40-F

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 40-F

(Check One)

o        Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934

or

ý        Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended December 31, 2006

Commission File Number: 001-32179

InterOil Corporation

(Exact Name of Registrant as Specified in Its Charter)

New Brunswick, Canada
(Province or Other Jurisdiction of Incorporation or Organization)

2911	Not Applicable
(Primary Standard Industrial Classification Code)	(I.R.S. Employer Identification Number)

Level 1
60-92 Cook Street
Cairns, QLD 4870, Australia
+61 (7) 4046-4600
(Address and Telephone Number of Registrant’s Principal Executive Offices)

CT Corporation Systems
111 8th Avenue
New York, New York 10011
(212) 894-8940
(Name, Address (Including Zip Code), and Telephone Number
(Including Area Code) of Agent for Service in the United States)

Copy to:

InterOil Corporation
25025 I-45 North, Suite 420
The Woodlands, TX 77380
Attention: General Counsel
(281) 292-1800
Facsimile: (281) 292-0888

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class	Name of Each Exchange on Which Registered
Common Shares	American Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

For annual reports, indicate by check mark the information filed with this form:

ý Annual Information Form ý Audited Annual Financial Statements

As of December 31, 2006, 29,871,180 of the issuer’s common shares were outstanding.

Indicate by check mark whether the registrant by filing the information contained in this form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). If “Yes” is marked, indicate the filing number assigned to the registrant in connection with such rule. o Yes 82-___ý No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. ý Yes o No

TABLE OF CONTENTS

PRINCIPAL DOCUMENTS
DISCLOSURE CONTROLS AND PROCEDURES
	Management’s report on Internal Control over financial reporting
	Changes in internal control over financial reporting:
AUDIT COMMITTEE
CODE OF ETHICS AND BUSINESS CONDUCT
PRINCIPAL ACCOUNTANT FEES AND SERVICES
OFF BALANCE SHEET ARRANGEMENTS
CONTRACTUAL OBLIGATIONS
AMEX CORPORATE GOVERNANCE
UNDERTAKINGS
INDEMNITY
CONSENT TO SERVICE PROCESS
SIGNATURES
EXHIBIT INDEX
Annual Information Form
Audited Annual Consolidated Financial Statements
Management's Discussion and Analysis
Consent of PricewaterhouseCoopers LLP
Consent of KPMG
Credit Agreement dated May 4, 2006
Memorandum of Understanding
Loan Agreement dated June 12, 2001
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of CEO Pursuant to Section 1350
Certification of CFO Pursuant to Section 1350

PRINCIPAL DOCUMENTS

The following documents have been filed as part of this Annual Report on Form 40-F (“Report”):

A. Annual Information Form

The 2006 Annual Information Form for InterOil Corporation (the “Company”) is incorporated herein by reference.

B. Audited Annual Financial Statements

The audited consolidated financial statements of the Company for the years ended December 31, 2006, 2005 and 2004, including the report of the Company’s independent auditors with respect thereto, are incorporated herein by reference. For a reconciliation of important differences between Canadian and United States generally accepted accounting principles, see Note 24 of the Notes to the audited financial statements incorporated herein by reference.

C. Management’s Discussion and Analysis

The Company’s Management’s Discussion and Analysis for the year ended December 31, 2006 (“MD&A”) is incorporated herein by reference.

DISCLOSURE CONTROLS AND PROCEDURES

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this Report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this Report.

Management’s report on Internal Control over financial reporting

Responsibility

Our management is responsible for establishing and maintaining adequate internal controls structure and procedures over financial reporting (as defined in rules 13a-15(f) under the Securities and Exchange Act of 1934, as amended). The company’s internal control system over financial reporting is a process designed to provide reasonable assurance to the Company’s management, board of directors and shareholders regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles (GAAP).

Inherent Limitations

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of change in conditions, or that the degree of compliance with policies or procedures may deteriorate.

Assessment

Under the supervision of our Chief Executive Officer and Chief Financial Officer, management conducted an assessment on the effectiveness of our internal control over financial reporting as of December 31 2006, using the criteria set forth in the framework established by the Committee of Sponsoring Organizations (COSO) entitled — Internal Controls — Integrated Framework. As a result of making this assessment, management concluded that the company maintained effective internal control over financial reporting as of December 31 2006:

As permitted by Securities and Exchange Commission guidance, management has excluded the operations related to IPL (PNG) Limited, a former Shell PNG’s wholesale and distribution businesses (acquired in October 2006) from its assessment of internal control over financial reporting as of December 31, 2006. The acquired business represented approximately six percent of 2006 consolidated net sales and nine percent of consolidated total assets at December 31, 2006.

This annual report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to audit by the company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the company to provide only management’s report in this annual report..

Changes in internal control over financial reporting:

There were no changes to the Company’s internal control over financial reporting during the period covered by this Report that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

AUDIT COMMITTEE

The Audit Committee of the Company’s Board of Directors is comprised of Dr. Byker, Mr. Speal and Mr Hansen . The Board of Directors has affirmatively determined that each of the members is financially literate and is an independent director for purposes of American Stock Exchange rules applicable to members of the audit committee. Additionally, the Board of Directors has determined that Mr. Speal has the accounting or financial management expertise to be considered a “financial expert” as defined by the Securities Exchange Act of 1934.

2

CODE OF ETHICS AND BUSINESS CONDUCT

The Company’s Board of Directors has adopted a Code of Ethics and Business Conduct which applies to all directors, officers and employees of the Company. The Board has not granted any waivers to the Code of Ethics and Business Conduct. The Code of Ethics and Business Conduct is accessible on the Company’s website http://www.interoil.com. Any amendments to or waivers of the Code of Ethics and Business Conduct that applies to the Company’s Chief Executive Officer, Chief Financial Officer, principle accounting officer or controller will also be posted on the Company’s website.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

Audit Fees Paid to Independent Auditors. Fees paid for professional services rendered related to the audit of the Company’s annual consolidated financial statements for the year ended December 31, 2006 by PricewaterhouseCoopers were $618,669 (2005 — $333,344) including out-of-pocket expenses.

Audit-Related Fees. Fees paid for professional services rendered related to audit-related services for the Company for the year ended December 31, 2006 by PricewaterhouseCoopers were $84,383 (2005 — 10,180). The audit-related services provided by PricewaterhouseCoopers during 2006 and 2005 consisted of reviewing the Company’s preparations for complying with the Sarbanes-Oxley Act of 2002.

Tax Fees. Fees paid for professional services rendered related to tax services for the Company for the year ended December 31, 2006 by PricewaterhouseCoopers were nil (2005 — $9,900).

All Other Fees. Fees paid for professional services rendered related to all other services for the Company for the year ended December 31, 2006 by PricewaterhouseCoopers were $124,364, out of which $91,253 related to involvement in responding to SEC queries on 40-F of December 31, 2005 and $33,111 consisted of procedures performed in connection with the quarterly financial reporting of the Company’s subsidiaries. The other services provided by PricewaterhouseCoopers of $22,884 consisted of procedures performed in connection with the quarterly financial reporting of the Company’s subsidiaries.

Pre-Approval. The Audit Committee of the Company’s Board of Directors pre-approves all auditing services, including the compensation and terms of the audit engagement, and all other non-audit services to be performed by the Company’s independent auditors. Non-audit services subject to the de-minimus exceptions described in Section 10A(i)(1)(B) of the Securities Exchange Act of 1934 may be approved by the Audit Committee prior to the completion of the audit. All of the services provided by the Company’s independent auditors during 2004 and 2005 were pre-approved by the audit committee.

OFF BALANCE SHEET ARRANGEMENTS

Please see the section titled “Off Balance Sheet Arrangements” in the Company’s MD&A, which is incorporated herein by reference.

CONTRACTUAL OBLIGATIONS

Please see the section titled “Contractual Obligations and Commitments” in the Company’s MD&A, which is incorporated herein by reference.

AMEX CORPORATE GOVERNANCE

The Company’s common shares are listed on The American Stock Exchange (“AMEX”). Section 110 of the AMEX company guide permits AMEX to consider the laws, customs and practices of foreign issuers in relaxing certain AMEX listing criteria, and to grant exemptions from AMEX listing criteria based on

3

these considerations. A company seeking relief under these provisions is required to provide written certification from independent local counsel that the non-complying practice is not prohibited by home country law. A description of the significant ways in which the Company’s governance practices differ from those followed by domestic companies pursuant to AMEX standards is as follows:

Shareholder Meeting Quorum Requirement. The AMEX minimum quorum requirement for a shareholder meeting is one-third of the outstanding common shares. In addition, a company listed on AMEX is required to state its quorum requirement in its bylaws. The Company’s quorum requirement is set forth in its By-Laws. A quorum for a meeting of members of the Company is two persons present in person, each being a shareholder entitled to vote thereat, or a duly appointed proxy for an absent shareholder so entitled.

Proxy Delivery Requirement. The AMEX requires the solicitation of proxies and delivery of proxy statements for all shareholder meetings, and requires that these proxies shall be solicited pursuant to a proxy statement that conforms to SEC proxy rules. The Company is a “foreign private issuer” as defined in Rule 3b-4 under the Securities Exchange Act of 1934, and the equity securities of the Company are accordingly exempt from the proxy rules set forth in Sections 14(a), 14(b), 14(c) and 14(f) of the Securities Exchange Act of 1934, as amended. The Company solicits proxies in accordance with applicable rules and regulations in Canada.

The foregoing are consistent with the laws, customs and practices in Canada.

UNDERTAKINGS

The Company undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

INDEMNITY

InterOil Corporation has agreed to indemnify and hold KPMG harmless against and from any and all legal costs and expenses incurred by KPMG in successful defence of any legal action or proceedings that arises as a result of KPMG’s consent to the inclusion of its audit report on InterOil Corporation’s past financial statements included in this registration statement.

CONSENT TO SERVICE PROCESS

The Company has previously filed a Form F-X in connection with the class of securities in relation to which the obligation to file this Report arises.

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SIGNATURES

Pursuant to the requirements of the Exchange Act, the Company certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.

INTEROIL CORPORATION
 

/s/ Phil E. Mulacek 

Phil E. Mulacek 

Chairman of the Board, Chief Executive Officer and President 

Date: March 30, 2007

EXHIBIT INDEX

The following exhibits have been filed as part of the Annual Report:

EXHIBIT
NUMBER		DESCRIPTION
	1.	Annual Information Form for the year ended December 31, 2006
	2.	Audited annual consolidated financial statements for the year ended December 31, 2006, including a reconciliation to United States generally accepted accounting procedures
	3.	Management’s Discussion and Analysis for the year ended December 31, 2006
	4.	Consent of PricewaterhouseCoopers LLP dated March 30, 2007
	5.	Consent of KPMG dated March 30, 2007
	6.	Credit Agreement between InterOil Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Clarion Finanz AG dated May 4, 2006
	7.	Memorandum of Understanding between InterOil Corporation, Merrill Lynch and Clarion Finanz AG
	8.	Loan Agreement between IP InterOil, Ltd. and Overseas Private Investment Corporation dated June 12, 2001, as amended
	9.	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
	10.	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934
	11.	Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code
	12.	Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code

EX-99.1

InterOil Corporation
Annual Information Form



For the Year Ended December 31, 2006
March 30, 2007

TABLE OF CONTENTS

General	1
Non-Gaap Measures	2
Legal Notice — Forward-Looking Statements	3
Corporate Structure	4
General Development Of The Business	7
Business Strategy	11
Description Of Our Business	14
Exploration And Production	14
Liquefaction, Refining And Marketing	19
Wholesale And Retail Distribution	23
Community Relations, Safety And The Environment	25
Risk Factors	27
Dividends	33
Description Of Our Capital Structure	34
Market For Our Securities	34
Directors And Officers	36
Board Committees	39
Interests Of Management And Others In Material Transaction	39
Legal Proceedings	40
Material Contracts	40
Transfer Agent And Registrar	43
Additional Information	44
Glossary Of Terms	45

GENERAL

The following Annual Information Form (AIF) should be read in conjunction with: the audited Consolidated Financial Statements and Notes for the year ended December 31, 2006 and the 2006 Management Discussion and Analysis. The AIF was prepared by the management of InterOil with respect to our financial performance for the periods covered by the related interim financial statements, along with a detailed analysis of our financial position and prospects.

In this AIF, references to “we”, “us”, “our”, “Company”, and “InterOil” refer to InterOil Corporation and its subsidiaries, unless the context requires otherwise. All dollar amounts are stated in United States dollars unless otherwise stated.

Annual Information Form     INTEROIL CORPORATION     1

NON-GAAP MEASURES

Earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA, represents our net income/(loss) plus total interest expense (excluding amortization of debt issuance costs), income tax expense, depreciation and amortization expense. EBITDA is used by InterOil to analyze operating performance. EBITDA does not have a standardized meaning prescribed by United States or Canadian generally accepted accounting principles and, therefore, may not be comparable with the calculation of similar measures for other companies. The items excluded from EBITDA are significant in assessing our operating results. Therefore, EBITDA should not be considered in isolation or as an alternative to net earnings, operating profit, net cash provided from operating activities and other measures of financial performance prepared in accordance with Canadian generally accepted accounting principles. Further, EBITDA is not a measure of cash flow under Canadian generally accepted accounting principles and should not be considered as such. The following table reconciles net income/(loss), to EBITDA, for each of the last eight quarters.

Quarters ended	2006(2),(3)												2005 (adjusted)(1),(2)
($ thousands) (unaudited)	Dec 31			Sep 30			Jun 30			Mar 31			Dec 31			Sep 30			Jun 30			Mar 31
Earnings before interest, taxes, depreciation and amortization		6,541			1,140			(10,257	)		(9,105	)		(5,566	)		3,486			(6,856	)		(5,858	)
Upstream		(1,051	)		(1,337	)		(2,262	)		(2,227	)		(2,362	)		(1,655	)		(2,615	)		(1,603	)
Midstream — Refining and Marketing		9,144			1,674			(8,188	)		(5,230	)		(6,333	)		6,070			(6,796	)		(3,405	)
Midstream — Liquefaction		(396	)		(298	)		—			—			—			—			—			—
Downstream		1,143			1,954			3,559			(326	)		3,963			2,522			2,550			584
Corporate & Consolidated		(2,299	)		(853	)		(3,366	)		(1,322	)		(834	)		(3,451	)		5			(1,434	)
Subtract:
Interest expense		5,649			5,349			3,609			2,666			2,989			2,455			2,996			2,547
Upstream		2			1			1			1			(6	)		2			2			2
Midstream — Refining and Marketing		2,479			3,329			2,731			2,342			2,756			2,320			2,735			2,351
Midstream — Liquefaction		—			—			—			—			—			—			—			—
Downstream		37			38			39			38			44			42			140			—
Corporate & Consolidated		3,131			1,981			838			285			195			91			119			194
Income taxes & non-controlling interest		1,049			244			1,031			(245	)		910			1,000			301			253
Upstream		—			—			—			—			—			—			—			—
Midstream — Refining and Marketing		42			(46	)		(137	)		(118	)		(129	)		19			(333	)		81
Midstream — Liquefaction		—			—			—			—			—			—			—			—
Downstream		996			416			1,005			(144	)		1,062			965			570			159
Corporate & Consolidated		11			(126	)		163			17			(23	)		16			64			13
Depreciation & amortization		3,554			3,100			2,862			2,837			2,700			2,943			2,699			2,695
Upstream		233			202			173			198			96			213			2			3
Midstream — Refining and Marketing		2,805			2,700			2,626			2,598			2,662			2,663			2,641			2,632
Midstream — Liquefaction		—			—			—			—			—			—			—			—
Downstream		537			222			89			62			55			55			51			43
Corporate & Consolidated		(21	)		(24	)		(26	)		(21	)		(113	)		12			5			17

Annual Information Form     INTEROIL CORPORATION     2

Quarters ended	2006(2),(3)												2005 (adjusted)(1),(2)
($ thousands) (unaudited)	Dec 31			Sep 30			Jun 30			Mar 31			Dec 31			Sep 30			Jun 30			Mar 31
Net income (loss) per segment(1)		(3,711	)		(7,553	)		(17,759	)		(14,363	)		(12,165	)		(2,912	)		(12,852	)		(11,353	)
Upstream		(1,286	)		(1,540	)		(2,436	)		(2,426	)		(2,452	)		(1,870	)		(2,619	)		(1,608	)
Midstream — Refining and Marketing		3,818			(4,309	)		(13,408	)		(10,052	)		(11,622	)		1,068			(11,839	)		(8,469	)
Midstream — Liquefaction		(396	)		(298	)		—			—			—			—			—			—
Downstream		(427	)		1,278			2,426			(282	)		2,802			1,460			1,789			382
Corporate & Consolidated		(5,420	)		(2,684	)		(4,341	)		(1,603	)		(893	)		(3,570	)		(183	)		(1,658	)

Comparative quarterly results for all quarters during 2005 have been adjusted and re-presented to include the adopted accounting treatment for exploration expenses associated with our $125 million Indirect Participation Interest Agreement entered into in February 2005 as reviewed by our auditors in the third quarter of 2005. The adjusted results present the quarterly financial information as if the indirect participation interest accounting policy we adopted during the third quarter of 2005 had been adopted at the inception of the agreement. See Note 23 to our unaudited financial statements for the three and nine month periods ended September 30, 2006 and 2005.

(1)	Our comparative quarterly results for all quarters during 2005 and 2006 have been represented to confirm with the presentation adopted at December 31, 2006. Previously, interest revenue and non-controlling interest were allocated to the corporate segment. Amounts associated with these line items are now included in each operating segments result.
(2)	Our September 2006 quarterly results have been represented to separate out our Midstream-Liquefaction segment from the Midstream Refining and Marketing segment.

LEGAL NOTICE — FORWARD-LOOKING STATEMENTS

This AIF contains “forward-looking statements” as defined in U.S. federal and Canadian securities laws. Such statements are generally identifiable by the terminology used, such as “may,” “plans,” “believes,” “expects,” “anticipates,” “intends,” “estimates,” “forecasts,” “budgets,” “targets” or other similar wording suggesting future outcomes or statements regarding an outlook. All statements, other than statements of historical fact, included in or incorporated by reference in this AIF are forward-looking statements. Forward-looking statements include, without limitation, statements regarding our plans for expanding our business segments, business strategy, contingent liabilities, environmental matters, and plans and objectives for future operations, future capital and other expenditures. By its very nature, such forward-looking information requires InterOil to make assumptions that may not materialize or that may not be accurate.

Each forward-looking statement reflects our current view of future events and is subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from any results expressed or implied by our forward-looking statements. These risks and uncertainties include, but are not limited to; the exploration and production, the refining and the distribution businesses are competitive; our refinery has not operated at full capacity for an extended period of time and our profitability may be materially affected if it is not able to do so; if we are not able to market all of our refinery’s output, we will not be able to operate our refinery at its full capacity and our financial condition and results of operations may be materially adversely affected; if our refining margins do not meet our expectations and our refinery operations are not profitable; we may be required to write down the value of our refinery; our refinery financial condition may be materially adversely affected if we are unable to obtain crude feedstocks for our refinery; our refining operations expose us to risks, some of which are not insured; our hedging activities may incur losses; we may not be successful in our exploration for oil and gas; if we are unable to renew our petroleum licenses with the Papua New Guinea government, we may be required to discontinue our exploration activities in Papua New Guinea; our investments in Papua New Guinea are subject to political, legal and economic risks that could materially adversely affect their value; new legislative, administrative or judicial actions that constrain licenses and permits from various government authorities may have a material affect on the company’s operations; weather and unforeseen operating hazards may impact our operating activities; our significant debt levels and our debt covenants may limit our future flexibility in obtaining additional financing; our ability to recruit and retain qualified personnel may have a material adverse effect on our operating results and stock price; Petroleum Independent and Exploration Corporation can affect our raising of capital through the issuance of common shares or securities convertible into common shares; compliance with and changes in environmental laws could adversely affect our performance; you may be unable to enforce your legal rights against us; changing regulations regarding corporate governance and public disclosure could cause additional expenses and failure to comply may adversely affect our reputation

Annual Information Form     INTEROIL CORPORATION     3

and the value of our securities; and the risks described under the heading “Risk Factors” in our Annual Information Form.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the forward-looking statements included in this AIF will prove to be accurate. In light of the significant uncertainties inherent in our forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Some of these and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements are more fully described under the heading Risk Factors.

Readers are cautioned that the foregoing list of important factors affecting forward-looking information is not exhaustive. Furthermore, the forward-looking information contained in this quarterly report is made as of the date of this report and, except as required by applicable law, InterOil does not undertake any obligation to update publicly or to revise any of the included forward-looking information, whether as a result of new information, future events or otherwise. The forward-looking information contained in this report is expressly qualified by this cautionary statement.

We currently have no production or reserves as defined in Canadian National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities. All information contained in this AIF regarding resources are references to undiscovered resources under Canadian National Instrument 51-101, whether stated or not.

CORPORATE STRUCTURE

InterOil Corporation was formed under the Business Corporations Act (New Brunswick).

Our registered office	Our corporate office
in Canada is located at:	in Australia is located at:
Brunswick House	Level 1, 60-92 Cook Street
10th Floor, 44 Chipman Hill	Portsmith, QLD 4870,
Saint John, NB E2L 4S6	Australia

We are a developing fully-integrated energy company whose focus is on operations in Papua New Guinea (“PNG”) and its surrounding region. We have four business segments:

Segments	Objective	Entity Shading
Upstream	Exploration and Production
Midstream	Liquefaction, Refining and Marketing
Downstream	Wholesale and Retail Distribution
Corporate	Corporate and Consolidations

We operate these business segments through various subsidiaries which have integrated shared management. Our material subsidiaries are described below. Unless otherwise noted, all of our subsidiaries are directly or indirectly 100% owned by InterOil Corporation.

Annual Information Form     INTEROIL CORPORATION     4

Upstream — Exploration and Production

S.P.I. Exploration and Production Corp. was incorporated in the Commonwealth of the Bahamas in 1998. S.P.I. Exploration and Production Corp. is a holding company that owns our upstream operating subsidiaries which hold exploration licenses and conduct exploration activities in Papua New Guinea. InterOil owns 9,999 (99.99%) of the outstanding ordinary shares of S.P.I. Exploration and Production Corp. and P.I.E. Group LLC, a Delaware limited liability company incorporated in 1996 that is controlled by Phil Mulacek, our Chief Executive Officer, owns 1 (0.01%) ordinary share of S.P.I. Exploration and Production Corp. Entities controlled by Gaylen Byker, one of our directors, also have an ownership interest in P.I.E. Group LLC.

Midstream — Liquefaction, Refining and Marketing

S.P. InterOil, LDC was incorporated in the Commonwealth of the Bahamas in 1996. S.P. InterOil, LDC is a holding company that owns our midstream operating subsidiaries. These operating subsidiaries own and operate our refinery located in Port Moresby, Papua New Guinea. The General Manager of S.P. InterOil, LDC is Petroleum Independent and Exploration Corporation (“P.I.E.”), a Texas corporation incorporated in 1981. Phil Mulacek, our Chief Executive Officer, is the President of, and owns an interest in P.I.E,. InterOil owns 20,152,870 (99.98%) and P.I.E. owns 5,000 (0.02%) of the outstanding ordinary shares of S.P. InterOil, LDC. We have entered into an agreement with P.I.E. to exchange, on a one-for-one basis, the 5,000 shares of S.P. InterOil, LDC that it holds for an equal number of shares of InterOil Corporation. P.I.E.’s ownership of these shares provided the U.S. content necessary for us to obtain $85 million in project financing from the Overseas Private Investment Corporation (“OPIC”), an agency of the U.S. Government. The proceeds of this financing were used to construct our refinery in Papua New Guinea.

EP InterOil, Ltd. was incorporated in the Cayman Islands in 1996. EP InterOil, Ltd. was used to finance the development of our refinery and is currently used for additional financing purposes. EP InterOil, Ltd. owns

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InterOil Limited, the operating subsidiary that owns our refinery. S.P. InterOil, LDC owns 100% of the voting ordinary shares and, as of March 31, 2006, owned 82.0 million (98.9%) of the non-voting ordinary shares of EP InterOil, Ltd. Enron Papua New Guinea Limited, a wholly-owned subsidiary of Enron, owns 897,542 (1.1%) of the non-voting ordinary shares of EP InterOil, Ltd. Enron Papua New Guinea Limited has decided that the refinery is not consistent with its corporate objectives and it has abandoned any further financing of the refinery. Enron Papua New Guinea Limited’s interest is anticipated to be diluted on an ongoing basis as we contribute more equity to EP InterOil, Ltd.

InterOil Limited was incorporated in Papua New Guinea in 1994. InterOil Limited owns and operates our refinery in Port Moresby, Papua New Guinea.

PNG LNG, Inc. was incorporated in the Commonwealth of the Bahamas in 2006. InterOil Corporation owns 100% of the outstanding ordinary shares of PNG LNG, Inc. Liquefied Nuigini Gas Ltd, which was incorporated in Papua New Guinea in 2006, is 100% owned by PNG LNG, Inc. Liquefied Nuigini Gas Ltd is currently involved in a project developing a Liquefied Natural Gas (“LNG”) business in Papua New Guinea.

Downstream — Wholesale and Retail Distribution

S.P.I. Distribution Limited was incorporated in the Commonwealth of the Bahamas in 2001. S.P.I. Distribution Limited is a holding company that owns our operating subsidiaries which in turn, own our wholesale and retail distribution operations, including InterOil Products Limited. InterOil Corporation owns 9,999 (99.99%) of the outstanding ordinary shares of S.P.I. Distribution and P.I.E. Group LLC, a Delaware limited liability company controlled by our Chief Executive Officer, owns 1 (0.01%) ordinary share of S.P.I. Distribution Limited .

InterOil Products Limited (formerly BP Papua New Guinea Limited) was incorporated in Papua New Guinea in 1969. We acquired InterOil Products Limited, which owns and operates our petroleum products distribution, wholesale and retail business in Papua New Guinea, in 2004. In 2006, InterOil Products Limited acquired Shell Papua New Guinea Ltd., whose name was then changed to IPL (PNG) Limited. IPL (PNG) was originally incorporated in Papua New Guinea January 6, 1977.

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GENERAL DEVELOPMENT OF THE BUSINESS

Three Year History

The following is a summary of significant events in the general development of InterOil’s business over the past three years.

2006

In 2006, InterOil undertook a number of activities to optimize and expand on its existing business assets.

Upstream

In the upstream segment, the year was dominated by the drilling of the Elk-1 well on the Elk structure in the Eastern Papua Basin in Papua New Guinea. We commenced drilling in February 2006 using our purpose built heli-portable rig. The rig, which was acquired in 2005, has allowed us to explore for oil and gas at a time when there have been significant delays worldwide due to the prevailing shortage of suitable drilling equipment.

The Elk-1 discovery well was completed on November 23, 2006. We currently have four exploration licenses and two retention licenses covering approximately nine million acres that are the focus of our exploration activities. We have funded our exploration efforts through indirect participation interest agreements, pursuant to which agreements, investors are not required to spend any additional amounts to drill the exploration wells drilled in connection with the agreements. Investors currently have the right to approximately a 31.55% working interest in any exploration wells drilled and, in any resulting fields by paying their share of all testing and development costs, including the costs of all development wells drilled.

Midstream

During 2006, we completed the revamp of our refinery which began in the second quarter of 2006. The revamp, which was completed in the third quarter of 2006, has resulted in production economies at our refinery in Papua New Guinea. In addition, the refinery team has concentrated on optimizing the crude being processed in order to obtain higher yields of distillates, which are higher margin products. The revamp and crude optimization efforts have resulted in an improving EBITDA figures for our midstream segment in the third and fourth quarters of 2006.

In May 2006, InterOil entered into a Memorandum of Understanding (“MOU”) with the Government of Papua New Guinea for natural gas development projects in Papua New Guinea pursuant to which InterOil will assist in the domestic processing of natural gas in Papua New Guinea. This memorandum of understanding is subject to a binding agreement to be negotiated. In May 2006, InterOil entered into a tri-party agreement with Merrill Lynch Commodities (Europe) Limited and an affiliate of Clarion Finanz AG that resulted in the formation of the National Gas Development Company, which will seek to build and develop a liquid natural gas (“LNG”) facility in Papua New Guinea.

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Downstream

For our downstream business, January 2006 began with InterOil entering into an agreement with Shell Overseas Holdings Limited (“Shell”) to indirectly purchase all of Shell’s retail and distribution assets in Papua New Guinea. The closing of this transaction was subject to the approval of several governmental authorities in Papua New Guinea, and closed effective October 1, 2006. The net purchase price of this business was $25.8 million, which is subject to working capital adjustments. The Shell asset portfolio is a distribution network that comprises 4 terminals, 3 depots and 28 retail sites.

In July 2006, we completed the construction of a two million liter diesel storage tank at our terminal in Wewak, East Sepik province in Papua New Guinea, to augment storage availability. The East Sepik province has experienced substantial growth in commercial and economic activity in recent years and this additional infrastructure will place us in a strong position to continue to service the needs of that market.

Financing

In 2006, InterOil undertook the following financing transactions:

ü	In May 2006, InterOil entered into a secured credit agreement for $130.0 million. The loan is divided into two tranches. Tranche 1, which represents $100.0 million of the facility, was available for drawdown from the time the agreement was signed. Tranche 2 drawdown was dependent upon milestones being reached with relation to the prospective building of a liquefied natural gas processing facility in Papua New Guinea. The full balance of the loan is repayable in May 2008. The interest rate payable on the loan is 4% from May 2006 and ending in March 2007. Between March 2007 and the end of the facility, the interest rate will be 10% unless a definitive Project Agreement is executed by InterOil and the lenders on or before March 2007. If the Project Agreement is delivered on or before March 2007, the interest rate will continue to be 4% for the full life of the loan. The loan was fully drawn down as at December 31, 2006.
ü	In May 2006, we repaid $25.0 million in unsecured borrowings (see January 2005 financing transactions under our, unsecured term loan facility, below).
ü	In May 2006, we entered into an agreement to amend the terms of the original PNG Drilling Ventures Limited, Agreement, whereby, PNG Drilling Ventures Limited converted their interest under the agreement into 575,575 InterOil common shares and also retained a 6.75% interest in the next four wells (the first of which is Elk-1) to be drilled by InterOil. PNG Drilling Ventures also has the right to participate in the 16 wells that follow the first four mentioned above up to an interest of 5.75% by contributing their share of costs.
ü	In August 2006, the credit limit under the BNP facility entered into in 2004 was increased to $170.0 million. The credit limit is comprised of a $130.0 million facility to provide letters of credit and short term loans to finance the purchase of crude cargoes and bank guarantees to facilitate hedging and a $40.0 million facility that allows us to discount eligible U.S. dollar receivables and fully cash back loans under the first facility.
ü	In December 2006, we renegotiated the terms of the OPIC secured loan where the half yearly principle payment due in December 2006 and June 2007 of $4.5 million each, have been deferred until December 31, 2007 and interest previously due on December 31, 2006 and June 30, 2007 were deferred until September 30, 2007. The normal repayment of interest and principal will recommence on September 30, 2007 and December 31, 2007, respectively.

Management Team

During 2006 the management team had the following movements

ü	Effective July 1, 2006, Dr Jack Hamilton was appointed as President of InterOil.
ü	On August 3, 2006, InterOil announced that Tom S. Donovan, Chief Financial Officer of InterOil had completed his employment agreement on July 31, 2006.

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ü	On August 30, 2006, InterOil announced that William J. Jasper III was appointed as President and Chief Operating Officer of InterOil. At this time, it was agreed that Christian Vinson, the former Chief Operating Officer, would focus on corporate development and government relations in Papua New Guinea and Dr. Jack Hamilton, the former President, was nominated by InterOil to serve as Chief Executive Officer of the recently formed PNG LNG Inc., which is the vehicle used to develop the proposed LNG facility adjacent to the InterOil refinery in Papua New Guinea.
ü	On October 1, 2006, Dr. Michael Folie retired as a director of InterOil for personal reasons.
ü	On October 26, 2006, Collin F Visaggio was appointed as Chief Financial Officer of InterOil.
ü	On December 29, 2006, Don R. Hansen was appointed as an independent director of InterOil and also agreed to serve as a member of the Audit and Compensation Committees of InterOil’s board of directors.

2005

Upstream

In 2005, our upstream business completed two exploration wells and a regional phase of 2D seismic acquisition in Petroleum Prospecting License 238 and an extensive airborne gravity and magnetic survey in Petroleum Prospecting Licenses 237 and 238 in Papua New Guinea. In addition, in October 2005, we acquired a purpose built heli-portable drilling rig that we plan to use to drill our future wells. The rig cost $7.6 million and is capable of drilling to depths of up to 13,500 feet.

Midstream

In January 2005, our midstream business announced the practical completion of our refinery in Papua New Guinea. Our refinery is rated to process up to 32,500 barrels of oil per day. The project agreement that we executed with the government of Papua New Guinea in May 1997 will provide us with tax benefits until December 31, 2010 and with other market privileges for a period of 30 years from the date of practical completion. We have executed an agreement with BP Singapore Pte Limited to act as the crude supplier for our refinery. Our agreement with BP Singapore does not expire until June 2009. In the second quarter of 2005, we commenced a refinery optimization program.

Financing

In 2005, InterOil undertook the following financing transactions:

ü In January 2005, we entered into a $20.0 million unsecured term loan facility. The interest rate on this loan is 5%. In July 2005, we increased the availability under this loan facility to $25.0 million. Borrowings under this facility are due 15 months after all funds are disbursed. As of December 31, 2005, $3.5 million remained available for future borrowings under this facility. (See May, 2006 for information regarding repayment of this loan)

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ü	In February 2005, we entered into an amended and restated indirect participation agreement with institutional accredited investors in which the investors paid us a total of $125.0 million and we agreed to drill eight exploration wells in Papua New Guinea. See “Indirect Participation Interest Agreements”.
ü	In August 2005, the secured revolving crude import facility with BNP Paribus initially entered into in March 2004, was increased to $150.0 million. At December 31, 2005, $44.0 million remained available for use.
ü	As of December 31, 2005, PNG Drilling Ventures Limited had converted $2.5 million of their investment into 141,545 of our common shares pursuant to an indirect participation interest agreement. See “Indirect Participation Interest Agreement”.

2004

Upstream

Our upstream business completed drilling Moose-2, which was commenced late in 2003 and also drilled Sterling Mustang. In 2004, our upstream business also completed seismic program across the Puri, Elk and Moose Prospects.

Midstream

In 2004, our midstream business continued the construction of our refinery in Papua New Guinea. In June 2004, the first crude was delivered to the refinery for processing during the commissioning of the refinery. In August 2004, we made our first sale of product from our refinery.

Downstream

In 2004, our downstream business also earned its first operating revenue after acquiring BP Papua New Guinea Limited, a distributor of refined petroleum products in Papua New Guinea, for $13.2 million in April. The assets held by BP Papua New Guinea Limited included existing inventories, three larger depots and seven terminals, and contracts to supply refined petroleum products to more than 30 independently-operated retail stations. Following the acquisition, we changed the name of this entity to InterOil Products Limited. InterOil Products Limited owns and operates our wholesale and retail distribution business in Papua New Guinea.

Financing

In 2004, InterOil undertook the following financing transactions:

ü In March 2004, we received an additional $3.2 million from PNG Drilling Ventures Limited for our second indirect interest participation agreement program. This, together with funds received in 2003, made the total contribution under the drilling participation agreement with PNG Drilling Ventures $12.2 million.

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ü	In May 2004, PNG Energy Investors converted their $7.7 million indirect participation interest into 683,140 common shares of InterOil.
ü	In July 2004, our common shares commenced trading on the Toronto Stock Exchange.
ü	In September 2004, our common shares commenced trading on the American Stock Exchange.
ü	In the third quarter of 2004, we issued $45.0 million in 8.875% senior convertible debentures due 2009 that were subsequently converted into 2.4 million common shares. We also issued warrants to acquire 359,415 common shares at a price of $21.91. The warrants have a five year term. As of December 31, 2006, warrants to purchase 340,247 common shares remained outstanding.

BUSINESS STRATEGY

InterOil’s strategy is developing a vertically integrated world class energy company in Papua New Guinea and the surrounding regions, focusing on niche market opportunities which provide financial rewards for InterOil shareholders, while being environmentally responsible, providing a quality working environment and contributing value to the communities in which InterOil operates. InterOil has taken a three-pronged approach when planning to achieve this strategy.

Capitalize On and Expand the Existing Business Assets

Our refinery team focused on optimization efforts to improve the profitability of our refinery, this has resulted in a positive EBITDA in the third quarter 2006 of $1.7 million and fourth quarter of 2006 of $9.1 million. Our ongoing crude selection efforts and recent refinery revamp have increased the percentage yield of jet fuel and diesel, commonly referred to as middle distillates, produced by our refinery in relation to the amount of naphtha and low sulfur waxy residue produced per barrel of crude feedstock processed. This has allowed us to process fewer barrels of crude feedstocks to meet growing middle distillate demand to the Papua New Guinea domestic market. Middle distillates that we sell to the domestic Papua New Guinea market improve gross margin whereas export naphtha and low sulfur waxy residue reduce gross margin. As part of the revamp activities, we installed new generators powered by low sulfur waxy residue and made modifications to the furnaces and boilers to also operate on low sulfur waxy residue. The refinery optimization works have improved the product slate, improved reliability and reduced fuel costs.

