants exercised                          (9,196,000)         0.75
        ---------------------------------------------------------------------
        Balance, December 31, 2007                           -  $          -
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        In connection with the April 10, 2006 private placement described
        above, the Company issued 4,698,000 common share purchase warrants
        entitling the holder to acquire one common share at $1.50 per share.
        All of the proceeds from the private placement were allocated to the
        Class A shares issued.

    (e) Performance Warrants

                                                     Number of      Exercise
                                                      Warrants         Price
        ---------------------------------------------------------------------
        Balance, December 31, 2006                   6,300,000  $       0.50
        ---------------------------------------------------------------------
        Balance, December 31, 2007 and
         December 31, 2008                           6,300,000  $       0.50
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Exercisable, December 31, 2008                       -  $          -
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The performance warrants may be exercised the earlier of:
        (a) immediately following a liquidity event whereby the Board of the
        Company determines to liquidate all or substantially all of the
        assets of the Company, (b) immediately following an offer to purchase
        at least 66 2/3% of the outstanding common shares for cash or similar
        consideration (other than pursuant to a reverse take-over) that is
        received and taken up and paid for by the offeror, or (c) December
        31, 2010, otherwise they expire.

        The performance warrants vest immediately if (a) or (b) above occurs,
        or after the shares are listed on a recognized stock exchange and all
        of the following performance criteria are satisfied; (i) the Company
        has a market capitalization of at least $30,000,000; (ii) at least
        32,000,000 equity shares are outstanding; and (iii) the Company meets
        or exceeds the minimum listing requirements of a Tier 1 Issuer as
        defined in the policies of the TSX Venture Exchange (collectively the
        "Performance Criteria"). If the Performance Criteria are met, the
        warrants vest as follows: 2,700,000 performance warrants upon
        achieving a share price of $1.00 per share, 1,800,000 performance
        warrants upon achieving a share price of $1.50 per share and
        1,800,000 performance warrants upon achieving a share price of $2.00
        per share. Share prices are calculated based on the ten day weighted
        average trading price per share of the Company.

        As at December 31, 2008 all performance criteria related to the
        Company have been satisfied except the minimum listing requirements
        for a Tier 1 Issuer on the TSX Venture Exchange.

        The fair value of the performance warrants was estimated at
        $1,466,550 using the Black-Scholes option pricing model assuming
        expected volatility of 90% and an expected life of between one and
        three years with corresponding risk-free rates of 4.07% to 4.16%.
        During 2006, all the substantive criteria were considered probable
        and the $1,466,550 was expensed.

        The remaining contractual life of the outstanding and exercisable
        performance warrants is 2 years.

    11. Contributed surplus

                                                   December 31,  December 31,
        (Cdn $)                                           2008          2007
        ---------------------------------------------------------------------

        Balance, beginning of year                $  2,131,653  $  1,500,050
        Stock-based compensation
          Expensed                                     794,233       451,430
          Capitalized                                  183,983       120,394
          Decrease/Increase in fair value of
           non-employee options
            Expensed                                   (18,100)            -
            Capitalized                               (277,847)       59,779
        ---------------------------------------------------------------------
        Balance, end of year                      $  2,813,922  $  2,131,653
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    12. Related party transactions

        As at December 31, 2008, the Company accrued legal costs of $10,000
        (2007 - $30,000) payable to a firm in which a director is a partner.
        During 2008 $146,354 (2007 - $432,125) of legal costs were paid to
        the same law firm. All related party transactions are in the normal
        course of operations, related party transactions entered into by the
        Company have been measured at the exchange amount established and
        agreed to by the related parties.

    13. Commitments

        As at December 31, 2008, the Company was committed under a lease for
        office premises, requiring future minimum rental payments of $192,864
        per annum (2007 - $82,246), expiring December 31, 2011.

        As at December 31, 2008 the Company had a flow through share
        commitment of $6 million which is to be spent on Canadian Exploration
        Expenditures ("CEE") prior to December 31, 2009. During the year
        ended December 31, 2008 the Company spent $385,888 of CEE towards
        this commitment.

    14. Financial instruments

        The Board of Directors has overall responsibility for the
        establishment and oversight of the Company's risk management
        framework.

        Credit risk

        Credit risk is the risk of financial loss to the Company if a
        customer or counterparty to a financial instrument fails to meet its
        contractual obligations. At December 31, 2008, the Company's accounts
        receivable relates to interest income and GST refunds. The amount
        outstanding is the Company's maximum credit exposure.

        The term deposits are fully redeemable, without penalty, 30 days
        after the date of investment and therefore classified as cash and
        cash equivalents. When applicable, the Company manages the credit
        exposure related to short-term investments by selecting counter
        parties based on credit ratings and monitors all investments to
        ensure, as far as possible, a stable return. The carrying amount of
        accounts receivable and cash and cash equivalents represents the
        maximum credit exposure.

