North Peace Energy Updates Operational Progress and Provides Q3 Financial
Results

CALGARY, Nov. 25 /CNW/ - North Peace Energy Corp. ("North Peace" or the "Company") releases operating and financial results for the three and nine months ended September 30, 2009.

About North Peace Energy

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 at Red Earth 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 (86,400 acres) with oil bearing thickness ranging for 10 to 16 metres, expected to be 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 has been producing since May 2009.

    
    Financial Update
    -----------------

    -   Working capital of $13.2 million and no debt as at September 30, 2009
    -   Capital expenditures of $699,780 in the third quarter
    -   Planned capital expenditures of $7.5 million in the fourth quarter of
        2009

    Corporate Update
    -----------------

    -   Front-end engineering has been completed on a 3,000 bbl/d pilot
        expansion. This is the first step of a potential 30,000 bbl/d
        commercial development
    -   Investigating potential joint venture partners on the Red Earth asset
        to secure additional capital

    Delineation Update
    ------------------

    -   The delineation program focused in Block B South is now underway;
        drilling commenced in November
        -  Eight vertical delineation wells are planned with additional
           contingent locations indentified

    -   This round of delineation combined with existing delineation is
        expected to be sufficient to advance a commercial project

    CSS Pilot Project Results
    --------------------------
    

North Peace's CSS pilot is the first thermal recovery project in the Red Earth area and has now been producing bitumen continuously for seven months. At this early stage of operations, the piloting efforts have not yet demonstrated the production rates and Steam to Oil Ratios ("SOR") required to advance full commercial development. Although initial results are encouraging, as expected several cycles will be required to demonstrate commerciality. In order to maximize production rates and reduce SORs, the Company is currently optimizing steaming strategies and is also investigating the use of alternate well types and configurations.

    
    The L1 well has completed its first cycle
    -   Total cycle length of nine months: steam injection of three months
        and production of six months
    -   Cumulative oil production of 9,500 bbls
           -  Peak oil production of 200 bbl/d, with average oil rates of
              35 bbl/d over the cycle
           -  Average oil cuts of 38%
    -   End of cycle SOR of 8.0 with an average 69% quality steam injected
           -  Adjusted for heat content, this equates to an SOR of 6.8 in
              Steam Assisted Gravity Drainage ("SAGD") projects where 100%
              quality steam is required
    -   Oil production at temperatures as low as approximately 20 degrees C
    -   Average bitumen sales price of $49.16/bbl, total sales of $467,020
           -  Gas purchases of 25,200 mcf at an average price of $5.32/mcf
              for a total gas cost of $134,064
    -   Indications are that minimal fracturing has occurred at the regulated
        injection pressure limitation
    -   Temperature logs show steam injected into the reservoir was
        concentrated at the toe of the well

    The L1 well is now in its second cycle
    -   Steam injection commenced in October and was completed in mid
        November
    -   This steam slug size was smaller than the first cycle's steam slug in
        an attempt to minimize SOR's by keeping the injected heat closer to
        the well
    -   This cycle focused steam at the heel of the well in an effort to more
        evenly distribute the steam over the horizontal length of the well
    -   Production is expected to commence in December 2009

    Production update on the L2 well
    -   The well has been producing for three months
    -   Peak oil production of 150 bbl/d was reached early in the cycle and
        has gradually declined to the current rate of 20 bbl/d
    -   Oil cuts have remained in the 5% - 15% range
    -   Similar to the L1 well, produced oil quality is as expected and no
        discernable sand production
    -   At this stage of production it is too early to determine full cycle
        SORs and production rates
           -  This information will be provided at the end of the cycle

    Operations Strategy Update
    --------------------------

    Data collected from the pilot is being used to optimize the commercial
    strategy. To accomplish this, the pilot needs to be operated for multiple
    cycles.

    Operational information learned to date

    -   Steam injection rates are lower than anticipated
           -  As a result, increased injection pressure limits may be
              required or modified steaming strategies will need to be
              developed
    -   First cycle production rates were lower than expected, resulting in
        higher SORs
           -  As a result, we need to optimize steaming and production
              strategies and may need to consider additional pilot strategies
    -   Oil is nearly mobile at reservoir conditions
           -  L1 well produced at temperatures significantly lower than
              expected
    -   Bitumen produced is of high quality as predicted
           - 10 degrees API and 90,000 - 200,000 centipoises and 16 degrees C
           -  Water separation from the produced emulsion is easier than
              expected, which may be beneficial in commercial operations
    -   No discernable sand production
           -  The current sand control strategy is sufficient

    Future plans to further define operating strategy and maximize existing
    facility utilization