Our downstream business has expanded its existing product line to include the distribution of low sulfur waxy residue, which is marketed in Papua New Guinea as InterOil Power Fuel (IPF) to Papua New Guinea’s Moitaka Power Station. The downstream business secured this business late in 2006 after InterOil conducted a trial with the Moitaka management to demonstrate the benefits of IPF in running the generators at the power station.

In 2007, InterOil’s priorities for capitalizing and expanding on existing business assets will include continuing to improve the refinery’s profitability using a disciplined approach to costs, evaluating improvements, modifications and additional equipment to improve flexibility and profitability of the refinery, and looking to increase the domestic market for IPF. The upstream business will continue to evaluate the potential gas and condensate discovery at the Elk location by drilling the appraisal well Elk-2 and conducting a 100-mile appraisal seismic program. In addition, we expect to drill an exploration well in Petroleum Retention License 5 and to re-enter and test the Stanley discovery in Petroleum Retention License 4 along with our joint venture partners in these licenses. The downstream business will focus on the further integration of the recently acquired Shell business into the existing distribution business to achieve economies of scale and synergies.

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Target Acquisitions and Growth Opportunities in Papua New Guinea and the Surrounding Area

In 2006, InterOil completed the acquisition of the Shell PNG Limited business. The addition of these assets to our distribution business on October 1 has made us the leading wholesale and retail distributor of hydrocarbons in Papua New Guinea.

During 2007, InterOil will continue to evaluate other potential opportunities in the wholesale and resale distribution business segment in Papua New Guinea and the surrounding area. In particular, the company is examining potential complementary business acquisitions and petroleum exports.

Our business strategy and operating plan has evolved to include as a primary business objective, the development of an onshore liquefied natural gas processing facility that will be built and operated at Napa Napa adjacent to our refinery. In May, InterOil signed a Memorandum of Understanding with the Independent State of Papua New Guinea for natural gas development projects in Papua New Guinea and a tri-party agreement with Merrill Lynch Commodities (Europe) Limited and an affiliate of Clarion Finanz AG related to the same. This objective received additional impetus with the potential gas discovery at Elk which will be appraised during 2007. During 2007 the company anticipates entering into a shareholder agreement relating to the LNG project and progressing development activities relating to the financing and construction of the infrastructure.

Position InterOil for Long-Term Oil and Gas Business Success

In 2006 our upstream business has made a potential natural gas and condensate discovery at the Elk location on Petroleum Prospecting License 238. The Company also increased its ownership in Petroleum Retention Licenses 4 and 5, which contain pre-existing gas and condensate discoveries of Stanley, Ketu and Elevala.

We currently have four exploration licenses and two retention licenses in Papua New Guinea covering approximately nine million acres of which amount, approximately 8.2 million nett acres are operated by InterOil. In 2006, our seismic acquisition program surveyed a total of 79 miles, all in Petroleum Prospecting License 238 using 2D seismic at a cost of $5.2 million. The 2006 seismic program complemented the 136 miles of seismic program that we acquired during the previous three years. As of December 31, 2006, we had acquired over 1,000 miles of 2D seismic data covering Petroleum Prospecting Licenses 236, 237 and 238, including the 215 miles we have recorded since acquiring these licenses. In addition to our seismic acquisition program, during 2006 we conducted 2,471 miles of airborne gravity and magnetic surveys in Petroleum Prospecting License 237 and 3,773 miles in Petroleum Prospecting License 238. Airborne gravity and magnetic methods have enabled us to better identify the quality of leads derived from surface geology, to identify previously unmapped leads and to optimize the location of our 2D seismic programs.

During 2007 we plan to conduct a detailed 2D seismic survey over the Elk discovery and leads on-trend with the Elk discovery that have been identified from seismic data and airborne gravity and magnetic surveys acquired by the Company to date.

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Summary of Strategic Priorities

Following is a table outlining the Company’s progress towards the strategic priorities of the Company and its goals for 2007.

Strategic
Priorities	2006 Progress	2007 Initiatives
Capitalize on and Expand on the Existing Business Assets	ü Completed refinery optimization project, which included the installation of new generators powered by low sulfur waxy residue and modifications of the furnaces and boilers to improve reliability and reduce fuel costs. ü Secured a contract to provide InterOil Power Fuel to Papua New Guinea’s Moitaka Power Station.	ü Evaluate feasibility of improvements, modifications and additional equipment to improve flexibility and profitability of the refinery. ü Continue to seek out potential markets for InterOil Power Fuel and distillate export opportunities to increase contribution to fixed costs. ü Cost reduction program targeting 10% reduction.
Target Acquisitions and Growth Opportunities in Papua New Guinea and the Surrounding Area	ü Finalized the terms of acquisition for Shell Papua New Guinea’s distribution network. The Shell Papua New Guinea business was transferred to InterOil on October 1. ü Examined other potential downstream growth opportunities. ü Progressed discussions for liquefied natural gas opportunity in Papua New Guinea with government and other potential partners.	ü Pursue opportunities to purchase a business or assets in the business of distributing fuel to the aviation sector. ü Pursue other potential downstream growth opportunities. ü Sign a project agreement relating to the LNG opportunity in Papua New Guinea and begin taking steps to advance project. ü Finalize investment decision and development plans for LNG project.
Position InterOil for Long-Term Oil and Gas Business Success	ü Made potential gas and condensate discovery at Elk location on existing Petroleum Prospecting License 238. ü Conducted seismic and airborne gravity and magnetic surveys on licenses to expand knowledge base of existing prospects and to identify new prospects.	ü Obtain further information about the Elk structure by drilling the Elk-2 appraisal well and conducting 100 miles of appraisal seismic. ü Conduct detailed 2D seismic surveys over the Elk discovery and lead on-trend with the Elk discovery that have been identified from seismic data and airborne gravity/magnetic surveys acquired by the company to date.

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DESCRIPTION OF OUR BUSINESS

Overview

Our operations are organized into four major business segments:

Segments	Operations
Upstream	Exploration and Production — Explores and appraises potential oil and gas bearing structures in Papua New Guinea with a view to commercializing discoveries.
Midstream	Liquefaction, Refining and Marketing — Markets the refined products it produces in Papua New Guinea both domestically and for export. Since early 2006, our business plan and operating strategy has evolved to include as a business objective, the development of an onshore liquefied natural gas processing facility in Papua New Guinea.
Downstream	Wholesale and Retail Distribution — Distributes refined products in Papua New Guinea on a wholesale and retail basis.
Corporate	Corporate and Consolidations — Engages in business development and improvement, common services and management, financing and treasury, government and investor relations. Common and integrated costs are recovered from business segments on an equitable driver basis. Our corporate segment results also include consolidation adjustments.

As of December 31, 2006, we had 551 full-time employees comprising: 48 in our upstream segment, 104 in our midstream segment, 353 in our downstream and 46 in our corporate segment.

EXPLORATION AND PRODUCTION

InterOil does not have any reserves and does not have any oil or gas production or related future net revenue.

We currently have four exploration licenses and two retention licenses in Papua New Guinea covering approximately nine million acres of which amount, approximately 8.2 million nett acres are operated by InterOil. Petroleum Prospecting Licenses 236, 237 and 238 are located in the Eastern Papuan Basin northwest of Port Moresby. We own a 100% working interest in, and our current exploration efforts are focused on, these three licenses. Our indirect participation interest investors have the right to a 31.55% working interest in the exploration wells currently being drilled and any resulting fields. These investors have a 31.55% interest in the next three exploration wells and a 24.8% interest in the two subsequent exploration wells. In addition, we own a 15% working interest in Petroleum Prospecting License 244, located offshore in the Gulf of Papua. As of December 31, 2006, we also owned a 43.13% working interest in Petroleum Retention Licenses 4 and a 28.576% working interest in Petroleum Retention License 5. All of InterOil’s oil and gas properties are located onshore in Papua New Guinea.

Petroleum License Details

Traditionally, exploration for oil and gas in Papua New Guinea has focused on the western part of the country. The majority of our exploration acreage in located in the Eastern Papuan Basin in Papua New Guinea. Each of our six licenses in Papua New Guinea is described below.

In general, the initial term a petroleum prospecting license is five years. Petroleum prospecting licenses may be renewed for an additional six years. However, 50% of the license area must be surrendered in order to

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obtain the renewal. Each petroleum prospecting license in Papua New Guinea requires a bond backed by a bank guarantee of approximately $33,000, an annual license fee and annual work and expenditure commitments as set by the Minister for Petroleum and Energy under the license conditions. Petroleum prospecting licenses are granted for an initial term of six years. The aggregate annual license fee for Petroleum Prospecting Licenses 236, 237 and 238 for 2006 was approximately $60,000. We are required to submit to the government of Papua New Guinea for approval a work program that includes our exploration plans and minimum expenditures every two years. Under our existing work commitments, we have no additional well obligations in any of our operated petroleum prospecting licenses through the end of March 2007. Our minimum biannual expenditure requirements for all of our petroleum prospecting license areas have been met through March 2007. We submitted our proposed work programs for the final two year period of each license to the Department of Petroleum and Energy in January 2007 and are awaiting approval. The work programs, if approved as submitted, total $20 million in minimum expenditures and consist of one well in each license and seismic programs in Petroleum Prospecting Licenses 237 and 238.

Petroleum retention licenses may be granted to licensees of petroleum prospecting licenses in which gas fields or parts of gas fields have been discovered to permit time for the licensee to develop commercialization alternatives for the gas discoveries. Petroleum Retention Licenses 4 and 5 were carved out of Petroleum Prospecting License 157 as a result of the Stanley, Elevala and Ketu gas discoveries We participated directly in drilling Stanley but Elevala and Ketu were drilled by the licensees from whom we acquired our working interest in Petroleum Prospecting License 157 prior to our entering into the license. The initial period of a petroleum retention license is for five years and an extension of five years may be granted. In connection with an application for, or a renewal of, a petroleum retention license, we are required to submit a one year work program and a work program for the remaining four years that is contingent on the results of the first year’s operations.

Petroleum Prospecting License 236

We have a 100% working interest in Petroleum Prospecting License 236, subject to elections made by holders of indirect participation interests described below, and are the operator of the license. This license was granted to us on March 28, 2003. We drilled an exploration well in this area in 2005 that satisfied the well obligation for this license through March 2007. During 2006, we conducted an extensive review of available data in this license in preparation for submission of a work program to further our exploration of the license in 2007. This license covers an area that includes our refinery and it does have limited road access. We believe that the proximity of this license area to Port Moresby would reduce the costs of developing any future oil or gas discoveries.

Petroleum Prospecting License 237

We have a 100% working interest in Petroleum Prospecting License 237, subject to elections made by holders of indirect participation interests described below, and are the operator of the license. This license was granted to us on March 28, 2003. We drilled an exploration well in this area in 2005. In 2006, we carried out an airborne gravity/magnetic survey consisting of 2,471 miles over the western and southern parts of this license.

Petroleum Prospecting License 238

We have a 100% working interest in Petroleum Prospecting License 238, subject to elections made by holders of indirect participation interests described below, and are the operator of the license. This license was granted to us on March 7, 2003. We drilled our first three exploration wells in this area. During 2006, we conducted an airborne gravity/magnetic survey consisting of 3,773 miles over the northern part of this license and conducted 79 miles of 2D seismic. Our Elk-1 well, which we commenced drilling in February 2006, will satisfy the well obligation for this license through March 2007.

Petroleum Prospecting License 244

We have a 15% working interest in Petroleum Prospecting License 244. Talisman Oil Ltd. is the operator of this license. This license was granted to us on February 25, 2005. This license is located offshore Papua New Guinea in the Gulf of Papua.

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Petroleum Retention License 4

We had a 43.13% working interest in Petroleum Retention License 4 at December 31, 2006. This license was granted to us on September 1, 2000. An application for a five year extension of the term of this license was submitted on August 26, 2005, but we have not yet received an approval of this extension request. This license is located in western Papua New Guinea. This license contains the Stanley-1 gas discovery well. During 2005, Santos Nuigini Exploration Ltd., the prior operator of this license, withdrew from this license and was replaced by Trans-Orient Petroleum (PNG) Limited. Also during 2005, Greenslopes Limited and Carnavon Petroleum Limited announced their intent to sell their interests in Petroleum Retention Licenses 4 and 5. We exercised our preemptive rights in connection with these transfers and the transfers were completed during 2006 which led to an increase in our working interest in Petroleum Retention License 4 from 20% to 43.13%.

Petroleum Retention License 5

We had a 28.576% working interest in Petroleum Retention License 5 at December 31, 2006. Santos Niugini Exploration Pty Limited is the operator of this license. This license was granted to us on February 15, 2000 and was renewed for an additional five year term on February 15, 2005. This license is located in western Papua New Guinea and contains the Elevala and Ketu gas discovery wells. As a result of the exercise and subsequent government approval of the preemptive rights discussed above, our working interest in Petroleum Retention License 5 increased from 20% to 28.576% during 2006.

2006 Exploration Activities

We are currently engaged in an eight well exploration program covering Petroleum Prospecting Licenses 236, 237 and 238 that was commenced in April 2005. During 2006, we drilled one well under this program and anticipate drilling an additional five wells by the end of 2008. In February 2006, we commenced drilling the Elk-1 well on Petroleum Prospecting License 238. On June 11, 2006 this well encountered high pressure gas at a depth of 5,543 feet and was shut in while well control equipment was mobilized to the site. Well control operations and reconfiguration of the rig were undertaken to enable managed pressure drilling and we resumed drilling the Elk-1 well on September 15, 2006. The well reached a total depth of 6,504 feet on October 7, 2006. A drill stem test was performed and wireline logs were acquired in the interval 5,379 to 6,087 feet. The data obtained from these operations indicate the possibility of a large gas accumulation. The well was completed as a potential producer on November 23, 2006. The Elk-2 well was spudded in the first quarter of 2007 to appraise the Elk-1 discovery.

In 2006, our seismic acquisition program surveyed a total of 79 miles, all in Petroleum Prospecting License 238 using 2D seismic methods at a cost of $5.2 million. The 2006 seismic program complemented 136 miles of seismic that we recorded during the previous three years. As of December 31, 2006, we had acquired over 1,000 miles of 2D seismic data covering Petroleum Prospecting Licenses 236, 237 and 238, including the 215 miles we have recorded since acquiring these licenses. During the first quarter of 2007, we mobilized a seismic crew to conduct a detailed 2D seismic survey over the Elk discovery and leads on-trend with the Elk discovery that have been identified from seismic data and airborne gravity/magnetic surveys acquired by InterOil.

In addition to our seismic acquisition program, during 2006, we conducted 2,471 miles of airborne gravity and magnetic surveys in Petroleum Prospecting License 237 and 3,773 miles in Petroleum Prospecting License 238. Airborne gravity and magnetic methods have enabled us to better identify the quality of leads derived from surface geology, to identify previously unmapped leads and to optimize the location of our 2D seismic programs.

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Oil and Gas Wells

We did not have an interest in any oil wells or producing gas wells as of December 31, 2006. The following table sets out the number and status of non-producing gas wells in which we have a working interest as of December 31, 2006. InterOil does did not have any interests in any non-producing oil/gas wells as at December 31, 2006.

Working Interest in Non Producing Gas Wells

Location	Gross	Net
Papua New Guinea	5	3

Properties with No Attributed Reserves

All of InterOil’s properties are unproved properties, all of which are located in Papua New Guinea. The following table sets out our undeveloped land holdings as of December 31, 2006.

Undeveloped Acres

Location	Gross		Net
Papua New Guinea		8,981,232		8,223,614
Total		8,981,232		8,223,614

Abandonment and Reclamation

Our abandonment and reclamation costs for all of our current licenses are estimated to be $80,000. These costs consist of the costs to rehabilitate two drilling locations that still need additional surface rehabilitation and are based on the costs we have incurred rehabilitating similar properties.

Costs Incurred

The following table summarizes the capital expenditure related to our exploration activities for the year ended December 31, 2006.

Expenditure	Amount ($ millions)
Property Acquisition Costs		0.3
Proved Properties		—
Undeveloped Properties		0.3
Exploration Costs		48.2
Development Costs		—
Total Expenditure		48.5

Tax Horizon

Since we have not generated any income from our exploration activities, we have not paid any income taxes with respect to such activities. We do not know when or if we will incur income taxes related to our oil and gas exploration and development activities.

Exploration and Development Activities

The following table sets out the results of our exploration activities during 2006. We did not have any development wells in 2006.

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Undeveloped Wells

Type	Gross		Net
Oil		—		—
Gas		1		0.68
Service		—		—
Dry		—		—
Total		1		0.68

Indirect Participation Agreements

In February 2005, we entered into an agreement with institutional accredited investors in which the investors paid us an aggregate of $125 million and we agreed to drill eight exploration wells in Papua New Guinea on Petroleum Prospecting Licenses 236, 237 and 238. When we choose to test or complete any of these wells, the investors have the right to a 25% working interest by paying their share of a budgeted testing amount. If the tested or completed well is a commercial success, the investors, by continuing to pay their 25% share of all future appraisal and development costs, such as seismic, development drilling, production facilities and pipelines, retain their right to a 25% working interest in the resulting field and production. In addition, between June 15, 2006 and 90 days after the drilling of the eighth exploration well, each investor may elect to convert its interest under the agreement into our common shares. An investor’s interest, or any portion thereof, may be converted into a number of common shares equal to the amount paid by the investor for its interest divided by $37.50. If all of the investors converted their entire indirect participation interest into common shares, we would be obligated to issue 3,333,334 common shares.

In May 2006, we entered into an agreement to amend the terms of the original indirect participation interest agreement signed with PNG Drilling Ventures in 2003. Under the amendment, PNG Drilling Ventures Limited (PNGDV) converted their remaining balance into InterOil common shares and also retained a 6.75% interest in the next four wells (the first of which is Elk-1). Like the above indirect participation interest, when we choose to test or complete any of these wells, the investors have the right to a 6.75% working interest by paying their share of the costs. PNGDV also has the right to participate in the 16 wells that follow the initial four wells up to an interest of 5.75%. The cost of participation in the additional sixteen wells is $112,500 per 1% per well, subject to target depths and expected expenditure.

In addition to the above, PNG Energy Investors (PNGEI), an indirect participation interest investor, that converted all of its interest to common shares in fiscal year 2004, has the right to participate up to a 4.25% interest in wells nine to 24. In order to participate, PNGEI would be required to contribute a proportionate amount of drilling costs related to these wells.

Strategic Priorities

Following is a table outlining the upstream segments progress towards the strategic priorities of the Company and its goals for 2007.

Strategic
Priorities	2006 Progress	2007 Initiatives
Target Acquisitions and Growth Opportunities in Papua New Guinea and the Surrounding Area	ü Acquired additional interest in PRL 4 and PRL 5 during the year.	ü Evaluate productive potential of the Stanley gas discovery in PRL 4 ü Drill Elevala-2 appraisal well in PRL 5 ü Complete evaluation of prospectivity of PPL 244. ü Participate in the Papua New Guinea offshore bid round

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Strategic
Priorities	2006 Progress	2007 Initiatives
Position InterOil for Long-Term Oil and Gas Business Success	ü Natural gas and condensate discovery at Elk location on existing PPL 238. ü Conducted seismic and airborne gravity and magnetic surveys on licenses to expand knowledge base of existing leads and prospects and to identify new leads and prospects. ü Modified InterOil’s Rig 2 to enable drilling into similar reservoir conditions encountered in Elk-1.	ü Further define the Elk structure and reservoir by drilling the Elk-2 appraisal well and conducting 100 miles of appraisal seismic. ü Conduct detailed 2D seismic surveys over the Elk discovery and Big Horn structure on-trend with the Elk discovery. ü Drill Antelope-1 new structure south of Elk. ü Prove up sufficient gas reserves to support the construction of a pipeline and liquefaction plant in Papua New Guinea.

LIQUEFACTION, REFINING AND MARKETING

Refining and Marketing

Our refinery located across the harbor from Port Moresby, the capital city of Papua New Guinea is the sole refiner of hydrocarbons in Papua New Guinea. Under our 30 year agreement with the Government of Papua New Guinea, the government has undertaken to ensure that all domestic distributors purchase their refined petroleum product needs from the refinery, or any refinery which is constructed in Papua New Guinea, at an Import Parity Price. (See “Marketing” for the definition of Import Parity Price). Our refinery’s output is sufficient to meet 100% of the domestic demand for the refined products we produce in Papua New Guinea. Jet fuel, diesel and gasoline are the primary products that we produce for the domestic market. The refining process also results in the production of naphtha and low sulfur waxy residue. To the extent that we do not convert this naphtha to gasoline, we export it to the rapidly growing Asian markets in two grades, light naphtha and mixed naphtha, which are predominately used as petrochemical feedstocks. Low sulfur waxy residue can be sold as fuel and is valued by more complex refineries as cracker feedstock.

Refinery Optimization

We completed an optimization program at our refinery in the second half of 2006, which has resulted in an improvement in the production slate and in particular, an improvement in the quantity of higher value refined products as a percentage of total products produced. The revamp program included the study of methods by which we could reduce our exposure to low margin product sales and improve the efficiency of fuel firing and power generation at the refinery. A part of this program included the acquisition and installation of a new set of three Hyundai generators, — each with an output capacity of 1.5 megawatts. The installation was effected on time and within the budget allowed for, in July 2006. These new generators have the distinct advantage that they can use the low sulfur waxy residue produced at our refinery, as a power fuel.

We performed a 30-day complete site turnaround and inspection at our refinery in June and July 2006 to facilitate the conversion of the existing crude distillation furnaces to burn low sulfur waxy residue, as their primary fuel, and to increase their overall fuel efficiency.

During the fourth quarter of 2006, a major operational reorganization took place that has resulted in cost savings and improved efficiencies at our refinery. We expect that these measures will result in the reduction in our refinery’s operating fixed costs by between 10% to 15% per annum.

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As discussed below under, (“Crude Supply and Throughput”), we evaluated multiple crude feedstocks to determine which feedstocks will allow us to achieve our target mix of refined products. These crude selection efforts were an integral part of our refinery optimization efforts. While we will continue to evaluate alternative crudes, we identified several crude feedstocks that now allow us to achieve our target production slate. In addition to our crude selection and ongoing optimization program, KBC Advanced Technologies a leading independent consulting and technology group, identified low cost modifications and assisted our staff in proving that we can run the crude unit at 27,500 bpd using low gas crude as feedstock, without major capital investment. This throughput allows us to meet the local demand and to potentially supply refined product to selected export sectors.

Facilities and Major Subcontractors

We have a jetty with two berths for loading and off-loading ships and a road tanker loading system. Our larger berth has deep water access of 56 feet (17 meters) and has been designed to accommodate 12,000 to 110,000 dwt crude and product tankers. Our smaller berth can accommodate ships with a capacity of up to 20,500 dwt. Our tank farm has the ability to store approximately 750,000 barrels of crude feedstocks and approximately 1.1 million barrels of refined products. We have a reverse osmosis desalination unit that produces all of the water used by our refinery, power generation facilities that meet all of our electricity needs, and other site infrastructure and support facilities, including a laboratory, a waste water treatment plant, staff accommodations and a fire station.

Petrofac Facilities Management Limited, a facilities management company, was responsible for the day-to-day operation and maintenance of our refinery until October 31, 2006 when we assumed operation of the refinery and terminated the Petrofac contract. Our management of the refinery allows us to better control the costs and performance of the facilities.

Our refinery’s on-site laboratory is staffed and operated by an independent company, SGS Australia Pty Ltd. (“SGS”), which is an ISO 9000 accredited company. The laboratory received Australian National Association of Testing Authorities (“NATA”) accreditation in 2006. All crude imports and finished products are tested and certified on-site to contractual specifications. SGS also provides independent certification of quantities loaded and discharged at the refinery.

Crude Supply and Throughput

In December 2001, we entered into an agreement with BP Singapore Pte Limited whereby (“BP”) is the exclusive supplier of crude feedstocks to our refinery. This agreement runs through to June 2009. BP is the largest marketer of crude oil in the Asia Pacific region. This contract provides a reliable source of supply and provides access to the majority of the regional crudes suitable for our refinery. Our supply agreement with BP provides BP with financial incentives to secure the most economically attractive crude feedstocks for our refinery. Our contract with BP limits our ability to purchase directly from producers or from other traders and marketers in the region. BP has potential conflicts of interest since it acts as a marketer for producers, procurer for BP refineries in the region and as procurer on our behalf.

During 2006, five different crude feedstocks, compared to eight in 2005, were processed as part of our crude optimization program initiated to improve our refining margins. We will continue to review alternative light sweet crudes that may provide improved margins for our refinery’s product slate. As a means of maximizing distillate yields, we also processed combinations of blended crude and pure (100% of a single crude) cargoes. During 2006, our refinery processed nine crude cargoes versus the eleven in 2005. In 2006, the refinery processed solely imported crude, due to the cargo economics and yield structure of the crudes. . The average daily crude throughput at our refinery for 2006 was approximately 19,784 barrels per day.

Marketing

Papua New Guinea is our principal market for all the products our refinery produces, other than naphtha and low sulfur waxy residue. Under our 30 year agreement with the Government of Papua New Guinea, the government has undertaken to ensure that all domestic distributors purchase their refined petroleum product needs from our refinery, or any refinery which is later constructed in Papua New Guinea, at an import parity price. In general, the import parity price is the price that would be paid in Papua New Guinea for a refined product that is being imported. For each refined product produced and sold locally in Papua New Guinea,

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the import parity price is calculated by adding the costs that would typically be incurred to import such product to the average posted price for such product in Singapore as reported by Platts. The costs that are added to the reported Platts price include freight costs, insurance costs, landing charges, losses incurred in the transportation of refined products, demurrage and taxes. The import parity pricing mechanism was implemented in September 2004 by the Papua New Guinea Independent Consumer and Competition Commission for purchases of refined products from our refinery.

The major export product from our refinery is naphtha, which is sold to Shell International Eastern Trading Company on a term basis pursuant to a contract that expires in September 2008. During 2006, there were four export cargoes of naphtha averaging approximately 30,000 metric tons each. The production of naphtha at the refinery is variable and depends on the composition of the crude feedstock used, the relative economics for gasoline and naphtha, and our ability to convert naphtha to gasoline. We did not export any gasoline nor middle distillates in 2006 due to the tightened product quality specifications in the Australian market. However, we are pursuing export opportunities in other regional market places.

Our products meet the specification in the nearby Pacific Island markets that we are currently targeting. Our refinery is fully certified to manufacture and market Jet A-1 fuel to international specifications and markets Jet A-1 product to both domestic Papua New Guinea and overseas airlines.

Due to the percentage of crudes we processed with lower LPG content, and until the conversion of the main process furnaces and commissioning of the Hyundai Generators which burn low sulfur waxy residue, we were a net importer of LPG. With the installation of the low sulfur waxy residue firing, improved facilities for recovering LPG from the reformer off-gas and increased percentages of sweet crudes containing LPG, we are looking to provide LPG to the local market in 2007 via an agreement with a third party.

Competition

Due to their favorable properties, light sweet crudes from the Southeast Asian and Northwestern Australian region are highly sought after by refiners. Therefore, there is significant competition to secure cargoes of these crude types. We rely on our relationship with our crude supplier, BP Singapore Pte Limited, to secure all of our crude feedstock needs at acceptable prices and in sufficient quantities. Due to the limited supply of light sweet crudes and the resources of most of our competitors, we are not always able to secure the specific crudes we desire for our refinery and are required to obtain alternate crudes that are available. To date, our relationship with BP has generally allowed us to obtain suitable crudes at competitive pricing.

We own the only refinery in Papua New Guinea. As a result, we are currently the only beneficiary of the import parity pricing structure and the ensuing requirement for domestic refined product needs to be procured from domestic refineries as described under “Marketing”. We do not envision there being any new entrants into the refining business within Papua New Guinea under the current market conditions. Excess jet fuel, diesel, gasoline, naphtha and low sulfur waxy residue that are exported are sold subject to prevailing commodity market conditions. Our geographical position and limited storage capacity limits our ability to compete with the regional refining center in Singapore to secure sales of large parcel sizes. However, these same factors may also provide competitive advantages if we expand our exports of refined products to the small and fragmented South Pacific markets.

Trading and Risk Management

Our revenues are derived from the sale of refined products. Prices for refined products and crude feedstocks are extremely volatile and sometimes experience large fluctuations over short periods of time as a result of relatively small changes in supplies, weather conditions, economic conditions and government actions. Due to the nature of our business, there is always a time difference between the purchase of a crude feedstock and its arrival at the refinery and the supply of finished products to the various markets.

Generally, we are required to purchase crude feedstock two months forwarding advance, whereas the supply/export of finished products will take place after the crude feedstock is discharged and processed. Because of this timing difference, there is an impact on our cost of crude feedstocks and the revenue from the proceeds of the sale of products, due to the fluctuation in prices during the time period. Therefore, we use various derivative instruments as a tool to reduce the risks of changes in the relative prices of our crude

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feedstocks and refined products. Such an activity is better known as hedging and risk management. These derivatives, which we use to manage our price risk, effectively enable us to lock-in the refinery margin such that we are protected in the event that the difference between our sale price of the refined products and the acquisition price of our crude feedstocks contracts are reduced. On the flip side, when we have locked-in the refinery margin and if the difference between our sales price of the refined products vis-à-vis our acquisition price of crude feedstocks expands or increases, then the benefits would be limited to the locked-in margin.

The derivative instrument which we generally use is the over-the-counter swap. The swaps transactions are concluded between the counterparties in the derivatives swaps market. It is common place among major refiners and trading companies in the Asia Pacific market to use the derivative swaps as a tool to hedge their price exposures and margins. Due to the wide usage of the derivative tools in the Asia Pacific region, the swaps market generally provides sufficient liquidity for our hedging and risk management activities. The derivative swaps instrument covers commodities or products such as jet, kerosene, diesel, naphtha, and also crudes such as Tapis and Dubai. Using these tools, InterOil actively engages in hedging activities to lock in margins. Occasionally, there is insufficient liquidity in the crude swaps market, and we then use other derivative instruments such as Brent futures on the IPE Exchange to hedge our crude costs.

We will continue with our hedging and risk management program in 2007, and we will continue to evaluate new approaches to enhance our hedging arrangement and margin protection.

Liquefaction

During 2006, InterOil, along with two other partners, have proposed a project proposal for the construction of a natural gas liquefaction plant to be built adjacent to our refinery. We are targeting a facility that will produce up to nine million tons per annum of LNG and condensates. The infrastructure currently being contemplated includes condensate storage and handling, a gas pipeline from the Elk location as well as other potential suppliers of gas, and LNG storage and handling. The LNG facility will also interface with our existing refining facilities.

Strategic Priorities

Following is a table outlining the midstream segments progress towards the strategic priorities of the Company and its goals for 2007.

Strategic
Priorities	2006 Progress	2007 Goals
Capitalize and Expand on the Existing Business Assets	ü Completed refinery optimization project to improve product slate, improve reliability and reduce fuel costs. ü Completed InterOil Power Fuel project at Moitaka Power Station. The downstream business won a tender to provide IPF to Moitaka supplied out of the refinery. ü Continued with crude optimization initiatives.	ü Evaluate feasibility of improvements, modifications and additional equipment to improve flexibility and profitability of the refinery ü Continue to seek out potential markets for InterOil Power Fuel ü Seek profitable distillate export opportunities to increase contribution to fixed costs ü Cost reduction program targeting 10% reduction.
Target Acquisitions and Growth Opportunities in Papua New Guinea	ü Commenced consultation with key stakeholders to discuss ways to stimulate local demand from the refinery ü Progressed discussions for LNG opportunity in Papua New Guinea with government and other potential partners.	ü Achieve growth in local demand for products from the refinery ü Sign shareholder agreement and project agreement relating to the proposed LNG plant. ü Complete basis of design and commence front end engineering design.

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Strategic
Priorities	2006 Progress	2007 Goals
Position InterOil for Long-Term Oil and Gas Business Success	ü Improved refinery profitability to almost a breakeven position in second half of 2006.	ü Maintain the positive momentum achieved in third and fourth quarter 2006 and achieve a profitable outcome for 2007

WHOLESALE AND RETAIL DISTRIBUTION

Following the closing of the transaction to acquire Shell’s Papua New Guinea distribution assets in October 2006, we have the largest wholesale and retail petroleum product retail distribution base in Papua New Guinea. This business includes bulk storage, transportation distribution, and the wholesaling and retailing of refined petroleum products. We believe that the Shell acquisition has provided us with the level of business that exceeds the critical mass required to provide financial returns. Our downstream business supplies petroleum products nationally through a portfolio of retail service stations and commercial customers. As of December 31, 2006, we supplied approximately 67% of Papua New Guinea’s refined petroleum product needs. The head office for our wholesale and retail distribution business is currently located in Lae, the industrial center of Papua New Guinea.

Supply of Products

Our retail and wholesale distribution business distributes diesel, jet fuel, gasoline, kerosene and fuel oil as well as Shell and BP branded commercial and industrial lubricants such as engine and hydraulic oils. In general, all of the refined products sold pursuant to our wholesale and retail distribution business are purchased from our refining and marketing business segment. We import the commercial and industrial lubricants, which constitute a small percentage of our sales. We also import fuel oil that we sell to a domestic power plant. Sales of imported fuel oil constituted approximately 6% of the volume of refined products that we sold in 2006 and involve low margins.

All of the companies engaged in the distribution of petroleum products in Papua New Guinea utilize two shared tankers to supply petroleum products from our refinery to their terminals and depots. All of our terminals and depots, with the exception of three inland depots, are supplied petroleum products from these shared tankers. We do not own these tankers; but rather, they are engaged on a full time charter basis. We are responsible for the scheduling of all the deliveries made by these tankers to the petroleum industry participants in Papua New Guinea. The inland depots are supplied by road tankers which are owned and operated by third party independent transport operators.

We utilize our terminal and depot network to distribute refined petroleum products to retail service stations and commercial customers. We supply retail service stations and commercial customers with petroleum products using trucks or, in the case of some commercial customers, coastal ships. We do not own any of these shipping or trucking distribution assets and incur and pass on the cost of transportation charges for these services.

Retail Distribution

As of December 31, 2006, we provided petroleum products to 60 retail service stations that now operate under the InterOil brand name. Of the 60 service stations that we supply, 21 are either owned by or leased to us with a sublease to company approved operators. The remaining 39 service stations are independently owned and operated. We supply products to each of these service stations pursuant to distribution supply agreements. Under the cover of an equipment loan agreement, we also provide fuel pumps and related infrastructure to the operators of the majority of these retail service stations that are not owned or leased by us.

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Wholesale Distribution

In addition to our retail distribution network, we also supply petroleum products as a wholesaler to commercial clients. We own and operate six large terminals and eleven depots that we use to supply product throughout Papua New Guinea. We enter into commercial supply agreements with mining, agricultural, fishing, logging and similar commercial clients whereby we supply their petroleum product needs. Pursuant to many of these agreements, we supply and maintain company-owned above-ground storage tanks and pumps that are used by these customers. More than two-thirds of the volume of petroleum products that we sold during 2006 was supplied to commercial customers. Although the volume of sales to commercial customers is far larger than through our retail distribution network, these sales have a lower mark-up margin.

Competition

Our main competitor in the wholesale and retail distribution business in Papua New Guinea is ExxonMobil. . We also compete with smaller local distributors of petroleum products. We believe that we will be able to obtain refined products for our distribution business at competitive prices. We also believe that our commitment to growing our distribution business in Papua New Guinea at a time when major-integrated oil and gas companies have indicated a desire to exit the Papua New Guinea market provides us with a competitive advantage. However, major-integrated oil and gas companies such as ExxonMobil have greater resources than we do and could expand much more rapidly in this market than we can, if they chose to do so.

Customers

We sell approximately 20% of our refined petroleum products to Ok Tedi Mining Limited pursuant to wholesale distribution contracts. We do not anticipate that the loss of other wholesale distribution contracts would have a material impact on this business segment. However, due to the amount of petroleum products provided to Ok Tedi Mining Limited, the loss of this customer, at least in the short term, would adversely affect the profitability of our retail and wholesale distribution business segment.

Strategic Priorities

Following is a table outlining the downstream segments progress towards the strategic priorities of the Company and its goals for 2007.

Strategic
Priorities	2006 Progress	2007 Goals
Capitalize and Expand on the Existing Business Assets	ü Secured a contract to provide IPF to Papua New Guinea’s Moitaka Power Station. ü Completed the construction of a 2 million liter diesel storage tank at our terminal in the province of East Sepik, to augment storage availability at that location.	ü Further integrate Shell distribution assets into the existing InterOil business to capitalize on cost efficiencies and operational synergies. ü Continue to seek out potential markets for InterOil Power Fuel. ü To carry out full retail network plan and rationalize or expand the retail network as a result
Target Acquisitions and Growth Opportunities in Papua New Guinea	ü Finalized the terms of acquisition for Shell Papua New Guinea’s distribution network. The Shell Papua New Guinea business was transferred to InterOil on October 1. ü Examined other potential downstream growth opportunities.	ü Pursue acquisition opportunities in the aviation distribution business. ü Pursue other potential downstream growth opportunities. ü To target new mining ventures currently in the start up phase in Papua New Guinea. ü To complete a 5-year strategic plan to identify future growth within the surrounding region.

