EMPIRE PETROLEUM CORP (EP) FY 2022 MD&A

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

The
following discussion should be read together with the consolidated financial statements and notes to consolidated financial statements,
which are included in this Annual Report on Form 10-K in Item 8, Financial Statements and Supplementary Data, and the information set
forth in Part I, Item 1A – Risk Factors.

Overview

Our
primary business is the exploration and development of oil and gas interests. We have incurred significant losses from operations in
years prior to 2022, and there is no assurance that we will maintain profitability or obtain funds necessary to finance our future operations.

We
seek to increase shareholder value by growing reserves, production, revenues, and cash flow from operating activities by executing our
mission to use highly-skilled personnel to thoughtfully and expertly spend capital to realize reserves on producing properties.

Management
places emphasis on operating cash flow in managing our business, as operating cash flow considers the cash expenses incurred during the
period and excludes non-cash expenditures not related directly to our operations.

Business
Strategy

Our
business strategy is to obtain long-term growth in reserves and cash flow on a cost-effective basis. Management regularly evaluates potential
acquisitions of properties that would enhance current core areas of operation.

2021
XTO Acquisition

On
March 12, 2021, the Company, through its wholly owned subsidiary Empire New Mexico, entered into a purchase and sale agreement with XTO
Holdings, LLC (a subsidiary of ExxonMobil) to acquire, among other things, certain oil and natural gas properties in New Mexico. The
transaction closed in May 2021. For more information about the transaction, refer to Note 4 of our Consolidated Financial Statements
included in this report.

Results
of Operations

The
following table reflects our summary operating information. Because of normal production declines, increased or decreased drilling activity
and the effects of acquisitions, the historical information presented below should not be interpreted as indicative of future results.

NM:
A percentage calculation is not meaningful due to change in signs, a zero-value denominator or a percentage change greater than 200.

-24-

Revenues

Revenues
increased primarily as a result of higher volumes due to a full year impact of the XTO acquisition as well as higher commodity prices
in 2022. Average realized oil price in 2022 was approximately $93 per barrel, while average realized price in 2021 was approximately
$67, an increase in price of approximately 39%. Realized natural gas price for 2022 was approximately $5.18 per Mcf, while realized pricing
for 2021 was approximately $3.68 per Mcf, an increase in price of approximately 41%. Net oil volumes were approximately 483,000 Bbls
for 2022, an increase of 45% over the same period in the prior year. Net natural gas volumes were approximately 876,000 Mcf for 2022
as compared to approximately 622,000 for 2021, an increase of approximately 41%. NGL revenues are primarily from our New Mexico properties
acquired from XTO.

Lease
Operating Expense and Production Taxes

Lease
operating expense was higher in 2022 primarily as a result of a full year of operations in New Mexico after the May 2021 XTO acquisition.
Lease operating expenses for New Mexico were approximately $5.1 million more in 2022 than for 2021. Production and ad valorem taxes have
increased as a direct result of the XTO acquisition’s properties and increased volumes produced and sold, paired with higher realized
prices. In addition to recompletions and sidetrack well drilling activity in North Dakota, we also undertook workover and other lease
operating activities in 2022; North Dakota’s lease operating expenses increased by approximately $3.3 million period-over-period
as a result of increased field activity.

Depreciation,
Depletion, Amortization and Accretion and Impairment

DD&A
decreased in 2022 as compared to 2021 despite an increase in production volumes. The decrease in the expense is primarily related to
New Mexico depletion rate due to the impact of a higher reserve base in 2022. Accretion expense was slightly higher in 2022 as the overall
obligation increases over time.

We assess our oil and gas properties for
impairment when circumstances indicate the carrying value may be greater than its estimated future net cash flows. In 2022, estimated
future cash flows from our properties in Louisiana were less than the net book value. As a result, we recorded a $936,000 impairment
expense.

General
and Administrative Expense

Board
compensation expense, exclusive of stock-based compensation, was approximately $388,000 in 2022 as compared to $209,000 in 2021. Overall
personnel expense increased approximately $500,000 in 2022 over 2021. In 2022, we recognized expenses totaling approximately
$1,269,000 in conjunction with resolution of a Texas sales tax audit for prior periods for which the initial assessment was received
in April 2022. This total includes consulting fees and an accrual for $528,000 for the final settlement which will be paid in early
2023. Fees paid for professional services including outsourced services and legal increased over 2021 by approximately $500,000 as a
direct result of acquisition-related work, SEC filings related to our operations, and our successful uplisting from the OTCQB to the
NYSE American. Included in general and administrative expenses for 2021 is $989,000 for expense associated with a non-cash right to
buy shares in conjunction with the conversion of unsecured notes payable in 2021 as discussed in Note 9 to the Consolidated
Financial Statements included in this report.