    -   Optimization Strategies
           -  Target the steam injection at different areas along the
              horizontal well to achieve more uniform heat distribution in
              the reservoir
           -  Vary steam injection rates, volumes and pressures to reduce
              SORs
           -  Gather fracture orientation information on a vertical
              delineation well to help determine the orientation of
              commercial horizontal wells

    -   Additional Pilot Strategies under consideration (if optimization
        strategies do not meet expectations)
           -  Convert L1 to a continuous injection and production process by
              converting its two vertical observation wells to steam
              injectors
           -  Perform a CSS test on a vertical well
           -  Enhance injectivity in wells with the use of radial drilling
              technology
           -  Drill an additional horizontal well and perform a multi-stage
              fracture stimulation prior to steaming
           -  Drill two additional horizontal wells to bound one of the
              existing horizontals in order to simulate a commercial well pad
              layout
           -  Test the potential for high pressure SAGD recovery by
              converting an existing horizontal well to a well pair
    

Once we have optimized our strategy for commercial operations the detailed design of the commercial project will be finalized and the commercial application will be submitted.

Louis Dufresne, President of North Peace, commented, "North Peace has remained focused and has executed; our pilot project has been on production since May. This simple but robust and cost-effective pilot facility is capturing the right data to develop an optimal commercial operations strategy. There is significant resource value waiting to be unlocked on our lands and our piloting efforts are a significant step towards realizing this value."

    
    Updated Corporate Presentation
    ------------------------------

    Available on the Company's website at:
    http://www.northpec.com/investor/event_presentations.html

    Conference Call
    ---------------
    

North Peace has scheduled a conference call to discuss the pilot project operations and recent corporate developments. The call is set for 9 a.m. Mountain Standard Time (11 a.m. Eastern Standard Time) on Thursday, November 26, 2009. To participate, please call 647-427-7450 or 1-888-231-8191. A discussion by Louis Dufresne, President & CEO of North Peace will be followed by a question and answer period. If you are unable to participate, a taped broadcast will be available until November 30, 2009. To access the replay, dial 416-849-0833 or 1-800-642-1687. The pass code is 42387828.

    
                   Management's Discussion and Analysis of
                              Financial Results
    

This Management's Discussion and Analysis (MD&A) for North Peace Energy Corp. ("North Peace" or the "Company") provides analysis of the Company's financial results for the three and nine month periods ended September 30, 2009. The following information should be read in conjunction with the unaudited interim financial statements for the three and nine months ended September 30, 2009 and the audited financial statements for the year ended December 31, 2008. See also "Forward looking Statements" below.

Additional information about North Peace filed with Canadian securities commissions is available on-line at www.sedar.com.

    
    Date of Report        November 25, 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 at Red Earth 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 (86,400 acres) with oil bearing thickness ranging for 10 to 16 metres, expected to be 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 has been producing since May 2009.

North Peace continues to advance its Red Earth asset to commercial production. The pilot CSS plant has been operational since the start of 2009 with the principal objective of demonstrating the feasibility of producing economic quantities of bitumen from the Company's resource and validating economic and technical parameters to optimize the design of future commercial development.

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

    During the three months ended September 30, 2009 North Peace has completed
the following significant milestones:

    -   Capital expenditures of $699,780 million during the quarter
    -   Oil Sales of $332,649 for the three months ended September 30, 2009

    Subsequent to September 30, 2009 the Company has completed the following:

    -   As at November 25, 2009, $2 million has been spent towards the flow
        through commitment of $6 million
           -  The delineation program of approximately $2.5 - $3.0 million is
              now underway on our own lands
           -  The remaining $1.0 - $1.5 million of flow through expenditures
              is being spent on other exploration locations prior to
              December 31, 2009

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

    Quarterly Financial Information

                            2009       2009       2009       2008       2008
                            Q3($)      Q2($)      Q1($)      Q4($)      Q3($)
    -------------------------------------------------------------------------

    Revenues               8,191      4,099     26,752    150,963    120,028
    Net Loss and
     Comprehensive loss  640,129    695,369    658,380     30,100    571,983
    Basic and diluted
    Net Loss Per share     0.008      0.012      0.012      0.001      0.012
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------


                            2008       2008       2007
                            Q2($)      Q1($)      Q4($)
    ---------------------------------------------------

    Revenues              39,045     87,905    117,197
    Net Loss and
     Comprehensive loss  486,924    399,290    448,481
    Basic and diluted
    Net Loss Per share     0.013      0.010      0.012
    ---------------------------------------------------
    ---------------------------------------------------


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

    Interest Income

                                                             Nine months
                                 2009             2008   ended September 30,
    -------------------------------------------------------------------------
                              Q3         Q2         Q3       2009       2008
    -------------------------------------------------------------------------
    Interest Income        8,191      4,099    120,028     39,042    246,978
    -------------------------------------------------------------------------
    

Interest income for the three months ended September 30, 2009 was $8,191 compared to $39,042 for the same period in 2008 the decrease is due to lower amounts of cash on deposit following the completion of pilot construction coupled with lower interest rates. Interest income for the nine months ended September 30, 2009 was $39,042 compared to $246,978 from the same period in 2008 the decrease is due to interest rates which fell from 2.00% to 0.25%. The increase from the second quarter of 2009 is due to the increased cash on deposit following the equity financing completed in June 2009.