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COMMUNITY RELATIONS, SAFETY AND THE ENVIRONMENT

Our Human Resources, Compensation, Environmental, Health and Safety Committees undertake with the Board of Directors and management, all necessary procedures, policies and industry and country best practices that are designed to protect InterOil’s employees, contractors, members of the public, and the environment. We regularly assess our operations in consultation with our stakeholders in order to help identify opportunities to improve on our best practices. We believe that through these efforts we have contributed towards the creation of a safer environment for our employees, stakeholders and the citizens of Papua New Guinea.

Environment

Our operations in Papua New Guinea are subject to a comprehensive range of environmental laws and regulations and a variety of local and international conventions. The Papua New Guinea environmental law regime provides for laws concerning:

ü	Emissions of substances into, and pollution and contamination of, the atmosphere, waters and land;
ü	Production, use, handling, storage, transportation and disposal of waste, hazardous substances and dangerous goods;
ü	Conservation of natural resources;
ü	The protection of threatened and endangered flora and fauna; and
ü	The health and safety of people.

Specifically, this environmental legislation provides for restrictions and prohibitions on spills, releases, or emissions of various substances produced in association with our operations in the oil and gas industry. With respect to our exploration and production business segment, these environmental laws require that our sites be operated, maintained, abandoned and reclaimed to standards set out in the relevant legislation. The significant Papua New Guinea laws applicable to our operations include the Environment Act 2000; the Oil & Gas Act 1998; the Dumping of Wastes at Sea Act (Ch. 369); the Conservation Areas Act (Ch.362); and the International Trade (Flora and Fauna) Act (Ch.391).

The Environment Act 2000 is the single most significant legislation affecting our operations. This act regulates the environmental impact of development activities in order to promote sustainable development of the environment and the economic, social and physical well-being of people. The Environment Act 2000 imposes a duty to take all reasonable and practicable measures to prevent or minimize environmental harm. A breach of this act can result in significant fines or penalties. Under the Compensation (Prohibition of Foreign Legal Proceedings) Act 1995, no legal proceedings for compensation claims arising from petroleum projects in Papua New Guinea may be taken up or pursued in any foreign court.

Compliance with Papua New Guinea’s environmental legislation can require significant expenditures. The environmental legislation regime is complex and subject to different interpretations. Although no assurances can be made, we believe that, absent the occurrence of an extraordinary event, compliance with existing Papua New Guinea laws regulating the release of materials into the environment or otherwise relating to the protection of the environment will not have a material effect upon our capital expenditures, earnings or competitive position with respect to our existing assets and operations. Future legislative action and regulatory initiatives could result in changes to operating permits, additional remedial actions or increased capital expenditures and operating costs that cannot be assessed with certainty at this time.

Our goal is to implement and maintain positive environmental practices and high standards of safety and social responsibility in all our operations. We actively review and improve our programs with the support of our staff, the Papua New Guinea government and local communities.

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Community Relations

The objectives of the Community Relations and Land Management Program encompass;

ü	Managing the expectations and demands of benefit streams perceived as a result of the establishment of the refinery;
ü	Managing expectations of community assistance programs to community institutions, and;
ü	To manage land acquisition related compensation claims, demands and payments;

Although our refinery is located on state owned land we have developed a long-term community development assistance program that includes local communities from the three main villages in the vicinity. In compliance with Papua New Guinea law, our development philosophy is based on “bottom-up planning” thus ensuring that all planning and development takes the local community into account.

In our exploration areas we have a team of land and industrial relations officers who operate in the field. This team undertakes initial “land-owner” identification and assists with the recruitment of local village personnel. Other duties include the establishment of communication channels with the community and their leaders to ensure minimum social disruption and the smooth running of exploration activities. The officers also have the responsibility of paying compensation to land-owners with respect to our activities. Other activities include the provision of health and medical services to our employees, contractors and the local communities in the areas in which our exploration activities are conducted. This has led to improved health and living standards.

The recording of verbal histories, clan boundaries and genealogies has been integrated with our extensive geological mapping, seismic and drilling activities and provides a valuable resource for future use. Preliminary social mapping and landowner identification studies of the customary land owners in our license areas is carried out on a consultative basis with the relevant stakeholders prior to conducting geological and exploration activities. The social mapping and landowner identification studies are undertaken in order to understand the social structure, how society functions and its relationship to the land, as well as identifying the actual owners and occupiers of the customary land on which all of our exploration activities are conducted.

We also work closely with the national and provincial governments, landowners and the community in order to ensure all our activities have a minimum environmental impact on the flora and fauna and to understand the quality of life of the people that inhabit the areas in which we work.

We are committed to:

ü	Comply with all applicable laws, regulations and standards and where laws do not exist adopt and apply standards that reflect the company’s commitment to socially and environmentally responsible behaviors.
ü	Maintain close liaison with the Department of Petroleum and Energy and all relevant Government departments to ensure that InterOil complies with all government legislation and regulations relevant to its activities in Papua New Guinea.
ü	Providing a safe and healthy working environment for all employees and contractors, and establishing emergency response procedures that allow personnel to respond promptly and effectively.
ü	Establishing community development assistance programs to enhance and improve the standard of health and education.
ü	Pursuing socially responsible community relations initiatives that reflect the community’s needs, enhance our reputation and recognize the importance of the culture, heritage and traditional rights of the communities in which we operate.
ü	Understanding the traditional and contemporary culture, beliefs and social dynamics of locals in all project areas with particular reference to land matters, in order to better manage socio-economic changes in oil and gas exploration and in our refinery operations in Papua New Guinea.
ü	Ensuring community affairs issues are a major focus in the planning, management and delivery of our activities, while ensuring that our health, safety and environment operating procedures are adhered to in every task performed;

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ü	Communicating with employees, contractors, partners, government and the local project impacted communities in a transparent, open and proactive manner;
ü	Providing cultural awareness information and training to our employees and contractors at all levels;
ü	Ensuring compliance with all applicable industrial relations legislation and procedures in all employment arrangements with our contractors and sub-contractors; and
ü	Providing business development advice and support to appropriate, representative and sustainable community owned enterprises where they have the capability to provide cost effective and competent services.

RISK FACTORS

Our financial results are subject to numerous risks and uncertainties, some of which are described below. The risks and uncertainties described below are not the only risks facing us. Additional risks not presently known to us or which we consider immaterial based on information currently available to us may also materially adversely affect us. If any of the following risks or uncertainties actually occur, our business, financial condition and results of operations could be materially adversely affected.

The exploration and production, the refining and the distribution businesses are competitive.

We operate in the highly competitive areas of oil exploration and production, refining and distribution of refined products. A number of our competitors have materially greater financial and other resources than we possess. Such competitors have a greater ability to bear the economic risks inherent in all phases of the industry.

In our exploration and production business, we will compete for the purchase of licenses from the government of Papua New Guinea and the purchase of leases from other oil and gas companies. Factors that affect our ability to compete in the marketplace include:

ü	Our access to the capital necessary to drill wells and acquire properties;
ü	Our ability to acquire and analyze seismic, geological and other information relating to a property;

ü	Our ability to retain the personnel necessary to properly evaluate seismic and other information relating to a property;
ü	The development of, and our ability to access, transportation systems to bring future production to the market, and the costs of such transportation systems;
ü	The standards we establish for the minimum projected return on an investment of our capital; and
ü	The availability of alternate fuel sources.

We will also compete with other oil and gas companies in Papua New Guinea for the labor and equipment needed to carry out our exploration operations. Most of our competitors have substantially greater financial and other resources than us. In addition, larger competitors may be able to absorb the burden of any changes in federal, state and local laws and regulations more easily than we can, which would adversely affect our competitive position. These competitors may be able to pay more for exploratory prospects and productive oil and gas properties and may be able to define, evaluate, bid for and purchase a greater number of properties and prospects than we can. Our ability to explore for oil and gas prospects and to acquire additional properties in the future will depend on our ability to conduct operations, to evaluate and select suitable properties, and to consummate transactions in this highly competitive environment. In addition, most of our competitors have been operating in the oil and gas business for a much longer time than we have and have demonstrated the ability to operate through industry cycles.

In our refining business, we will compete with several companies for available supplies of crude oil and other feedstocks and for outlets for our refined products. BP has agreed to supply all of our feedstock. However, many of our competitors obtain a significant portion of their feedstocks from company-owned production, which may enable them to obtain feedstocks at a lower cost. The high cost of transporting goods to and from Papua New Guinea reduces the availability of alternate fuel sources and retail outlets for our refined

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products. Competitors that have their own production or extensive distribution networks are at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better positioned to withstand periods of depressed refining margins or feedstock shortages. In addition, new technology is making refining more efficient, which could lead to lower prices and reduced margins. We cannot be certain that we will be able to implement new technologies in a timely basis or at a cost that is acceptable to us.

Our refinery has not operated at full capacity for an extended period of time and our profitability may be materially negatively affected if it is not able to do so.

Our refinery did not operate at full capacity during 2006. In addition our ability to operate our refinery at its rated capacity must be considered in light of the risks inherent in the operation of, and the difficulties, costs, complications and delays we face as the operator of, a relatively small refinery. These risks include, without limitation, shortages and delays in the delivery of crude feedstocks or equipment; contractual disagreements; labor shortages or disruptions; difficulties marketing our refined products; political events; accidents; and unforeseen engineering, design or environmental problems. If these risks prevent us from operating at full capacity in the future, our profitability may be negatively affected.

If we are not able to market all of our refinery’s output, we will not be able to operate our refinery at its full capacity and our financial condition and results of operations may be materially adversely affected.

The project agreement described under “Material Contracts” gives us certain rights to supply the domestic market in Papua New Guinea with our refined products. We have entered into domestic sales contracts with the major distributors in Papua New Guinea under which they will purchase refined products for distribution in Papua New Guinea exclusively from us. However, our project agreement provides that if there is more than one refinery operating in Papua New Guinea during the term of the project agreement, the right to supply the domestic market will be shared by the refineries in proportion to their refining capacities. Therefore, if one or more additional refineries are built in Papua New Guinea, our share of the domestic market will be diminished.

We are able to fulfill the domestic market in Papua New Guinea’s demand for our products by refining approximately 16,000 barrels of crude feedstock a day. Our refinery is rated to process up to 32,500 barrels of oil per day and our current optimization efforts are intended to further increase our daily throughput capacity. In order to process these additional barrels of crude feedstock, we must identify markets into which we can sell our products profitably. The operating margins currently needed for our refinery to sell refined products profitably and the cost and availability of obtaining tankers to export our refined products limit our ability to export our refined products from Papua New Guinea. In addition, under our current refinery configuration we are unable to export diesel and gasoline to Australia due to recent changes in Australia’s regulations regarding permitted sulfur and benzene content that our refined products currently do not meet.

We plan to market the balance of the refinery’s output in nearby regional markets. Although we have signed export contracts with Shell that expire in September 2007 and January 2008, we are currently operating the refinery at less than full capacity due to an inability to profitably export our refined products. We can give no assurances that we will be able to profitably market the refinery’s output to these regional markets and we may be unable to market all of the refinery’s output we produce. In addition, if our relationship with Shell were to terminate for any reason, we cannot assure you that we will be able to enter into other commercial agreements for the export of our refinery’s output.

If our refining margins do not meet our expectations, we may be required to write down the value of our refinery.

The determination of our refinery’s fair market value is highly dependent upon the difference between the sale price we receive for refined products that we produce and the cost of the crude feedstocks used to produce those refined products. This difference is commonly referred to as refining margin. The optimization work recently performed at our refinery has improved its operating efficiency. However, volatile market conditions beyond our control could cause our refining margins and resulting cash flows to fall below expectations for extended periods, should this occur we will be required to write down the carrying value of

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our refinery on our balance sheet. Any significant write down of the value of our refinery could result in our failure to meet the financial covenants under our outstanding loan agreements.

The prices we receive for the refined products we produce and sell are likely to continue to be subject to large fluctuations in response to relatively minor changes in the supply of and demand for oil and a variety of additional factors beyond our control. These factors include, but are not limited to, the condition of the worldwide economy and the demand for and supply of oil, the actions of the Organization of Petroleum Exporting Countries, governmental regulations, political stability in the Middle East and elsewhere, and the availability of alternate fuel sources. Oil and gas markets are both seasonal and cyclical. The prices for oil will affect:

ü	Our revenues, cash flows and earnings;
ü	Our ability to attract capital to finance our operations, and the cost of such capital;
ü	The value of our oil properties;
ü	The profit or loss we incur in refining petroleum products; and
ü	The profit or loss we incur in exploring for and developing reserves.

Our refinery’s financial condition may be materially adversely affected if we are unable to obtain crude feedstocks for our refinery.

Our project agreement requires the government of Papua New Guinea to take action to ensure that domestic crude oil producers sell us their Papua New Guinea domestic crude production for use in our refinery and that refined products for domestic Papua New Guinea use will be purchased from us by distributors at the import parity price. However, our agreement with BP Singapore is our only commercial agreement for the delivery of crude feedstock. The BP agreement expires on June 14, 2009. If our relationship with BP were to terminate for any reason, we cannot assure you that we will be able to enter into other commercial agreements to supply adequate feedstock to our refinery. In addition, early termination of the BP agreement could have a material adverse effect on our results of operations and financial condition.

Various crude oils that are suitable for use as refinery feedstock are available in the nearby region. However, our access to oil sourced from farther outside Papua New Guinea may be more limited. In addition, the increased cost, if any, of oil from outside Papua New Guinea may reduce our gross profit margins and negate the operational benefits of using such oil. We can provide no assurances that we will be able to obtain all of the oil needed to operate our refinery or that we will be able to obtain the crude feedstocks that allow us to operate our refinery at profitable levels.

Our refining operations expose us to risks, not all of which are insured.

Our refining operations are subject to various hazards common to the industry, including explosions, fires, toxic emissions, maritime hazards and uncontrollable flows of crude oil and refined products. In addition, our refining operations are subject to hazards of loss from earthquakes, tsunamis and severe weather conditions. As protection against operating hazards, we maintain insurance coverage against some, but not all of such potential losses. We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. In addition, losses may exceed coverage limits. As a result of market conditions, premiums and deductibles for certain types of insurance policies for refiners have increased substantially and could escalate further. In some instances, certain insurance could become unavailable or available only for reduced amounts of coverage. For example, insurance carriers now require broad exclusions for losses due to risk of war and terrorist acts. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position.

Our hedging activities may result in losses.

To reduce the risks of changes in the relative prices of our crude feedstocks and refined products, we may enter into hedging arrangements. Hedging arrangements would expose us to risk of financial loss in some circumstances, including the following:

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ü	If the amount of refined products produced is less than expected or is not produced or sold during the planned time period;
ü	If the other party to the hedging contract defaults on its contract obligations; or
ü	If there is a change in the expected differential between the underlying price in the hedging agreement and actual prices received.

In addition, these hedging arrangements may limit the benefit we would receive from increases in the price of our refined products relative to the prices for our crude feedstocks.

We may not be successful in our exploration for oil and gas.

We currently do not have any oil or gas reserves that are deemed proved, probable or possible pursuant to National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities. As of December 31, 2006, we had drilled five unsuccessful exploration wells and have one discovery well which we are in the process of appraising. We plan to drill at least five additional exploration wells in Papua New Guinea during the next two years. We cannot be certain that the exploration wells we drill will be productive or that we will recover all or any portion of the costs to drill these wells. Because of the high cost, topography and subsurface characteristics of the areas we are exploring, we have limited seismic or other geoscience data to assist us in identifying drilling objectives. The lack of this data makes our exploration activities more risky than would be the case if such information were readily available.

In addition, our exploration and development plans may be curtailed, delayed or cancelled as a result of a lack of adequate capital and other factors, such as weather, compliance with governmental regulations, landowner interference, mechanical difficulties, shortages of materials, delays in the delivery of equipment, success or failure of activities in similar areas, current and forecasted prices for oil and changes in the estimates of costs to complete the projects. We will continue to gather information about our exploration projects, and it is possible that additional information may cause us to alter our schedule or determine that a project should not be pursued at all. You should understand that our plans regarding our projects are subject to change.

The successful acquisition and development of oil and gas properties requires an assessment of recoverable reserves, future oil and gas prices and operating costs, potential environmental and other liabilities and other factors. Such assessments are necessarily inexact. As a result, we may not recover the purchase price of a property from the sale of production from the property, or may not recognize an acceptable return from properties we acquire. In addition, we cannot assure you that our exploitation activities will result in the discovery of any reserves. Our operations may be curtailed, delayed or canceled as a result of a lack of adequate capital and other factors, such as title problems, weather, compliance with governmental regulations or price controls, mechanical difficulties, or shortages or delays in the delivery of equipment. In addition, the costs of exploration and development may materially exceed initial estimates.

If we are unable to renew our petroleum licenses with the Papua New Guinea government, we may be required to discontinue our exploration activities in Papua New Guinea.

Our petroleum prospecting licenses are granted for a period of six years. However, every two years we are required to submit a work program containing our minimum expenditures for the succeeding biannual period. In order for us to retain our licenses, the Papua New Guinea government could require us to expend more than we have budgeted or deem appropriate. If we are unable to meet the minimum expenditure levels or determine that making such expenditures is not in our best interests, we will be required to relinquish our petroleum prospecting licenses.

Our petroleum retention licenses are granted for a period of five years. In connection with an application for, or a renewal of, a petroleum retention license, we are required to submit a one year work program and a work program for the remaining four years that is contingent on the results of the first year’s operations. If we determine that the contingent work is not justified or requires revision, we may be required to renegotiate the terms of the work program with the government of Papua New Guinea in order to retain our retention

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license. If we were unable to agree upon a revised work program for the remaining term of the retention license, we may be required to forfeit the license.

Our investments in Papua New Guinea are subject to political, legal and economic risks that could materially adversely affect their value.

Our investments in Papua New Guinea involve risks typically associated with investments in developing countries, such as uncertain political, economic, legal and tax environments; expropriation and nationalization of assets; war; renegotiation or nullification of existing contracts; taxation policies; foreign exchange restrictions; international monetary fluctuations; currency controls; and foreign governmental regulations that favor or require the awarding of service contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction.

Political conditions have at times been unstable in Papua New Guinea. We attempt to conduct our business in such a manner that political and economic events of this nature will have minimal effects on our operations. We believe that oil exploration and refinery operations are in the long term best interests of Papua New Guinea and that we will continue to have the support of the current government. Notwithstanding the current support, our ability to conduct operations or exploration and development activities is subject to changes in government regulations or shifts in political attitudes over which we have no control. There can be no assurance that we have adequate protection against any or all of the risks described above.

In addition, if a dispute arises with respect to our Papua New Guinea operations, we may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons, especially foreign oil ministries and national oil companies, to the jurisdiction of Canada or the United States.

New legislative, administrative or judicial actions that constrain licenses and permits from various government authorities may have a material adverse affect on the companies operations.

Our operations require licenses and permits from various governmental authorities to drill wells, operate the refinery and market our refined products. We believe that we hold all necessary licenses and permits under applicable laws and regulations for our operations in Papua New Guinea and believe we will be able to comply in all material respects with the terms of such licenses and permits. However, such licenses and permits are subject to change in various circumstances. There can be no guarantee that we will be able to obtain or maintain all necessary licenses and permits that may be required to maintain for continued operations.

Weather and unforeseen operating hazards may adversely impact our operating activities.

Our operations are subject to risks inherent in the oil and gas industry, such as blowouts, cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires, equipment failures, pollution, and other environmental risks. These risks could result in substantial losses due to injury and loss of life, severe damage to and destruction of property and equipment, pollution and other environmental damage, and suspension of operations. Our Papua New Guinea operations are subject to a variety of additional operating risks such as earthquakes, mudslides, tsunamis, cyclones and other effects associated with active volcanoes, extensive rainfall or other adverse weather conditions. Our operations could result in liability for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs and other environmental damages. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. As a result, substantial liabilities to third parties or governmental entities may be incurred, the payment of which could have a material adverse effect on our financial condition and results of operations.

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Our significant debt levels and our debt covenants may limit our future flexibility in obtaining additional financing.

As of December 31, 2006, we had $184.2 million in long-term debt, excluding current maturities. The level of our indebtedness will have important effects on our future operations, including:

ü	A portion of our cash flow will be used to pay interest and principal on our debt and will not be available for other purposes;
ü	Our OPIC loan agreement, secured loan agreement and BNP credit facility contain financial tests which we must satisfy in order to avoid a default under such credit facilities; and
ü	Our ability to obtain additional financing for capital expenditures and other purposes may be limited.

We make, and will continue to make, substantial capital expenditures for exploration, development, acquisition and production of oil and gas reserves, refinery expansions and improvements, acquisitions of distribution assets, and for further capital acquisitions and expenses. We will need additional financing to complete our business plans. If we are unable to obtain debt or equity financing because of lower refining margins, lower oil prices, delays, operating difficulties, construction costs, or lack of drilling success, we may not have the ability to expend the capital necessary to undertake or complete future drilling programs and to make other needed capital expenditures. We also intend to make offers to acquire oil and gas properties and distribution assets in the ordinary course of our business. If these offers are accepted, our capital needs may increase substantially. There can be no assurance that additional debt or equity financing or cash generated by operations will be available to meet these requirements.

Our ability to recruit and retain qualified personnel may have a material adverse effect on our operating results and stock price.

Our success depends in large part on the continued services of our executive officers, our senior managers and other key personnel. The loss of these people, especially without advance notice, could have a material adverse impact on our results of operations and our stock price. It is also very important that we attract and retain highly skilled personnel, including technical personnel, to operate our refinery, accommodate our exploration plans, and replace personnel who leave. Competition for qualified personnel can be intense, and there are a limited number of people with the requisite knowledge and experience. Under these conditions, we could be unable to recruit, train, and retain employees. If we cannot attract and retain qualified personnel, it could have a material adverse impact on our operating results and stock price.

Petroleum Independent and Exploration Corporation can affect our raising of capital through the issuance of common shares or securities convertible into common shares.

Mr. Phil E. Mulacek, our Chief Executive Officer, is the President of, and has an ownership interest in, Petroleum Independent and Exploration Corporation. Petroleum Independent and Exploration Corporation owns 433,169 of our common shares, and has a right to exchange its remaining 5,000 shares of S.P. InterOil, LDC on a one-for-one basis for our common shares. Our articles of amalgamation contain restrictions on our issuance of common shares or securities convertible into common shares, except with, among other things, the consent of Petroleum Independent and Exploration Corporation. Mr. Mulacek has an ownership interest in, and Petroleum Independent and Exploration Corporation is the sole general manager of, P.I.E. Group, LLC, which, with Commodities Trading International Corporation, have pre-emptive rights in respect of issuances of our common shares or securities convertible into common shares. Therefore, through his control of Petroleum Independent and Exploration Corporation and P.I.E. Group, LLC, Mr. Mulacek or any successor to his interest in those companies can prevent us from raising capital through the issuance of common shares or securities convertible into common shares.

Compliance with and changes in environmental laws could adversely affect our performance.

We are subject to extensive laws and regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures and the characteristics and composition of gasoline and diesel fuels. If we violate or fail to comply with these laws and regulations, we could be fined

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or otherwise sanctioned. Because environmental laws and regulations are increasingly becoming more stringent and new environmental laws and regulations are continuously being enacted or proposed, the level of future expenditures required for environmental matters could increase in the future. In addition, any major upgrades to our refinery could require material additional expenditures to comply with environmental laws and regulations.

You may be unable to enforce your legal rights against us.

We are a New Brunswick, Canada Corporation. Substantially all of our assets are located outside of Canada and the United States. It may be difficult for investors to enforce, outside of Canada and the United States, judgments against us that are obtained in Canada or the United States in any such actions, including actions predicated upon the civil liability provisions of the securities laws of Canada and the United States. In addition, many of our directors and officers are nationals or residents of countries outside of Canada and the United States, and all, or a substantial portion of, the assets of such persons are located outside of Canada and the United States. As a result, it may be difficult for investors to affect service of process within Canada or the United States upon such persons or to enforce judgments against them obtained in Canadian or United States courts, including judgments predicated upon the civil liability provisions of the securities laws of Canada or the United States.

Changing regulations regarding corporate governance and public disclosure could cause additional expenses and failure to comply may adversely affect our reputation and the value of our securities.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and new and changing provisions of Canadian securities laws, are creating uncertainty because of the lack of specificity and varying interpretations of the rules. As a result, the application of the rules may evolve over time as new guidance is provided by regulatory and governing bodies, which could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We are committed to maintaining high standards of corporate governance and public disclosure. Our efforts to comply with evolving laws, regulations and standards have resulted in, and are likely to continue to result in, increased general and administrative expenses and a diversion of management time and attention from revenue-generating activities to compliance activities.

Beginning with our annual report for the year ending December 31, 2007, Section 404 of the Sarbanes-Oxley Act of 2002 will require us to include an internal control report of management with our annual report on Form 40-F, which is to include management’s assessment of the effectiveness of our internal control over financial reporting as of the end of the fiscal year. That report will also be required to include a statement that our independent auditors have issued an attestation report on management’s assessment of our internal control over financial reporting.

In order to achieve compliance with Section 404 within the prescribed period, management has adopted a detailed project work plan to assess the adequacy of our internal control over financial reporting, validate through testing that controls are functioning as documented, remediate any control weaknesses that may be identified, and implement a continuous reporting and improvement process for internal control over financial reporting. Any failure to comply with applicable laws relating to corporate governance and public disclosure may materially adversely affect our reputation and the value of our securities.

DIVIDENDS

To date we have not paid dividends on our common shares and currently reinvest all cash flow from operations for the future operation and development of our business. Our OPIC loan agreement restricts the subsidiaries that operate our refining business segment from paying dividends to its parent companies and ultimately to InterOil.

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DESCRIPTION OF OUR CAPITAL STRUCTURE

We are authorized to issue an unlimited number of common shares. Holders of common shares are entitled to one vote per share at meetings of our shareholders, to receive dividends on common shares when declared by our Board of Directors and to receive pro-rata our remaining property and assets upon our dissolution or winding up, subject to any rights having priority over the common shares.

Our articles of amalgamation contain restrictions on our issuance of common shares or securities convertible into common shares without the approval of Petroleum Independent and Exploration Corporation, a corporation controlled by Phil Mulacek, our Chief Executive Officer. There are also pre-emptive rights in our articles granted to P.I.E. Group LLC, a company controlled by our Chief Executive Officer, and Commodities Trading International Corporation in respect of issuances of our common shares or securities.

Our by-laws and governing statute, the Business Corporations Act (New Brunswick), provide for cumulative voting for the election for directors such that each shareholder entitled to vote for the election of directors has the right to cast a number of votes equal to the number of votes attached to the common shares held by such shareholder multiplied by the number of directors to be elected, and may cast all such votes in favor of one candidate or distribute them among all candidates in any manner.

MARKET FOR OUR SECURITIES

Our common shares trade on the Toronto Stock Exchange under the symbol IOL in Canadian dollars, on the American Stock Exchange under the symbol IOC in US dollars, and on the Port Moresby Stock Exchange under the symbol IOC in Papua New Guinea Kina. The following tables disclose the monthly high and low trading prices and volume of our common shares traded on the TSX and AMEX during 2006:

Toronto Stock Exchange (TSX:IOL) in Canadian Dollars

Month	High		Low		Volume
January	$	31.30	$	18.75		771,500
February	$	20.53	$	18.30		481,100
March	$	19.83	$	14.70		504,500
April	$	17.97	$	15.10		261,000
May	$	18.95	$	13.55		371,500
June	$	22.95	$	14.37		316,800
July	$	22.75	$	19.31		109,700
August	$	21.99	$	13.32		339,900
September	$	21.76	$	16.22		187,400
October	$	21.75	$	17.30		459,800
November	$	34.99	$	20.56		1,430,400
December	$	35.41	$	29.44		441,900
Total						5,675,500

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American Stock Exchange (AMEX:IOC) in United States Dollars

Month	High		Low		Volume
January	$	26.41	$	16.00		7,592,100
February	$	18.75	$	15.80		3,655,900
March	$	17.50	$	12.64		6,285,700
April	$	15.82	$	13.05		3,348,200
May	$	17.26	$	12.75		5,848,000
June	$	20.54	$	12.96		6,014,200
July	$	20.14	$	16.70		3,976,600
August	$	19.46	$	12.14		7,848,000
September	$	19.50	$	14.50		5,553,700
October	$	19.59	$	15.20		1,000,500
November	$	30.80	$	18.05		21,506,200
December	$	30.50	$	26.12		10,009,700
Total						92,638,800

Prior Sales

In February 2005, we entered into an agreement with institutional accredited investors in which the investors paid us $125 million and we agreed to drill eight exploration wells in Papua New Guinea. Investors are able to convert their interests under the agreement into a maximum of 3,333,334 of our common shares.

We issued $45.0 million in 8.875% senior convertible debentures due 2009 and warrants to purchase 359,415 of our common shares in private placements on August 27, 2004 and September 3, 2004. The debentures were subsequently converted into 2.4 million of our common shares. Each warrant entitles the holder to purchase one common share at an exercise price of $21.91, subject to certain adjustments, until August 27, 2009. As of December 31, 2006, warrants to purchase 340,247 common shares remained outstanding.

During 2004, we raised $12.2 million from PNG Drilling Ventures Limited for our second indirect interest participation agreement program. As of December 31, 2005, PNG Drilling Ventures Limited had converted $2.5 million of their investment into 141,545 of our common shares. As of December 31, 2006, PNG Drilling Ventures Limited had converted their remaining interest into 575, 575 shares and also retained 6.75% in the next four wells. Elk–1 is the first of these wells. PNG Drilling Ventures Limited also has the right to participate in the 16 wells to follow the four mentioned above up to interest of 5.75% at a cost of $112,500 per well (with higher amounts to be paid if the depth exceeds 3,500 meters and the cost exceeds $8.5 million).

In addition to the above, PNG Energy Investors (“PNGEI”), an indirect participation interest investor, that converted all of its interests to common shares in fiscal year 2004, has the right to participate up to 4.25% interest in wells 9 to 24. In order to participate, PNGEI would be required to contribute a proportionate amount of drilling costs related to these wells.

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DIRECTORS AND OFFICERS

The following table provides information with respect to all of our directors and executive officers.

Directors and Officers

Name	Address	Position	Date of Appointment
Phil E. Mulacek	The Woodlands, TX, USA	Chairman, CEO, & Director	May 29, 1997
Christian M. Vinson	The Woodlands, TX,USA	Vice President of Corporate Development and Government Affairs, & Director	May 29, 1997
Gaylen J. Byker	Grand Rapids, MI, USA	Director(1)	May 29, 1997
Roger N. Grundy	Matlock Derbyshire, UK	Director	May 29, 1997
Donald R. Hansen	Calgary, AB, Canada	Director(2)	December 29, 2006
Edward N. Speal	Toronto, ON, Canada	Director(3)	June 25, 2003
Anesti Dermedgoglou	Cairns, QLD, Australia	Vice President of Investor Relations	June 3, 2002
Peter Diezmann	Lae, Papua New Guinea	General Manager — Wholesale and Retail Distribution	March 1, 2005
Gerry Gilbert	Cairns, QLD, Australia	General Manager — Exploration and Production	July 1, 2005
William J. Jasper III	Cairns, QLD, Australia	President and Chief Operating Officer	August 30, 2006
Anthony Poon	Sydney, NSW, Australia	General Manager — Supply and Trading	October 1, 2005
Collin F Visaggio	Perth, WA, Australia	Chief Financial Officer	October 26, 2006

(1)	Gaylen Byker acted as Chairman of the Audit Committee, the Nominating and Corporate Governance Committee and Compensation Committee.
(2)	Donald Hansen acted as a member of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee from the date of his appointment, December 29, 2006.
(3)	Edward Speal acted as a member of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee

As of February 28, 2007, our directors and executive officers as a group beneficially owned 7,519,381 common shares, representing 25.2% of our outstanding common shares. The common shares beneficially owned by our directors and executive officers exclude 662,000 shares issuable upon exercise of outstanding options.

The following is a brief description of the background and principal occupation of each director and executive officer during the preceding five years:

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Phil E. Mulacek is the Chairman of our Board of Directors and our Chief Executive Officer. He has held these positions since the inception of InterOil in 1996. Mr. Mulacek is the founder and President of Petroleum Independent Exploration Corporation based in Houston, Texas. Petroleum Independent Exploration Corporation was established in 1981 for the purposes of oil and gas exploration, drilling and production, and operated across the southwest portion of the United States. Petroleum Independent Exploration Corporation led the development of our refinery and the commercial activities that were necessary to secure the refinery’s economic viability. Mr. Mulacek has over 25 years experience in oil and gas exploration and production and holds a Bachelor of Science Degree in Petroleum Engineering from Texas Tech University.

Christian M. Vinson is Executive Vice President of InterOil and head of Corporate Development & Government Affairs. From 1995 to August 2006 he was our Chief Operating Officer. Mr. Vinson joined us from Petroleum Independent Exploration Corporation, a Houston, Texas based oil and gas exploration and production company. Before joining Petroleum Independent Exploration Corporation, Mr. Vinson was a manager with NUM Corporation, a Schneider company involved in mechanical and electrical engineering automation, in Naperville, Illinois where his responsibilities included the establishment of the company’s first office in the United States. Mr. Vinson earned an Electrical and Mechanical Engineering degree from Ecole d’Electricité et Mécanique Industrielles, Paris, France.

Gaylen J. Byker is President of Calvin College, a liberal arts institution of higher learning, located in Grand Rapids, Michigan. Dr. Byker has obtained four university degrees including a PhD in international relations from the University of Pennsylvania and a Doctorate of Jurisprudence from the University of Michigan. Dr. Byker is a former partner of Offshore Energy Development Corporation where he was head of Development, Hedging and Project Finance for gas exploration and transportation projects offshore. Prior to joining OEDC, he was co-head of Commodity Derivatives at Phibro Energy, Inc., a subsidiary of Salomon, Inc. and head of the Commodity-Indexed Transactions Group at Banque Paribas, New York, with worldwide responsibility for hedging and financing transactions utilizing long-term commodity price risk management. Dr. Byker was manager of Commodity-Indexed Swaps and Financings for Chase Manhattan Investment Bank, New York, and was also a lawyer at Morgan, Lewis & Bockius in Philadelphia, Pennsylvania, U.S..

Roger N. Grundy is the Managing Director of Breckland Ltd, a UK-based engineering consulting firm, and is an internationally recognized expert in the area of refinery efficiency. Mr. Grundy serves as the Technical Director for our refinery and has acted as a consultant to more than 150 existing refineries on six continents for major oil companies, independents and various banks. Mr. Grundy has 40 years experience in all areas of oil refinery and petrochemical operations and construction and holds an Honors Degree in Mechanical Engineering from University College, London. He is also a Fellow of the UK Institution of Mechanical Engineers, Member of the American Institute of Chemical Engineers and a Member of the Energy Institute.

Donald R. Hansen is currently Managing Director with Scotia Waterous in their Calgary, Alberta head office. His focus is on the Private Equity side of their business. Mr. Hansen is also Chief Executive Officer of his privately owned oil and gas consulting company, Red Deer River Energy Corp. Formerly, Mr. Hansen was Vice President, International Energy Operations for Unocal Corp. in Houston, Texas. In his capacity with Unocal in Houston, Mr. Hansen had regional VP responsibilities for West Africa, Latin America, Caspian, China, Europe, Russia, Alaska and Canada as well as new international ventures. Prior to moving to Houston with Unocal, Mr. Hansen resided in Calgary, Alberta and was President and CEO of Northrock Resources Ltd., the Canadian business unit and a wholly owned subsidiary of Unocal Corporation. Northrock Resources Ltd. was a Canadian publicly traded exploration and production company that was sold to Unocal in 2000. Mr. Hansen was President and CEO of Northrock Resources Ltd., and helped build the company from a virtual start-up to over 30,000 boed of production. Prior to Northrock, Mr. Hansen was Vice President Operations for Sceptre Resources and held positions in production engineering, exploitation and gas marketing at Dome Petroleum and Amoco Canada.

Mr. Hansen has had over 26 years of Exploration and Production experience. He joins InterOil with significant board experience and has served on the boards of Black Gold Energy LLC, several Unocal domestic and foreign subsidiaries, Asia Society Texas, Houston, the Unocal Foundation and Northrock Resources Ltd. Mr. Hansen has also served two terms as Governor, Canadian Association of Petroleum Producers in Calgary, and has served on the boards of; YMCA, Calgary, North West Family Church, Calgary, and a private technology company, Outland Technologies Inc. In 1980, Mr. Hansen earned a Bachelor of Science degree in engineering from the University of Saskatchewan with great distinction.