Stock-based
Compensation

We
utilize stock-based compensation to compensate members of management and retain talented personnel. Our stock-based compensation increased
in 2022 due to a higher number of awards in 2022. We anticipate stock-based compensation to continue to be utilized in 2023 and beyond
to attract and retain talented personnel and compensate Board members and consultants.

Interest
Expense

Cash-based
interest expense increased slightly as a decrease due to a lower outstanding balance under our Credit Facility was offset by the impact
of higher interest rates. We have minimal interest-bearing vehicle and equipment notes payable.

Non-cash
interest expense is fully attributable to the related party notes payable as described in Note 9 to the Consolidated Financial Statements
included in this report. In 2021, a non-cash charge was recorded to interest expense of approximately $7.0 million related to interest
and amortization of debt issuance costs for convertible notes issued in 2021 that were fully converted prior to December 31, 2021.

-25-

Income
taxes

For
2022, we had income before income taxes which would result in a tax provision that was offset by a change in the valuation allowance
due to the anticipated use of the NOL carryforward. For periods prior to 2022, our effective tax rate is 0%. Due to having current
taxable income which cannot be fully offset by NOLs, the tax rate is 3% in 2022. We have generated net operating losses since
inception, which would normally reflect a tax benefit in the consolidated statement of operations and a deferred asset on the
consolidated balance sheet. However, because of the current uncertainty as to our ability to achieve sustained profitability and the
potential limitation of NOL carryforwards, a valuation reserve has been established that offsets the amount of any tax benefit
available for each period presented in the consolidated statements of operations.

Liquidity

As
of December 31, 2022, we had approximately $12 million cash on hand and approximately $300,000 available on the Credit Facility.
For additional information regarding the Credit Facility, see Note 8 to the Consolidated Financial Statements included in this report.
We expect to incur costs related to limited drilling activities in core areas as well as future oil and natural gas acquisitions.
It is expected that management will use a combination of cash on hand and cash flows from operations as well as seeking additional debt
or equity funding for these acquisitions and to fund ongoing operations.

Working
Capital

Working
capital (presented below) was $5.1 million as of December 31, 2022 compared to $1.1 million as of December 31, 2021, representing a change
of approximately $4.0 million. This change is primarily a result of the acquisition of producing properties in New Mexico, which served
to increase volumes sold for the year ended December 31, 2022, as well as the stronger pricing environment in 2022.

Cash
Flows

Cash
Flows from Operating Activities

Ongoing
operations from core assets contributed to cash flows provided by operating activities for the year ended December 31, 2022. In 2021,
we incurred approximately $18.0 million in non-cash expenses related to the convertible notes payable (See Related Party Transactions
for more information) that contributed to a net loss for financial reporting purposes.

Cash
Flows from Investing Activities

Cash
flows from investing activities in 2022 reflect $2.7 million related to acquisitions of oil and natural gas properties as compared to
$19.5 million in 2021 which primarily related to the XTO acquisition that occurred in May 2021. In 2022, we began recompletions and other
capitalizable efforts in multiple states as we sought to bring production online from existing wells and bring on new production from
sidetrack drilling in North Dakota which led to an increase in additions to oil and natural gas properties in 2022. We also participated
in the drilling of four non-operated wells through Empire Rockies Region in 2022 spending approximately $600,000. In 2021, we had a cash
outflow of approximately $2.5 million related to four other non-operated drilled wells. As part of the XTO acquisition, we entered into
an agreement to create a sinking fund for future plugging liabilities, paying approximately $4.8 million into that fund in 2021. In 2022,
we were able to negotiate for the release of the sinking fund requirement. Approximately $2 million of the sinking fund balance was returned
to us in 2022.

-26-

Cash
Flows from Financing Activities

In
2022, we received approximately $3.4 million in cash from warrant exercises. We also made approximately $1.2 million of principal payments
in 2022 on our Credit Facility. In 2021, the XTO acquisition and operations executing our mission were funded by proceeds from debt issued
of approximately $20.5 million as well as proceeds from stock and warrant issuances of approximately $11.3 million. We have quarterly
payment obligations related to our bank debt of $300,000 per quarter (increased to $500,000 per quarter in 2023) in addition to minimal
monthly payments for notes payable arising from the purchase of vehicles and equipment.

Capital
Resources

Capital
Expenditures

For
2022, additions to oil and natural gas properties totaled $14.6 million including $2.7 million related to acquisitions. The $11.9 million
not related to acquisitions primarily reflects well enhancement projects in North Dakota and non-operated drilling. We anticipate capital expenditures in 2023 that will be funded with cash on hand, cash flows from operations, debt, and/or equity issuances.

Related Party
Transactions

The
2021 issuance of a secured convertible note and an unsecured convertible note to Energy Evolution, a related party, as well as the conversion
of these notes in 2021 are described further in Note 9 to the Consolidated Financial Statements included in this report. These transactions
were related party transactions for accounting purposes.

Off-Balance
Sheet Arrangements

We
do not have any off-balance sheet arrangements.