Stock-based Compensation

    
                                                             Nine months
                                 2009             2008   ended September 30,
    -------------------------------------------------------------------------
                              Q3         Q2         Q3       2009       2008
    -------------------------------------------------------------------------
    Stock-based
     Compensation        291,644    294,031    217,161    890,545    534,188
    -------------------------------------------------------------------------
    

Stock-based compensation was $291,644 for the three months ended September 30, 2009. The increase from the same period last year and in the year to date numbers is due to 2009 stock option grants. In addition, $117,983 related to stock based compensation was capitalized during the nine month period relating to consultants working directly on the capital program and pilot project.

The average fair value of the options granted during the nine month ended September 31, 2009 was $0.33 per option (2008 - $0.82) assuming an average volatility of 80% (2008 - 80%) on the underlying shares, a weighted average exercise price of $0.54 (2008 - $1.46), a risk-free interest rate of 2.11% - 2.23% (2007 - 2.81% - 3.35%), an expected life of 4 years (2008 - 4 years), and an expected dividend rate of nil (2008 - nil).

Administrative Expenses

    
                                                           Nine months ended
                                 2009             2008        September 30,
    -------------------------------------------------------------------------
                              Q3         Q2         Q3       2009       2008
    -------------------------------------------------------------------------
    G&A expense
      Salaries, Benefits
       and Consulting
       Fees              222,365    217,369    277,432    641,329    634,792
      Legal, Accounting
       and Audit Fees      7,000     57,367     47,232     36,435     89,980
      Office rent         64,891     64,282     27,578    194,064     82,174
      Other G&A          163,283    165,667    112,017    413,831    333,314
    -------------------------------------------------------------------------
    Administrative
     Expenses            457,539    504,685    464,259  1,285,659  1,140,260
    -------------------------------------------------------------------------
    

Salaries, Benefits and Consulting Fees

Salaries, benefits and consulting fees for the three months ended September 30, 2009 were $222,365 compared to $277,432 for the same period in 2008 the decrease is due to reduced consulting fees in 2009 as pilot construction was beginning in the third quarter 2008. Salaries, benefits and consulting fees for the nine months ended September 30, 2009 was $641,329 compared to $634,792 the increase from the same period in 2008 is due salary increases from 2008. The salaries, benefits and consulting fees are consistent with the second quarter in 2009.

Legal, Accounting and Audit Fees

Legal, accounting and audit fees for the three months ended September 30, 2009 were $7,000 compared to $47,232 for the same period in 2008 the decrease is due to reduced legal costs as no corporate legal work was completed during the quarter. Legal, accounting and audit fees for the nine months ended September 30, 2009 were $36,435 compared to $89,980 the decrease from the same period in 2008 is due reduced corporate legal working in 2009. Legal, accounting and audit fees decreased from the second quarter in 2009 due to is due to additional legal work during the second quarter related to the year-end regulatory filings completed that quarter.

Office Rent

Office rent has increased from the three month period and nine month period in the previous year because the Company relocated to larger office space on January 1, 2009. Office rent for the quarter is consistent with the second quarter 2009.

Depreciation and Accretion

    
                                                           Nine months ended
                                 2009             2008        September 30,
    -------------------------------------------------------------------------
                              Q3         Q2         Q3       2009       2008
    -------------------------------------------------------------------------
    Depletion,
     Depreciation and
     Accretion            18,110     17,780     10,591     53,632     30,727
    -------------------------------------------------------------------------
    

The increase in depletion, depreciation and accretion increased from the three month period and nine month period in the previous year is due to the construction of the pilot project with its subsequent depreciation, from additional depreciation expense on other assets and increased accretion expense from new asset retirement obligations on the horizontal wells and the pilot project.

    
    Red Earth CSS Pilot
    -------------------
    

The Red Earth CSS pilot commenced production at the beginning of May 2009. All revenues and expenses from the pilot have been recorded as an adjustment to the capitalized costs of the project. Operating costs were incurred starting January 2009. The majority of these operating costs relate to steam generation, which began in January 2009 and fixed facility costs. Well related operating costs were incurred with first production in May 2009.