Annual Information Form      INTEROIL CORPORATION      37

Edward N. Speal is based in Toronto, Ontario and is President and CEO of BNP Paribas (Canada). Previously, Mr. Speal was Managing Director responsible for the Energy, Project Finance and Corporate Banking businesses for BNP Paribas in Canada. Mr. Speal was the President and Chief Executive Officer of Paribas Bank of Canada from 1996 to 2000. Mr. Speal worked in New York for Banque Paribas running its Commodity Index Trading Group from 1992 until 1996. From 1989 to 1991, he was managing director of R. P. Urfer & Co., working on an exclusive basis for Banque Paribas as Advisory Director assisting in the establishment and development of its global commodity derivatives business. From 1983 to 1989, Mr. Speal worked for the Chase Manhattan Bank of Canada. Mr. Speal is a Canadian citizen and is a graduate of Queen’s University at Kingston.

Anesti Dermedgoglou is our Vice President of Investor & Public Relations. Mr. Dermedgoglou joined us in 2002. From 1998 until joining us, Mr. Dermedgoglou was a stock broker with Merrill Lynch in Perth, Western Australia. From 1996 to 1998 Mr. Dermedgoglou was a stock-broker at Porter Western Limited in Perth, Western Australia. Mr. Dermedgoglou was a Director of Frankel Pollack Vinderine Inc, one of the largest stock broking companies in South Africa, from 1986 to 1996. Mr. Dermedgoglou is a former member of the Johannesburg Stock Exchange. Mr. Dermedgoglou has worked in the stock broking industry for 16 years and holds a Bachelor of Commerce Degree from The University of South Africa.

Peter Diezmann is General Manager of our Wholesale and Retail Distribution business segment. Mr. Diezmann joined us in March 2005. Prior to joining us, Mr. Diezmann had worked first for Amoco Oil Company and then following it’s acquisition by BP, for BP Australia since 1981, serving in various capacities, including retail, wholesale, distributor, and terminals & logistics management positions, and as General Manager of BP Papua New Guinea for four years prior to our acquisition of that business. Mr. Diezmann holds a Masters of Business Administration (MBA) Degree from James Cook University in Queensland, Australia.

Gerry Gilbert is General Manager of our Exploration and Production business segment. Mr. Gilbert joined us in July 2005. Mr. Gilbert was CEO of Oluma, Inc., a company that designs, manufactures, and markets a suite of fiber-optic products and systems from July 2004 until May 2005. From September 2001 to June 2004, Mr. Gilbert was the Senior VP—International for Transworld Exploration and Production and was responsible for the company’s exploration and production activities which were largely focused in West Africa, New Zealand and Indonesia. From August 2000 until September 2001, Mr. Gilbert worked as an independent consultant to the exploration and production industry. From July 1995 until August 2000, Mr. Gilbert was Executive VP and President, respectively, for Western Atlas’ and Baker Hughes’ exploration and production groups. Mr. Gilbert’s professional career spans 37 years in the upstream oil and gas industry and oil service industry. Mr. Gilbert has held senior management positions in the geophysical service divisions of Western Atlas, Halliburton and Texas Instruments. Mr. Gilbert has a Bachelor of Science Degree in Electrical Engineering from the University of Texas at Austin, a Master of Science Degree in Electrical Engineering from Southern Methodist University and has also completed The Management Program at Rice University. Mr. Gilbert is a member of the Geology Foundation Advisory Council at UT Austin, the Society of Petroleum Engineers, the Society of Exploration Geophysicists, the American Association of Petroleum Geologists, the European Association of Geoscientists and Engineers and the IEEE.

William J Jasper III is President and Chief Operating Officer of InterOil Corporation. Mr. Jasper joined us on August 30, 2006. Mr. Jasper, as President of InterOil leads the refining and downstream business. Prior to joining us, Mr. Jasper had worked for Chevron Pipe Line Company since 1974, serving in leadership and management capacities over facilities, pipelines and terminals. Mr. Jasper has an extensive background in operations and maintenance. Prior to this role Mr. Jasper had served 4 years as Chairman of the West Texas LPG Partnership Board of Directors. Mr. Jasper was also past President and General Manager of Kenai Pipe Line Company in Alaska, and West Texas Gulf Pipeline in Texas.

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Anthony Poon is General Manager of our Supply, Trading & Risk Management department. Mr. Poon joined us in October 2005. From January 2003 until joining us, Mr. Poon was a private oil trading and risk management consultant. During 2002, Mr. Poon served as a Business Manager/Operations Leader with ChevronTexaco Singapore. Prior to joining ChevronTexaco, Mr. Poon had been employed by Caltex in Singapore for more than 30 years. Mr. Poon’s last position with Caltex was Head of the International Crude Oil Trading Department for Caltex in Singapore where he was responsible for crude and derivatives trading and price risk management, including crude supply to Caltex’s refineries worldwide. During his tenure at Caltex, Mr. Poon held various positions involving refinery supply operations, shipping, terminalling, demurrage and oil loss claims, and crude and refined product operations.

Collin F Visaggio is Chief Financial Officer of InterOil. Mr. Visaggio joined us on July 17, 2006 and was appointed to the position of Chief Financial Officer on October 26, 2006. Mr. Visaggio is a Certified Practicing Accountant with a Bachelor and a Masters Degree in Business. He has also attended the Stanford Senior Executive Program in Management.

Mr. Visaggio is a seasoned oil and gas executive who has 24 years’ experience in senior financial and business positions within Woodside Petroleum and BP Australia. His career has given him a broad spectrum of financial and business experience in Exploration and Production, Offshore Gas Production, Oil Refining, LNG and Domestic Gas. Mr. Visaggio spent most of his career at Woodside Petroleum from March 1988 to July 2005, with his most recent positions being Manager, Compliance and Business for the Africa Business Unit, and Manager, Commercial and Planning for the Gas Business Unit. His responsibilities included the management of the business unit financial and business processes and implementing governance. Prior to this and during his 17 years with Woodside he was Deputy Chief Financial Officer and Financial Analysis and Planning Manager within Corporate Finance. Prior to joining InterOil Mr. Visaggio was Chief Financial Officer for Alocit Group Ltd from July 2005 until March 2006.

Mr. Visaggio currently serves as Chairman of the Board of Directors and Chairman of the Finance Committee of Santa Maria Ladies College. Mr Visaggio has served as Director and Officer of Santa Maria College since February 2004.

BOARD COMMITTEES

Our Board of Directors has formed an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Dr. Byker, Mr. Hansen and Mr. Speal are the members of each of these committees. Dr. Byker is the Chairman of the Audit Committee and the Nominating and Corporate Governance Committee. Dr. Byker is also the Chairman of the Compensation Committee. Dr. Folie, who resigned as a director effective October 1, 2006, was previously a member of both of these committees and prior to his resignation acted as the Chairman of the Compensation Committee.

INTERESTS OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTION

Phil Mulacek, our Chief Executive Officer, and Gaylen Byker, a director of InterOil is has ownership interests in certain subsidiaries of InterOil, which are described under “Corporate Structure”, as follows:

ü

Mr. Mulacek controls P.I.E. Group LLC and entities controlled by Mr. Byker, also have an ownership interest in P.I.E. Group LLC. P.I.E. Group LLC. owns 0.01% interest of S.P.I. Exploration and Production Corporation. S.P.I. Exploration and Production Corporation is a holding company that owns InterOil’s upstream operating subsidiaries that hold exploration licenses and conduct exploration activities in Papua New Guinea.

ü

Petroleum Independent and Exploration Corporation (“P.I.E.”) has a 0.02% interest of S.P. InterOil, LDC, which is a holding company of InterOil that owns InterOil’s midstream operating subsidiaries that own and operate InterOil’s refinery in Papua New Guinea. Mr. Mulacek is the President of, and has an ownership interest in, P.I.E. P.I.E. was paid a management fee of $150,000, $150,000, and $150,410 during 2006, 2005 and 2004, respectively. This management fee relates to Petroleum Independent and Exploration Company being appointed the General Manager of our subsidiary, S.P. InterOil, LDC.

Annual Information Form      INTEROIL CORPORATION      39

ü

P.I.E. has a 0.01% interest of S.P.I. Distribution Limited, which is a holding company of InterOil that owns InterOil’s wholesale and retail distribution operations.

ü

We had no loans with P.I.E. in 2006. In 2005 and 2004, we made interest payments of $9,376, and $246,745, and loan principal payments of $1.1 million and $2.2 million to P.I.E. As of December 31, 2005, we had repaid all amounts that we owed to P.I.E. The loans outstanding to P.I.E. were for amounts loaned by lending institutions to P.I.E. These loans were collateralized by barges legally owned by P.I.E. but beneficially owned by us and common shares of ours owned by P.I.E. The interest rates charged to us by P.I.E. reflected the actual interest rates paid by P.I.E. to the lending institutions.

Breckland Limited provides technical and advisory services to us on normal commercial terms. Roger Grundy, one of our directors, is also a director of Breckland and he provides consulting services to us as an employee of Breckland. Breckland was paid $140,165, $179,608 and $120,426 in fees and expenses during 2006, 2005 and 2004, respectively.

LEGAL PROCEEDINGS

The Company is involved in various claims and litigation arising in the normal course of business. While the outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in the Company’s favor, the Company does not currently believe that the outcome of adverse decisions in any pending or threatened proceedings related to these and other matters or any amount which it may be required to pay by reason thereof would have a material adverse impact on its financial position, results of operations or liquidity.

The Company currently has an outstanding $10.6 million cost of control insurance claim for the Elk well which is being assessed by the loss adjusters. The amount and timing of any payment related to this claim is currently unknown.

MATERIAL CONTRACTS

Each of the following material agreements has been filed on SEDAR at www.sedar.com.

Date	Description
May 4, 2006	Credit Agreement between InterOil Corporation and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Clarion Finanz AG
May 4, 2006	Memorandum of Understanding between InterOil Corporation, Merrill Lynch and Clarion Finanz AG
January 4, 2006	Purchase and Sale Agreement between InterOil Products Limited and Shell Overseas Holdings Limited
December 27, 2005	Code of Ethics and Business Conduct
August 12, 2005	$150 Million Secured Revolving Crude Import Facility between EP InterOil, Ltd. and BNP Paribas, Singapore Branch. Amended August 14, 2006 and increased to $170 million.
February 25, 2005	Amended and Restated Indirect Participation Interest Agreement between InterOil Corporation and the Investors signatory thereto
May 12, 2004	Amended Indirect Participation Interest Agreement between InterOil Corporation and PNG Energy Investors, LLC
July 21, 2003	Drilling Participation Agreement between InterOil Corporation and PNG Drilling Ventures Limited. Amended in May 2006
March 26, 2002	Engineering, Procurement and Construction Contract for InterOil Refinery between InterOil Limited and Clough Niugini Limited
June 12, 2001	Loan Agreement between EP InterOil, Ltd. and Overseas Private Investment Corporation, as amended

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Date	Description
December 21, 2001	Crude Supply Agency and Sales Agreement between EP InterOil, Ltd. and BP Singapore Pte Limited
March 23, 2001	Export Marketing and Shipping Agreement between EP InterOil, Ltd. and Shell International Eastern Trading Company
February 6, 2001	Agreement for the Sale and Purchase of Naphtha between EP InterOil, Ltd. and Shell International Eastern Trading Company
May 29, 1997	Refinery State Project Agreement between InterOil Limited, EP InterOil, Ltd. and The Independent State of Papua New Guinea

Credit Agreement dated May 4, 2006

The Credit Agreement dated May 4, 2006 between us, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Clarion Finanz AG (as co-lead arrangers and co-bookrunners) and others provides for the establishment of a $130.0 million secured credit facility for us.

The loan notes issued under the credit facility have a 24 month maturity and require quarterly interest payments in arrears. The applicable interest rate is 4% until the fourth quarterly payment date, after which it will increase to 10%. If we enter into a joint venture / project development agreement to pursue an LNG/NGL project in Papua New Guinea with Clarion Finanz AG and Merrill Lynch Commodities (Europe) Limited (or affiliates) by that payment date, the interest rate will remain at 4%.

The loans are repayable on maturity with optional prepayments. The Credit Agreement also provides for mandatory prepayments out of net cash proceeds in respect of certain prepayment events.

As a condition of the Credit Agreement, we entered into a memorandum of understanding with Clarion Finanz AG and Merrill Lynch Commodities (Europe) Limited (outlining the terms under which the parties have the right to participate in certain LNG/NGL projects in Papua New Guinea) and an engagement letter with Merrill Lynch, Pierce, Fenner & Smith Incorporated and Clarion Finanz AG (relating to certain potential securities offerings by us or our subsidiaries).

Purchase and Sale Agreement dated January 4, 2006

The Purchase and Sale Agreement dated January 4, 2006 with Shell Overseas Holdings Limited provides for the purchase by us of all of the outstanding shares of Shell Papua New Guinea Limited. Shell Papua New Guinea Limited owns wholesale and retail distribution assets in Papua New Guinea. The purchase price for the shares is $10.0 million, plus the value of Shell Papua New Guinea Limited’s net current assets. This agreement provides that the closing of the acquisition is subject to the approval of several governmental authorities in Papua New Guinea. The transaction contemplated by this agreement closed on October 1, 2006.

Code of Ethics and Business Conduct dated December 27, 2005

We established a Corporate code of ethics and business conduct on December 27, 2005. The code applies to all directors, officers and employees of InterOil and its subsidiaries. It covers a number of key corporate compliance areas and serves as a guide to all directors, officers and employees.

$150 Million Secured Revolving Crude Import Facility dated August 12, 2005

We entered into a $150.0 Million Secured Revolving Crude Import Facility with BNP Paribas, Singapore Branch on August 12, 2005. The terms of this agreement are described under “General Development of Our Business.” On August 14, 2006 this facility was increased to an amount of $170.0 million and renewed until June 30, 2007.

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Amended and Restated Indirect Participation Interest Agreement dated February 25, 2005

In February 2005, we entered into an agreement with institutional accredited investors in which the investors paid us $125.0 million and we agreed to drill eight exploration wells in Papua New Guinea on Petroleum Prospecting Licenses 236, 237 or 238. The terms of this agreement are described under “Description of Our Business—Exploration and Production—Indirect Participation Interest Agreement.”

Amended Indirect Participation Interest Agreement dated May 12, 2004

We entered into an Amended Indirect Participation Interest Agreement with PNG Energy Investors, LLC on May 12, 2004. This agreement grants PNG Energy Investors the right to acquire up to a 4.25% working interest in 16 exploration wells following our drilling of an initial eight exploration wells. As of December 31, 2006, we had drilled five exploration wells. PNG Energy Investors will have the right to acquire a working interest in the ninth through the 24^th exploration well. PNG Energy Investors is required to pay us for its initial interest in such exploration wells and for all completion and future development costs attributable to its interest in any wells in which it acquires an interest.

Drilling Participation Agreement dated July 21, 2003

During 2004, we raised $12.2 million from PNG Drilling Ventures Limited, as agent and trustee for its investors, pursuant to the Drilling Participation Agreement. Under this agreement PNG Drilling Ventures has the right to acquire a working interest in our first 16 exploration wells equal to 13.5% multiplied by the result of eight divided by the number of exploration wells we drill. PNG Drilling Ventures will be required to pay its share of any completion costs for future exploration wells or future development costs if an exploration well is a commercial success. As of December 31, 2005, PNG Drilling Ventures Limited had converted $2.5 million of their investment into 141,545 of our common shares. As of December 31, 2006, PNG Drilling Ventures Limited had converted their remaining interest into 575, 575 shares and also retained 6.75% in the next four wells. Elk–1 is the first of these wells. PNG Drilling Ventures Limited also has the right to participate in the 16 wells to follow the four mentioned above up to interest of 5.75% at a cost of $112,500 per well (with higher amounts to be paid if the depth exceeds 3,500 meters and the cost exceeds $8.5 million).

Engineering Procurement and Construction Contract dated March 26, 2002

On March 26, 2002, we entered into an engineering procurement and construction contract with Clough Niugini Limited, which provides for the design, procurement, and construction of our refinery. This agreement was a lump-sum, turnkey contract providing for a construction/commissioning period of 26 months. Except for the defect liability provisions which expired in January 2006, this construction contract terminated upon practical completion of the refinery in January 2005. Pursuant to a settlement agreement between us and Clough, all outstanding issues between us regarding the terms of this contract and the warranties have been resolved.

OPIC Loan Agreement dated June 12, 2001

Our $85.0 million loan from OPIC was used to finance the construction of our refinery and is secured by all of the refinery’s capital assets. The loan matures on December 31, 2014 and requires semi-annual principal payments of $4,500,000 and semi-annual interest payments. Each disbursement under the loan bears interest at a rate equal to a weighted average of treasury rates at the time of disbursement plus 3.0%. During 2005, the weighted average interest rate of all disbursements pursuant to this loan agreement was 7.1%.

Crude Supply Agency and Sales Agreement

In December 2001, we entered into an agreement with BP Singapore Pte Limited whereby BP will supply crude feedstocks to our refinery through June 2009. Our agreement with BP provides BP with financial incentives to secure the most economically attractive crude feedstocks for our refinery. Our contract with BP may limit our ability to purchase directly from producers or from other traders and marketers in the region. Under this agreement, we pay BP the market price for crude feedstocks that it provides plus a nominal marketing fee per barrel.

Annual Information Form      INTEROIL CORPORATION      42

Export Marketing and Shipping Agreement dated March 23, 2001

We entered into an agreement with Shell International Eastern Trading Company whereby Shell will market and distribute or purchase all petroleum products, other than naphtha which is governed by a separate agreement, exported by our refinery. Subject to limited exceptions, Shell has the exclusive right under this agreement to market, sell and distribute all products exported from the refinery other than marine diesel. Shell also agrees to purchase all of our refined products that exceed the domestic Papua New Guinea demand and are not covered by other export contracts. This agreement expires in January 2008.

Agreement for the Sale and Purchase of Naphtha dated February 6, 2001

We entered into an agreement with Shell International Eastern Trading Company whereby Shell will market and distribute or purchase all naphtha exported by our refinery. Under this contract, Shell agrees to purchase all of the naphtha produced by the refinery that is available for export. This agreement expires in September 2008.

Refinery State Project Agreement

On May 29, 1997, we entered into a project agreement with the Government of Papua New Guinea under which we agreed to construct and operate a refinery in Port Moresby, Papua New Guinea. The project agreement expires on January 31, 2035. In the project agreement, the Government of Papua New Guinea has agreed to use its best efforts to enable us to purchase sufficient crude oil produced in Papua New Guinea for the refinery to run at full capacity. If necessary, these efforts would include proposing legislation and issuing executive orders or policy directives. In addition, the government of Papua New Guinea has agreed that future agreements between Papua New Guinea and producers of oil in Papua New Guinea will contain provisions requiring such producers to sell oil produced in Papua New Guinea to local refineries to meet Papua New Guinea’s requirements for refined petroleum products. The purchase price for this oil will be the prevailing fair market price of such oil at the time of purchase.

The project agreement provides that the government of Papua New Guinea will take all actions necessary such that any refinery constructed in Papua New Guinea, including ours, will have the exclusive right to sell refined products at the import parity price prior to any imports into Papua New Guinea. In general, the import parity price is the price that would be paid in Papua New Guinea for a refined product that is being imported. For each refined product produced and sold locally in Papua New Guinea, the import parity price is calculated by adding the costs that would typically be incurred to import such product to the average posted price for such product in Singapore as reported by Platts. The costs that are added to the reported Platts’ price include freight costs, insurance costs, landing charges, losses incurred in the transportation of refined products, demurrage and taxes.

The project agreement provides that, until December 31, 2010, income from the refinery will not be taxed.

TRANSFER AGENT AND REGISTRAR

Our transfer agent and registrar is Computershare Trust Company of Canada. In Papua New Guinea our transfer agent and registrar is Computershare Ltd. The registers for transfers of our common shares are maintained by Computershare Trust Company of Canada at its principal offices in Toronto, Ontario. Queries should be directed to Computershare Trust Company at 1-888-267-6555 (toll free in North America).

Annual Information Form      INTEROIL CORPORATION      43

ADDITIONAL INFORMATION

Additional information, including that related to directors’ and officers’ remuneration, principal holders of our common shares and securities authorized for issuance under equity compensation plans will be contained in our management information circular for our upcoming annual meeting of shareholders. Additional financial information is provided in our audited consolidated financial statements and related management’s discussion and analysis for the year ended December 31, 2006. Our audited financial statements, management’s discussion and analysis and additional information can be found on SEDAR at www.sedar.com and on our web site at www.interoil.com.

Copies of the financial statements, management’s discussion and analysis and any additional copies of this Annual Information Form may also be obtained by contacting Anesti Dermedgoglou, Vice President of Investor Relations at level 1, 60-92 Cook Street, Portsmith, QLD 4870, Australia; Australian Phone: +61 (7) 4046-4600.

Annual Information Form      INTEROIL CORPORATION      44

GLOSSARY OF TERMS

Barrel, Bbl (petroleum) Unit volume measurement used for petroleum and its products; 1 barrel = 42 US gallons, 35 Imperial gallons (approx.), or 159 liters (approx.); 7.3 barrels = 1 ton (approx.); 6.29 barrels = 1 cubic meter = 35.32 cubic feet.

Condensate A component of natural gas which is a liquid at surface conditions.

Crack spread The simultaneous purchase or sale of crude against the sale or purchase of refined petroleum products. These spread differentials which represent refining margins are normally quoted in dollars per barrel by converting the product prices into dollars per barrel and subtracting the crude price.

EBITDA Earnings before interest, taxes, depreciation and amortization. EBITDA represents net income/(loss) plus total interest expense (excluding amortization of debt issuance costs), income tax expense, depreciation and amortization expense. EBITDA is used to analyze operating performance.

Feedstock Raw material used in a processing plant.

GAAP Generally accepted accounting principles.

IPF InterOil Power Fuel. InterOil’s marketing name for low sulphur waxy residue oil.

IPP Import Parity Price. For each refined product produced and sold locally in Papua New Guinea, IPP is calculated by adding the costs that would typically be incurred to import such product to the average posted price for such product in Singapore as reported by Platts. The costs that are added to the reported Platts price include freight costs, insurance costs, landing charges, losses incurred in the transportation of refined products, demurrage and taxes.

LNG Liquefied natural gas. Natural gas converted to a liquid state by pressure and severe cooling, then returned to a gaseous state to be used as fuel. Acceptable first reference abbreviation. LNG is moved in tankers, not via pipelines. LNG, which is predominantly methane, artificially liquefied, is not to be confused with NGLs, natural gas liquids, heavier fractions which occur naturally as liquids. See also natural gas.

LPG Liquefied petroleum gas, typically ethane, propane butane and isobutane. Usually produced at refineries or natural gas processing plants, including plants that fractionate raw natural gas plant liquids. LPG can also occur naturally as a condensate.

LSWR Low sulfur waxy residual fuel oil.

Mark-to-market To revalue futures/option positions using current market prices to determine profit/loss. The profit/loss can then be paid, collected or simply tracked daily.

Naphtha That portion of the distillate obtained in the refinement of petroleum which is intermediate between the lighter gasoline and the heavier benzene, and has a specific gravity of about 0.7, used as a solvent for varnishes, illuminant, etc.

Natural gas A naturally occurring mixture of hydrocarbon and non-hydrocarbon gases found in porous geological formations beneath the earth’s surface, often in association with petroleum. The principal constituent is methane.

Natural gas measurements The following are some of the standard abbreviations used in natural gas measurement.

Mcf: standard abbreviation for 1,000 cubic feet.
Bil cu ft: Billion cubic feet. Also abbreviated to bcf.
Tcf: trillion cubic feet.

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PGK Currency of Papua New Guinea

PPL Petroleum Prospecting License. The tenement given by the Independent State of Papua New Guinea to explore for oil and gas.

PRL Petroleum Retention License. The tenement given by the Independent State of Papua New Guinea to allow the licensee holder to evaluate the commercial and technical options for the potential development of an oil and/or gas field.

Sweet/sour crude Definitions which describe the degree of a given crude’s sulfur content. Sour crudes are high in sulfur, sweet crudes are low.

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Schedule A

FORM 51-101F3

REPORT OF MANAGEMENT AND
DIRECTORS ON OIL AND GAS DISCLOSURE

Management of InterOil Corporation (the “Company”) is responsible for the preparation and disclosure of information with respect to the Company’s oil and gas activities in accordance with securities regulatory requirements. This information includes reserves data, which consist of the following:

(a)	(i)	proved and proved plus probable oil and gas reserves estimated as at December 31, 2006 using forecast prices and costs; and
	(ii)	the related estimated future net revenue; and
(b)	(i)	proved oil and gas reserves estimated as at December 31, 2006 using constant prices and costs; and
	(ii)	the related estimated future net revenue.

The Company does not have any reserves as defined under National Instrument 51-101.

The board of directors has reviewed the Company’s procedures for assembling and reporting other information associated with oil and gas activities and has reviewed that information with management. The board of directors has approved:

(a)	the content and filing with securities regulatory authorities of the other oil and gas information;
(b)	the content and filing of this report.

Because the reserves data are based on judgements regarding future events, actual results will vary and the variations may be material.

/s/ Phil E. Mulacek Phil E. Mulacek, Chairman and	/s/ Gaylen J. Byker Gaylen J. Byker, Director
Chief Executive Officer
/s/ Christian M. Vinson	/s/ Roger N. Grundy
Christian M. Vinson,	Roger N. Grundy, Director
Officer and Director

Dated: March 30, 2007

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EX-99.2

InterOil Corporation Consolidated Financial Statements
(Expressed in United States dollars)

Years ended December 31, 2006, 2005 and 2004

InterOil Corporation Consolidated Financial Statements
(Expressed in United States dollars)

Table of contents

Management’s Report	1
Auditor’s Report to the Shareholders	2
Consolidated Balance Sheets	4
Consolidated Statements of Operations	5
Consolidated Statements of Cash Flows	6
Consolidated Statements of Shareholders’ Equity	7
Notes to the Consolidated Financial Statements	8
Reconciliation to accounting principles generally accepted in the United States	33

InterOil Corporation Consolidated Financial Statements
(Expressed in United States dollars)

MANAGEMENT’S REPORT

The management of InterOil Corporation is responsible for the financial information and operating data presented in this Annual Report.

The consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. When alternative accounting methods exist, management has chosen those it deems most appropriate in the circumstances. Financial statements are not precise as they include certain amounts based on estimates and judgments. Management has determined such amounts on a reasonable basis in order to ensure that the financial statements are presented fairly, in all material respects. Financial information presented elsewhere in this Annual Report has been prepared on a basis consistent with that in the consolidated financial statements.

InterOil Corporation maintains systems of internal accounting and administrative controls. These systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and that the Company’s assets are properly accounted for and adequately safeguarded.

The Audit Committee, appointed by the Board of Directors, is composed of independent non-management directors. The Committee meets regularly with management, as well as the external auditors, to discuss auditing, internal controls, accounting policy and financial reporting matters. The Committee reviews the annual consolidated financial statements with both management and the independent auditors and reports its findings to the Board of Directors before such statements are approved by the Board.

The 2006 consolidated financial statements have been audited by PricewaterhouseCoopers, the independent auditors, in accordance with Canadian generally accepted auditing standards on behalf of the shareholders. PricewaterhouseCoopers has full and free access to the Audit Committee.

Management is currently liaising with the Securities Exchange Commission (‘SEC’ or ‘Commission’) in relation to comments initially raised by the SEC staff in July 2006 on the Form 40-F filed for the year ended December 31, 2005. The queries are primarily in relation to the accounting treatment of the Indirect Participation Interest agreement # 3 (refer to note 18) as a conveyance in accordance with SFAS 19 — ‘Financial Accounting and Reporting by Oil and Gas Producing Companies’. The SEC staff have also raised comments about other issues related to the accounting treatment of Indirect Participation Interest agreement # 3 such as the bifurcation of the derivative, the fair value methodologies applied and the application of accretion expense. Discussions regarding the 2005 Form 40-F are ongoing and may result in modifications to that document or to this Form 40-F. The Company will continue to work with the SEC to reach resolution of any outstanding issues and will provide updates if any material developments occur. Any changes based on the revised accounting treatment, if made, will not affect the cash position of the Company.

Phil Mulacek	Collin Visaggio
Chief Executive Officer	Chief Financial Officer

1

INDEPENDENT AUDIT REPORT TO THE SHAREHOLDERS OF INTEROIL CORPORATION

We have audited the balance sheet of InterOil Corporation as at December 31, 2006 and December 31, 2005, and the statements of operations, shareholders’ equity and cash flows for each of the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2006 and December 31, 2005 and the results of its operations and its cash flows for each of the years then ended in accordance with Canadian generally accepted accounting principles.

PricewaterhouseCoopers

Melbourne, Australia
March 30, 2007

2

DIV style="font-family: Helvetica,Arial,sans-serif">

AUDITORS’ REPORT TO THE SHAREHOLDERS

We have audited the consolidated balance sheet of InterOil Corporation as at December 31, 2004 and the consolidated statements of operations, shareholders’ equity, and cash flows for the year ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2004 and the results of its operations and its cash flows for the year ended December 31, 2004 in accordance with Canadian generally accepted accounting principles.

(signed) KPMG

Sydney, Australia
March 4, 2005

3

InterOil Corporation

Consolidated Balance Sheets
(Expressed in United States dollars)

	As at
	December 31,			December 31,			December 31,
	2006			2005			2004
	$			$			$
Assets
Current assets:
Cash and cash equivalents (note 5)		31,681,435			59,601,807			28,544,398
Cash restricted (note 7)		29,301,940			16,452,216			15,497,127
Trade receivables (note 8)		67,542,902			49,958,973			58,698,069
Commodity derivative contracts (note 7)		1,759,575			1,482,798			503,500
Other assets		2,954,946			1,011,195			806,123
Inventories (note 9)		67,593,558			44,087,484			27,916,902
Prepaid expenses		880,640			638,216			190,135
Total current assets		201,714,996			173,232,689			132,156,254
Cash restricted (note 7)		3,217,284			210,053			102,096
Deferred financing costs (note 17)		1,716,757			1,256,816			1,311,488
Plant and equipment (note 10)		242,642,077			237,399,148			244,363,355
Oil and gas properties (note 11)		37,449,734			16,399,492			6,605,360
Future income tax benefit (note 12)		1,424,014			1,058,898			1,303,631
Total assets		488,164,862			429,557,096			385,842,184
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable and accrued liabilities		73,310,793			26,005,034			26,328,544
Income tax payable		2,784,576			3,900,459			2,881,398
Working capital facility — crude feedstock (note 13)		36,873,508			70,724,322			76,520,541
Deferred hedge gain (note 7)		1,385			1,016,998			537,358
Business combination financing (note 14)		—			—			12,123,106
Unsecured loan (note 16)		—			21,453,132			—
Due to related parties (note 15)		—			—			1,056,251
Deferred liquefaction project liability (note 17)		6,553,080			—			—
Current portion of secured loan (note 17)		13,500,000			9,000,000			9,000,000
Current portion of indirect participation interest — PNGDV (note 18)		730,534			—			—
Current portion of indirect participation interest (note 18)		12,460,725			35,092,558			13,749,852
Total current liabilities		146,214,601			167,192,503			142,197,050
Accrued financing costs (note 17)		1,087,500			921,109			863,329
Secured loan (note 17)		184,166,433			71,500,000			76,000,000
Indirect participation interest (note 18)		36,827,877			30,166,311			—
Indirect participation interest — PNGDV (note 18)		1,012,999			9,685,830			10,608,830
Total liabilities		369,309,410			279,465,753			229,669,209
Non-controlling interest (note 19)		5,759,206			6,023,149			6,404,262
Shareholders’ equity:
Share capital (note 20)		233,889,366			223,934,500			216,813,654
Authorised – unlimited Issued and outstanding – 29,871,180 (Dec 31, 2005 – 29,163,320) (Dec 31, 2004 – 28,310,884)
Contributed surplus		4,377,426			2,933,586			1,841,776
Warrants (note 22)		2,137,852			2,137,852			2,258,227
Foreign currency translation adjustment		1,492,869			477,443			463,200
Conversion options (note 18)		25,475,368			25,475,368			—
Accumulated deficit		(154,276,635	)		(110,890,555	)		(71,608,144	)
Total shareholders’ equity		113,096,246			144,068,194			149,768,713
Total liabilities and shareholders’ equity		488,164,862			429,557,096			385,842,184

See accompanying notes to the consolidated financial statements. Commitments and contingencies (note 24)

On behalf of the Board — Phil Mulacek, Director Christian Vinson, Director

4

InterOil Corporation

Consolidated Statement of Operations
(Expressed in United States dollars)

	December 31,			December 31,			December 31,
	2006			2005			2004
	$			$			$
Revenue
Sales and operating revenues		511,087,934			481,180,645			70,644,486
Interest		3,223,995			1,830,808			382,461
Other		3,747,603			528,270			196,337
		518,059,532			483,539,723			71,223,284
Expenses
Cost of sales and operating expenses		499,494,540			467,246,990			65,344,516
Administrative and general expenses		20,728,618			14,672,793			7,831,550
Depreciation and amortization		12,352,672			11,036,550			639,075
Exploration costs, excluding exploration impairment (note 11)		1,657,671			—			2,903,313
Exploration impairment (note 11)		416,923			2,144,429			35,566,761
Legal and professional fees		3,937,517			3,606,415			3,573,727
Short term borrowing costs		8,478,540			8,855,857			4,705,190
Long term borrowing costs		11,856,872			6,351,337			1,401,256
Accretion expense (note 18)		3,741,254			5,647,491			—
Loss on amendment of indirect participation interest — PNGDV (note 18)		1,446,901			—			—
Foreign exchange loss/(gain)		(4,744,810	)		796,590			392,805
		559,366,698			520,358,452			122,358,193
Loss before income taxes and non-controlling interest		(41,307,166	)		(36,818,729	)		(51,134,909	)
Income taxes
Current		(1,232,487	)		(2,605,265	)		(2,538,410	)
Future		(1,110,386	)		(226,729	)		663,347
		(2,342,873	)		(2,831,994	)		(1,875,063	)
Loss before non-controlling interest		(43,650,039	)		(39,650,723	)		(53,009,972	)
Non-controlling interest (note 16)		263,959			368,312			70,091
Net loss		(43,386,080	)		(39,282,411	)		(52,939,881	)
Basic loss per share (note 20)		(1.47	)		(1.36	)		(2.09	)
Diluted loss per share (note 20)		(1.47	)		(1.36	)		(2.09	)
Weighted average number of common shares outstanding
Basic and diluted		29,602,360			28,832,263			25,373,575

See accompanying notes to the consolidated financial statements

5

InterOil Corporation
Consolidated Statement of Cash Flows
(Expressed in United States dollars)

	December 31,			December 31,			December 31,
	2006			2005			2004
	$			$			$
Cash flows provided by (used in):
Operating activities
Net (loss) (note 5)		(43,386,080	)		(39,282,411	)		(52,939,881	)
Adjustments for non-cash transactions
Non-controlling interest		(263,959	)		(381,113	)		(70,091	)
Depreciation and amortization		12,352,672			11,036,550			639,075
Future income tax asset		1,333,108			244,733			(663,347	)
Loss/(gain) on sale of other assets		—			—			(94,260	)
Loss/(gain) on sale of plant and equipment		263,945			(95,053	)		—
Impairment of plant and equipment		755,857			—			—
Amortization of discount on debt		28,891			161,255			604,045
Amortization of deferred financing costs		219,033			154,672			268,873
Accretion of discount on indirect participation interest		3,741,254			5,647,491			—
Debt conversion settlement expense — debentures (note 22)		—			—			77,589
Interest expense forfeited by debenture holders		—			—			998,438
Loss/(gain) on unsettled hedge contracts		(71,875	)		119,200			33,858
Gain on derivative contracts		(1,220,500	)		(585,000	)		—
Stock compensation expense		1,976,072			1,668,896			1,209,921
Inventory revaluation		—			355,215			1,508,334
Capitalized oil and gas properties expensed		416,923			2,144,429			35,566,761
Loss on amendment of indirect participation interest — PNGDV		1,446,901			—			—
Unrealized foreign exchange loss/(gain)		(4,744,810	)		796,590			392,805
Non-cash interest on secured loan facility		2,926,025			—			—
Change in non-cash operating working capital
(Increase)/decrease in trade receivables		(10,438,531	)		8,751,789			(49,224,125	)
(Increase) in commodity derivative contracts		—			(33,858	)		—
(Increase)/decrease in other assets and prepaid expenses		4,051			(653,153	)		982,014
Decrease/ (increase) in inventories		2,642,493			(16,515,467	)		(23,240,590	)
Increase in accounts payable, accrued liabilities and income tax payable		28,773,008			3,752,531			4,183,664
		(3,245,522	)		(22,712,704	)		(79,766,917	)
Investing activities
Expenditure on oil and gas properties		(21,405,742	)		(11,249,477	)		(19,154,106	)
Expenditure on plant and equipment		(13,585,792	)		(5,575,194	)		(38,947,904	)
Proceeds from indirect participation interest		—			80,410,591			10,724,885
Expenditure on oil and gas properties applied against indirect participation interest (note 18)		(21,152,032	)		(31,774,513	)		—
Proceeds received on sale of assets		3,770,080			112,229			405,353
Redemption of short-term investments		—			—			24,723,572
Acquisition of subsidiary net of cash received (note 14)		(25,820,515	)		—			4,631,904
Repayment of business combination financing		—			(12,226,581	)		—
(Increase) in restricted cash held as security on borrowings		(15,856,955	)		(1,063,046	)		(15,501,806	)
Change in non-cash working capital
Increase/(decrease) in accounts payable and accrued liabilities		2,412,621			(3,165,756	)		4,094,594
		(91,638,335	)		15,468,253			(29,023,508	)
Financing activities
Repayments of secured loan		(4,500,000	)		(4,500,000	)		—
Proceeds from secured loan, net of transaction costs		125,293,488			—			2,000,000
Net proceeds from senior convertible debentures and warrants		—			—			41,740,234
Proceeds from conversion options		—			22,700,814			6,259,967
Proceeds from related party borrowings		—			—			1,775,565
(Repayments) to related parties		—			(1,056,251	)		(2,198,065	)
Proceeds from unsecured borrowings		—			21,453,132			5,100,000
Repayments of unsecured borrowings		(21,453,132	)		—			(5,100,000	)
Proceeds from/(repayments of) working capital facility		(33,850,814	)		(5,796,219	)		76,520,541
Proceeds from issue of common shares		1,473,943			5,500,384			2,020,316
		66,963,485			38,301,860			128,118,558
Increase/(decrease) in cash and cash equivalents		(27,920,372	)		31,057,409			19,328,133
Cash and cash equivalents, beginning of period		59,601,807			28,544,398			9,216,265
Cash and cash equivalents, end of period (note 5)		31,681,435			59,601,807			28,544,398

See accompanying notes to the consolidated financial statements

See note 5 for non cash financing and investing activities

6

InterOil Corporation

Consolidated Statements of Shareholders’ Equity
(Expressed in United States dollars)

	Year ended
	December 31,			December 31,			December 31,
	2006			2005			2004
	$			$			$
Share capital
At beginning of period		223,934,500			216,813,654			157,449,200
Adjustment to reflect change in accounting for employee stock options (note 2(t))		—			—			92,434
Issue of capital stock (note 20)		9,954,866			7,120,846			59,272,020
At end of period		233,889,366			223,934,500			216,813,654
Contributed surplus
At beginning of period		2,933,586			1,841,776			540,222
Adjustment to reflect change in accounting for employee stock options (note 2(t))		—			—			645,216
Stock compensation (note 21)		1,443,840			1,091,810			656,338
At end of period		4,377,426			2,933,586			1,841,776
Warrants
At beginning of period		2,137,852			2,258,227			—
Movement for period (note 22)		—			(120,375	)		2,258,227
At end of period		2,137,852			2,137,852			2,258,227
Foreign currency translation adjustment
At beginning of period		477,443			463,200			—
Movement for period, net of tax		1,015,426			14,243			463,200
At end of period		1,492,869			477,443			463,200
Conversion options
At beginning of period		25,475,368			—			—
Movement for period (note 18)		—			25,475,368			—
At end of period		25,475,368			25,475,368			—
Accumulated deficit
At beginning of period		(110,890,555	)		(71,608,144	)		(11,031,402	)
Adjustment to reflect change in accounting for employee stock options (note 2(t))		—			—			(737,650	)
Adjustment to cummulative debentures conversion expense (note 22)		—			—			(6,899,211	)
Net (loss) for period		(43,386,080	)		(39,282,411	)		(52,939,881	)
At end of period		(154,276,635	)		(110,890,555	)		(71,608,144	)
Shareholders’ equity at end of period		113,096,246			144,068,194			149,768,713

See accompanying notes to the consolidated financial statements

7

InterOil Corporation

Notes to Consolidated Financial Statements
(Expressed in United States dollars)

1. Nature of operations and organization

InterOil Corporation (the “Company” or “InterOil”) is a publicly traded, integrated oil and gas company operating in Papua New Guinea (“PNG”).

