UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

or

IVANHOE ENERGY INC.

Suite 654 – 999 Canada Place
Vancouver, British Columbia, Canada
V6C 3E1

(604) 688-8323

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report:
Not Applicable

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act)

The number of shares of the registrant’s capital stock outstanding as of March 31, 2004 was 168,739,911 Common Shares, no par value.

TABLE OF CONTENTS

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Part I — Financial Information

Item 1 Financial Statements

IVANHOE ENERGY INC.
Unaudited Consolidated Balance Sheets
(stated in thousands of U.S. Dollars except share amounts)

(See accompanying notes)

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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Loss and Deficit
Three Month Periods Ended March 31
(stated in thousands of U.S. Dollars except per share amounts)

(See accompanying notes)

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IVANHOE ENERGY INC.
Unaudited Consolidated Statements of Cash Flow
Three Month Periods Ended March 31
(stated in thousands of U.S. Dollars)

(See accompanying notes)

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Notes to the Consolidated Financial Statements
March 31, 2004
(all tabular amounts are expressed in thousands of U.S. dollars except per share data)
(Unaudited)

1.

BASIS OF PRESENTATION

The Company’s accounting policies are in accordance with accounting principles generally accepted in Canada. These policies are consistent with accounting principles generally accepted in the U.S., except as outlined in Note 12. The unaudited consolidated financial statements have been prepared on a basis consistent with the accounting principles and policies reflected in the December 31, 2003 consolidated financial statements, except for a change in the policy of accounting for stock based compensation which has been implemented retroactively with a restatement of prior period financial statements, and should be read in conjunction therewith. The December 31, 2003 consolidated balance sheet, as restated, was derived from the audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles (“GAAP”) in Canada and the U.S. In the opinion of management, all adjustments (which included normal recurring adjustments) necessary for the fair presentation for the interim periods have been made. The results of operations and cash flows are not necessarily indicative of the results for a full year.

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts and other disclosures in these consolidated financial statements. Actual results may differ from those estimates.

2.

CHANGE IN ACCOUNTING POLICY

Prior to January 1, 2004, the Company accounted for options granted to employees and directors using the intrinsic-value of the options. Under this method, compensation costs were not recognized in the financial statements for share options granted at market value but rather disclosure was required, on a pro forma basis, of the impact on net income of using the fair value at the option grant date. The Company does, however, recognize compensation costs in its financial statements for options granted to non-employees after January 1, 2002 based on the fair value of the options at the date granted. The Company uses the Black-Scholes option pricing model for determining the fair value of options issued at grant date.

For fiscal years beginning on or after January 1, 2004, Canadian GAAP requires compensation costs to be recognized in the financial statements using the fair value based method of accounting for all stock options granted after January 1, 2002. Implementation of this change in accounting policy requires retroactive application with the option of restating financial statements of prior periods.

Accordingly, effective January 1, 2004, the Company changed its accounting policy, for Canadian GAAP purposes, to recognize compensation costs using the fair value based method of accounting for stock options granted to employees and directors after January 1, 2002. This change has been adopted retroactively and the Company has elected to restate the financial statements of prior periods (See Note 7).

3.

OIL AND GAS PROPERTIES

Oil and gas properties, equipment and gas-to-liquids (“GTL”) investments are net of accumulated depletion and depreciation of $11.9 million and $10.5 million as well as a provision for impairment of oil and gas properties of $34.0 million as at March 31, 2004 and December 31, 2003, respectively.

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In January 2004, the Company signed farm-out and joint operating agreements with Richfirst Holdings Limited (“Richfirst”), a wholly-owned subsidiary of China International Trust & Investment Company to jointly develop the Dagang oil project. Richfirst will acquire a 40% working interest in the project following Chinese regulatory approvals and an up-front payment of $20.0 million. Richfirst advanced $10.0 million of the up-front payment (see Note 9) but as at March 31, 2004 final regulatory approvals had not been received.

In February 2004, the Company farmed into the Knights Landing project, which is a 14,000-acre block located in the Sutter and Yolo counties, in northern California. Under this exploration and development farm-in agreement, the Company purchased, for $1.0 million, a 50% non-operated interest in four recent discoveries in the contract area and agreed to fund, for $0.6 million, gas gathering, surface treatment facilities and meters to connect the four wells to an existing pipeline system.

4.

LONG TERM ASSETS

In January 2004, the Company signed a Stock Purchase and Shareholders’ Agreement with Ensyn Group Inc. (“Ensyn Group”) and its subsidiary, Ensyn Petroleum International Ltd. (“Ensyn”), pursuant to which the Company acquired a 10% equity interest in Ensyn and exclusive rights to use the proprietary Ensyn RTPTM Process in several key international markets. The Company will pay $2.0 million and grant Ensyn rights to acquire equity interests in the Company’s international oil development projects that use the Ensyn RTPTM Process. The purchase price for the 10% equity interest in Ensyn will be paid in four equal installments and completion of the acquisition is subject to the attainment of specific milestones: (1) upon signing the heads of agreement, (2) upon signing the Stock Purchase and Shareholders’ Agreement, (3) upon Ensyn delivering a commercial demonstration facility to California and (4) upon confirmation of the economic viability of the Ensyn RTPTM Process from the commercial demonstration facility. The first two milestone payments totaling $1.0 million are included in long-term assets (See Note 11).

5.