    
                                                           Nine months ended
                                 2009             2008        September 30,
    -------------------------------------------------------------------------
                              Q3         Q2         Q3       2009       2008
    -------------------------------------------------------------------------
    Production (bbls/day)     91         62          -         51          -
    Average sales price
     (CDN$/bbl)            47.13      53.33          -      49.16          -
    Revenue              332,649    218,499          -    531,148          -
    Operating Costs &
     Royalties          (634,119)  (838,490)         - (1,811,133)         -
    -------------------------------------------------------------------------
    Net operating
     revenues           (301,470)  (619,991)         - (1,279,985)         -
    -------------------------------------------------------------------------


    Liquidity and Capital Resources
    -------------------------------
    

As at September 30, 2009 the Company had working capital of $13.2 million and no debt.

On June 23, 2009 the Company completed a private placement equity offering, issuing a total of 21,109,000 units ("Units"), at a price of $0.55 per Unit for gross proceeds of approximately $11.6 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 $0.75 per share until December 23, 2010.

The 2009 capital budget includes $5.5 million of drilling capital. The Company will spend $2.5 to $3.0 million of the drilling budget on 8 delineation wells (with additional locations identified) in the Red Earth area. The Red Earth delineation program commenced in November 2009. The remaining drilling capital will be allocated to other exploration locations to be determined during the fourth quarter. As at November 25, 2009 $4.5 million has been spent as part of this exploration program. Current working capital is sufficient to fund this capital budget, pilot operations and G&A for 2009/2010.

    
    Commitments
    -----------

    As at September 30, 2009, the payments due under the office lease are as
follows:

    (Cdn $)
    -------------------------------------------------------------------------
    2009                                                              48,216
    2010                                                             192,864
    2011                                                             192,864
    Thereafter                                                           Nil
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

The office lease expires December 31, 2011.

The Company has a flow through share commitment of $6 million which is to be spent on Canadian Exploration Expenditures ("CEE") prior to December 31, 2009. As at September 30, 2009 the Company had spent approximately $540,000 on CEE towards this commitment.

Capital Expenditures

    
                                                           Nine months ended
                                 2009             2008        September 30,
                         ----------------------------------------------------
                              Q3         Q2         Q3       2009       2008
    -------------------------------------------------------------------------
    Land & Lease Rentals  96,764      8,512     56,356    180,260    196,961
    Drilling and
     Completion          232,061    230,466  2,253,696    688,707  5,834,649
    Geological Costs      35,031     41,845     13,301     91,502     69,601
    Pilot Facilities
      Construction,
       equipment and
       engineering             -    691,392  4,123,684  3,923,060  7,208,080
      Capitalized plant
       overhead and
       operations        301,470    548,295          -  1,259,986          -
    Other                 34,454    181,314     97,204    406,800    189,246
    -------------------------------------------------------------------------
    Total                699,780  1,701,824  6,544,231  6,550,315 13,498,537
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------
    

The Company is a development stage enterprise and therefore capitalizes net revenue and depreciation until the Company commences its planned commercial operations. The Company has capitalized $1,259,986 for pilot operations in the nine months ended September 30, 2009.

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

    
    Additional Disclosure for Venture Issuers without Significant Revenues
    ----------------------------------------------------------------------
    

As at September 30, 2009, 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 September 30,
2009:

                                                          September 30, 2009
    -------------------------------------------------------------------------

    Common shares outstanding                                     76,179,800
    Weighted average number of shares outstanding during
     the period                                                   62,725,712
    Stock options outstanding                                      6,065,000
    Performance warrants outstanding                               6,300,000
    $0.75 Warrants outstanding                                    10,554,500
    $2.00 Warrants outstanding                                     6,666,650
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    As at November 24, 2009, there were no changes to the amounts in the above
table.

    Off Balance Sheet Arrangements
    ------------------------------

    There were no off balance sheet arrangements, other than the office lease
commitment.

    Transactions with Related Parties
    ---------------------------------

    As at September 30, 2009, the Company accrued legal costs of $70,000
payable to a firm in which a director is a partner. These costs were for
general legal services and legal work for the equity financing in June 2009.

    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)
    -----------------------------------------------------------
    

In May 2009, the CICA amended Section 3862, "Financial Instruments - Disclosures," to include additional disclosure requirements about fair value measurement for financial instruments and liquidity risk disclosures. These amendments require a three level hierarchy that reflects the significance of the inputs used in making the fair value measurements. Fair values of assets and liabilities included in Level 1 are determined by reference to quoted prices in active markets for identical assets and liabilities. Assets and liabilities in Level 2 include valuations using inputs other than quoted prices for which all significant outputs are observable, either directly or indirectly. Level 3 valuations are based on inputs that are unobservable and significant to the overall fair value measurement. These amendments are effective for on December 31, 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.