Management has organized the Company’s operations into four major segments — Upstream, Midstream, Downstream and Corporate.

Upstream includes Exploration and Production operations for crude oil and natural gas in PNG. Midstream includes Liquefaction, Refining and Marketing of products both domestically in Papua New Guinea and for export. Downstream includes Wholesale and Retail Distribution of refined products in PNG. Corporate engages in business development and improvement, common services and management, financing and treasury, government and investor relations. Common and integrated costs are recovered from business segments on an equitable driver basis.

2. Significant accounting policies

The principal accounting policies adopted in the preparation of the financial report are set out below. These policies have been consistently applied for all years presented, unless otherwise stated.

(a) Basis of preparation

These financial statements are prepared in accordance with Canadian generally accepted accounting principles (“GAAP”) applicable to a going concern, which, in the case of the Company, differ in certain respects from those in the United States. These differences are described in note 26, Reconciliation to Accounting Principles Generally Accepted in the United States.

The consolidated financial statements for the year ended December 31, 2006 are in accordance with Canadian GAAP which requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying Company’s accounting policies. These estimates and judgments may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from these estimates.

Management is currently liaising with the Securities Exchange Commission (‘SEC’ or ‘Commission’) in relation to comments initially raised by the SEC staff in July 2006 on the Form 40-F filed for the year ended December 31, 2005. The queries are primarily in relation to the accounting treatment of the Indirect Participation Interest agreement # 3 (refer to note 18) as a conveyance in accordance with SFAS 19 — ‘Financial Accounting and Reporting by Oil and Gas Producing Companies’. The SEC staff have also raised comments about other issues related to the accounting treatment of Indirect Participation Interest agreement # 3 such as the bifurcation of the derivative, the fair value methodologies applied and the application of accretion expense. Discussions regarding the 2005 Form 40-F are ongoing and may result in modifications to that document or to this Form 40-F. The Company will continue to work with the SEC to reach resolution of any outstanding issues and will provide updates if any material developments occur. Any changes based on the revised accounting treatment, if made, will not affect the cash position of the Company.

(b) Principles of consolidation

The consolidated financial statements of the Company incorporates the assets and liabilities of InterOil Corporation as at December 31, 2006, December 31, 2005, December 31, 2004 and the results of all subsidiaries for the years then ended. Subsidiaries of InterOil Corporation include SP InterOil, LDC (“SPI”) (99.9%), SPI Exploration and Production Corporation (100%), SPI Distribution Limited (100%), InterOil Australia Pty Ltd (100%), SPI InterOil Holdings Limited (100%), Direct Employment Services Company (100%), PNG LNG, Inc (100%) and their subsidiaries. InterOil Corporation and its subsidiaries together are referred to in these financial statements as the Company or the consolidated entity.

Effective October 1, 2006 the Company acquired 100% shareholding of Shell Papua New Guinea Ltd from Shell. The acquired entity has been renamed IPL (PNG) Ltd and is a fully owned subsidiary of InterOil Products Limited. The results of IPL (PNG) Ltd have been incorporated into the Company consolidation from October 1, 2006.

During the year 2006, the Company has set up PNG LNG (Inc), a Bahamas incorporated entity, to construct and operate a Liquefied Natural Gas facility (‘LNG Project’) in PNG. The results of the LNG Project has been disclosed separately within the segment notes, refer to note 4.

Subsidiaries are all those entities over which the Company has the power to govern the financial and operating policies generally accompanying a shareholding of more than one-half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Company controls another entity.

Subsidiaries are fully consolidated from the date on which control is transferred to the Company. They are de-consolidated from the date that control ceases.

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Company, refer to note 2(h).

Intercompany transactions, balances and unrealized gains on transactions between Company companies are eliminated on consolidation.

Minority interest in the results and equity of subsidiaries are shown separately in the consolidated statements of operations and balance sheets.

8

InterOil Corporation

Notes to Consolidated Financial Statements
(Expressed in United States dollars)

2. Significant accounting policies (cont’d)

(c) Going concern

These consolidated financial statements assume that InterOil will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations and therefore the consolidated financial statements do not include any adjustments relating to the recoverability of assets.

As shown in the consolidated financial statements, the Company incurred a net loss of $43.4 million (2005 — $39.3 million, 2004 – $53.0 million) and used cash in its operating activities of $3.2 million (2005 — $22.7 million, 2004 — $79.8 million) during the year ended December 31, 2006. The Company had cash and cash equivalents of $31.7 million (2005 — $59.6 million, 2004 — $28.5 million) and $32.5 million (2005 — $16.7 million, 2004 — $15.6 million) in restricted cash as at December 31 2006. The Company believes that this is sufficient to fund on-going operations. The current financial condition, among other factors, indicates that with focused management and the continued support of lenders InterOil has the ability to continue as a going concern.

The Company’s continuation as a going concern is dependent upon its ability to internally generate or externally raise additional cash to allow for the satisfaction of its obligations on a timely basis. InterOil is actively optimizing the business, improving cash generated from operations and exploring various financing alternatives. Management has initiated business improvement programs and will continue to manage value enhancing opportunities and reduce expenses until optimal operations are achieved. While the Company is exploring all opportunities to improve its financial condition, there is no assurance that these programs will be successful.

(d) Segment reporting

An operating segment (also referred to as a ‘business segment’) is a component of an enterprise:

a.	that engages in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other segment of the same enterprise),
b.	whose operating results are regularly reviewed by the Company’s management to make decisions about resources to be allocated to the segment and assess its performance, and
c.	for which discrete financial information is available.

The Company’s assets and operations are predominantly based in Papua New Guinea and therefore are disclosed as one geographical segment. Refer to note 1 for the management’s organization of the Company by business segment.

(e) Foreign currency translation

Functional and presentation currency

Items included in the financial statements of each of the Company’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in United States Dollars which is InterOil’s functional and presentation currency.

Group companies

For subsidiaries considered to be self-sustaining foreign operations, all assets and liabilities denominated in foreign currency are translated to United States dollars at exchange rates in effect at the balance sheet date and all revenue and expense items are translated at the rates of exchange in effect at the time of the transactions. Foreign exchange gains or losses are reported as a separate component of shareholders’ equity as a Foreign currency translation adjustment.

For subsidiaries considered to be an integrated foreign operation, monetary items denominated in foreign currency are translated to United States dollars at exchange rates in effect at the balance sheet date and non-monetary items are translated at rates of exchange in effect when the assets were acquired or obligations incurred. Revenue and expense items are translated at the rates of exchange in effect at the time of the transactions. Foreign exchange gains or losses are included in the statement of operations.

(f) Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable. Amounts disclosed as revenue are net of returns, trade allowances and duties and taxes paid. The following particular accounting policies, which significantly affect the measurement of results and of financial position, have been applied.

Revenue from midstream operations:

Revenue from sales of products is recognized when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable, persuasive evidence of an arrangement exists and the sales price is fixed or determinable. During the years ended December 31, 2006 and December 31, 2005, sales between the business segments of the Company have been eliminated from sales and operating revenues and cost of sales.

9

InterOil Corporation

Notes to Consolidated Financial Statements
(Expressed in United States dollars)

2. Significant accounting policies (cont’d)

Up to December 31, 2004, the sales between business segments of the Company were eliminated from sales, operating revenues, cost of sales and refinery assets as all revenues and expenses relating to the refinery were capitalized as part of the development stage activities.

Revenue from downstream operations:

Sales of goods are recognized when the Company has delivered products to the customer, the customer takes ownership and assumes risk of loss, collection of the receivable is probable, persuasive evidence of an arrangement exists and the sale price is fixed or determinable. It is not the Company’s policy to sell products with a right of return.

Interest income:

Interest income is recognized on a time-proportionate basis.

(g) Income tax

The income tax expense or revenue for the period is the tax payable on the current period’s taxable income based on the national income tax rate for each jurisdiction adjusted by changes in deferred tax assets and liabilities attributable to temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements and to unused tax losses.

Deferred tax assets and liabilities are recognized for temporary differences at the tax rates expected to apply when the assets are recovered or liabilities are settled, based on those tax rates which are enacted or substantively enacted for each jurisdiction. The relevant tax rates are applied to the cumulative amounts of deductible and taxable temporary differences to measure the deferred tax asset or liability.

Deferred tax assets are recognized for deductible temporary differences and unused tax losses only if it is more likely than not that future taxable amounts will be available to utilize those temporary differences and losses. A valuation allowance is provided against any portion of a future tax asset which will more likely not be recovered.

(h) Acquisitions of assets

The purchase method of accounting is used to account for all acquisitions of assets (including business combinations) regardless of whether equity instruments or other assets are acquired. Cost is measured as the fair value of the assets given, shares issued or liabilities assumed at the date of exchange plus costs directly attributable to the acquisition.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The excess of the cost of acquisition over the fair value of the Company’s share of the identifiable net assets is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference, to the extent possible, is allocated against acquired fixed assets in accordance with the standards on a pro rata basis. Any further excess is presented as an extraordinary gain in the statement of operations.

Where settlement of any part of cash consideration is deferred, the amounts payable in future are discounted to their present value as at the date of exchange. The discount rate is the Company’s incremental borrowing rate, being the rate at which similar borrowing could be obtained from an independent financier under comparable terms and conditions.

(i) Impairment of assets

Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The carrying amount of a long-lived asset is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from its use and eventual disposition.

An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its fair value. Fair value is the amount of the consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act. When no liquid market exists, the fair value is the present value of future cash flows discounted at the risk free rate of interest plus a risk premium. If an impairment loss is recognized, the adjusted carrying amount becomes the new cost basis.

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows.

10

InterOil Corporation

Notes to Consolidated Financial Statements
(Expressed in United States dollars)

2. Significant accounting policies (cont’d)

(j) Cash and cash equivalents

Cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to insignificant risk of changes in value.

(k) Restricted cash

Restricted cash consists of cash on deposit with a maturity of less than three months at the time of purchase but which is restricted from being used in daily operations. Restricted cash is carried at cost and any accrued interest is classified under other assets.

(l) Trade receivables

The collectibility of trade receivables is assessed on an ongoing basis. Debts which are known to be uncollectible are written off. A provision for doubtful receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. The amount of provision is recognized in the statement of operations.

The Company sells certain trade receivables with recourse to BNP Paribas under its working capital facility. The receivables are retained on the balance sheet as the Company retains control over these receivables.

(m) Inventory

Raw materials and stores and finished goods

Raw materials and stores and finished goods are stated at the lower of costs and net realizable value. Costs comprise direct materials, direct labor and an appropriate proportion of variable and fixed overhead expenditure. Net realizable value is the estimated selling price in the ordinary course of the business less the estimated costs of completion and the estimated costs necessary to make the sale.

Crude oil and refined petroleum products

Crude oil and refined petroleum products are recorded on a first-in, first-out basis and the net realizable value test for crude oil and refined petroleum products are performed separately. The cost of midstream refined petroleum product consists of raw material, labour, direct overheads and transportation costs. The cost of downstream refined petroleum product includes the cost of the product plus related freight, wharfage and insurance.

(n) Assets held for sale

Non-current assets are classified as held for sale and stated at the lower of their carrying amount and fair value less costs to sell if their carrying amount will be recovered principally through a sale transaction rather than through continuing use.

An impairment loss is recognized for any initial or subsequent write down of the asset (or disposal group) to fair value less costs to sell. A gain is recognized for any subsequent increase in fair value less costs to sell an asset but not in excess of any cumulative impairment loss previously recognized. A gain or loss not previously recognized by the date of sale of the non-current asset is recognized at the date of derecognition.

Non-current assets are not depreciated or amortized while they are classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognized.

Non-current assets classified as held for sale are presented separately from other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet.

(o) Derivative financial instruments

Derivative financial instruments are utilized by the Company in the management of its crude purchase cost exposures and its finished products sales price exposures. The Company’s policy is not to utilize derivative financial instruments for trading or speculative purposes. The Company may choose to designate derivative financial instruments as hedges.

11

InterOil Corporation

Notes to Consolidated Financial Statements
(Expressed in United States dollars)

2. Significant accounting policies (cont’d)

When applicable, at the inception of the hedge, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions, the nature of the risk being hedged, how the hedging instruments’ effectiveness in offsetting the hedged risk will be assessed and a description of the method for measuring effectiveness. This process includes linking all derivatives to specific assets and liabilities on the balance sheet or to specific firm commitments or anticipated transactions. The Company also assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair value or cash flows of hedged items at inception and on an ongoing basis.

Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded in a separate component of liabilities until earnings are affected by the variability in cash flows of the designated hedged item.

The Company discontinues hedge accounting prospectively when it is determined that the derivative is no longer effective in offsetting changes in cash flows of the hedged item, the derivative expires or is sold, terminated or exercised, the derivative is no longer designated as a hedging instrument because it is unlikely that a forecasted transaction will occur, a hedged firm commitment no longer meets the definition of a firm commitment or management determines that designation of the derivative as a hedging instrument is no longer appropriate.

In all situations in which hedge accounting is discontinued, the Company continues to carry the derivative at its fair value on the balance sheet and recognizes any subsequent changes in its fair value in earnings. The adjustment of the carrying amount of the hedged asset or liability is accounted for in the same manner as other components of the carrying amount of that asset or liability. When hedge accounting is discontinued because it is probable that a forecasted transaction will not occur, the Company recognizes it immediately in earnings gains and losses that were previously accumulated in a separate component of liabilities.

The Company enters into crude swaps in order to reduce the impact of fluctuating crude prices on its cost of sales. These swap agreements require the periodic exchange of payments without the exchange of the notional product amount on which the payments are based. The Company designates its crude price swap agreements as hedges of the underlying purchase. Cost of sales is adjusted to include the payments made or received under the crude purchase cost swaps.

The Company enters into naphtha, diesel and jet kerosene swaps in order to reduce the impact of fluctuating naphtha, jet kerosene and diesel prices respectively on its revenue. These swap agreements require the periodic exchange of payments without the exchange of the notional product amounts on which the payments are based. The Company designates its naphtha, diesel and jet kerosene price swap agreements as hedges of the underlying sale. Sales revenue of the respective product is adjusted to include the payments made or received under the price swaps.

(p) Deferred financing costs

Deferred financing costs represent the unamortized financing costs paid to secure borrowings. Amortization is provided on a straight-line basis over the term of the related debt and is included in expenses for the period.

(q) Plant and equipment

Refinery assets

The Company’s most significant item of plant and equipment is the oil refinery in Papua New Guinea which is included within midstream assets. During 2004, the Company was considered to be in the construction and pre-operating stage of development of the oil refinery, however, the pre-operating stage ceased on January 1, 2005. Project costs, net of any recoveries, incurred during the pre-operating stage were capitalized as part of plant and equipment. Development costs and the costs of acquiring or constructing support facilities and equipment are also capitalized.

The refinery assets are recorded at cost. Interest costs relating to the construction and pre-operating stage of the development project prior to commencement of commercial operations were capitalized as part of the cost of such plant and equipment.

Refinery related assets are depreciated on straight line basis over their useful lives, at an average rate of 4% per annum. The refinery is built on land leased from the Independent State of Papua New Guinea. The lease expires on July 26, 2097 and does not outline any terms for restoration and closure costs.

Repairs and maintenance costs, other than major turnaround costs, are charged to earnings as incurred. Major turnaround costs will be deferred to other assets when incurred and amortized over the estimated period of time to the next scheduled turnaround. No major turnaround costs had been incurred at December 31, 2006.

12

InterOil Corporation

Notes to Consolidated Financial Statements
(Expressed in United States dollars)

2. Significant accounting policies (cont’d)

Other assets

Property, plant and equipment are recorded at cost. Depreciation of assets begins when the asset is in place and ready for its intended use. Assets under construction and deferred project costs are not depreciated. Depreciation of plant and equipment is calculated using the straight line method, based on the estimated service life of the asset. Maintenance and repair costs are expensed as incurred. Improvements that increase the capacity or prolong the service life of an asset are capitalized. The depreciation rates by category are as follows:

Downstream	0% - 25	%
Midstream	1% - 33	%
Upstream	4% - 100	%
Corporate	13% - 33	%

During the year 2006, InterOil has adopted a deminimus threshold of $5,000 below which all capital purchases are expensed in the period of purchase.

Leased assets

Leases of property, plant and equipment where the Company has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are classified at the lease’s inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. The corresponding rental obligations, net of finance charges, are included in other long term payables. Each lease payment is allocated between the liability and the finance charges so as to achieve a constant rate on the finance balance outstanding. The interest element of the finance cost is charged to the statement of operations over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period. The property, plant and equipment acquired under finance leases are depreciated over the shorter of asset’s useful life and the lease term.

Leases in which a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease payments are representative of the pattern of benefit derived from the leased asset and accordingly are included in expenses in the periods in which they are incurred.

Asset retirement obligations

Estimated costs of future dismantlement, site restoration and abandonment of properties are provided based upon current regulations and economic circumstances at year end. Management estimates there are no material obligations associated with the retirement of the refinery or with its normal operations relating to future restoration and closure costs. The refinery is built on land leased from the Independent State of Papua New Guinea. The lease expires on July 26, 2097.

Environmental remediation

Remediation costs are accrued based on estimates of known environmental remediation exposure. Ongoing environmental compliance costs, including maintenance and monitoring costs, are expensed as incurred. Provisions are determined on an assessment of current costs, current legal requirements and current technology. Changes in estimates are dealt with on a prospective basis. As at December 31, 2006, no provision has been raised.

Disposal of property, plant and equipment

At the time of disposition of plant and equipment, accounts are relieved of the asset values and accumulated depreciation and any resulting gain or loss is included in the statement of operations.

(r) Oil and gas properties

The Company uses the successful-efforts method to account for its oil and gas exploration and development activities. Under this method, costs are accumulated on a field-by-field basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred. The Company continues to carry as an asset the cost of drilling exploratory wells if the required capital expenditure is made and drilling of additional exploratory wells is underway or firmly planned for the near future or when exploration and evaluation activities have not yet reached a stage to allow reasonable assessment regarding the existence of economical reserves. Capitalized costs for producing wells will be subject to depletion on the units-of-production method.

Geological and geophysical costs are expensed as incurred, except when they have been incurred to facilitate production techniques, to increase total recoverability and to determine the desirability of drilling additional development wells within a proved area. Geological and geophysical costs capitalized would be included as part of the cost of producing wells and be subject to depletion on the units-of-production method.

13

InterOil Corporation

Notes to Consolidated Financial Statements
(Expressed in United States dollars)

2. Significant accounting policies (cont’d)

(s) Accounts payable and accrued liabilities

These amounts represent liabilities for goods and services provided to the Company prior to the end of financial year which are unpaid. These amounts are unsecured and are usually paid within 30 days of recognition.

(t) Employee entitlements

Wages and salaries, and annual leave

Liabilities for wages and salaries, including annual leave expected to be settled within 12 months of the reporting date are recognized in accounts payables in respect of employees’ services up to the reporting date and are measured at the amounts expected to be paid when liabilities are settled.

Long Service Leave

The liability for long service leave is recognized in the provision for employee benefits and measured as the present value of expected future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected future wage and salary levels, experience of employee departures, periods of service and statutory obligations.

Retirement benefit obligations

The Company contributed to a defined contribution plan and the Company’s legal or constructive obligation is limited to these contributions. Contributions to the defined contribution fund are recognized as an expense as they become payable.

Stock-based compensation

Stock-based compensation benefits are provided to employees via the Company Option plan and an employee share scheme. The fair value at grant date is independently determined using a Black-Scholes option pricing model that takes into account the exercise price, the terms of the option, the vesting criteria, the share price at grant date and expected price volatility of the underlying share, the expected yield and risk-free interest rate for the term of the option.

Upon exercise of options, the balance of the contributed surplus relating to those options is transferred to share capital.

The Company uses the fair value based method to account for employee stock options. Under the fair value based method, compensation expense is measured at fair value at the date of grant and is expensed over the award’s vesting period.

Prior to January 1, 2004, the Company applied the fair value based method only to employee stock appreciation rights, and applied the settlement method of accounting to employee stock options. Under the settlement method, any consideration paid by employees on the exercise of stock options or purchase of stock was credited to share capital and no compensation expense was recognized. The Company adopted the fair value based method to account for employee stock options, beginning January 1, 2004. In accordance with one of the transitional options permitted, the Company has retroactively applied the fair value based method to all employee stock options granted on or after January 1, 2002, without restatement to prior periods in the year ended December 31, 2004. The effect of retroactively adopting the fair value based method to the 2004 financial statements, without restatement, was to increase the opening accumulated deficit by $737,650, increase contributed surplus by $645,216 and increase share capital by $92,434.

Profit-sharing and bonus plans

The Company recognizes a provision where contractually obliged or where there is a past practice that has created a constructive obligation.

(u) Earnings per share

Basic earnings per share

Basic common shares outstanding are the weighted average number of common shares outstanding for each period. The calculation of basic per share amounts is based on net earnings/(loss) divided by the weighted average of common shares outstanding.

Diluted earnings per share

Diluted per share amounts are computed similarly to basic per share amounts except that the weighted average shares outstanding are increased to include additional shares from the assumed exercise of stock options, conversion options and warrants, if dilutive. The number of additional shares is calculated by assuming that outstanding stock options were exercised and the proceeds from such exercises were used to acquire shares of common stock at the average price during the reporting period.

14

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

2. Significant accounting policies (cont’d)

(v) Reclassification

Certain prior years’ amounts have been reclassified to conform to current presentation.

3. Financial Risk Management

The Company’s activities expose it to a variety of financials risks; market risk, credit risk, liquidity risk and cash flow interest rate risk. The Company’s overall risk management program focuses on the unpredictability of markets and seeks to minimize potential adverse effects on the financial performance of the Company. The Company uses derivative financial instruments to hedge certain price risk exposures.

Risk Management is carried out by the Finance Department under policies approved by the Board of Directors. The Finance Department identifies, evaluates and hedges financial risks in close cooperation with the Company’s operating units. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as use of derivative financial instruments.

(a) Market risk

Foreign exchange risk

Foreign exchange risk arises when future commercial transactions and recognized assets and liabilities are denominated in a currency that is not the Company’s functional currency.

The Company operates internationally and is exposed to foreign exchange risk arising from currency exposures to the United States Dollar.

Most of the Company transactions are undertaken in United States Dollars, hence reducing the foreign exchange risk exposure of the Company. The Papua New Guinea Kina exposures are minimized as the downstream sales in local currency is used to adequately cover the operating expenses of the midstream refinery and downstream operations.

Price risk

The midstream refining operations of the Company are largely exposed to price fluctuations during the period between the crude purchases and the refined products leaving the refinery on sales to downstream operations and other distributors. The Company actively tries to manage the price risk by entering into derivative contracts to buy and sell crude and finished products.

The derivative contracts are entered into by the Management based on documented risk management strategies which have been approved by the Risk Management Committee. All derivative contracts entered into are reviewed by the Risk Management Committee as part of the meetings of the Committee.

Product risk

The composition of the crude feedstock will vary the refinery output of products. The 2006 output achieved includes distillates fuels, which includes diesel, gasoline and jet fuels (65%) (2005 - 55%) and naphtha and low sulphur waxy residue (28%) (2005 — 39%). The product yields obtained will vary going forward as the refinery operations are optimized and will vary based on the type of crude feedstock used.

Management tries to manage the product risk by actively reviewing the market for demand and supply, trying to maximize the production of the higher margin products and also renegotiating the selling prices for the lower margin products.

(b) Credit risk

A significant amount of the Company’s export sales are made to one customer in Singapore which represented $86,156,904 (2005 -$151,106,105) or 17% (2005 — 32%) of total sales in the year ended December 31, 2006. The Company’s domestic sales for the period ended December 31, 2006 were not dependent on a single customer or geographic region of Papua New Guinea.

The export sales to one customer cannot be considered a key risk as there is a ready market for InterOil export products and the prices are quoted on active markets.

15

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

3. Financial Risk Management (cont’d)

(c) Liquidity risk

Prudent liquidity risk management implies maintaining sufficient cash and marketable securities and the availability of funding through an adequate amount of committed credit facilities. Due to the dynamic nature of the underlying business, Company Finance aims at maintaining flexibility in funding by keeping committed credit lines available.

(d) Cash flow and fair value interest rate risk

As the Company has no significant interest-bearing assets, the Company’s income and operating cash flows are substantially independent of changes in market interest rates.

The Company’s interest-rate risk arises from long-term borrowings and working capital financing facilities. Borrowings issued at variable rates expose the Company to cash flow interest-rate risk. Borrowings issued at fixed rates expose the Company to fair value interest-rate risk.

The Company’s long term borrowings mainly consists of OPIC and Merrill Lynch facilities (refer note 17) and the working capital financing facility is provided by BNP Paribas (refer note 13). Company is actively seeking to manage its cash flow and fair value interest-rate risks.

(e) Geographic risk

The operations of InterOil are concentrated in Papua New Guinea.

4. Segmented financial information

As stated in note 1, management has identified four major business segments — upstream, midstream, downstream and corporate. The corporate segment includes assets and liabilities that do not specifically relate to the other business segments. Results in this segment primarily include financing costs and interest income.

During the year the Company has started incurring costs in relation to the Liquefaction project which has been reported separately under Midstream — Liquefaction project below.

The foreign exchange loss/(gain) for the years have been disclosed separately during the year to provide additional information to the reader. This item was classified under office and administration and other expenses in the prior periods. The prior period comparatives have been reclassified to reflect the change in disclosure.

During the year, management has also decided to reclassify the interest and other income to the relevant segments to provide additional information to the reader.

Consolidation adjustments relating to total assets relates to the elimination of intercompany loans and investments in subsidiaries.

Notes to and forming part of the segment information

Segment information is prepared in conformity with the accounting policies of the entity as disclosed in note 2.

Segment revenues, expenses and total assets are those that are directly attributable to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. Upstream, midstream and downstream include costs allocated from the corporate activities based on a fee for services provided. The eliminations relate to sales and operating revenues between segments recorded at transfer prices based on current market prices and to unrealized intersegment profits in inventories.

16

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

4. Segmented financial information (cont’d)

				Midstream -
				Refining and			Midstream -									Consolidation
Year ended December 31, 2006	Upstream			Marketing			Liquefaction			Downstream			Corporate			adjustments			Total
Revenues from external customers		—			315,211,130			—			195,876,804			—			—			511,087,934
Intersegment revenues		—			136,583,916			—			22,480			8,669,933			(145,276,329	)		—
Interest revenue		2,820,888			360,319			—			100,750			1,601,491			(1,659,453	)		3,223,995
Other revenue		2,427,816			—			—			1,319,787			—			—			3,747,603
Total segment revenue		5,248,704			452,155,365			—			197,319,821			10,271,424			(146,935,782	)		518,059,532
Cost of sales and operating expenses		—			451,374,165			—			183,511,182			—			(135,390,806	)		499,494,541
Office and admin and other expenses		6,370,436			8,017,245			694,416			7,671,208			14,974,443			(8,552,604	)		29,175,144
Foreign exchange (gain)/loss		(61,423	)		(4,635,878	)		(219	)		(192,433	)		145,142			—			(4,744,811	)
Exploration costs, excluding exploration impairment		1,657,671			—			—			—			—			—			1,657,671
Exploration impairment		416,923			—			—			—			—			—			416,923
Depreciation and amortisation		806,142			10,729,546			—			909,767			37,247			(130,030	)		12,352,672
Accretion expense		3,741,254			—			—			—			—			—			3,741,254
Interest expense		5,428			10,880,779			—			151,730			7,894,820			(1,659,453	)		17,273,304
Total segment expenses		12,936,431			476,365,857			694,197			192,051,454			23,051,652			(145,732,893	)		559,366,698
(Loss)/income before income taxes and non-controlling interest		(7,687,727	)		(24,210,492	)		(694,197	)		5,268,367			(12,780,228	)		(1,202,889	)		(41,307,166	)
Income tax expense		—			—			—			(2,273,773	)		(69,100	)		—			(2,342,873	)
Non controlling interest		—			259,169			—			—			—			4,790			263,959
Total net income/(loss)		(7,687,727	)		(23,951,323	)		(694,197	)		2,994,594			(12,849,328	)		(1,198,099	)		(43,386,080	)
Total assets		68,260,887			325,351,819			(683,582	)		98,722,803			393,700,711			(397,187,776	)		488,164,862

				Midstream -
				Refining and			Midstream -								Consolidation
Year ended December 31, 2005	Upstream			Marketing			Liquefaction		Downstream			Corporate			adjustments			Total
Revenues from external customers		—			356,326,763			—		124,853,882			—			—			481,180,645
Intersegment revenues		—			80,094,501			—		6,202			5,345,017			(85,445,720	)		—
Interest revenue		1,011,511			244,157			—		95,317			686,718			(206,895	)		1,830,808
Other revenue		283,634			496			—		245,760			30,509			(32,129	)		528,270
Total segment revenue		1,295,145			436,665,917			—		125,201,161			6,062,244			(85,684,744	)		483,539,723
Cost of sales and operating expenses		—			436,490,554			—		110,857,139			—			(80,100,703	)		467,246,990
Office and admin and other expenses		2,426,909			9,204,613			—		4,724,568			11,608,822			(5,465,658	)		22,499,254
Foreign exchange (gain)/loss		(689,084	)		1,434,498			—		843			50,333			—			796,590
Exploration costs, excluding exploration impairment		—			—			—		—			—			—			—
Exploration impairment		2,144,429			—			—		—			—			—			2,144,429
Depreciation and amortisation		314,467			10,598,134			—		204,247			49,732			(130,030	)		11,036,550
Accretion expense		5,647,491			—			—		—			—			—			5,647,491
Interest expense		—			10,161,899			—		225,450			806,694			(206,895	)		10,987,148
Total segment expenses		9,844,212			467,889,698			—		116,012,247			12,515,581			(85,903,286	)		520,358,452
(Loss)/income before income taxes and non-controlling interest		(8,549,067	)		(31,223,781	)		—		9,188,914			(6,453,337	)		218,542			(36,818,729	)
Income tax expense		—			—			—		(2,755,845	)		(76,149	)		—			(2,831,994	)
Non controlling interest		—			362,140			—		—			—			6,172			368,312
Total net income/(loss)		(8,549,067	)		(30,861,641	)		—		6,433,069			(6,529,486	)		224,714			(39,282,411	)
Total assets		75,587,143			314,904,035			—		47,342,109			317,227,597			(325,503,788	)		429,557,096

17

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

4. Segmented financial information (cont’d)

				Midstream -
				Refining and			Midstream -								Consolidation
Year ended December 31, 2004	Upstream			Marketing			Liquefaction		Downstream			Corporate			adjustments			Total
Revenues from external customers		—			26,309,547			—		62,410,291			—			(18,075,352	)		70,644,486
Intersegment revenues		—			—			—		489,111			3,787,944			(4,277,055	)		—
Interest revenue		151,780			8,761			—		56,896			165,024			—			382,461
Other revenue		(39,267	)		(63,031	)		—		205,836			92,799			—			196,337
Total segment revenue		112,513			26,255,277			—		63,162,134			4,045,767			(22,352,407	)		71,223,284
Cost of sales and operating expenses		—			27,685,347			—		53,158,737			—			(15,499,568	)		65,344,516
Office and admin and other expenses		1,649,191			3,167,216			—		3,146,905			10,538,730			(3,766,608	)		14,735,434
Exchange (Gain)/loss		—			(34,121	)		—		—			—			—			(34,121	)
Exploration costs, excluding exploration impairment		2,903,313			—			—		—			—			—			2,903,313
Exploration impairment		35,566,761			—			—		—			—			—			35,566,761
Depreciation and amortisation		12,510			311,986			—		224,214			90,365			—			639,075
Interest expense		4,932			843,888			—		455,368			1,899,027			—			3,203,215
Total segment expenses		40,136,707			31,974,316			—		56,985,224			12,528,122			(19,266,176	)		122,358,193
(Loss)/income before income taxes and non-controlling interest		(40,024,194	)		(5,719,039	)		—		6,176,910			(8,482,355	)		(3,086,231	)		(51,134,909	)
Income tax expense		—			—			—		(1,899,803	)		24,740			—			(1,875,063	)
Non controlling interest		—			68,961			—		—			—			1,130			70,091
Total net income/(loss)		(40,024,194	)		(5,650,078	)		—		4,277,107			(8,457,615	)		(3,085,101	)		(52,939,881	)
Total assets		21,570,219			310,941,494			—		34,436,144			211,530,962			(192,636,636	)		385,842,184

5. Cash and cash equivalents

The components of cash and cash equivalents are as follows:

	December 31,		December 31,		December 31,
	2006		2005		2004
	$		$		$
Cash on deposit		31,681,435		59,597,724		24,224,523
Bank term deposits
-Papua New Guinea kina deposits		—		—		4,315,513
-Australian dollar deposits		—		4,083		4,362
		31,681,435		59,601,807		28,544,398

18

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

6. Supplemental cash flow information

	December 31,		December 31,		December 31,
	2006		2005		2004
	$		$		$
Cash paid during the year
Interest		8,548,552		13,373,832		1,444,006
Income taxes		2,306,218		1,656,985		1,914,459
Interest received		3,154,380		1,800,062		671,479
Non-cash investing and financing activities:
Deferred financing costs included in accounts payable and accrued liabilities		500,000		100,000		—
Accrued financing costs and deferred financing costs		—		—		834,439
Increase in additional paid up capital as a result of a change in accounting policy for stock based compensation (2(t))		—		—		645,216
Decrease in plant and equipment as a result of impairment		755,857		—		—
Deferred liquefaction project liability		6,553,080		—		—
Increase in share capital from:
the exercise of share options		532,232		577,086		646,216
the exercise of warrants		—		120,375		—
change in accounting policy for stock based compensation (note 2(t))		—		—		92,434
transfer of deferred transaction costs on conversion of the debenture		—		—		(3,093,734	)
transfer of carrying value of debentures to share capital on conversion of the securities		—		—		42,890,448
conversion of indirect participation interest into share capital		7,948,691		923,000		9,226,260
shares issued to induce conversion of debentures		—		—		6,976,800
transaction costs being attributed to share capital transaction		—		—		300,000
Movement in accumulated deficit as a result of the inducement paid on conversion of the debentures		—		—		(6,899,211	)

All non-cash investing and financing activities disclosed in note 6 relate to the “corporate” segment except for that involving the decrease in plant and equipment as a result of impairment (upstream).