        Liquidity risk

        Liquidity risk is the risk that the Company will not be able to meet
        its financial obligations as they are due. The Company's approach to
        managing liquidity is to ensure, as far as possible, that it will
        have sufficient liquidity to meet its liabilities when due, under
        both normal and stressed conditions without incurring unacceptable
        losses or risking harm to the Company's reputation.

        Based on the current working capital balance the Company currently
        has sufficient capital to fund corporate and operational expenses
        until the end of 2009. However, the recent downturn in the capital
        markets may limit the Company's ability to raise the capital
        necessary to undertake or complete projects capital expenditures
        during 2009 or undertake expanded operations in 2009 if the capital
        market conditions do not improve. If debt or equity financing is
        available, there is no assurance that it will be on terms acceptable
        to the Company. In the second half of 2009, the Company will make an
        assessment on its future capital planning, taking into account, among
        other factors, capital market conditions at that time.

        The Company prepares periodic capital expenditure budgets, which are
        regularly monitored and updated as considered necessary. Further, the
        Company utilizes authorizations for expenditures on both operated and
        non-operated projects to further manage capital expenditures. The
        Company does not have a credit facility.

        Market risk

        Market risk is the risk that changes in foreign exchange rates,
        commodity prices, and interest rates will affect the Company's net
        earnings or the value of financial instruments. The objective of
        market risk management is to manage and control market risk exposures
        within acceptable limits, while maximizing returns.

        Foreign currency exchange rate risk

        Foreign currency exchange rate risk is the risk that the future cash
        flows will fluctuate as a result of changes in foreign exchange
        rates. The Company had no forward exchange rate contracts in place as
        at or during the year ended December 31, 2008.

        Commodity price risk

        Commodity price risk is the risk that the future cash flows will
        fluctuate as a result of changes in commodity prices. From time to
        time, the Company may use both financial derivatives and physical
        delivery sales contracts to manage market risks. Any such
        transactions would be approved by the Board of Directors. The Company
        has not entered into any financial or physical delivery sales
        contracts on future production at December 31, 2008.

        Interest rate risk

        Interest rate risk is the risk that future cash flows will fluctuate
        as a result of changes in market interest rates. The Company's
        exposure is limited to interest rate fluctuations on its cash in its
        bank account which bears a floating rate of interest, historically
        between 0.50% and 4.50%. The Company had no interest rate swap or
        financial contracts in place as at or during the year ended
        December 31, 2008.

        Fair value

        The Company's carrying value of cash and cash equivalents, accounts
        receivable and accounts payable and accruals approximates its fair
        value due to the immediate or short-term maturity of these
        instruments.

    15. Capital Management

        The Company's objectives when managing capital is to safeguard its
        ability to continue as a going concern, so that it can continue to
        provide returns to shareholders and benefits for other stakeholders.
        The Company manages the capital structure and makes adjustments to it
        in light of changes in economic conditions and the risk
        characteristics of the underlying assets.

        As the Company does not have any externally imposed capital
        requirements, for the purposes of this disclosure, the Company has
        defined its capital to mean its long-term debt (nil) and
        shareholders' equity, as determined each reporting date.

        In order to maintain or adjust its capital structure, the Company may
        from time-to-time issue additional common shares. As a result of the
        economic global downturn, access to its capital markets may be
        limited. The Company will adjust its capital spending if access to
        external capital sources is unavailable. In the future the Company
        may consider adding debt to its capital structure, the form and
        amount of potential debt will be dependent on future capital
        requirements and the resulting debt to equity ratios.

        There have been no changes to capital management in the year ended
        December 31, 2008.

    16. Loss per Share

    	   The following is a reconciliation of basic and diluted loss per
        share.

                          Three months ended          Twelve months ended
                              December 31,                December 31,
                      -------------------------------------------------------
                              2008          2007          2008          2007
        ---------------------------------------------------------------------

        Net Loss
         (Cdn $)      $     30,100       448,481     1,488,297     1,228,325
        Weighted
         average number
         of shares
         outstanding    55,070,800    38,050,640    47,219,898    30,992,790
        Basic loss
         per share    $      0.001         0.012         0.032         0.040
        Diluted
         gainloss per
         share        $      0.001         0.012         0.032         0.040

        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The Company is in a loss position for the period and all options are
        out of the money, therefore all dilutive instruments are
        anti-dilutive in nature.
    




For further information:

For further information: Louis Dufresne, President & CEO, James
Glessing, Vice President, Finance & CFO, North Peace Energy Corp., 630, 505 -
3rd Street SW, Calgary, Alberta, T2P 3E6, Telephone (403) 262-6024, Facsimile:
(403) 262-6072, E-mail: info@northpec.com, www.northpec.com Or Stephanie K
Mesher, Bryan Mills Iradesso, (403) 503-0144 ext. 216, smesher@bmir.com

Organization Profile

NORTH PEACE ENERGY CORP.

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