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.

Although in certain cases capital markets have improved since the significant downturn experienced in 2008, capital market conditions may limit the Company's ability to raise the capital necessary to undertake or complete projected capital expenditures after 2010. In addition, if debt or equity financing is available, there is no assurance that it will be on terms acceptable to the Company.

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.

Capital Markets

Based on the current working capital balance, the Company's budget indicates that the Company currently has sufficient capital to fund corporate and operational expenses until the end of 2010. However, capital market conditions may limit the Company's ability to raise the capital necessary to undertake expanded operations after 2010 if the capital market conditions do not improve. The Company has flexibility in timing future capital expenditures related to further development 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 been volatile. The Company's currently intends to operate its CSS pilot project notwithstanding the prevailing commodity price environment as the purpose of the pilot project is to validate the economic and technical parameters of the commercial project. Crude oil prices, while a significant factor, are only one of many factors in the Company's decision to advance a commercial project. The Company will monitor commodity prices as it is evaluating 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 implemented the new Royalty Framework ("NRF") on January 1, 2009. 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.

    
    Project and Company Outlook
    ---------------------------
    

During 2009, the Company has been focused on pilot operations. The data collected from the pilot will be used in evaluating the feasibility of future commercial operations and be used to design any future commercial development.

In the fourth quarter of 2009, the Company plans to spend $2.5 to $3.0 million of its drilling budget on 8 delineation wells (with additional locations indentified) in the Red Earth area. $2.0 to $2.5 million of drilling capital will be allocated to other exploration locations.

    
    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 International Accounting Standards Board ("IASB") issued an amendment to IFRS 1"Additional Exemptions for First-time Adopters" in July 2009 for oil and gas companies following full cost accounting. This amendment will enable an entity to measure exploration and evaluation assets at the amount determined under the entity's previous accounting principles and it also provides for the measurement of oil and gas assets in the development or production phase, among other things, by allocating the amount determined by the entity's previous accounting principles to the underlying assets on a pro rata basis using reserve volumes or reserve values at the date of transition.

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 the 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 in the fourth quarter of 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 Petroleum Initially-In-Place; 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)
    -------------------------------------------------------------------------
                                                  September 30,  December 31,
                                                          2009          2008
    (Cdn $)
    -------------------------------------------------------------------------
    Assets

    Current assets
      Cash and cash equivalents (note 4)          $ 13,404,841  $ 18,119,752
      Accounts receivable                              288,974       922,537
      Prepaid expenses                                 139,858        86,290
    -------------------------------------------------------------------------
                                                    13,833,673    19,128,579

    Oil and gas properties (note 5)                 61,639,964    54,875,482
    Other assets                                        40,029        48,097
    Future income tax asset                                  -       557,477
    -------------------------------------------------------------------------
                                                  $ 75,513,666  $ 74,609,635
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Liabilities and Shareholders' Equity

    Current liabilities
      Accounts payable and accruals               $    641,880  $  8,788,438

    Asset retirement obligations (note 6)              530,077       442,303
    Future income tax liability                        452,197             -
    -------------------------------------------------------------------------
                                                     1,624,154     9,230,741
    -------------------------------------------------------------------------

    Shareholders' equity
      Equity Instruments (note 7)                   76,654,413    67,158,445
      Contributed surplus (note 8)                   3,822,450     2,813,922
      Deficit                                       (6,587,351)   (4,593,473)
    -------------------------------------------------------------------------
                                                    73,889,512    65,378,894

    -------------------------------------------------------------------------
                                                  $ 75,513,666  $ 74,609,635
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Future Operations (note 1)
    Commitments (note 10)

    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          Nine months ended
                                 September 30,               September 30,
                              2009          2008          2009          2008
    -------------------------------------------------------------------------

    Revenue
      Interest Income $      8,191  $    120,028  $     39,042  $    246,978
    -------------------------------------------------------------------------
                             8,191       120,028        39,042       246,978
    -------------------------------------------------------------------------

    Operating expenses
      General and
       administrative      457,539       464,259     1,400,659     1,140,260
      Stock-based
       compensation        291,644       217,161       890,545       534,188
      Depletion,
       depreciation
       and accretion        18,110        10,591        53,632        30,727
    -------------------------------------------------------------------------
                           767,293       692,011     2,344,836     1,705,175
    -------------------------------------------------------------------------

    Net Loss before
     taxes            $    759,102  $    571,983  $  2,305,794  $  1,458,197

    Future Income Tax
     reduction            (118,973)            -      (311,916)            -
    -------------------------------------------------------------------------

    Net Loss and
     Comprehensive
     Loss                  640,129       571,983     1,993,878     1,458,197