SEGMENT INFORMATION

The following tables present the Company’s interim segment information for the three-month periods ended March 31, 2004 and 2003 and identifiable assets as at March 31, 2004 and December 31, 2003:

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6.	SHARE CAPITAL

Following is a summary of the changes in share capital and stock options outstanding for the three-month period ended March 31, 2004:

During the three-month period ended March 31, 2004, the Company closed two special warrant financings to advance its international and North American oil and gas operations and for general corporate purposes. The financings consist of 7,172,414 special warrants at $2.90 per special warrant. Each special warrant entitles the holder to acquire one common share and one common-share purchase warrant at no additional cost. Two common-share purchase warrants are exercisable to purchase an additional common share at $3.00 at any time on or prior to the first anniversary date following the special warrant date of issue and at $3.20 thereafter until the second anniversary date of the special warrant date of issue. The net proceeds from the special warrant financings have been apportioned to the common shares. No amounts have been apportioned to the purchase warrants.

The following common-share purchase warrants are outstanding and exercisable as at March 31, 2004:

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7.	STOCK BASED COMPENSATION

The Company accounts for all stock options granted using the fair value based method of accounting, which it adopted retroactively effective January 1, 2004 for stock options granted to employees and directors after January 1, 2002. Under this method, compensation costs are recognized in the financial statements over the options’ vesting period using an option- pricing model for determining the fair value of the options at the grant date.

The effect of the accounting change on the net loss for the three-month period ended March 31, 2004 and on the net loss for the three-month period ended March 31, 2003, as previously reported, was an increase of $0.2 million and $0.1 million, respectively. There is negligible effect on the net loss per share for either period. The deficit as at the beginning of the three month periods ended March 31, 2004 and 2003 has increased $0.8 million and $0.3 million, respectively, to reflect the retroactive adoption of the fair value based method of accounting for stock options granted to employees and directors after January 1, 2002. Additionally, 0.3 million options granted to employees and directors after January 1, 2002 were exercised during the third and fourth quarters of 2003 resulting in a $0.3 million increase in share capital as at December 31, 2003 with a corresponding reduction in contributed surplus.

The increases resulting from the foregoing change in accounting principle were calculated in accordance with the Black-Scholes option pricing model, using the following data and assumptions: 72% to 100% price volatility, using the prior two years weekly average prices of the Company’s common shares; expected dividend yield of 0%; option terms to expiry of 5 years, as defined by the option agreements; risk-free rate of return as of the date of the grant of 4.1% to 5.6%, based on five year Canada Bond yields.

8.	NOTES PAYABLE

In February 2003, the Company obtained a bank facility for up to $5.0 million to drill 30 new oil wells and upgrade surface transmission and steam injection facilities in the southern expansion of South Midway. Interest only is payable until July 15, 2004 at 0.25% above the bank’s prime rate or 2.75% over the London Inter-Bank Offered Rate (“LIBOR”), at the option of the Company. After July 15, 2004, the loan is repayable over three years plus interest at 0.50% above the bank’s prime rate or 3.0% over LIBOR, at the option of the Company. The loan is secured by all the Company’s rights and interests in the South Midway properties. The loan balance as at March 31, 2004 is $1.0 million with a three-month fixed LIBOR rate of 3.875%.

9.	ADVANCE PAYABLE

In March 2004, the Company received a $10.0 million advance as part of the $20.0 million up-front payment due from Richfirst for their farm-in to the Dagang oil project (See Note 3). The advance is repayable July 1, 2004 plus accrued and unpaid interest at 5% per annum. Richfirst, at its option, may elect to apply the advance against the $20.0 million up-front payment due to the Company. If such election is made by Richfirst prior to closing the farm-out agreement, which includes receiving Chinese regulatory approvals, the Company will not be required to repay the advance nor the accrued and unpaid interest on the advance and Richfirst would be entitled to 50% of its participating interest share of production from the Dagang oil project from the date of the advance.

10.	ASSET RETIREMENT OBLIGATION

The undiscounted amount of expected cash flows required to settle the Company’s asset retirement obligations is estimated at $1.0 million to be settled over a twelve-year period

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starting in 2010. The liability for the expected cash flows, as reflected in the financial statements, has been discounted at 5% to 7%.

11.	SUBSEQUENT EVENT

In April 2004, the Company signed an agreement with Ensyn Group and Ensyn pursuant to which the Company advanced to Ensyn $1.0 million until July 31, 2004 at which time the Company may elect to take an additional 5% equity interest in Ensyn or consider the advance as a loan to be repaid plus interest over a period commencing on July 31, 2005.

12.	ADDITIONAL DISCLOSURE REQUIRED UNDER U.S. GAAP

The consolidated financial statements have been prepared in accordance with Canadian GAAP, which conforms to U.S. GAAP except as below:

Consolidated Balance Sheets

As discussed under “Stock Based Compensation” in Note 7, the Company changed its accounting policy, for Canadian GAAP, to recognize compensation costs using the fair value based method of accounting for stock options granted to employees and directors after January 1, 2002. For US GAAP, the Company continues to apply APB Opinion No. 25, as interpreted by FASB Interpretation No. 44, in accounting for its stock option plan and does not recognize compensation costs in its financial statements for stock options issued to employees and directors. Accordingly, for U.S. GAAP purposes, share capital would be reduced by $0.3 million as at March 31, 2004 and December 31, 2003 related to the employees’ and directors’ exercise of options in the third and fourth quarters of 2003; contributed surplus would be reduced by $0.7 million and $0.5 million as at March 31, 2004 and December 31, 2003, respectively, for stock options issued to employees and directors, but not yet exercised; and the deficits as at March 31, 2004 and December 31, 2003 would be reduced by $1.0 million and $0.8 million, respectively, for the amount of stock based compensation expense recognized for Canadian GAAP.

The application of U.S. GAAP has the following effect on oil and gas properties and shareholders’ equity:

Under U.S. GAAP, the transfer of deficit to share capital, which occurred in 1999, would not be recognized and shareholders’ equity would be presented as follows:

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