7. Financial instruments

Cash and cash equivalents

With the exception of cash and cash equivalents and restricted cash, all financial assets are non-interest bearing. In 2006, the Company earned 5.0% (2005 — 2.9%) on the cash on deposit which related to the working capital facility. In 2006, cash and cash equivalents earned an average interest rate of 5.1% per annum (2005 — 1.3%, 2004 — 1.6%) on cash, other than the cash on deposit that was related to the working capital facility.

Credit risk is minimized as all cash amounts and certificates of deposit are held with large banks which have acceptable credit ratings determined by a recognized rating agency. The carrying values of cash and cash equivalents, trade receivables, all other assets, accounts payable and accrued liabilities, all short-term loan facilities and amounts due to related parties approximate fair values due to the short term maturities of these instruments.

Cash restricted

All other components of cash and cash equivalents are non-interest bearing. Restricted cash, which mainly relates to the working capital facility, is comprised of the following:

	December 31,		December 31,		December 31,
	2006		2005		2004
	$		$		$
Cash deposit on working capital facility (5.0%)		29,301,940		16,452,216		15,497,127
Cash restricted — Current		29,301,940		16,452,216		15,497,127
Cash deposit on secured loan (3.9%)		647,502		106,267		—
Debt reserve for secured loan		2,420,000		—		—
Bank term deposits on Petroleum Prospecting Licenses (0.8%)		107,997		103,786		102,096
Cash deposit on office premises (4.5%)		41,785		—		—
Cash restricted — Non-current		3,217,284		210,053		102,096
		32,519,224		16,662,269		15,599,223

19

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

7. Financial instruments (cont’d)

Cash held as deposit on the working capital facility supports the Company’s working capital facility with BNP Paribas. The balance is initially based on 20% of the outstanding balance of the facility subject to fluctuations or variations in inventory and accounts receivables. The cash held as deposit on secured loan supports the Company’s secured loan borrowings with the Overseas Private Investment Corporation (“OPIC”).

The debt reserve for secured loan supports the bridging facility. As part of the facility, InterOil is required to maintain two quarterly interest repayments in the debt reserve account.

Bank term deposits on Petroleum Prospecting Licenses are unavailable to the Company while Petroleum Prospecting Licenses 236, 237 and 238 are being utilized by the Company.

The prior year balances of restricted cash have been reclassified to correctly reflect the current and non-current component, consistent with the current year presentation.

Commodity derivative contracts

InterOil uses derivative commodity instruments to manage exposure to price volatility on a portion of its refined product and crude inventories.

At December 31, 2006, InterOil had a net receivable of $1,759,575 (2005 — $1,482,798, 2004 - -$503,500) relating to commodity hedge contracts. Of this total, a payable of $45,925 (2005 - receivable of $897,798, 2004 — receivable of $503,500) relates to hedges deemed effective at December 31, 2006 and a receivable of $1,805,500 (2005 — $585,000, 2004 — $nil) relates to outstanding derivative contracts for which hedge accounting was not applied or had been discontinued. The gain/(loss) on hedges for which final pricing will be determined in future periods was $1,385 (2005 — $1,016,998, 2004 — $537,358). This amount has been included in the deferred hedge gain/(loss) account on the balance sheet.

As at December 31, 2006, InterOil had entered into naphtha swap agreements to hedge a portion of first quarter 2007 naphtha sales. These transactions have been hedge accounted and tested for effectiveness on a regular basis. If any of hedge accounted transactions are found to be ineffective in comparison to management’s risk mitigation policies, hedge accounting is discontinued on those transactions. The gain or loss on derivative contracts that have been hedge accounted are charged to sales or cost of sales depending on the timing of the risk the hedge was expected to cover. The unrealized gain/loss on these hedge transactions are included in deferred hedge gain/(loss) in the balance sheet until these transactions are settled. The gain on the derivative contracts for which hedge accounting has been discontinued is included in general and administration expenses for the year.

During the year, InterOil entered into Brent contracts to hedge a portion of its anticipated low sulphur waxy residue sales by buying and selling the raw material component, crude at fixed prices to match the timing of the purchase and sale respectively. These transactions are not hedge accounted and any gain/loss on these contracts are included in general and administration expenses for the year. As at December 31, 2006 of the $1,805,500 from non-hedge accounted transactions, $1,745,500 (2005 — $nil, 2004 — $nil) relates to transactions for which hedge accounting was not applied and $60,000 (2005 — $585,000, 2004 — $nil) relates to transactions for which hedge accounting was discontinued.

The following summarizes the effective hedge contracts by derivative type on which final pricing will be determined in future periods as at December 31, 2006:

Derivative	Type	Notional volumes (bbls)
Naphtha swap	Sell Naphtha		175,000
As at December 31, 2005:

Derivative	Type	Notional volumes (bbls)
Crude swap	Sell crude		300,000
Crude swap	Buy crude		250,000
Jet kerosene crack spread swap	Sell jet kerosene/buy crude		249,999
As at December 31, 2004:

Derivative	Type	Notional volumes (bbls)
Naphtha swap	Sell naphtha		50,000
Naphtha crack spread swap	Sell naphtha/buy crude		50,000

20

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

8. Trade receivables

InterOil has a discounting facility with BNP Paribas on specific monetary receivables under which the Company is able to sell, on a revolving basis, specific monetary receivables up to $40,000,000 (refer to note 13). As at December 31, 2006, $23,671,568 (2005 — $23,196,914, 2004 — $13,034,904) in outstanding accounts receivable had been sold with recourse under the facility. As the sale is with recourse, the receivables are retained on the balance sheet and included in the accounts receivable and the proceeds are recognized in the working capital facility. The Company has retained the responsibility for administering and collecting accounts receivable sold.

At December 31, 2006, $55,955,400 (2005 — $39,430,264, 2004 — $49,989,840) of the trade receivables secures the BNP Paribas working capital facility disclosed in note 13. This balance includes $20,186,665 (2005 — $5,059,192, 2004 — $3,078,447) of intercompany receivables which were eliminated on consolidation.

9. Inventories

	December 31,		December 31,		December 31,
	2006		2005		2004
	$		$		$
Midstream — refining and marketing (crude oil feedstock)		12,795,356		5,019,580		3,971,982
Midstream — refining and marketing (refined petroleum product)		22,329,270		25,967,357		16,396,975
Midstream — refining and marketing (parts inventory)		46,646		—		—
Downstream (refined petroleum product)		32,422,296		13,100,547		7,547,945
		67,593,568		44,087,484		27,916,902

At December 31, 2006, all inventory balances are carried at cost where as in 2005 and 2004 the balances reflected net realizable value. The net realizable value write downs for prior year 2005 and 2004 of $355,215 and $1,508,334 are included in cost of sales.

At December 31, 2006, $35,171,272 (2005 — $30,986,937, 2004 — $20,368,957) of the midstream inventory balance secures the BNP Paribas working capital facility disclosed in note 13.

10. Plant and equipment

The majority of the Company’s plant and equipment is located in Papua New Guinea, except for items in the corporate segment with a net book value of $118,644 (2005 — $132,375, 2004 — $86,327) which are located in Australia. Amounts in deferred project costs and work in progress are not being amortized.

Consolidation entries relates to midstream assets which were created when the gross margin on 2004 refinery sales to the downstream segment were eliminated in the development stage of the refinery.

										Corporate &
December 31, 2006	Upstream			Midstream			Downstream			Consolidated			Totals
Plant and equipment		1,247,201			249,741,042			37,697,458			146,797			288,832,498
Deferred project costs and work in progress		—			723,566			715,653			—			1,439,219
Consolidation entries		—			—			—			(2,990,688	)		(2,990,688	)
Accumulated depreciation and amortisation		(153,455	)		(21,760,341	)		(22,697,003	)		(28,153	)		(44,638,952	)
Net book value		1,093,746			228,704,267			15,716,108			(2,872,044	)		242,642,077
Capital expenditure		—			11,948,960			10,543,842			156,817			22,649,619

21

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

10. Plant and equipment (cont’d)

										Corporate &
December 31, 2005	Upstream			Midstream			Downstream			Consolidated			Totals
Plant and equipment		5,657,125			238,078,544			12,164,417			331,183			256,231,269
Deferred project costs and work in progress		—			1,987,085			1,386,488			—			3,373,573
Consolidation entries		—			—			—			(3,120,718	)		(3,120,718	)
Accumulated depreciation and amortisation		(308,378	)		(11,245,748	)		(7,332,042	)		(198,808	)		(19,084,976	)
Net book value		5,348,747			228,819,881			6,218,863			(2,988,343	)		237,399,148
Capital expenditure		—			3,284,108			1,902,334			95,782			5,282,224

										Corporate &
December 31, 2004	Upstream			Midstream			Downstream			Consolidated			Totals
Plant and equipment		5,659,248			236,551,876			10,875,211			263,217			253,349,552
Deferred project costs and work in progress		—			—			949,924			—			949,924
Consolidation entries		—			—			—			(2,002,214	)		(2,002,214	)
Accumulated depreciation and amortisation		(19,792	)		(419,629	)		(7,317,596	)		(176,890	)		(7,933,907	)
Net book value		5,639,456			236,132,247			4,507,539			(1,915,887	)		244,363,355
Capital expenditure		1,131			40,532,990			1,320,644			83,920			41,938,685

During the year ended December 31, 2006, InterOil recognized a loss of $263,945 (2005 — gain of $95,053, 2004 — gain of $94,260) on the disposal of assets.

During 2006, InterOil sold one of the two barges included in the upstream segment. Prior to the sale, an impairment assessment was performed and an impairment loss of $755,857 was recognized. This loss is included in office and administrative expenses in the statement of operations.

11. Oil and gas properties

Costs of oil and gas properties which are not subject to depletion and which have not been applied against the indirect participation interest liability (note 18) are as follows:

	December 31,		December 31,		December 31,
	2006		2005		2004
	$		$		$
Drilling equipment		18,242,972		15,100,860		5,353,471
Petroleum Prospecting License drilling programs at cost		19,206,762		1,298,632		1,251,889
		37,449,734		16,399,492		6,605,360

The following table discloses a breakdown of the exploration expenses presented in the statements of operations for the periods ended:

	December 31,		December 31,		December 31,
	2006		2005		2004
	$		$		$
Exploration costs, excluding exploration impairment		1,657,671		—		2,903,313
Exploration impairment
Costs incurred in prior years		—		2,059,367		16,576,982
Costs incurred in current year		416,923		85,062		18,989,779
Total exploration impairment		416,923		2,144,429		35,566,761
		2,074,594		2,144,429		38,470,074

22

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

12. Income taxes

The combined income tax expense in the consolidated statements of operations reflects an effective tax rate which differs from the expected statutory rate (combined federal and provincial rates). Differences for the years ended were accounted for as follows:

	December 31,			December 31,			December 31,
	2006			2005			2004
	$			$			$
(Loss) before income taxes and non controlling interest		(41,307,166	)		(36,818,729	)		(51,134,909	)
Statutory income tax rate		35.10	%		35.10	%		35.12	%
Computed tax (benefit)		(14,498,815	)		(12,923,374	)		(17,958,580	)
Effect on income tax of:
Losses in foreign jurisdictions not deductible		251,639			2,834,689			2,273,530
Non-deductible stock compensation expense		693,601			585,783			424,924
Gains and losses on foreign exchange		(1,358,526	)		268,843			58,659
Tax rate differential in foreign jurisditions		1,103,122			1,224,361			(341,613	)
Over provision for tax in prior years		(51,632	)		(113,950	)		(42,874	)
Tax losses for which no future tax benefit has been brought to account		12,166,624			9,845,189			2,696,330
Temporary differences for which no future tax benefit has been brought to account		778,301			1,123,458			14,552,726
Temporary differences brought to account on acquisition of subsidiary		1,135,181			(34,902	)		(488,027	)
Other — net		2,123,377			21,897			699,988
		2,342,872			2,831,994			1,875,063

The future income tax asset comprised the tax effect of the following:

	December 31,			December 31,			December 31,
	2006			2005			2004
	$			$			$
Future tax assets
Temporary differences
Plant and equipment		3,030,479			2,665,173			2,263,654
Exploration expenditure		24,828,156			12,184,351			11,541,022
Other — net		122,713			99,834			127,240
		27,981,348			14,949,358			13,931,916
Losses carried forward		27,060,498			17,373,507			4,850,380
		55,041,846			32,322,865			18,782,296
Less valuation allowance		(53,617,833	)		(31,263,967	)		(17,478,665	)
		1,424,013			1,058,898			1,303,631

All future tax assets recorded in the consolidated balance sheet relate to Papua New Guinea. The amounts are non current at December 31, 2006.

The valuation allowance for deferred tax assets increased by $22,353,866 (2005 — $13,785,302, 2004 - - $16,114,573) in the year ended December 31, 2006. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the actual levels of past taxable income, scheduled reversal of deferred tax liabilities, projected future taxable income, projected tax rates and tax planning strategies in making this assessment. Management has determined that a 100% valuation allowance of the net operating loss carry-forward is appropriate as of December 31, 2006 in respect of losses generated from the operations.

The Refinery Project Agreement gives “pioneer” status to InterOil Limited. This status gives the Company a tax holiday beginning upon the date of the commencement of commercial production, January 1, 2005 and ending in four years on December 31, 2010.

23

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

12. Income taxes (cont’d)

In relation to the refinery, tax losses incurred prior to January 1, 2005 will be frozen during the five year tax holiday and will become available for use after the tax holiday ceases on December 31, 2010. Tax losses carried forward to offset against future earnings total K169,689,231 (US $54,690,839) at December 31, 2006. All losses incurred by InterOil have a twenty year carry forward period.

13. Working capital facility — crude feedstock

As at the beginning of 2006, InterOil has a working capital credit facility with BNP Paribas (Singapore branch) with a maximum availability of $150,000,000. During the year this facility was increased to a maximum availability of $170,000,000.

This financing facility supports the ongoing procurement of crude oil for the refinery and includes related hedging transactions. The facility comprises a base facility to accommodate the issuance of letters of credit followed by secured loans in the form of short term advances. In addition to the base facility, the agreement offers both a cash secured short term facility and a discounting facility on specific monetary receivables (note 8). The facility is secured by sales contracts, purchase contracts, certain cash accounts associated with the refinery, all crude and refined products of the refinery and trade receivables.

The facility bears interest at LIBOR + 2.5% on the short term advances. During the year the weighted average interest rate was 7.28% (2005 — 5.81%, 2004 — 4.36%).

The following table outlines the facility and the amount available for use at year end:

	December 31,			December 31,			December 31,
	2006			2005			2004
	$			$			$
Working capital credit facility		170,000,000			150,000,000			100,000,000
Less amounts included in the working capital facility liability:
Short term advances		(13,201,940	)		(47,527,408	)		(63,485,637	)
Discounted receivables (note 8)		(23,671,568	)		(23,196,914	)		(13,034,904	)
		(36,873,508	)		(70,724,322	)		(76,520,541	)
Less: other amounts outstanding under the facility:
Letters of credit outstanding		(79,000,000	)		(33,765,000	)		(14,000,000	)
Hedging facility		(1,500,000	)		(1,500,000	)		—
Working capital credit facility available for use		52,626,492			44,010,678			9,479,459

At December 31, 2006, the company had two letters of credit outstanding for $79,000,000, which expire in January 2007. A letter of credit of $42,000,000 relates to a December crude receipt and expires on January 1, 2007 and a letter of credit of $37,000,000 relates to January crude receipt and expires on January 25, 2007.

The cash deposit on working capital facility, as separately disclosed in note 7, included restricted cash of $29,301,940 (2005 — $16,452,216, 2004 — $15,497,127) which was being maintained as a security market for the facility. In addition, inventory of $35,171,272 (2005 — $30,986,937, 2004 — $20,368,957) and trade receivables of $55,955,400 (2005 — $34,371,072, 2004 — $46,911,393) also secured the facility. The trade receivable balance securing the facility includes $20,186,665 (2005 — $5,059,192, 2004 — $3,078,447) of inter-company receivables which were eliminated on consolidation.

14. Acquisition of a subsidiary

IPL PNG Ltd.

On October 1, 2006, InterOil, through its wholly owned subsidiary, InterOil Products Limited acquired 100% of the outstanding common shares of Shell Papua New Guinea Limited which was subsequently renamed IPL PNG Ltd (“IPL PNG”). IPL PNG is a distributor of refined petroleum products in Papua New Guinea.

24

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

14. Acquisition of a subsidiary (cont’d)

The results of IPL PNG’s operations have been included in the consolidated financial statements since October 1, 2006, the date on which control of IPL PNG’s shares was transferred to InterOil. The purchase price is $10,000,000 plus an amount equal to the net current assets of Shell based on the year ended 2005 accounts. However, if the net current assets at the transfer date exceed the net current assets in the year end 2005 accounts by more than Kina 500,000, then InterOil will pay the amount of excess to the vendor.

The transfer date accounts are being reviewed by an independent accountant to establish the final settlement of the purchase price. As at December 31, 2006, InterOil has paid $30,639,000 in cash to Shell and this balance will be further subject to a working capital adjustment. As at December 31, 2006, InterOil has accrued $1,771,000 as expected adjustment to purchase price for the working capital adjustment. In addition to the amounts paid and accrued by IPL, $171,410 of acquisition related costs have been incurred on the transaction.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.

	$
Cash		4,989,895
Trade receivables		6,288,834
Inventory		20,429,728
Other assets		2,190,226
Future income tax benefit		1,698,224
Property, plant and equipment		8,799,691
Total assets acquired		44,396,598
Accounts payable and accrued liabilities		(11,815,188	)
Net assets acquired		32,581,410

The net cash paid on purchase of IPL PNG of $25,820,515 is comprised of $30,639,000 paid to Shell during the year and $171,410 transaction costs incurred, less $4,989,895 held by IPL PNG at the time of acquisition.

PNG LNG Inc. and Liquid Niugini Gas Ltd

In 2006, InterOil acquired 100% of the issued share capital of PNG LNG, Inc. and Liquid Niugini Gas Ltd for a total cost of $1,001. The purchase price reflected the book value of the shares at the time of acquisition as both were dormant shelf companies at the time of acquisition. These companies comprise the Midstream — liquefaction segment reported in these financials.

Direct Employment Services Company and SPI InterOil Holdings Limited

In 2005, InterOil acquired 100% of the issued share capital of Direct Employment Services Company (“DESC”) and SPI InterOil Holdings Limited for a total cost of $2,000 which was paid in cash. The purchase price reflected the book value of the shares at the time of acquisition.

DESC was initially established for the purposes of providing non-profit management services to the Company for its U.S. employees and it has continued to provide management services to the Company since its acquisition. Prior to its acquisition, DESC was partially owned by Christian Vinson, the Company’s Chief Operating Officer.

SPI InterOil Holdings Limited is a dormant shelf company to be used for a future business endeavor.

InterOil Products Limited

On April 28, 2004, InterOil, through its wholly owned subsidiary, SPI Distribution Limited, acquired 100% of the outstanding common shares of BP Papua New Guinea Limited which was subsequently renamed InterOil Products Limited (“IPL”). IPL is a distributor of refined petroleum products in Papua New Guinea.

The results of IPL’s operations have been included in the consolidated financial statements since April 28, 2004, the date control of IPL’s shares was transferred to InterOil. Under the purchase agreement, InterOil Corporation was entitled to the profit of IPL from March 1, 2004. The profit earned after tax between March 1, 2004 and April 28, 2004 of $1,243,746 was recognized as a reduction in the acquisition cost.

25

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

14. Acquisition of a subsidiary (cont’d)

The adjusted purchase price is $13,226,854, including a service agreement for $1,000,000 related to the purchase. A deposit of $1,000,000 of the purchase price was paid in 2004. The remaining $12,226,854 (discounted amount $12,123,106) was paid on March 1, 2005 and was included in current liabilities in the financial statements at December 31, 2004.

The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.

	$
Cash		5,859,517
Trade receivables		8,241,400
Inventory		6,759,089
Other assets		1,614,249
Future income tax benefit		640,284
Property, plant and equipment		3,180,530
Total assets acquired		26,295,069
Accounts payable and accrued liabilities		(13,399,720	)
Net assets acquired		12,895,349

The net cash received from the purchase of IPL (excluding the deferred settlement) of $4,631,904 is comprised of $5,859,517 held by IPL at the time of acquisition less $1,000,000 paid relating to the acquisition price and $227,613 paid in transaction costs and in stamp duty.

15. Related parties

Petroleum Independent and Exploration Corporation (“P.I.E.”)

P.I.E. is controlled by Phil Mulacek, an officer and director of InterOil and acts as a sponsor of the Company’s oil refinery project. Articles of association of SPI InterOil LDC (“SPI”) provide for the business and affairs of the entity to be managed by a general manager appointed by the shareholders of SPI and its U.S. sponsor under the Overseas Private Investment Corporation (“OPIC” - which is an agency of the U.S. Government) loan agreement. SPI does not have a Board of Directors, instead P.I.E. has been appointed as the general manager of SPI. Under the laws of the Commonwealth of The Bahamas, the general manager exercises all powers which would typically be exercised by a Board of Directors, being those which are not required by laws or by SPI’s constituting documents to be exercised by the members (shareholders) of SPI.

During the year, $150,000 (2005 — $150,000, 2004 — $150,410) was expensed for the sponsor’s legal, accounting and reporting costs. These costs were included in accrued liabilities at December 31, 2006.

During the prior year ended December 31, 2005, a balance outstanding from 2004 of $1,056,251 was repaid in full. The loan had interest charged at 5.75% per annum while it was outstanding in 2005. For the year ended December 31, 2005, the Company incurred total interest to PIE amounting to $9,376 (2004 — $246,745). All of the interest collected by P.I.E. on this loan was used to pay interest incurred under the Wells Fargo facility.

Breckland Limited

The entity is controlled by Roger Grundy, a director of InterOil, and provides technical and advisory services to the Company on normal commercial terms. Amounts paid or payable to Breckland during the year amounted to $140,165 (2005 — $179,608, 2004 — $120,426).

Direct Employment Services Company (“DESC”)

The services of certain executive officers and senior management of the Company are provided under a management services agreement with DESC. DESC is a U.S. private Company that was partially owned by Christian Vinson, the Company’s Chief Operating Officer prior to its acquisition by InterOil on November 23, 2005 (note 14). In 2005, InterOil acquired 100% of the issued share capital of the entity for a total cost of $1,000 which was paid in cash. Christian Vinson received $500 for his 50% interest in the entity. The purchase price reflects the book value of the shares at the time of acquisition. Prior to the acquisition, DESC was paid $549,978 for its management services in the nine months ended September 30, 2005 (year ended 2004 — $708,104).

26

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

15. Related parties (cont’d)

Director fees

Amounts due to Directors and executives at December 31, 2006 totaled $18,000 for Directors fees (2005 — $30,500, 2004 — $61,000) and $nil for executive bonuses (2005 — $573,571, 2004- $320,000). These amounts are included in accounts payable and accrued liabilities.

BNP Paribas

One of our Directors — Edward Speal, is the President and CEO of BNP Paribas (Canada). InterOil has a working capital facility with BNP Paribas (Singapore) of $170,000,000 (as per note 13) - Management does not consider this to be related party transaction as the Director does not have the ability to exercise, directly or indirectly, control, joint control or significant influence over BNP (Singapore).

16. Unsecured loan

On January 28, 2005, InterOil obtained a $20 million term loan facility. The loan had an interest rate equal to 5% per annum payable quarterly in arrears and includes a 1% arrangement fee of the face amount. On July 21, 2005, the short term loan facility increased from $20 million to $25 million. The term of the loan was fifteen months from the initial disbursement dates, and was repayable at any time prior to expiry with no penalty.

The loan and all accrued interest was repaid during 2006 and therefore the total balance outstanding at December 31, 2006 is $nil (2005 — $21,453,132).

17. Secured loan

	December 31,		December 31,		December 31,
	2006		2005		2004
	$		$		$
Secured loan (OPIC) — current portion		13,500,000		9,000,000		9,000,000
Secured loan (OPIC) — non current portion		62,500,000		71,500,000		76,000,000
Secured loan (bridging facility) — non current portion		121,666,433		—		—
Total non current secured loan		184,166,433		71,500,000		76,000,000
Total secured loan		197,666,433		80,500,000		85,000,000

OPIC Secured Loan

On June 12, 2001, the Company entered into a loan agreement with OPIC to secure a project financing facility of $85,000,000. The loan is secured over the assets of the refinery project which have a carrying value of $228,704,267 at December 31, 2006 (2005 — $225,669,179, 2004 — $236,132,247).

The interest rate on the loan is equal to the treasury cost applicable to each promissory note outstanding plus the OPIC spread (3%). During 2006 the weighted average interest rate was 7.01% (2005 — 7.10%, 2004 — 6.65%) and the total interest expense included in long term borrowing costs was $5,512,975 (2005 — $6,038,887, 2004 — $nil).

The loan agreement was last amended on December 29, 2006. Under the amendment, the half yearly principal payment due in December 2006 and June 2007 of $4,500,000 each have been deferred until December 31, 2007 and interest previously due on December 31, 2006 and June 30, 2007 were deferred until September 30, 2007. The normal repayment of interest and principal will recommence on September 30, 2007 and December 31, 2007 respectively. Interest relating to the loan is accrued in the financial statements and has been included in accounts payable and accrued liabilities. Fees of $500,000 associated with the amendment have been included in deferred financing costs and accrued financing costs at December 31, 2006.

Due to the amendment of the loan agreement, three installment payments amounting to $13,500,000 which become due for payment on December 31, 2007 have been reclassified into the current portion of the liability. The agreement contains certain financial covenants which include the maintenance of minimum levels of tangible net worth and limitations on the incurrence of additional indebtedness. Under the amendment, the covenants related to minimum levels of tangible net worth have been waived until June 2008.

Deferred financing costs relating to OPIC loan of $1,582,555 (2005 — $1,256,816, 2004 — $1,311,488) are being amortized over the period until December 2014.

27

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

17. Secured loan (cont’d)

The accrued financing costs of $1,450,000 (2005 — $921,109, 2004 — $863,329) included discounting of the liability. The total liability is $1,450,000 and will be due for payment in four quarterly installments of $362,500 commencing on December 31, 2007. As at December 31, 2006 $1,087,500 is included under non-current liabilities and the balance is included under current liabilities.

Bridging Facility

InterOil entered into a loan agreement for $130,000,000 on May 3, 2006. The loan is divided into two Tranche’s — Tranche 1, which represents $100,000,000 and Tranche 2, which represented the remaining balance of $30,000,000. As at December 31, 2006, InterOil has drawn down the full facility of $130,000,000. The agreement contains certain financial covenants which include the maintenance of minimum levels of fixed charge ratios, a maximum leverage ratio and limitations on the incurrence of additional indebtedness. The loan is secured over the assets of the downstream business and secondary security over refinery assets.

The full balance of the loan will be repayable on May 3, 2008 with interest payable quarterly in arrears. The interest rate on the loan will be 4% commencing on May 3, 2006 and ending on March 31, 2007. Between March 31, 2007 and the end of the facility (May 3, 2008), the interest rate will be 10% unless a definitive LNG/NGL Project Agreement is executed by InterOil and the lenders on or before March 31, 2007. If the Project Agreement is delivered on or before March 31, 2007, the interest rate will continue to be 4% for the full life of the loan. Management believe that there is high likelihood of the LNG/NGL Project Agreement being signed before the due date to achieve the discounted interest rate for the last year of the facility.

The loan is valued on the balance sheet based on the present value of the expected cash flows. The expected cash flows include not only interest payments but also a 3.5% commitment fee payable to the lenders at the time of each draw down. The expected cash flows have been adjusted to take into account the likelihood of different interest rate outcomes relevant to the second year of the facility. Interest expense is recognized based on the market rate of interest InterOil would be expected to pay on such a borrowing should it not be connected to an LNG/NGL Project. The effective rate used in the calculation is 9.18%.

The difference between the book value of the loan at the time of the cash being received and the actual funds drawn down is the Deferred liquefaction project liability in the current liability section of the balance sheet. This liability of $6,553,080 will be transferred to the profit and loss account as income if a definitive LNG/NGL Project Agreement is executed by InterOil and the lenders on or before March 31, 2007.

Annual administration fees of $100,000 has been included under deferred financing costs and amortized over the year until May 2007. The balance as at December 31, 2006 was $33,333.

Bank covenants under the above facilities currently restrict the payment of dividends by the Company.

18. Indirect participation interests

Indirect participation interest (“IPI”)

	December 31,		December 31,		December 31,
	2006		2005		2004
	$		$		$
Current portion		12,460,725		35,092,558		13,749,852
Non current portion		36,827,877		30,166,311		—
Total indirect participation interest		49,288,602		65,258,869		13,749,852

The IPI balance relates to $125,000,000 received by InterOil subject to the terms of the agreement dated February 25, 2005 between the corporation and certain investors. In exchange InterOil has provided the investors with a 25% interest in an eight well drilling program to be conducted in InterOil’s petroleum prospecting licenses 236, 237 and 238. Prior to December 31, 2004, the Company received deposits of $13,749,852 and the remaining $111,250,148 was received in 2005.

Under the agreement, all or part of this indirect participation interest may be converted to a maximum of 3,333,334 common shares in the company between June 15, 2006 and the later of December 15, 2006, or until 90 days after the completion of the eighth well at a price of $37.50 per share. Should the conversion to shares not be exercised, the indirect participation interest in the eight well drilling program will be maintained and distributions from success in these wells will be paid in accordance with the agreements. Any partial conversion of an indirect participation interest into common shares will result in a corresponding decrease in the investors’ interest in the eight well drilling program.

28

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

18. Indirect participation interests (cont’d)

Under the IPI agreement, InterOil is responsible for drilling the eight wells, four of which will be in PPL 238, one in PPL 236, and one in PPL 237. The investors will be able to approve the location of the final two wells to be drilled. In the instance that InterOil proposes completion of an exploration or development well, the investors will be asked to contribute to the completion work in proportion to their IPI percentage and InterOil will bear the remaining cost. Should an investor choose not to participate in the completion works, the investor will forfeit their right to the well in question as well as their right to convert into common shares.

InterOil has accounted for the $125,000,000 indirect participation interest as a non financial liability with a conversion option. The initial value of the conversion option was calculated using the Black-Scholes Model with the following assumptions: a risk free rate of 3.2%, a volatility of 45%, a life of 695 days, and a dividend yield of nil. The fair value of the conversion feature as of February 4, 2005 (the date the terms of the IPI agreement were initially agreed to with investors), using the Black-Scholes model, was $26,121,864. The fair value of the IPI liability was calculated based on projected costs of $105,000,000 related to completing the Company’s obligations under the IPI agreement, discounted at a rate of 11.25%. The fair value of the IPI liability component was $93,705,017.

The sum of the calculated value of the conversion option and the IPI liability resulted in a calculated value for the total IPI agreement amounting to $119,826,881. The Company used the relative fair value approach to adjust the non-financial liability and the conversion feature associated with the IPI agreement to equal the total proceeds received in connection with the IPI agreement. The calculated value of the conversion option was approximately 21.80% of the total calculated value. This percentage was multiplied by the total gross proceeds from the IPI agreement of $125 million to arrive at the book value of the conversion option of $27,249,587. The book value of the IPI liability of $97,750,413 was calculated in the same manner.

The difference between the original book value of the non-financial liability ($97,750,413) and the actual expenditures, up to $105,000,000, will be treated as accretion expense over the life of the IPI agreement and is recognized in the income statement using the effective interest rate method. In the event that expenditures for the eight well drilling program exceed $105,000,000, these additional costs will be either capitalized as exploration expenditures or expensed in accordance with the successful efforts method of accounting.

All costs incurred by the Company relating to the eight well drilling program, including geological and geophysical costs, and commission costs associated with structuring the agreement, will be charged against the liability to a maximum amount of $105,000,000. To December 31, 2006 a total of $51,259,158 (2005 — $31,774,513) has been charged against the liability for geological and geophysical costs and drilling costs and an additional $6,364,523 (2005 — $6,364,523) has been charged against the liability for finance and transaction costs. The liability was increased during the year by an accretion expense of $3,514,378 (2005 — $5,647,491). This amount represents the accretion of the discount calculated on the non-financial liability component of the indirect participation interest. InterOil will bear the costs for subsequent works projects and completion activities in proportion to its remaining ownership in the eight wells. These costs are accounted for in accordance with the Company’s stated accounting policies.

InterOil paid financing fees and transaction costs of $8,138,742 related to the indirect participation interest on behalf of the indirect participation interest investors in 2005. These fees have been apportioned between the indirect participation interest and the conversion options in the same proportion as the original $125,000,000 was allocated between the non financial liability and the conversion options. The indirect participation interest liability portion of the finance and transaction costs was $6,364,523 and the remaining $1,774,219 was allocated against the conversion option, reducing the conversion option value to $25,475,368.

Indirect participation interest — PNGDV

	December 31,		December 31,		December 31,
	2006		2005		2004
	$		$		$
Current portion		730,534		—		—
Non current portion		1,012,999		9,685,830		10,608,830
Total indirect participation interest — PNGDV		1,743,533		9,685,830		10,608,830

29

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

18. Indirect participation interests (cont’d)

As at December 31, 2006, the balance of the PNG Drilling Ventures Limited (“PNGDV”) indirect participation interest in the Company’s phase one exploration program within the area governed by petroleum prospecting licenses “ppl” 236, 237 and 238 is $1,743,533 (2005 — $9,685,830, 2004 - $10,608,830). This is the result of an amendment to the original agreement whereby PNG Drilling Ventures Limited converted their remaining balance of $9,685,830 into 575,575 InterOil common shares and also retained a 6.75% interest in the next four wells (the first of the four wells is Elk-1). PNGDV also has the right to participate in the 16 wells that follow the first four mentioned above up to an interest of 5.75% at a cost of $112,500 per 1% per well (with higher amounts to be paid if the depth exceed 3,500 meters and the cost exceeds $8,500,000).

The accounting for the amendment to the agreement resulted in the fair value of the shares issue of $7,948,691 being recognized as share capital. The Company has also recognized a liability relating to its obligation to drill four wells on behalf of the investors of $3,184,040. The difference between the opening balance and the amount allocated to share capital and the amount allocated to the liability of $1,446,901 has been expensed as a cost of amending the original transaction.

During the year ended December 31, 2006, $1,667,396 of geological and geophysical costs and drilling costs have been allocated against the liability of $3,184,040 and the liability has increased by the accretion of $226,889, bringing the remaining balance to $1,743,533.

Other

In addition to the above, PNG Energy Investors (“PNGEI”), an indirect participation interest investor, that converted all of its interest to common shares in fiscal year 2004, has the right to participate up to a 4.25% interest in wells 9 to 24. In order to participate, PNGEI would be required to contribute a proportionate amount of drilling costs related to these wells.

19. Non controlling interest

On September 11, 1998 Enron Papua New Guinea Ltd (“Enron”), SPI’s former joint venture partner, exercised its option (pursuant to a January 1997 joint venture agreement with SPI) to terminate the joint venture agreement. Consequently, SPI purchased Enron’s voting, non-participating shares in E.P. InterOil Limited (“EPI”), a wholly owned subsidiary of SPI, for a nominal amount. Enron no longer actively participates in the refinery operations but continues to be a non-voting participating shareholder in EPI. SPI now holds all voting non-participating shares issued from EPI and has sole responsibility for managing the refinery. Enron does not hold any transfer or conversion rights into shares of InterOil Corporation.

At December 31, 2006, a subsidiary, SP InterOil LDC, holds 98.92% (2005 — 98.83%) of the non-voting participating shares issued from EPI.

20. Share capital

The authorized share capital of the Company consists of an unlimited number of common shares with no par value. Each common share entitles the holder to one vote.

Common shares — Changes to issued share capital were as follows:

	Number of shares		$
January 1, 2004		24,815,961		157,449,200
Shares issued for debt		3,184,828		56,698,121
Shares issued on exercise of options		310,095		2,666,333
December 31, 2004		28,310,884		216,813,654
Shares issued for debt		52,000		923,000
Shares issued on exercise of warrants		19,168		540,346
Shares issued on exercise of options		781,268		5,657,500
December 31, 2005		29,163,320		223,934,500
Shares issued on exercise of options		132,285		2,006,175
Shares issued on amendment of indirect participation interest - PNGDV		575,575		7,948,691
December 31, 2006		29,871,180		233,889,366

30

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

21. Stock compensation

At December 31, 2006, there were 2,570,500 (2005 — 911,068) common shares reserved for issuance under the Company stock option plan.