    Deficit at
     beginning of
     period              5,947,222     3,991,390     4,593,473     3,105,176
    -------------------------------------------------------------------------

    Deficit at end
     of period        $  6,587,351  $  4,563,373  $  6,587,351  $  4,563,373
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Net Loss per share
     (note 11)
      Basic and
       Diluted        $     0.008   $      0.012  $      0.032  $      0.035
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    North Peace Energy Corp.
    (A Development Stage Company)

    Statements of Cash Flows
     (unaudited)

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

                              Three months ended          Nine months ended
                                 September 30,               September 30,
                              2009          2008          2009          2008
    -------------------------------------------------------------------------

    Cash provided by
     (used in):

    Operating Activities
      Net Loss        $   (640,129) $   (571,983) $ (1,993,878) $ (1,458,197)
      Non-cash charges
       to earnings
        Depletion,
         depreciation
         and accretion      18,110        10,591        53,632        30,727
        Stock-based
         compensation      291,644       217,161       890,545       534,188
        Future income
         tax reduction    (118,973)            -      (311,916)            -
    -------------------------------------------------------------------------
                          (449,348)     (344,231)   (1,361,617)     (893,282)
      Net change in
       non cash working
       capital
        Accounts
         receivable         85,285      (186,679)      610,566        23,791
        Prepaid
         expenses         (102,688)      (57,346)      (53,568)      (58,589)
        Accounts
         payable and
         accruals           47,703        47,065       (52,230)      (29,569)
    -------------------------------------------------------------------------
                          (419,048)     (541,191)     (856,849)     (957,649)
    -------------------------------------------------------------------------
    Investing Activities
      Additions to oil
       and gas
       properties         (699,780)   (6,544,231)   (6,550,315)  (13,498,538)
      Other assets          (2,729)       (4,854)      (14,646)      (13,366)
      Net change in non
       cash working
       capital
        Accounts
         receivable         56,921             -        22,997      (124,049)
        Accounts
         payable and
         accruals         (359,318)    3,835,383    (8,184,574)    5,841,694
    -------------------------------------------------------------------------
                        (1,004,906)   (2,713,702)  (14,726,538)   (7,794,259)
    -------------------------------------------------------------------------
    Financing
     Activities
      Proceeds on
       issue of common
       shares, net of
       share issue
       costs                (2,940)   24,226,918    10,778,230    24,277,418
      Net change in
       non cash
       working capital
        Accounts
         payable and
         accruals            3,641        80,000        90,246        80,000
    -------------------------------------------------------------------------
                               701    24,306,918    10,868,476    24,357,418
    -------------------------------------------------------------------------

    Increase (Decrease)
     in cash and cash
     equivalents        (1,423,253)   21,052,025    (4,714,911)   15,605,510

    Cash and cash
     equivalents,
     beginning of
     period             14,828,094     4,517,878    18,119,752     9,964,393
    -------------------------------------------------------------------------
    Cash and cash
     equivalents, end
     of period        $ 13,404,841  $ 25,569,903  $ 13,404,841  $ 25,569,903
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------

    Supplemental
     disclosure:
      Interest
       received       $     44,104  $     12,930  $    194,777  $    321,481
    -------------------------------------------------------------------------
    -------------------------------------------------------------------------



    North Peace Energy Corp.
    (A Development Stage Company)

    Notes to Financial Statements
    As at and for the periods ended September 30, 2009 and 2008 (unaudited)

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

    1.  Nature of operation and future operations

        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. 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. Production
        from its pilot project has commenced in the first half of 2009,
        however production of commercial quantities is not expected for two
        to three years.

        The Company's Red Earth project contains 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 operating.

        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. If the
        going concern assumption was not appropriate for these financial
        statements, adjustments might be necessary to the carrying value of
        assets and liabilities, the reported revenues and expenses and the
        balance sheet classifications used.

        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 September 30, 2009 the Company had
        working capital of $13.2 million and no debt. The Company has a flow
        through commitment of $6 million to be spent on Canadian Exploration
        Expenditures ("CEE") prior to December 31, 2009. As at September 30,
        2009 the Company had spent approximately $540,000 towards this
        commitment. The Company has sufficient working capital to satisfy its
        flow through commitment.

        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.

        The recent downturn in the capital markets may limit the Company's
        ability to raise the capital necessary to undertake commercial
        development capital expenditures after 2010 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.

        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.

    2.  Adoption of new accounting policies

        The International Accounting Standards Board ("IASB") has issued an
        amendment to IFRS 1"Additional Exemptions for First-time Adopters".
        Included in the amendment issued in July 2009 by the IASB are
        transition exemptions for oil and gas companies following full cost
        accounting. The transition exemptions allow full cost companies to
        allocate their existing full cost PP&E balances using reserve values
        or volumes to IFRS compliant units of account without requiring
        retroactive adjustment, subject to an initial impairment test. The
        Company intends to adopt the transition exemptions.