Critical Accounting
Estimates

The
preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management
to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosures
of contingent assets and liabilities. Because estimates and assumptions require significant judgment, future actual results could differ
from those estimates and could have a significant impact on our results of operations, financial position and cash flows. We re-evaluate
our estimates and assumptions at least on a quarterly basis. In our management’s opinion, the more significant reporting areas
impacted by management’s judgments and estimates are as follows:

Successful
Efforts Method of Accounting for Oil and Natural Gas Activities

We
use the successful efforts method of accounting for oil and natural gas operations. Under this method, costs to acquire oil and natural
gas properties, drill successful exploratory wells, drill and equip development wells, and install production facilities are capitalized.
Estimated proved oil and natural gas reserves, management’s outlook on commodity prices and projected future cash flows of oil
and natural gas reserves are a significant part of our financial calculations. Following are examples of how these estimates affect financial
results:

Proved
oil and natural gas reserves are the estimated quantities of oil, natural gas and NGLs which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions.
Reserve quantities and future cash flows included in this report are prepared in accordance with guidelines established by the SEC and
the Financial Accounting Standards Board (“FASB”). The accuracy of reserve estimates is a function of:

-27-

Proved
reserves information included in this report is based on estimates prepared by independent petroleum engineers, Cawley Gillespie &Associates.
The independent petroleum engineers evaluated 100% of our estimated proved producing reserve quantities and their related future net
cash flows as of December 31, 2022. Estimates prepared by others may be higher or lower than these estimates. Because these estimates
depend on many assumptions, all of which may differ substantially from actual results, reserve estimates may be different from the quantities
of oil and natural gas that are ultimately recovered. Management may make revisions to reserve estimates throughout the year as additional
information becomes available. Such changes could trigger an impairment of our oil and natural gas properties and have an impact on our
depletion expense prospectively. For example, a change of 10 percent in our total proved reserves could change our annual depletion and
amortization expense by $200,000. The actual impact would depend on the specific areas impacted.

Impairment
of Oil and Gas Properties

We
assess our proved properties for impairment using estimates of future undiscounted cash flows. This assessment requires significant judgment
and assumptions including commodity price outlooks, estimates of reserve quantities, expected lease operating costs and capital costs.
An impairment expense could result if oil and gas prices decline in the future as it may not be economic to develop some of these unproved
properties. We performed an assessment as of December 31, 2022 and identified one area that was impaired and recorded an impairment in
2022 of $936,000.

Asset
Retirement Obligation

Asset
retirement obligations (“AROs”) consist primarily of estimated future costs associated with the plugging and abandonment
of oil and natural gas wells, removal of equipment and facilities from leased acreage, and land restoration in accordance with applicable
local, state and federal laws. The discounted fair value of an ARO liability is required to be recognized in the period in which it is
incurred, with the associated asset retirement cost capitalized as part of the carrying cost of the oil and natural gas asset. The recognition
of an ARO requires that management make numerous assumptions regarding such factors as the estimated probabilities, amounts and timing
of settlements; the credit-adjusted risk-free rate to be used; inflation rates; and future advances in technology. In periods subsequent
to the initial measurement of the ARO, we must recognize period-to-period changes in the liability resulting from the passage of time
and revisions to either the timing or the amount of the original estimate of undiscounted cash flows.

Stock-Based
Compensation

We
recognize stock-based compensation expense associated with restricted stock units, which consists of time-based awards and options. We
account for forfeitures of equity-based incentive awards as they occur. Stock-based compensation expense related to time-based restricted
stock units is based on the price of our common stock on the grant date. Stock-based compensation related to options is the fair value
of the option recognized over the vesting period. The fair value of an option is determined using the Black-Scholes option valuation
with the following assumption inputs:  dividend yield, expected annual volatility risk free interest rate and an expected life.

Income
Taxes and Uncertain Tax Positions

Our
tax provision is based upon the tax laws and rates in effect in the applicable jurisdiction in which operations are conducted and income
is earned. As part of the process of preparing the consolidated financial statements, management is required to estimate the income tax
provision. This process involves estimating the actual current tax exposure together with assessing temporary differences resulting from
differing treatment of items, such as depreciation, amortization and certain accrued liabilities for tax and accounting purposes.

Deferred
tax expense or benefit represents the change in the balance of deferred tax assets or liabilities. Valuation allowances are established
to reduce deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
At December 31, 2022 and 2021, a valuation allowance for deferred tax assets was recorded.

Management
applies the accounting standards related to uncertainty in income taxes. This accounting guidance clarifies the accounting for uncertainties
in income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the
consolidated financial statements. It requires that we recognize in the consolidated financial statements the financial effects of a
tax position, if that position is more likely than not of being sustained upon examination, including resolution of any appeals or litigation
processes, based upon the technical merits of the position. It also provides guidance on measurement, classification, interest, penalties
and disclosure. We have no uncertain tax positions at either December 31, 2022 or December 31, 2021.

-28-