Options are issued at no less than market price to directors, staff and contractors. Options are exercisable on a 1:1 basis. Options vest at various dates in accordance with the applicable option agreement, have an exercise period of three to five years assuming continuous employment by the InterOil Company and may be exercised at any time after vesting within the exercise period. Upon resignation or retirement, vested options must be exercised within 30 days for employees and 90 days for directors.

	December 31, 2006						December 31, 2005						December 31, 2004
				Weighted						Weighted						Weighted
	Number of			average			Number of			average			Number of			average
Stock options outstanding	options			exercise price $			options			exercise price $			options			exercise price $
Outstanding at beginning of year		746,800			22.23			1,162,322			9.91			1,363,265			7.55
Granted		725,500			15.87			516,450			25.82			224,460			26.30
Exercised		(132,285	)		(11.14	)		(781,322	)		(6.50	)		(310,095	)		(6.52	)
Forfeited		(285,433	)		(18.01	)		(74,000	)		(13.11	)		(100,308	)		(25.28	)
Expired		(41,082	)		(15.36	)		(76,650	)		(26.01	)		(15,000	)		(8.00	)
Outstanding at end of year		1,013,500			20.59			746,800			22.23			1,162,322			9.91

	Options issued and outstanding						Options exercisable
					Weighted average
			Weighted average		remaining term				Weighted average
Range of exercise prices $	Number of options		exercise price $		(years)		Number of options		exercise price $
5.01 to 8.00		10,000		5.27		0.39		10,000		5.27
13.01 to 24.00		714,000		18.03		3.63		150,000		18.84
24.00 to 31.00		289,500		27.44		1.93		77,500		30.27
		1,013,500		20.59		2.97		237,500		22.00

The fair value of the 725,500 (2005 — 516,450, 2004 — 224,460) options granted subsequent to January 1, 2006 has been estimated at the date of grant in the amount of $6,447,315 (2005 - $4,834,139, 2004 — $1,122,938) using a Black-Scholes pricing model. An amount of $1,976,072 (2005 - - $1,668,896, 2004 — $1,202,921) has been recognized as compensation expense for the year ended December 31, 2006. Of the current year compensation expense of $1,976,072 (2005 — $1,668,896, 2004 - - $1,202,921), $1,443,840 (2005 — $1,091,810, 2004 — $656,338) was adjusted against contributed surplus under equity and $532,230 (2005 — $577,086, 2004 — $546,583) was applied to share capital.

The assumptions contained in the Black Scholes pricing model are as follows:

								Weighted average
		Risk free interest						expected life for
Year	Period	rate (%)		Dividend yield		Volatility (%)		options
2006	October 1 to December 31		4.6		—		65		5.0
2006	July 1 to September 30		5.1		—		68		4.2
2006	January 1 to June 30		4.4		—		60		4.8
2005	July 1 to December 31		2.5		—		55		3.6
2005	January 1 to June 30		2.5		—		45		3.2
2004	January 1 to December 31		2.5		—		45		3.8

31

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

22. Debentures and warrants

In 2004, InterOil issued a total of $45,000,000 in senior convertible debentures. The debentures were to mature on August 28, 2009 and bore interest at a rate of 8.875% per annum, payable quarterly. The debentures were converted into 2,232,143 common shares of the Company at a fixed conversion price of $20.16 per share on December 31, 2004 at the investors’ option.

In 2004, in connection with the issuance of senior convertible debentures, InterOil issued five-year warrants to purchase 359,415 common shares at an exercise price equal to $21.91. A total of 340,247 (2005 — 340,247, 2004 — 359,415) were outstanding at December 31, 2006. The warrants are exercisable between August 27, 2004 and August 27, 2009. The warrants are recorded at the fair value calculated at inception as a separate component of equity. The fair value was calculated using a Black-Scholes pricing model with the following assumptions: risk-free interest rate of 2.5%, dividend yield of nil, volatility factor of the expected market price of the Company’s common stock of 45% and a weighted average expected life of the warrants of five years.

23. Loss per share

Warrants, conversion options and stock options totaling 4,687,081 common shares at prices ranging from $5.27 to $37.50 were outstanding as at December 31, 2006 but were not included in the computation of the diluted loss per share because they caused the loss per share to be anti-dilutive.

24. Commitments and contingencies

Payments due by period contractual obligations are as follows:

			Less than										More than
	Total		1 year		1-2 years		2-3 years		3-4 years		4-5 years		5 years
	’000		’000		’000		’000		’000		’000		’000
Secured loan obligations		197,666		13,500		130,666		9,000		9,000		9,000		26,500
Accrued financing costs		1,450		363		1,087		—		—		—		—
Acquisition of subsidiary — IPL PNG Ltd		1,771		1,771		—		—		—		—		—
Indirect participation interest — PNGDV (note 18)		1,744		731		1,013		—		—		—		—
Indirect participation interest (note 18)		49,289		12,461		21,087		15,740		—		—		—
Petroleum prospecting and retention licenses (a)		5,237		1,877		3,360		—		—		—		—
		257,157		30,703		157,213		24,740		9,000		9,000		26,500

(a) The amount pertaining to the petroleum prospecting and retention licenses represents the amount InterOil has committed to spend to its joint venture partners. In addition to this amount, InterOil must drill an exploration well on PPL 237 in the two year period commencing March 2007. As the cost of drilling this well cannot be estimated, it is not included within the above table.

The Company is involved in various claims and litigation arising in the normal course of business. While the outcome of these matters is uncertain and there can be no assurance that such matters will be resolved in the Company’s favour, the Company does not currently believe that the outcome of adverse decisions in any pending or threatened proceedings related to these and other matters or any amount which it may be required to pay by reason thereof would have a material adverse impact on its financial position, results of operations or liquidity.

The Company currently has an outstanding $10.6 million cost of control insurance claim for the Elk well which is being assessed by the loss adjusters. The amount and timing of any payment related to this claim is currently unknown.

The Company has income tax filings that are subject to audit and potential reassessment. The findings may impact the tax liability of the Company. The final results are not reasonably determinable at this time and management believes that it has adequately provided for current and future income taxes.

25. Subsequent events

On March 30, 2007, the Company’s $130 million secured bridging facility (refer to note 17) was amended to extend the period subject to the existing 4% interest rate from March 31, 2007 to June 30, 2007. Between June 30, 2007 and the end of the facility (May 3, 2008), the interest rate will be 10% unless a definitive LNG/NGL Project Agreement is executed on or before June 30, 2007. If the Project Agreement is delivered on or before June 30, 2007, the interest rate will continue to be 4% for the full life of the loan.

32

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

26. Reconciliation to accounting principles generally accepted in the United States

The audited consolidated financial statements of the Company for the twelve month periods ended December 31, 2006, 2005 and 2004 have been prepared in accordance with generally accepted accounting principles in Canada (“Canadian GAAP”) which, in most respects, conforms to generally accepted accounting principles in the United States (“U.S. GAAP”). The reconciliations and other information presented in this note are solely in relation to the consolidated financial statements. The significant differences between Canadian GAAP and U.S. GAAP as they relate to the Company are presented throughout this note. Additionally, where there is no significant conflict with Canadian GAAP requirements some of the additional U.S. GAAP disclosure requirements have been incorporated throughout the Canadian GAAP financial statements.

Consolidated statements of operations

The following table presents the consolidated statements of operations under U.S. GAAP compared to Canadian GAAP:

Year ended
	December 31, 2006						December 31, 2005						December 31, 2004
	$						$						$
	Canadian GAAP			U.S. GAAP			Canadian GAAP			U.S. GAAP			Canadian GAAP			U.S. GAAP
Revenue
Sales and operating revenues (1)		511,087,934			511,189,438			481,180,645			481,180,645			70,644,486			121,974,268
Interest income		3,223,995			—			1,830,808			—			382,461			—
Other income		3,747,603			—			528,270			—			196,337			—
		518,059,532			511,189,438			483,539,723			481,180,645			71,223,284			121,974,268
Expenses
Cost of sales and operating expenses (excluding depreciation shown below) (1)		499,494,540			499,584,532			467,246,990			467,400,576			65,344,516			129,871,126
Administrative and general expenses (1), (2)		20,728,618			20,762,574			14,672,793			14,687,717			7,831,550			8,081,740
Depreciation and amortization (1)		12,352,672			11,591,513			11,036,550			10,836,696			639,075			1,462,953
Exploration costs, excluding exploration impairment		1,657,671			1,657,671			—			—			2,903,313			2,903,313
Exploration impairment		416,923			416,923			2,144,429			2,144,429			35,566,761			35,566,761
Legal and professional fees (1)		3,937,517			3,937,517			3,606,415			3,606,415			3,573,727			3,655,631
Short term borrowing costs		8,478,540			8,478,540			8,855,857			8,855,857			4,705,190			4,705,190
Long term borrowing costs (1)		11,856,872			11,856,872			6,351,337			6,351,337			1,401,256			1,897,029
Accretion expense		3,741,254			3,741,254			5,647,491			5,647,491			—			—
Debt conversion expense (5)		—			—			—			—			—			6,976,800
Loss/(gain) on revaluation of conversion options (6)		—			19,755,017			—			(4,279,284	)		—			—
Loss on amendment of indirect participation interest — PNGDV (16)		1,446,901			1,446,901			—			—			—			—
Foreign exchange loss/(gain) (2)		(4,744,810	)		(4,744,810	)		796,590			796,590			392,805			392,805
Non-controlling interest (7)		(263,959	)		(265,865	)		(368,312	)		(368,475	)		(70,091	)		(265,624	)
Interest income		—			(3,223,995	)		—			(1,830,808	)		—			(382,461	)
Other income		—			(3,747,603	)		—			(528,270	)		—			(196,337	)
		559,102,739			571,247,041			519,990,140			513,320,271			122,288,102			194,668,926
Loss before income taxes		(41,043,207	)		(60,057,603	)		(36,450,417	)		(32,139,626	)		(51,064,818	)		(72,694,658	)
Income tax expense (3)		(2,342,873	)		(2,342,873	)		(2,831,994	)		(2,831,994	)		(1,875,063	)		(1,875,063	)
Loss before cumulative effect of accounting change		(43,386,080	)		(62,400,476	)		(39,282,411	)		(34,971,620	)		(52,939,881	)		(74,569,721	)
Cumulative effect of accounting change (4)		—			—			—			—			—			(737,650	)
Net loss		(43,386,080	)		(62,400,476	)		(39,282,411	)		(34,971,620	)		(52,939,881	)		(75,307,371	)

33

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

26. Reconciliation to accounting principles generally accepted in the United States (cont’d)

Reconciliation of Canadian GAAP net income/(loss) to U.S. GAAP net income/(loss)

	Year ended
	December 31,			December 31,			December 31,
	2006			2005			2004
	$			$			$
Net loss as shown in the Canadian GAAP financial statements		(43,386,080	)		(39,282,411	)		(52,939,881	)
Description of items having the effect of increasing reported income
Decrease in depreciation and amortization due to difference in date of commencement of operations of refinery (1)		761,159			199,854			—
Gain on revaluation of conversion options (6)		—			4,279,284			—
Decrease in non-controlling interest expense (7)		1,907			163			195,533
Decrease in administrative and general expenses from ineffective portion of hedges (2)		—			22,456			—
Increase in sales as a result of items being ineligible for capitalization due to difference in date of commencement of operations of refinery(1)		—			—			51,329,782
Increase in sales from ineffective portion of hedges (2)		101,504			—			—
Description of items having the effect of decreasing reported income
Loss on revaluation of conversion options (6)		(19,755,017	)		—			—
Increase in depreciation and amortization due to difference in date of commencement of operations of refinery (1)		—			—			(823,878	)
Increase in cost of sales and operating expenses as a result of items being ineligible for capitalization due to difference in date of commencement of operations of refinery (1)		—			(153,586	)		(64,526,610	)
Increase in cost of sales from ineffective portion of hedges (2)		(89,992	)		—			—
Increase in administrative and general expenses from ineffective portion of hedges (2)		(33,956	)		—			—
Increase in administrative and general expenses as a result of items being ineligible for capitalization due to difference in date of commencement of operations of refinery (1)		—			(37,380	)		(250,190	)
Increase in legal and professional fees as a result of items being ineligible for capitalization due to difference in date of commencement of operations of refinery (1)		—			—			(81,904	)
Increase in long term borrowing costs as a result of items being ineligible for capitalization due to difference in date of commencement of operations of refinery (1)		—			—			(495,773	)
Debt conversion expense (5)		—			—			(6,976,800	)
Cumulative effect of accounting change relating to stock compensation (4)		—			—			(737,650	)
Net loss according to US GAAP		(62,400,476	)		(34,971,620	)		(75,307,371	)

Statements of comprehensive income/(loss), net of tax

	Year ended
	December 31,			December 31,			December 31,
	2006			2005			2004
	$			$			$
Net loss in accordance with U.S. GAAP, net of tax		(62,400,476	)		(34,971,620	)		(75,307,371	)
Foreign currency translation reserve, net of tax		1,015,426			14,243			463,200
Deferred hedge gain, net of tax		(993,153	)		457,184			537,358
Total other comprehensive income, net of tax		22,273			471,427			1,000,558
Comprehensive loss, net of tax		(62,378,203	)		(34,500,193	)		(74,306,813	)

Statements of cash flows

There are no material differences in the statement of cash flows between Canadian and U.S. GAAP except for the classification of ‘Expenditure on oil and gas properties’ which is classified under investing activities under Canadian GAAP. Under U.S. GAAP this item is classified as an operating activity.

34

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

26. Reconciliation to accounting principles generally accepted in the United States (cont’d)

Statements of accumulated other comprehensive income, net of tax (AOCI)

						Total
	Foreign					accumulated
	currency					other
	translation		Deferred hedge			comprehensive
	reserve		gain			income
AOCI balance as of December 31, 2003		—		—			—
Current period change		463,200		537,358			1,000,558
AOCI balance as of December 31, 2004		463,200		537,358			1,000,558
Current period change		14,243		457,184			471,427
AOCI balance as of December 31, 2005		477,443		994,542			1,471,985
Current period change		1,015,426		(993,153	)		22,273
AOCI balance as of December 31, 2006		1,492,869		1,389			1,494,258

Per share amounts

Basic per share amounts are computed by dividing net income available to shareholders by the weighted average number of shares outstanding for the reporting period. Diluted per share amounts reflects the potential dilution that could occur if options or contracts to issue shares were exercised or converted into shares.

For the calculation of diluted per share amounts, the basic weighted average number of shares is increased by the dilutive effect of stock options determined using the treasury method. No potential shares in options on issue were dilutive for the years ended December 31, 2006, 2005 and December 31, 2004.

Weighted average number of shares on which earnings per	Year ended December 31,
share calculations are based in accordance with U.S. GAAP	2006			2005			2004
Basic		29,602,360			28,832,263			25,373,575
Effect of dilutive options		—			—			—
Diluted		29,602,360			28,832,263			25,373,575
Net income/(loss) per share in accordance with U.S. GAAP
Basic		(2.11	)		(1.21	)		(2.97	)
Diluted		(2.11	)		(1.21	)		(2.97	)

Consolidated balance sheets

	December 31, 2006				December 31, 2005				December 31, 2004
	Canadian GAAP		U.S. GAAP		Canadian GAAP		U.S. GAAP		Canadian GAAP		U.S. GAAP
Current assets		201,714,996		201,714,996		173,442,742		173,442,742		132,258,350		132,258,350
Oil and gas properties		37,449,734		37,449,734		16,399,492		16,399,492		6,605,360		6,605,360
Capital assets (1), (2)		242,642,077		231,175,281		237,399,148		225,171,193		244,363,355		232,496,306
Deferred financing costs		1,716,757		1,716,757		1,256,816		1,256,816		1,311,488		1,311,488
Restricted Cash		3,217,284		3,217,284		—		—		—		—
Future income tax benefit (3)		1,424,014		1,424,014		1,058,898		1,058,898		1,303,631		1,303,631
Total assets		488,164,862		476,698,066		429,557,096		417,329,141		385,842,184		373,975,135
Current liabilities (2), (6)		146,214,601		173,164,195		167,192,503		188,187,731		142,197,050		141,659,692
Accrued financing costs		1,087,500		1,087,500		921,109		921,109		863,329		863,329
Long term debt (6)		222,007,309		236,007,431		111,352,141		110,536,000		86,608,830		86,608,830
Non-controlling interest (7)		5,759,206		5,416,831		6,023,149		5,682,695		6,404,262		6,063,971
Shareholders’ equity (1) (2) (4) (5) (6)		113,096,246		61,022,109		144,068,194		112,001,606		149,768,713		138,779,313
Total liabilities and shareholders’ equity		488,164,862		476,698,066		429,557,096		417,329,141		385,842,184		373,975,135

(1)

Operations

The Company determined that refinery operations commenced under U.S. GAAP at December 1, 2004, which is the date management assessed that construction of the refinery was substantially complete and ready for its intended use. The Company ceased capitalization of certain costs to the refinery project at this date and recognized one month’s results from sales, related costs of sales and operating expenses and administrative and general expenses in the statement of operations for the year ended December 31, 2004.

35

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

26. Reconciliation to accounting principles generally accepted in the United States (cont’d)

	As disclosed in note 2(q) in the consolidated financial statements, operations commenced on January 1, 2005 under Canadian GAAP. Therefore, the Company continued to capitalize December 2004’s results to the refinery project. Due to the difference in the cost basis of the refinery, the depreciation expense recorded under U.S. GAAP differs from that recorded under Canadian GAAP during 2005.
	In the prior year, in addition to recognizing December 2004’s results in the statement of operations, one month of depreciation expense was also recorded under U.S. GAAP for the refinery during 2004. The useful life for the refinery under U.S. GAAP is the same as that disclosed under Canadian GAAP in note 2(q) in the consolidated financial statements.
(2)	Derivative instruments and hedging
	The Company accounts for derivatives and hedging activities in accordance with FASB Statement No. 133, “Accounting for Derivative Instruments and Certain Hedging Activities”, as amended (“SFAS No. 133”), which requires that all derivative instruments be recorded on the balance sheet at their respective fair values.
	The Canadian Institute of Chartered Accountants issued Accounting Guideline 13 “Hedging Relationships” (“AcG-13”), which became effective January 1, 2004. This guideline was issued to align certain accounting principles under Canadian GAAP with SFAS No. 133, including hedge documentation and assessing hedge effectiveness. The Company adopted the hedge accounting provisions in AcG-13 and SFAS No. 133 in respect of the commodity forward contracts it transacted beginning in July 2004. Under Canadian GAAP, the Company includes hedges which are unsettled at period end in current liabilities based on a marked to market calculation. Under SFAS No. 133 the marked to market amount for the unsettled hedges is included in other comprehensive income to the extent that they are effective. The ineffective portion is expensed. Details of hedge accounting is disclosed in notes 2(o) and 7 in the consolidated financial statements of the Company for the year ended December 31, 2006.
(3)	Income tax effect of adjustments
	The income tax effect of U.S. GAAP adjustments was an addition to the future tax asset of $6,871,557 (2005 — reduction of $1,497,267) for the year ended December 31, 2006 due to an increase in the loss carry-forwards. A corresponding decrease in the valuation allowance was recorded. No income tax expense was recorded in the years ended December 31, 2006, 2005 and 2004 due to the tax holiday period in Papua New Guinea through five years after the refinery commences operations.
(4)	Stock based compensation
	At January 1, 2004, the Company adopted the provisions of CICA 3870 in respect of the employee stock-based awards, which resulted in recognition of compensation expense for such awards under Canadian GAAP on a basis consistent with the fair value provisions of SFAS No. 123. As disclosed in note 2(t) to the consolidated financial statements, the Company retroactively applied the fair value method to all employee stock options granted on or after January 1, 2002, without restatement to prior years.
	This is not consistent with the modified prospective transition method allowed for a voluntary change to the fair value method under FASB Statement No. 148 “Accounting for Stock-Based Compensation — Transition and Disclosure, an amendment of FASB Statement No. 123” (“SFAS No. 148”). The modified prospective method requires retroactive consideration of all employee stock awards granted, modified or settled on or after January 1, 1995. The Company did not adjusted for this GAAP difference as there were no options granted, modified or settled between January 1, 1995 and January 1, 2002 that would have materially impacted net income for the years ended December 31, 2005, 2004 and 2003.
	The cumulative effect of this change in accounting principle of $737,650 was recorded to opening accumulated deficit under Canadian GAAP. This is required to be disclosed as a cumulative change in accounting principle in the statement of operations under U.S. GAAP.

36

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

26. Reconciliation to accounting principles generally accepted in the United States (cont’d)

(5)	Debt conversion expense
	As disclosed in note 22 in the consolidated financial statements, 100% of the convertible debentures were converted before December 31, 2004. The Company issued an additional 180,000 shares to induce conversion before the end of the year. Under Canadian GAAP, the fair value of these shares was recorded as an increase in share capital of $6,976,800 with offsetting adjustments to retained earnings of $6,899,211 and a conversion expense of $77,589.
	FASB Statement No. 84, “Induced Conversions of Convertible Debt” requires an expense to be recorded when convertible debt is converted under an inducement. The Company recognized the entire fair value of the inducement shares of $6,976,800 as a conversion expense under U.S. GAAP.
(6)	Indirect participation interest
	As disclosed in note 18 in the consolidated financial statements, the Company entered into an indirect participation interest agreement in exchange for proceeds of $125,000,000. Under Canadian GAAP, this amount was apportioned between non financial liabilities and equity.
	EITF 00-19 “Accounting for derivatives indexed to and potentially settled in a Company’s own stock” requires the conversion options to be treated as a current liability. As a result, the conversion options should be adjusted to their fair market value on the reporting date. As such the Company has recognised a loss on the revaluation of conversion options totalling $19,755,017 (2005 — gain of $4,279,284) at December 31, 2006.
	Under Canadian GAAP, the Company split $8,138,742 of transaction costs relating to the indirect participation interest agreement between the indirect participation interest liability ($6,364,523) and the conversion options ($1,774,219). Under U.S. GAAP the full amount of $8,138,742 has been allocated to the indirect participation interest liability.
(7)	Non controlling interest
	The non-controlling interest movements are the result of the U.S. GAAP adjustments relating to the midstream operations described in points 1 to 4 above.

Acquisition of InterOil Products Limited (“IPL”)

The following summary unaudited pro forma condensed consolidated financial information for the twelve month periods ended December 31, 2004 and 2003 shows the estimated pro forma impact on the Company’s consolidated financial statements of the acquisition of IPL as of April 28, 2004. Refer to note 14 of the consolidated financial statements. This pro forma information is based on management’s current estimates of, and good faith assumptions regarding, the adjustments arising from the transactions described above. The pro forma adjustments are based on currently available information and actual adjustments could differ materially from current estimates.

The pro forma information does not purport to represent what the financial position and results of operations would actually have been had the acquisition of IPL been consummated on the dates indicated or to project the financial position of any future date of operations of any future period.

The following pro forma statements of earnings for the years ended December 31, 2004 and 2003 give effect to the acquisition of IPL as if it had occurred on January 1, 2003.

	InterOil			IPL (1)		Pro forma
Twelve months ended December 31, 2004	(audited)			(unaudited)		(unaudited)
Sales and operating revenue — Canadian GAAP		70,644,486			27,317,000		97,961,486
Sales and operating revenue — US GAAP		121,974,268			27,317,000		149,291,268
Net profit/(loss) — Canadian GAAP		(52,939,881	)		2,350,000		(50,589,881	)
Net profit/(loss) — U.S. GAAP		(75,307,371	)		2,350,000		(72,957,371	)
Basic loss per share (cents per share)
Canadian GAAP (2)		(208	)				(199	)
U.S. GAAP (3)		(297	)				(287	)
Diluted loss per share (cents per share)
Canadian GAAP (2)		(208	)				(199	)
U.S. GAAP (3)		(297	)				(287	)

37

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

26. Reconciliation to accounting principles generally accepted in the United States (cont’d)

	InterOil			IPL (1)		Pro forma
Twelve months ended December 31, 2003	(audited)			(unaudited)		(unaudited)
Sales and operating revenue — Canadian and U.S. GAAP		—			69,897,000		69,897,000
Net profit/(loss) — Canadian GAAP		(3,517,569	)		6,474,000		2,956,431
Net profit — U.S. GAAP		4,435,965			6,474,000		10,909,965
Basic earnings/(loss) per share (cents per share)
Canadian GAAP (2)		(15	)				14
U.S. GAAP (3)		20					49
Diluted earnings/(loss) per share (cents per share)
Canadian GAAP (2)		(15	)				13
U.S. GAAP (3)		18					45

(1)	Financial data for the year ended December 31, 2004 represents results for the period from January 1, 2004 to April 28, 2004, the effective date the Company gained control of IPL, and is derived from the unaudited management accounts of IPL. Financial data for the year ended December 31, 2003 represents the actual results for the year ended December 31, 2003.
(2)	The weighted average number of shares used in the earnings per share information is consistent with that used under Canadian GAAP for the respective periods.
(3)	The weighted average number of shares used in the earnings per share information is consistent with that used under U.S. GAAP for the respective periods.

Recent Accounting Pronouncements

Fair value measurements

In September 2006, the FASB issued FAS 157 which defines fair value, establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. The standard is effective for fiscal years beginning after November 15, 2007 and all interim periods within those fiscal years. The Company does not expect that the application of FAS 157 will have a material impact on the financial statements.

Accounting for uncertainty in income taxes

In June 2006, the FASB issued FIN 48 which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The standard is effective for fiscal years beginning after December 15, 2006. The Company does not expect that the application of FIN 48 will have a material impact on the financial statements.

Accounting for certain hybrid financial instruments

In March 2006, the FASB issued FAS 155 which amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The standard is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not expect that the application of FAS 155 will have a material impact on the financial statements.

Accounting for registration payment arrangements

In December 2006, the FASB issued a FASB Staff Position FSP EITF 00-19-2 which addresses an issuer’s accounting for registration payment arrangements. This FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. The guidance in this FSP amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for registration payment arrangements.

38

InterOil Corporation
Notes to Consolidated Financial Statements
(Expressed in United States dollars)

26. Reconciliation to accounting principles generally accepted in the United States (cont’d)

The FSP is effective immediately for registration payment arrangements and the financial instruments subject to those arrangements that are entered into or modified subsequent to the date of this FSP. Effective for financial statements issued for fiscal years beginning after December 15, 2006, and interim periods within those fiscal years, for registration payment arrangements that were entered into prior to the issuance of this FSP. InterOil will adopt this standard effective for the fiscal year beginning January 1, 2007.

The adoption of this FSP from January 1, 2007 will result in the elimination of the GAAP difference between Canadian and U.S. GAAP in relation to the treatment of the options included in the indirect participation interest (as disclosed in note 26 (6)). InterOil will fair value its options as at February 25, 2007 (when the Registration Rights agreement lapses) and a gain of $15,146,353 will realized which will reduce the loss of $19,755,017 recognized in 2006. Based on these adjustments there will exist a permanent GAAP difference amounting to $329,380 in the conversion options included under equity on account of the gains and losses realized on conversion options in 2005, 2006 and on February 25, 2007.

39

EX-99.3

InterOil Corporation
Management Analysis and Discussion

For the Year Ended December 31, 2006
March 30, 2007

TABLE OF CONTENTS

Overview	2
Non-Gaap Measures	2
Legal Notice – Risk Factors And Forward-Looking Statements	3
Business Environment	4
Risk Management	7
Business Strategy	9
Financial Results	11
Year In Review	17
Midstream Refining And Marketing Year In Review	20
Midstream Liquefaction Year In Review	25
Downstream Year In Review	26
Corporate Year In Review	30
Liquidity And Capital Resources	31
Critical Accounting Estimates	37
New Accounting Standards	39
Non-Gaap Measures Reconciliation	41
Statement Regarding Disclosure Controls	42
Public Securities Filings	42
Glossary Of Terms	42

The following Management’s Discussion and Analysis (MD&A) should be read in conjunction with: the audited Consolidated Financial Statements and Notes for the year ended December 31, 2006 and the 2006 Annual Information Form. The MD&A was prepared by the management of InterOil with respect to our financial performance for the periods covered by the related interim financial statements, along with a detailed analysis of our financial position and prospects.

Our financial statements and the financial information contained in this MD&A have been prepared in accordance with generally accepted accounting principles (GAAP) in Canada and are presented in United States dollars (USD) unless otherwise specified. References to “we,” “us,” “our,” “Company,” and “InterOil” refer to InterOil Corporation and its subsidiaries.

Management Discussion and Analysis      INTEROIL CORPORATION     1

OVERVIEW

InterOil is developing a vertically integrated world class energy company in Papua New Guinea and the surrounding region. Our operations are organized into four major segments:

Segments	Operations
Upstream	Exploration and Production — Explores and appraises potential oil and natural gas structures in Papua New Guinea with a view to commercializing significant discoveries.
Midstream	Refining, Marketing & Liquefaction — Markets the refined products it produces in Papua New Guinea both domestically and for export. Since early 2006, our business plan and operating strategy has evolved to include as a business objective, the development of an onshore liquefied natural gas processing facility in Papua New Guinea.
Downstream	Wholesale and Retail Distribution — Distributes refined products in Papua New Guinea on a wholesale and retail basis.
Corporate	Corporate — Engages in business development and improvement, common services and management, financing and treasury, government and investor relations. Common and integrated costs are recovered from business segments on an equitable driver basis. Our corporate segment results also include consolidation adjustments.

NON-GAAP MEASURES

Earnings before interest, taxes, depreciation and amortization, commonly referred to as EBITDA, represents our net income/(loss) plus total interest expense (excluding amortization of debt issuance costs), income tax expense, depreciation and amortization expense. EBITDA is used by InterOil to analyze operating performance. EBITDA does not have a standardized meaning prescribed by United States or Canadian generally accepted accounting principles and, therefore, may not be comparable with the calculation of similar measures for other companies. The items excluded from EBITDA are significant in assessing our operating results. Therefore, EBITDA should not be considered in isolation or as an alternative to net earnings, operating profit, net cash provided from operating activities and other measures of financial performance prepared in accordance with Canadian generally accepted accounting principles. Further, EBITDA is not a measure of cash flow under Canadian generally accepted accounting principles and should not be considered as such. For reconciliation of EBITDA to the net income (loss) under GAAP, refer to the Non GAAP Measures Reconciliation of this MD&A.

Management Discussion and Analysis      INTEROIL CORPORATION     2

LEGAL NOTICE — RISK FACTORS AND FORWARD-LOOKING STATEMENTS

This MD&A contains “forward-looking statements” as defined in U.S. federal and Canadian securities laws. Such statements are generally identifiable by the terminology used, such as “may,” “plans,” “believes,” “expects,” “anticipates,” “intends,” “estimates,” “forecasts,” “budgets,” “targets” or other similar wording suggesting future outcomes or statements regarding an outlook. All statements, other than statements of historical fact, included in or incorporated by reference in this MD&A are forward-looking statements. Forward-looking statements include, without limitation, statements regarding our plans for expanding our business segments, business strategy, contingent liabilities, environmental matters, and plans and objectives for future operations, future capital and other expenditures. By its very nature, such forward-looking information requires InterOil to make assumptions that may not materialize or that may not be accurate.

Each forward-looking statement reflects our current view of future events and is subject to known and unknown risks, uncertainties and other factors that could cause our actual results to differ materially from any results expressed or implied by our forward-looking statements. These risks and uncertainties include, but are not limited to; the exploration and production, the refining and the distribution businesses are competitive; our refinery has not operated at full capacity for an extended period of time and our profitability may be materially affected if it is not able to do so; if we are not able to market all of our refinery’s output, we will not be able to operate our refinery at its full capacity and our financial condition and results of operations may be materially adversely affected; if our refining margins do not meet our expectations and our refinery operations are not profitable; we may be required to write down the value of our refinery; our refinery financial condition may be materially adversely affected if we are unable to obtain crude feedstocks for our refinery; our refining operations expose us to risks, some of which are not insured; our hedging activities may incur losses; we may not be successful in our exploration for oil and gas; if we are unable to renew our petroleum licenses with the Papua New Guinea government, we may be required to discontinue our exploration activities in Papua New Guinea; our investments in Papua New Guinea are subject to political, legal and economic risks that could materially adversely affect their value; new legislative, administrative or judicial actions that constrain licenses and permits from various government authorities may have a material affect on the company’s operations; weather and unforeseen operating hazards may impact our operating activities; our significant debt levels and our debt covenants may limit our future flexibility in obtaining additional financing; our ability to recruit and retain qualified personnel may have a material adverse effect on our operating results and stock price; Petroleum Independent and Exploration Corporation can affect our raising of capital through the issuance of common shares or securities convertible into common shares; compliance with and changes in environmental laws could adversely affect our performance; you may be unable to enforce your legal rights against us; changing regulations regarding corporate governance and public disclosure could cause additional expenses and failure to comply may adversely affect our reputation and the value of our securities; and the risks described under the heading “Risk Factors” in our Annual Information Form.

Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot assure you that the forward-looking statements included in this MD&A will prove to be accurate. In light of the significant uncertainties inherent in our forward-looking statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. Some of these and other risks and uncertainties that could cause actual results to differ materially from such forward-looking statements are more fully described under the heading “Risk Factors” in our Annual Information Form for the year ended December 31, 2006.

Readers are cautioned that the foregoing list of important factors affecting forward-looking information is not exhaustive. Furthermore, the forward-looking information contained in this quarterly report is made as of the date of this report and, except as required by applicable law, InterOil does not undertake any obligation to update publicly or to revise any of the included forward-looking information, whether as a result of new information, future events or otherwise. The forward-looking information contained in this report is expressly qualified by this cautionary statement.

We currently have no production or reserves as defined in Canadian National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities. All information contained in this MD&A regarding resources are references to undiscovered resources under Canadian National Instrument 51-101, whether stated or not.

Management Discussion and Analysis      INTEROIL CORPORATION     3

BUSINESS ENVIRONMENT

InterOil is a vertically integrated energy company with business segments through the whole hydrocarbon supply chain. InterOil is therefore exposed to the usual hydrocarbon production, refining and marketing business environment and regulatory regime of the hydrocarbon industry. Following is a summary of the hydrocarbon business environment to which InterOil is exposed.

Competitive Environment and Regulated Pricing

InterOil is the sole refiner of hydrocarbons in Papua New Guinea and under our 30 year agreement with the Government of Papua New Guinea, the government has undertaken to ensure that all domestic distributors purchase their refined petroleum product needs from the refinery, or any refinery which is constructed in Papua New Guinea, at an Import Parity Price (IPP). For each of the refined products produced and sold locally in Papua New Guinea, the monthly IPP is calculated by adding the costs that would typically be incurred to import such products to the average monthly posted price in Singapore as reported by Platts. The import parity price is regulated by the Papua New Guinea Independent Consumer and Competition Commission (ICCC).

InterOil is a significant participant in the distribution business in Papua New Guinea. Its major competitors have included Mobil and Shell; however, InterOil has completed the purchase of Shell Papua New Guinea’s distribution assets on October 1. The ICCC sets the maximum margins that may be charged by the wholesale and retail distribution industry in Papua New Guinea. Our downstream business may charge less than the maximum margin set by the ICCC in order to maintain its competitiveness with other participants in the market.

Interest Rates

The LIBOR USD overnight rate is the benchmark floating rate used in our midstream working capital facility and therefore accounts for a significant amount of the interest rate exposure.

The LIBOR USD overnight rate has steadily increased from around 2.3% to around 5.3% between 2005 and 2006.

Rate increases add additional cost to financing our crude cargoes. In 2007, indications are that interest rates will be more likely to fall.

Skill and Resource Scarcity

Similar to our competitors, we are facing a shortage of skilled labor to work in our business. Our success depends in large part on the continued services of our executive officers, our senior managers and other key technical personnel. Competition for qualified personnel can be intense, and there are a limited number of people with the requisite knowledge and experience.

Management Discussion and Analysis      INTEROIL CORPORATION     4

Crude Prices

Crude prices have continued to be volatile throughout the year. The price of Tapis crude oil, as quoted by the Asian Petroleum Price Index (APPI), is a benchmark for setting crude prices within the region where we operate and is used by us when we purchase crude feedstock for our refinery. The price of Tapis during 2006 averaged $68.15 per barrel compared to $56.85 per barrel during 2005. The pricing formula used to determine the domestic sales price of our refined products does not allow us to fully recover the increased costs of working capital that result from increases in the cost of crude feedstocks. The Tapis monthly average for January 2007 was at 19 month low at $53.69 per barrel but has since recovered and is trading above $60 per barrel. We expect Tapis, and crude in general, to continue to trade at similar prices as experienced over the last two years. However, unforeseeable global events can affect this expectation. In January 2007, we commenced providing TAPIS crude price assessments to the Asian Petroleum Price Index.

Refining Margin

The benchmark price for refined products in the region we operate is the average spot price quotations for refined products from Singapore as reported by Platts. This benchmark, the Mean of Platts Singapore, is commonly referred to as the MOPS price for the relevant refined product.

The distillation process our refinery uses to convert crude feedstocks into refined products is commonly referred to as hydroskimming. While the Singapore Tapis hydroskimming margin is a useful indicator of the general margin available for hydroskimming refineries in the region in which we operate, it should be noted that the differences in our approach to crude selection, transportation costs and IPP pricing work to assist our refinery in outperforming the Singapore Tapis hydroskimming margin. Therefore, our refinery realizes additional margins due to its niche location when compared to the benchmark for the region.