        In May 2009, the CICA amended Section 3862, "Financial Instruments -
        Disclosures," to include additional disclosure requirements about
        fair value measurement for financial instruments and liquidity risk
        disclosures. These amendments require a three level hierarchy that
        reflects the significance of the inputs used in making the fair value
        measurements. Fair values of assets and liabilities included in Level
        1 are determined by reference to quoted prices in active markets for
        identical assets and liabilities. Assets and liabilities in Level 2
        include valuations using inputs other than quoted prices for which
        all significant outputs are observable, either directly or
        indirectly. Level 3 valuations are based on inputs that are
        unobservable and significant to the overall fair value measurement.
        These amendments are effective for on December 31, 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.  Basis of presentation

        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, 2008 except as noted. These financial
        statements should be read in conjunction with the audited year-end
        financial statements for North Peace Energy Corp.

    4.  Cash and cash equivalents

        Included in cash and cash equivalents is a redeemable term variable
        rate deposit totaling $11 million which currently bears interest at
        0.25 % and matures on June 23, 2010. The term deposits are fully
        redeemable, without penalty, 30 days after the date of investment and
        are therefore classified as cash and cash equivalents.

    5.  Oil and gas properties

                                                  September 30,  December 31,
        (Cdn $)                                           2009          2008
        ---------------------------------------------------------------------

        Oil and gas
         interests                                $ 43,269,455  $ 42,442,785
        Pilot Project
          Equipment
           and
           construction                             16,401,285    12,432,697
          Startup costs                                183,416             -
          Capitalized
           operations                                1,785,807             -
        ---------------------------------------------------------------------
                                                  $ 61,639,963  $ 54,875,482
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        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 operating. At
        September 30, 2009, the Company has no economic reserves or
        commercial production. Accordingly, no provision for depletion
        expense has been made.

        Stock-based compensation recovery for consultants of $40,812 was
        capitalized during the nine months ended September 30, 2009 (2008 -
        $93,864 recovery).

        Deposits with the Energy Resources and Conservation Board of $495,382
        (2008 - $126,782) were included in oil and gas properties as at
        September 30, 2009.

    6.  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.

                                                  September 30,  December 31,
        (Cdn $)                                           2009          2008
        ---------------------------------------------------------------------

        Asset retirement obligations, beginning
         of period                                $    442,303  $    215,820
        Additions                                       64,506       212,296
        Accretion                                       30,918        17,120
        Change in estimates                             (7,650)       (2,933)
        ---------------------------------------------------------------------

        Asset retirement obligations, end of
         period                                   $    530,077  $    442,303
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The total undiscounted amount of cash flows required to settle the
        obligations as measured at September 30, 2009 is estimated to be
        $1,273,466 (2008 - $1,121,365). 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 - 10% (2008 - 8%) and the
        estimated inflation rate used to project future costs was 2% (2008 -
        2%).

    7.  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, 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 (i)                        16,969,660    22,999,951
        Share issue costs (ii)                               -    (1,774,667)
           Tax effect of share issue costs                   -       479,736
        ---------------------------------------------------------------------
        Balance December 31, 2008                   55,070,800  $ 64,158,452
        Equity financing (iii)                      21,109,000     9,393,505
        Share issue costs (iv)                               -      (831,720)
        Tax effect of share issue costs                      -       217,738
        Tax effect of flow through shares                    -    (1,500,000)
        ---------------------------------------------------------------------
        Balance September 30, 2009                  76,179,800  $ 71,437,975

                                                        Number
                                                     of Shares        Amount

        $0.75 Share Purchase Warrants

        Balance December 31, 2008                            -  $          -
        Equity financing (iii)                      10,554,500     2,216,445
        ---------------------------------------------------------------------
        Balance September 30, 2009                  10,554,500     2,216,445

        $2.00 Share Purchase Warrants

        Balance December 31, 2007                            -  $          -
        Equity financing (i)                         6,666,650     2,999,993
        ---------------------------------------------------------------------
        Balance December 31, 2008 and
         September 30, 2009                          6,666,650  $  2,999,993

        Total Equity Instruments                                $ 76,654,413
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

           i.    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 nil.

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

         iii.    On June 23, 2009 the Company completed a private placement
                 equity offering, issuing a total of 21,109,000 units
                 ("Units"), at a price of $0.55 per Unit for gross proceeds
                 of approximately $11.6 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 $0.75 per share until December
                 23, 2010.

                 The fair value of the warrants is $0.21 per warrant assuming
                 a volatility of 80% on the underlying shares, a risk-free
                 interest rate of 2.23%, an expected life of 1.5 years and an
                 expected dividend rate of nil.

          iv.    Share issue costs relate to the costs incurred for the
                 equity issuance on June 23, 2009

        (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, 2007   2,280,500  $ 1.00 - 2.62         $ 1.43
        Options exercised              (50,500)          1.00           1.00
        Options granted              1,830,000    1.18 - 1.50           1.46
        ---------------------------------------------------------------------
        Balance, December 31, 2008   4,060,000  $ 1.00 - 2.62         $ 1.45
        Options granted              2,455,000    0.28 - 0.55           0.54
        Options forfeited             (450,000)   1.00 - 1.50           1.17
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------
        Balance, September 30, 2009  6,065,000  $ 0.28 - 2.62         $ 1.11
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        The average fair value of the options granted during 2009 was $0.33
        per option (2008 - $0.82) assuming an average volatility of 80%
        (2008 - 80%) on the underlying shares, a weighted average exercise
        price of $0.54 (2008 - $1.46), a risk-free interest rate of
        2.11% - 2.23% (2007 - 2.81% - 3.35%), an expected life of 4 years
        (2008 - 4 years), and an expected dividend rate of nil (2008 - nil).

        Stock options issued to employees 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 expense of
        $890,545 during the nine months ended September 30, 2009 and $117,983
        was capitalized to oil and gas properties.

        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 became exercisable when the Company's previously announced
        cyclic steam pilot project demonstrated 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 September 30, 2009.

                                Options
                              Outstanding               Options Exercisable
                                Weighted                            Weighted
        Range of                Average     Remaining                Average
        Exercise   Number of     Price     Contractual   Options      Price
        Price      Options     Per Share    Life (yrs) Exercisable  Per Share
        ---------------------------------------------------------------------
        $0.28 -
         $0.50        50,000      $0.28         4.39       16,667      $0.28
        $0.51 -
         $1.00     3,520,000      $0.70         2.17      790,000      $1.00
        $1.01 -
         $2.00     2,095,000      $1.53         3.67      836,666      $1.58
        $2.00 -
         $3.00       400,000      $2.62         2.67      266,667      $2.62
        ---------------------------------------------------------------------
                   6,065,000      $1.11         2.74    1,910,000      $1.47
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------


        (d)   Performance Warrants

                                                     Number of      Exercise
                                                      Warrants         Price
        ---------------------------------------------------------------------
        Balance, December 31, 2007                   6,300,000  $       0.50
        ---------------------------------------------------------------------
        Balance, December 31, 2008 and
         September 30, 2009                          6,300,000  $       0.50
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        Exercisable, September 30, 2009                      -  $          -
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

        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 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 September 30, 2009 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 1.25 years.

    8.  Contributed surplus

                                                  September 30,  December 31,
        (Cdn $)                                           2009          2008
        ---------------------------------------------------------------------

        Balance, beginning of period              $  2,813,922  $  2,131,653
        Stock-based compensation
          Expensed                                     852,547       794,233
          Capitalized                                   99,731       183,983
          Increase/(Decrease) in fair value of
           non-employee options
            Expensed                                    37,998       (18,100)
            Capitalized                                 18,252      (277,847)
        ---------------------------------------------------------------------
        Balance, end of period                    $  3,822,450  $  2,813,922
        ---------------------------------------------------------------------
        ---------------------------------------------------------------------

    9.  Related party transactions

        As at September 30, 2009, the Company accrued legal costs of $70,000
        payable to a firm in which a director is a partner. These costs were
        for general legal services and legal work for the equity financing in
        June 2009. 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.

    10. Commitments

        As at January 1, 2009, 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.

        The Company has a flow through share commitment of $6 million which
        is to be spent on Canadian Exploration Expenditures ("CEE") prior to
        December 31, 2009. As at September 30, 2009 the Company had spent
        approximately $540,000 of CEE towards this commitment.

    11. Loss per Share

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

                              Three months ended          Nine months ended
                                 September 30,               September 30,
                      -------------------------------------------------------
                              2009          2008          2009          2008
        ---------------------------------------------------------------------

        Net loss
         (Cdn $)      $  (640,129)  $   (571,983) $ (1,993,878) $ (1,458,197)
        Weighted
         average
         number of
         shares
         outstanding    76,179,800    49,414,247    62,725,712    41,844,120
        Basic loss
         per share    $      0.008  $      0.012  $      0.032  $      0.035
        Diluted loss
         per share    $      0.008  $      0.012  $      0.032  $      0.035

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

        The Company is in a loss position for the period, therefore all
        dilutive instruments which include stock options and performance
        warrants are anti-dilutive in nature.
    

SOURCE NORTH PEACE ENERGY CORP.

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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