Singapore Tapis hydroskimming margins increased during the first six months of 2006 then gave up this increase during the third quarter 2006 before improving slightly during fourth quarter. Volatility has increased during the past 18 months and we believe that hydroskimming margins will continue to remain volatile given oil pricing uncertainty.

Exchange Rates

Changes in the Papua New Guinea Kina (PGK) to United States dollar (USD) exchange rate can affect our midstream results as there is a small timing difference between the foreign exchange rates utilized when setting the monthly PGK IPP price and the foreign exchange rate used to convert subsequent receipt of PGK proceeds to USD to repay our crude cargo borrowings. The PGK strengthened against the USD during 2006 (from 0.323 to 0.330). During 2007 we expect the PGK to remain relatively stable against the USD.

Management Discussion and Analysis      INTEROIL CORPORATION     5

Domestic Demand

Refinery sales trends indicate that domestic demand for middle distillates has grown by 14% during 2006 versus 2005.

The refinery on average sold 11,900 bbls/day to the domestic market during the second half of 2006 as compared to 10,400 bbls/day in the second half of 2005.

The majority of the demand increase was driven by the growing investment in the resource sector of Papua New Guinea. We expect this trend to continue into 2007 as current world demand for commodities results in increased foreign investment in Papua New Guinea.

Impact of Key Factors on Earnings

The following table shows the estimated after-tax effects that changes in certain factors would have on InterOil’s 2006 net earnings from continuing operations had these changes occurred. Amounts are in USD unless otherwise specified.

				Annual Net Earnings Impact
Factor(1)(2)	Change (+)			(thousands of dollars)		($/share)(3)
Change in domestic demand		1	%		383		0.01
Change in hydro-skimming margin	$1.00/bbl				6,655		0.22
Change in IPP pricing margin for retail and distribution business	0.01 PGK/litre				1,815		0.06
Change in LIBOR rate		1	%		730		0.03

(1)	The impact of a change in one factor may be compounded or offset by changes in other factors. This table does not consider the impact of any inter-relationship among the factors.
(2)	The impact of these factors is illustrative and based off of sales and borrowings made during the 2006 year.
(3)	Per share amounts are based on the number of shares outstanding at December 31, 2006.

Management Discussion and Analysis      INTEROIL CORPORATION     6

RISK MANAGEMENT

Risk Factors

InterOil’s financial results are influenced by the business environment in which we operate. These risk factors can be found under the heading “Risk Factors” in our 2006 Annual Information Form available at www.sedar.com.

InterOil’s Risk Profile

InterOil’s risk exposures are mitigated and managed by management’s strategy for handling risks within the business. These risks have been categorized into four broad categories: business risks; operational risks; market risks and regulatory risks. Management believes that each risk requires a unique response and while some risks are managed through internal controls and business processes, others are managed through insurance and hedging. The following describes InterOil’s approach to managing major risks.

Business Risks

Our success depends in large part on the continued services of our executive officers, our senior managers and other key personnel. The loss of these people could have a material adverse impact on our results of operations. It is very important that we attract and retain highly skilled personnel, including technical personnel, to operate our refinery, accommodate our exploration plans, and manage the strategic direction of the business. Our human resources team manages our exposure in this area by engaging in active recruitment and retention programs.

Unrelated entities manage the operation of assets in which InterOil has an interest, such as upstream operations in our Petroleum Retention License 4 (43.1% interest) and Petroleum Retention License 5 (28.6% interest) leases. Inappropriate third-party operation of these assets could adversely affect InterOil’s financial performance; however, InterOil takes steps to partially mitigate this exposure by playing an active role on joint venture committees.

InterOil makes, and will continue to make, substantial capital expenditures for exploration, development, acquisition and production of oil and gas reserves, refinery expansions and improvements, acquisitions of distribution assets, and for further capital acquisitions and expenses. We will need additional financing to complete our business plans. The Board of Directors and executive management team proactively manage this exposure by continually reviewing business models, business plans and financing plans to meet the company’s strategic direction.

Operational Risks

We cannot assure our shareholders that our exploration activities will result in the discovery of any reserves; however, we take active steps to maximize the possibility of success by hiring highly qualified management and technical personnel and by engaging in activities such as seismic acquisition programs to enhance the possibility of success of our prospective drilling activities.

Exploring for, refining, transporting and marketing hydrocarbons involves operational hazards. These hazards include well blowouts, fires, explosions, and migration of harmful substances. Any of these operational incidents could cause personal injury, environmental contamination or damage and destruction of the Company’s assets. These incidents could also interrupt operations. InterOil manages operational risks primarily through its environmental, health and safety policies and committees as well as ensuring that we have suitably trained and qualified personnel in each of our operations.

The Company also purchases insurance to transfer the financial impact of some operational risks to third-party insurers. InterOil regularly evaluates its exposures related to operational risk and then adjusts the nature of its coverage, including deductibles and limits. Although InterOil maintains insurance in line with customary industry

Management Discussion and Analysis      INTEROIL CORPORATION     7

practices, the Company cannot and does not fully insure against all risks. Losses resulting from operational incidents that are not covered by insurance could have a material adverse impact on the Company.

Our midstream operations are dependent on the company’s ability to obtain suitable crude feedstock. Our project agreement requires the government of Papua New Guinea to take action to ensure that domestic crude oil producers sell us their domestic crude production for use in our refinery should we elect to utilize it. We are also able to obtain crude from outside of Papua New Guinea. During our crude optimization efforts, the refinery identified that lighter crudes that result in increased distillate yields, which are produced outside of Papua New Guinea, are the preferred source of crude for our refinery. In order to help mitigate the risk that we will be unable to enter into commercial arrangements for crude, either domestically or internationally, we have entered into an exclusive crude supply agreement with BP Singapore. Under this agreement which expires on June 14, 2009, BP Singapore acts as our agent in the procurement of crude.

Market Risks

Our midstream operations are highly dependent on the difference between the sale price we receive for refined products that we produce and the cost of the crude feedstocks used to produce those refined products. This difference is commonly referred to as refining margin. We use various derivative instruments and risk management techniques to minimize our exposure to market fluctuations in refining margins and also to the inventory holding price risk. Inventory holding price risk refers to changes in prices that occur between the time that we purchase feedstocks and the price of finished product at the time that we subsequently sell refined products. This holding period varies according to the sales cycle of each refined product.

The Company, due to its extensive borrowing requirement, will be adversely impacted by increases to interest rates. To balance this risk we have adopted a strategy of maintaining a mix of both fixed and floating interest rates on our debt portfolio.

Due to its operations being in Papua New Guinea, our Company is exposed to foreign exchange risk as revenues and expenditures or capital expenditure and investment proceeds could be in differing currencies from each other. Our primary foreign exchange risk is between the USD and the PGK. Our exploration business which incurs expenditure in PGK whilst holding its available funds in USD partially offsets the risk in the midstream operations, which incurs costs in USD whilst deriving the majority of its revenue in PGK. This exposure is further managed by a program of obtaining forward dated foreign exchange transactions.

Regulatory Risks

InterOil’s operations are based in Papua New Guinea and as a result involve risks typically associated with investments in developing countries, such as uncertain political, economic, legal and tax environments; expropriation and nationalization of assets; war; renegotiation or nullification of existing contracts; taxation policies; foreign exchange restrictions; international monetary fluctuations; currency controls; and foreign governmental regulations that favor or require the awarding of service contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction. In addition, InterOil’s operations are regulated by and could be intervened upon by, the Papua New Guinea government. InterOil endeavors to mitigate the impact of its operational location and the related government regulations by maintaining co-operative relationships with its regulators and the government of Papua New Guinea. InterOil’s business development team aims to have regular, constructive communication with regulators and the government so issues can be resolved in a mutually acceptable fashion.

InterOil’s operations are subject to extensive laws and regulations, including those relating to the discharge of materials into the environment, waste management, pollution prevention measures and the characteristics and composition of gasoline, jet and diesel fuels. Because environmental laws and regulations are becoming more stringent and new environmental laws and regulations are continuously being enacted or proposed, the monetary cost of environmental compliance could increase in the future. InterOil manages its environmental risks primarily through its environmental, health and safety policies and committees as well as an extensive third party testing program at the refinery.

Management Discussion and Analysis      INTEROIL CORPORATION     8

InterOil must comply with many changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new Securities and Exchange Commission (SEC) regulations and new and changing provisions of Canadian securities laws. The Company would face a wide variety of impacts should it fail to meet the requirements of new legislation. To manage this exposure, InterOil tasks its in-house legal, internal audit, and accounting teams with monitoring changes in legislation, regulation and accounting standards. Where necessary, InterOil also uses external professional advisors. InterOil has an internal audit function which test its controls and procedures to ensure compliance with Sarbanes-Oxley.

BUSINESS STRATEGY

InterOil’s strategy is to develop a vertically integrated energy company in Papua New Guinea and surrounding regions, focusing on niche market opportunities which provide financial rewards for InterOil shareholders, while being environmentally responsible, providing a quality working environment and contributing value to the communities in which InterOil operates. InterOil has taken a three-pronged approach when planning to achieve this strategy.

Q:

What is InterOil’s business strategy?

A:

To develop a vertically integrated energy company in Papua New Guinea.

Summary of Strategic Priorities

Following is a table outlining the Company’s progress towards the strategic priorities of the Company and its goals for2007. Refer to the Annual Information Form for a summary of strategic priorities by segment.

Strategic
Priorities	2006 Progress	2007 Initiatives
Capitalize on and Expand on the Existing Business Assets	ü   Completed refinery optimization project, which included the installation of new generators and modifications of the furnaces and boilers to improve reliability and reduce fuel costs. ü   Secured a contract to provide InterOil Power Fuel to Papua New Guinea’s Moitaka Power Station.	ü   Evaluate feasibility of improvements, modifications and additional equipment to improve flexibility and profitability of the refinery. ü   Continue to seek out potential markets for InterOil Power Fuel and distillate export opportunities to increase contribution to fixed costs. ü   Cost reduction program targeting 10% reduction.

Management Discussion and Analysis      INTEROIL CORPORATION     9

Strategic
Priorities	2006 Progress	2007 Initiatives
Target Acquisitions and Growth Opportunities in Papua New Guinea and the Surrounding Area	ü   Finalized the terms of acquisition for Shell Papua New Guinea’s distribution network. The Shell Papua New Guinea business was transferred to InterOil on October 1. ü   Examined other potential downstream growth opportunities. ü   Progressed discussions for liquefied natural gas opportunity in Papua New Guinea with government and other potential partners.	ü   Pursue opportunities to purchase a business or assets in the business of distributing fuel to the aviation sector. ü   Pursue other potential downstream growth opportunities. ü   Sign a shareholder agreement relating to the LNG opportunity in Papua New Guinea and begin taking steps to advance project. ü   Finalize FEED decision and development plans for LNG project.
Position InterOil for Long-Term Oil and Gas Business Success	ü   Made potential gas and condensate discovery at Elk location on existing Petroleum Prospecting License 238. ü   Conducted seismic and airborne gravity and magnetic surveys on licenses to expand knowledge base of existing prospects and to identify new prospects.	ü   Obtain further information about the Elk structure by drilling the Elk-2 appraisal well and conducting 100 miles of appraisal seismic. ü   Conduct detailed 2D seismic surveys over the Elk discovery and lead on-trend with the Elk discovery that have been identified from seismic data and airborne gravity/magnetic surveys acquired by the company to date.

Management Discussion and Analysis      INTEROIL CORPORATION     10

FINANCIAL RESULTS

Summary of Consolidated Annual Financial Results

Annual Consolidated Financial Results

Consolidated results for year ended December 31, 2006 compared to year ended December 31, 2005 and 2004

Consolidated – Operating results	Years ended December 31,
($ thousands, unless otherwise indicated)	2006(1)			2005			2004(2)
Sales and operating revenues		511,088			481,181			70,644
Interest revenue		3,224			1,831			382
Other non-allocated revenue		3,748			528			196
Total revenue		518,060			483,540			71,222
Cost of sales and operating expenses		(499,495	)		(467,247	)		(65,344	)
Office and administration and other expenses		(24,430	)		(23,296	)		(14,701	)
Exploration costs		(1,658	)		—			(2,903	)
Exploration impairment		(417	)		(2,144	)		(35,567	)
Accretion expense		(3,741	)		(5,647	)		—
Earnings before interest, taxes, depreciation and amortization (unaudited)		(11,681	)		(14,794	)		(47,293	)
Depreciation and amortization		(12,353	)		(11,037	)		(639	)
Interest expense		(17,273	)		(10,987	)		(3,203	)
Loss from ordinary activities before income taxes		(41,307	)		(36,818	)		(51,135	)
Income tax expense		(2,343	)		(2,832	)		(1,875	)
Non-controlling interest		264			368			70
Total net loss(3)		(43,386	)		(39,282	)		(52,940	)
Net loss per share (dollars)		(1.47	)		(1.36	)		(2.09	)
Net loss per diluted share (dollars)		(1.47	)		(1.36	)		(2.09	)
Total assets		488,165			429,557			385,842
Non current liabilities		223,095			112,273			87,472
Cash flows used in operations		(3,246	)		(22,713	)		(79,767	)
Cash dividends declared per share		—			—			—

(1)	Our wholesale and retail distribution business segment acquired the business of Shell PNG Limited on October 1, 2006 and information in this table includes the results of the Shell business from this date.
(2)	Our refinery began commercial operations on January 1, 2005. During 2004 we were still constructing and commissioning our refinery and the costs associated with the construction and commissioning of our refinery were capitalized rather than expensed. As a result of our refinery not having any commercial operations in 2004, our 2004 to 2005 and 2006 results are not comparable. In addition, our wholesale and retail distribution business segment was acquired on April 28, 2004 and only operated for eight months during 2004. As a result of our downstream results not having a full year operations in 2004, our 2004 to 2005 and 2006 results are not comparable.
(3)	We did not have any discontinued operations or extraordinary items during the periods covered by this table.

Management Discussion and Analysis      INTEROIL CORPORATION     11

Annual Consolidated Financial Result Analysis

EBITDA improved by $3.1 million over 2005 whilst total net loss increased by $4.1 million due to higher depreciation and interest expense. The EBITDA improvement is primarily due to increased interest revenues, increased upstream revenues from the rental of our rig, helicopters and camp sites to third parties and a decrease in the accretion expense recognized on the indirect participation interest liability, which has declined as 2006 seismic and drilling costs were offset against it. A more detailed explanation of our consolidated 2006 results is contained below. A detailed analysis of each segments earning is contained under the heading “Year in Review”.

Consolidated results analysis for year ended December 31, 2006 compared to year ended December 31, 2005.

Net Loss Comparison Based on Key Differences
(millions of USD, after-tax)

InterOil’s net loss increased from $39.3 million ($1.36/share) in 2005 to $43.4 million ($1.47/share) in 2006. However, InterOil’s EBITDA improved from a loss of $14.8 million ($0.53/share) to a loss of $11.7 million ($0.39/share). Much of the increased loss in 2006 relates to higher depreciation and interest costs.

(1)	The movement in the midstream gross margin is calculated as the total midstream revenues from operations less cost of goods sold and operating expenses. Gross margin does not have a standardized meaning prescribed by Canadian generally accepted accounting principles and, therefore, may not be comparable with the calculation of similar measures for other companies.
(2)	Other mainly includes movements in office and administration expenses.

While a complete discussion of each of the segment’s result can be found under the section “Year in Review,” the following points highlight some of the key movements that have resulted in a $4.1 million increase in our net loss between 2006 and 2005.

ü The refinery operations experienced a gross margin improvement of $0.5 million between 2005 and 2006. Although the gross margin suffered in the first half of 2006 due to shut down days, the positive impact of the revamp and optimization efforts have resulted in a net improvement for the year.

Management Discussion and Analysis      INTEROIL CORPORATION     12

ü	In addition, the midstream operations experienced a $4.6 million exchange gain in 2006 as compared to a $1.4 million exchange loss in 2005 which partially resulted from the strengthening of the PGK against the USD. During the year we negotiated improved rates on our PGK to USD transactions.
ü	The refinery experienced higher interest expense in 2006 as a result of market increases in the cost of crude feedstock being financed, increases in the LIBOR indicator rates and increases to the volume of inventory on hand during the optimization shutdown.
ü	During 2006 we started our midstream liquefaction segment and up to the end of 2006 we had incurred $0.7 million of costs relating to the preliminary stages of a liquefied natural gas plant project.
ü	Our downstream business had a $0.7 million increase in depreciation expense, primarily due to the acquisition of Shell Papua New Guinea on October 1, 2006.
ü	Our upstream operations experienced lower accretion expense as a result of a decrease in the related indirect participation interest liability. The indirect participation interest liability is decreased as the obligation to complete the drilling program is being met.
ü	During the year, we recognized a $0.8 million loss on the impairment of one of our two barges. One of these barges was sold during the year.
ü	Our interest expense for the year has increased as a result of the $130 million secured loan financing.
ü	We incurred a $1.4 million expense relating to the amendment of the PNG Drilling Ventures indirect participation interest agreement.

Management Discussion and Analysis      INTEROIL CORPORATION     13

Summary of Consolidated Quarterly Financial Results

Quarterly Consolidated Financial Results

Consolidated results for each quarter, 2006 compared to each quarter 2005 by business segment.

Quarters ended
($ thousands unless stated	2006(2), (3)												2005 (adjusted)(1),(2)
otherwise) (unaudited)	Dec 31			Sep 30			Jun 30			Mar 31			Dec 31			Sep 30			Jun 30			Mar 31
Sales and operating revenues		171,734			111,372			124,671			110,283			125,216			129,465			125,275			103,584
Upstream		(337	)		1,290			2,946			1,350			854			404			37			—
Midstream — Refining and Marketing		147,538			94,687			106,825			103,105			108,625			115,273			114,717			98,051
Midstream — Liquefaction		—			—			—			—			—			—			—			—
Downstream		91,990			39,527			37,995			27,808			39,044			32,449			29,993			23,715
Corporate & Consolidated		(67,457	)		(24,132	)		(23,095	)		(21,980	)		(23,307	)		(18,661	)		(19,472	)		(18,182	)
Earnings before interest, taxes, depreciation and amortization		6,541			1,140			(10,257	)		(9,105	)		(5,566	)		3,486			(6,856	)		(5,858	)
Upstream		(1,051	)		(1,337	)		(2,262	)		(2,227	)		(2,362	)		(1,655	)		(2,615	)		(1,603	)
Midstream — Refining and Marketing		9,144			1,674			(8,188	)		(5,230	)		(6,333	)		6,070			(6,796	)		(3,405	)
Midstream — Liquefaction		(396	)		(298	)		—			—			—			—			—			—
Downstream		1,143			1,954			3,559			(326	)		3,963			2,522			2,550			584
Corporate & Consolidated		(2,299	)		(853	)		(3,366	)		(1,322	)		(834	)		(3,451	)		5			(1,434	)
Net income (loss) per segment(4)		(3,711	)		(7,553	)		(17,759	)		(14,363	)		(12,165	)		(2,912	)		(12,852	)		(11,353	)
Upstream		(1,286	)		(1,540	)		(2,436	)		(2,426	)		(2,452	)		(1,870	)		(2,619	)		(1,608	)
Midstream — Refining and Marketing		3,818			(4,309	)		(13,408	)		(10,052	)		(11,622	)		1,068			(11,839	)		(8,469	)
Midstream — Liquefaction		(396	)		(298	)		—			—			—			—			—			—
Downstream		(427	)		1,278			2,426			(282	)		2,802			1,460			1,789			382
Corporate & Consolidated		(5,420	)		(2,684	)		(4,341	)		(1,603	)		(893	)		(3,570	)		(183	)		(1,658	)
Net income (loss) per share(4) (dollars)
Per Share — Basic		(0.13	)		(0.25	)		(0.60	)		(0.49	)		(0.42	)		(0.10	)		(0.45	)		(0.40	)
Per Share — Diluted		(0.13	)		(0.25	)		(0.60	)		(0.49	)		(0.42	)		(0.10	)		(0.45	)		(0.40	)

(1)	Comparative quarterly results for all quarters during 2005 have been adjusted and re-presented to include the adopted accounting treatment for exploration expenses associated with our $125 million Indirect Participation Interest Agreement entered into in February 2005 as reviewed by our auditors in the third quarter of 2005. The adjusted results present the quarterly financial information as if the indirect participation interest accounting policy we adopted during the third quarter of 2005 had been adopted at the inception of the agreement. See Note 23 to our unaudited financial statements for the three and nine month periods ended September 30, 2006 and 2005.
(2)	Our comparative quarterly results for all quarters during 2005 and 2006 have been represented to confirm with the presentation adopted at December 31, 2006. Previously, interest revenue and non-controlling interest were allocated to the corporate segment. Amounts associated with these line items are now included in each operating segments result.
(3)	Our September 2006 quarterly results have been represented to separate out our Midstream-Liquefaction segment from the Midstream-Refining and Marketing segment as the liquefaction business has become an increasingly important component of our business.
(4)	We did not have any discontinued operations or extraordinary items during the periods covered by this table.

Management Discussion and Analysis      INTEROIL CORPORATION     14

Quarterly results have been affected by movements in refining gross margins (as described in the Business Environment section), the impact of fluctuating production levels at the refinery resulting from maintenance and other shutdowns, the level of exploration activity not funded by our indirect participation interest agreement, changes in our borrowings, the acquisition of additional assets in our downstream business, and changes in volumes sold by our downstream business.

Quarterly Consolidated Financial Results Analysis

Consolidated results analysis for three Months to December 2006 versus three Months to December 2005

Net Income/(Loss) Comparison Based on Key Differences
(millions of USD, after-tax)

EBITDA improved by $12.1 million from a loss of $5.6 million (loss of $0.19/share) to a profit of $6.5 million ($0.22/share).
InterOil’s net loss improved from a loss of $12.2 million ($0.42/share) in the fourth quarter of 2005 to $3.7 million ($0.12/share) in the fourth quarter of 2006.

(1)	The movement in the midstream gross margin is calculated as the total midstream revenues from operations less cost of goods sold and operating expenses. Gross margin does not have a standardized meaning prescribed by Canadian generally accepted accounting principles and, therefore, may not be comparable with the calculation of similar measures for other companies.
(2)	Other mainly includes movements in office and administration expenses.

Our fourth quarter 2006 net loss has improved by $8.5 million over our fourth quarter 2005 loss. The primary reasons for the change between the 2005 and 2006 quarters are as follows:

ü The refinery operations experienced a gross margin improvement of $12.9 million between the 2005 quarter and the 2006 quarter. This is the result of the positive impact of the revamp and optimization efforts which has resulted in a more profitable product mix in 2006 and lower associated fuel costs for the refinery. In addition, the fourth quarter of 2006 benefited from changes that we negotiated in our low sulphur waxy residue and naphtha sales contracts.

Management Discussion and Analysis      INTEROIL CORPORATION     15

ü	In addition, the midstream operations experienced a $0.4 million exchange gain in 2006 as compared to a $1.2 million exchange loss in 2005 which partially resulted from the strengthening of the PGK against the USD. During the year we negotiated improved rates on our PGK and USD transactions.
ü	The office and administration and other costs for the fourth quarter of 2006 have decreased by approximately $1.1 million. This is largely the result of a gain on derivative instruments that were not subject to hedge accounting.
ü	During 2006 we started our midstream liquefaction segment and during the fourth quarter of 2006 we incurred $0.4 million of costs relating to the preliminary stages of a liquefied natural gas plant project.
ü	Our downstream business had a $3.2 million decrease in its net income for the quarter over the prior year. This primarily related to product pricing. The IPP dropped from 1.56 PGK (USD $0.50) in September to 1.49 PGK (USD $0.48) at the beginning of January 2007. As the IPP declined each month, any inventory holdings purchased in preceding periods were sold at lower IPP prices, resulting in lower margins. The effect of this was compounded by our acquisition of Shell. Although we gained additional sales volume in the quarter, our gross margin declined. Sales volumes for our downstream business increased from 655 kilolitres per day in the fourth quarter of 2005 to 1,472 kilolitres per day in the fourth quarter of 2006.
ü	Our upstream operations experienced lower accretion expense as a result of a decrease in the related indirect participation interest liability. The indirect participation interest liability is decreased as the obligation to complete the drilling program is being met.
ü	In 2005 we recognized $1.4 million in exploration expenses, primarily relating to the costs of testing the Black Bass and Triceratops wells. In 2006, there were no similar exploration costs that were recognized. The majority of our fourth quarter 2006 expenditures were allocated against the indirect participation interest agreement.
ü	Depreciation associated with our midstream and upstream segment increased as a result of a full quarter of depreciation being recognized on our rig and exploration warehouse and also as the result of depreciation being recognized on the capitalized revamp costs.

Our interest expense for the quarter has increased by $2.7 million as a result of the $130.0 million secured loan financing. We entered the facility in May 2006.

For further analysis of the first through third quarter results, refer to InterOil’s quarterly MD&A available on the Company’s website at www.interoil.com or on www.sedar.com. An analysis of our fourth quarter 2006 results is contained on pages 13 to 15 under the heading “Results for quarter ended December 31, 2006”.

Management Discussion and Analysis      INTEROIL CORPORATION     16

YEAR IN REVIEW

The following section provides a review of 2006 for each of our business segments. It includes a business summary, an operational review of the year, a review of financial results, and an analysis of each stream’s contribution to InterOil’s corporate strategy.

Upstream Year In Review

Upstream Business Summary

Our upstream business currently has four exploration licenses and two retention licenses in Papua New Guinea covering approximately nine million acres, of which amount, approximately 8.2 million nett acres are operated by InterOil. Petroleum Prospecting Licenses 236, 237 and 238 are located in the Eastern Papuan Basin northwest of Port Moresby and are 100% owned and operated by the Company. Our current exploration efforts are focused on these three licenses. Our indirect participation interest investors have the right to a 31.55% working interest in the exploration wells currently being drilled and any resulting fields. These investors have a 31.55% interest in the next three exploration wells and a 24.8% interest in the two subsequent exploration wells. In addition, we own a 15% working interest in Petroleum Prospecting License 244, located offshore in the Gulf of Papua, a 43.1% working interest in Petroleum Retention License 4 and a 28.6% working interest in Petroleum Retention License 5.

Q:

How much property in Papua New Guinea does the InterOil upstream business encompass?

A:

InterOil has four exploration licenses and two retention licenses covering approximately 9 million acres.

Upstream Operating Review

Key Upstream Metrics	2006		2005
Wells drilled		1		2
Total wells drilled in eight well indirect participation interest program		3		2
Total feet drilled		6,087		12,597
2D seismic miles acquired		79		100
Airborne gravity and magnetic survey miles acquired		6,244		3,800
Total spent on seismic acquisition ($ millions)		6.8		11.0
Total spent on drilling ($ millions)		37.9		22.9

During the year we continued the eight well drilling program covering Petroleum Prospecting Licenses 236, 237 and 238 which we commenced in April 2005. In 2006, the Company drilled the third well in this program, Elk-1 on Petroleum Prospecting Licenses 238. This well, which was spudded in February 2006, encountered high pressure gas at a depth of 5,543 feet on June 11, 2006 and was shut-in while well control equipment was mobilized to the site. Well control operations and modifications to the rig were undertaken to enable managed

Management Discussion and Analysis      INTEROIL CORPORATION     17

pressure drilling and we resumed drilling Elk-1 on September 15, 2006. The well reached a total depth of 6,087 feet. A drill-stem test was performed and wireline logs were acquired in the interval 5,379 to 6,087 feet. The data obtained from these operations indicate the possibility of a significant natural gas and condensate accumulation. The Elk-2 well was spudded on February 9, 2007 to appraise the Elk-1 discovery and to explore for an oil zone in this structure.

During 2006, we acquired a total of 79 miles of 2D seismic over Petroleum Prospecting License 238 at a cost of $5.2 million. The 2006 seismic program complemented the 136 miles of seismic program that we acquired during the previous three years. As of year end, we had access to 1,000 miles of 2D seismic data covering Petroleum Prospecting Licenses 236, 237 and 238, including the 215 miles we have recorded since acquiring these licenses. During the first quarter of 2007 we mobilized a seismic crew to conduct a detailed 2D seismic survey over the Elk discovery and leads on-trend with the Elk discovery that have been identified from seismic data and airborne gravity and magnetic surveys acquired by InterOil.

In addition to the seismic program, we also conducted 2,471 miles of airborne gravity and magnetic surveys in 237 and 3,773 miles in Petroleum Prospecting License 238. Airborne gravity and magnetic methods have enabled us to better identify the quality of leads derived from surface geology, to identify previously unmapped leads and to optimize the location of our 2D seismic programs.

Upstream Financial Results

Upstream – Operating results	Years ended December 31,
($ thousands)	2006			2005(1)			2004(1)
External sales		—			—			—
Inter-segment revenue		—			—			—
Other non-allocated revenue		5,249			1,295			113
Total segment revenue		5,249			1,295			113
Cost of sales and operating expenses		—			—			—
Office and administration and other expenses		(5,553	)		(1,738	)		(1,648	)
Exploration costs		(1,658	)		—			(2,903	)
Exploration impairment		(417	)		(2,145	)		(35,567	)
Impairment expense on barge sale		(757	)		—			—
Accretion expense		(3,741	)		(5,647	)		—
Earnings before interest, taxes, depreciation and amortization (unaudited)		(6,877	)		(8,235	)		(40,005	)
Depreciation and amortization		(806	)		(314	)		(13	)
Interest expense		(5	)		—			(5	)
Loss from ordinary activities before income taxes		(7,688	)		(8,549	)		(40,023	)
Income tax expense		—			—			—
Total net loss		(7,688	)		(8,549	)		(40,023	)

(1) Our 2005 and 2004 segment results have been represented to confirm with the presentation adopted in 2006. Previously, interest revenue and non-controlling interest were allocated to the corporate segment. Amounts associated with these line items are now included in each operating segments result.

Management Discussion and Analysis      INTEROIL CORPORATION     18

Upstream Financial Results Analysis

During 2006, the upstream business had a net loss of $7.7 million as compared to a loss of $8.5 million in 2005.

The key variances in the year ended 2006 as compared to the year ended 2005 are explained as follows:

ü	An increase in other revenues of $3.9 million in 2006 primarily related to the rental of our company-owned rig being charged against our indirect participation interest at current market day rents. Because we expense the costs of owning and maintaining this rig, the amounts charged to the indirect participation interest liability are recognized as revenue by our upstream business segment. The increase is also contributed by intercompany interest revenue of $1.4m received by Upstream from Corporate on account of the use of IPI funds. The revenue also relates to the one-time rental of camp facilities and providing logistics support to another exploration company.
ü	An increase of $2.7 million, included in office and administration and other expenses, related to the costs of owning and maintaining the rig.
ü	An increase of $1.7 million in exploration expenses relating to the seismic program undertaken in 2006. In 2005, all seismic costs were allocated against our indirect participation interest liability rather than being expensed. In 2006, in accordance with the accounting treatment adopted for the indirect participation interest liability, a portion of our exploration costs were allocated against the liability, but the remaining component was recognized as an expense item.
ü	A decrease of $1.7 million in exploration impairment is the result of the testing costs relating to the Black Bass and Triceratops wells being expensed in 2005 whereas in 2006 the majority of the expense relates to the acquisition of additional interests in our PRL 4 and PRL 5 licenses.
ü	An increase of $0.8 million for the impairment expense on a barge sale. The Company sold one of its two barges to a third party during the year.
ü	Accretion expense decreased by $1.9 million in 2006 as a result of a decrease in the indirect participation interest liability. During 2006, the indirect participation liability has decreased as the obligation to complete the drilling program is being met.
ü	An increase in depreciation expense of $0.5 million in 2006 as a result of a full year of depreciation being recognized on the rig, offices and warehouse which were purchased part way through 2005.

Outlook for 2007

2007 planned activity

ü	Drill appraisal well, Elk-2, and exploration well Antelope-1
ü	Conduct 100 miles of appraisal seismic over the Elk structure
ü	Drill one well in PRL 5
ü	Re-enter and test the Stanley gas discovery in PRL 4

Key factors that will affect our 2007 progress

ü	Results from Elk-2 and Antelope-1
ü	Ability to attract and retain staff in a competitive oil and gas industry
ü	Conclusion of an exploration funding agreement with an industry major
ü	Proving sufficient gas reserves to guarantee the liquefaction project

Management Discussion and Analysis      INTEROIL CORPORATION     19

MIDSTREAM REFINING AND MARKETING YEAR IN REVIEW

Midstream Refining and Marketing Business Summary

The midstream operations predominately relate to our refinery situated in Port Moresby, the capital city of Papua New Guinea. Our refinery comprises of a 32,500b/d crude distillation unit (CDU) and a 3,500b/d catalytic reforming unit (CRU) which were commissioned during the second half of 2004 and began commercial operations in 2005. InterOil is the sole refiner of hydrocarbons in Papua New Guinea and the refinery’s output is sufficient to meet 100% of the domestic demand in Papua New Guinea. Diesel, jet fuel and gasoline are the primary products that we produce for the domestic market.

Operation of the CDU also results in the production of naphtha and low sulfur waxy residue and sometimes limited volumes of LPG’s are produced depending on the crude feedstock. To the extent that we do not convert naphtha to gasoline within the CRU, we export it to the Asian markets in two grades, light naphtha and mixed naphtha, which are predominately used as petrochemical feedstocks. To the extent that we do not consume the low sulfur waxy residue as part of the refinery’s fuel requirement or sell it within Papua New Guinea as fuel for electricity generation — a profitable new niche market we have recently created — the low sulfur waxy residue is exported as it is valued by more complex refineries as cracker feedstock or may be utilized as fuel in large power stations.

A:

The refinery’s output is sufficient to meet 100% of the domestic demand in Papua New Guinea.

Q:

How much of the domestic demand in Papua New Guinea does the refinery supply?

Midstream Refining and Marketing Operating Review

Key Refining and Marketing Metrics	2006			2005
Net income/(loss) ($ millions)	($	24.0	)	($	30.9	)
EBITDA ($ millions)	($	2.6	)	($	10.5	)
Throughput (barrels per day)(1)		19,784			23,117
Cost of production per barrel(2)	$	3.46		$	3.09
Working capital financing cost per barrel of production(2)	$	1.16		$	0.96
Distillates as percentage of production		65	%		55	%

(1)	Throughput per day has been calculated excluding shut down days.
(2)	Our cost of production per barrel and working capital financing cost per barrel have been calculated based on a notional throughput. Our actual throughput has been adjusted to include the throughput that would have been necessary to produce the equivalent amount of diesel that we imported during the year.

The refining and marketing stream has been improved by reducing its net loss and increasing its EBITDA by $7.9 million from 2005 to 2006. The improvements in the results are explained in detail in the optimization efforts section below as well as in the summary of financial results.

Management Discussion and Analysis      INTEROIL CORPORATION     20

In 2006 our total throughput for the year was 19,784 bbls per day versus 23,117 bbls per day in 2005. The decrease in throughput from 2005 to 2006 is the result of improved distillate yields. In addition, during 2005 the refinery was run at higher throughputs in the early part of the year in order to complete commissioning requirements.

The decrease in throughput has resulted in higher costs of production per barrel. Although total operating costs were down approximately $0.8 million, total notional throughput was also down by approximately 1 million barrels over the course of the year. The refinery is undertaking a cost reduction program in 2007 with the goal of reducing operating costs by approximately 10%.

Our working capital financing costs have increased, primarily due to the substantial increase in the LIBOR rate which has increased from approximately 2.3% to approximately 5.3% between 2005 and 2006.

During 2006, the refinery’s objective was to satisfy the domestic Papua New Guinea demand for diesel, jet, kerosene and gasoline while minimizing production of naphtha and low sulphur waxy residue. The refinery was able to achieve this objective through optimization efforts which have resulted in an increased distillate output as a percentage of total production. Naphtha and low sulphur waxy residue are exported at a lower margin than the distillates which are sold in Papua New Guinea.

Optimization Efforts

Our midstream business operations were focused on optimization projects to improve profitability throughout 2006. Most of the optimization occurred in June and July when we shutdown the refinery to install new generators and to modify the furnaces and boilers to also run on low sulfur waxy residue. These works improved the product slate, improved reliability and reduced fuel costs. The shutdown had minor short-term cost impacts whilst facilitating major long-term profitability improvements. Despite the cost impacts resulting from the shutdown of the refinery, the refinery’s performance in the second half of 2006 was significantly improved from that of the first half of 2006.

A:

These initiatives have resulted in increased yields of higher value products and lower fuel consumption at the refinery.

Q:

How do the “revamp” works and crude optimization efforts undertaken in 2006 improve profitability?

Management Discussion and Analysis      INTEROIL CORPORATION     21

Distillates, such as jet fuel and diesel, produced for the domestic market contribute a higher gross margin than naphtha and low sulphur waxy residue. As a result, increasing the yield of distillates produced has resulted in a higher gross margin for the business. In addition to reducing the yield of naphtha and low sulphur waxy residue, the revamp works have resulted in a reduced fuel requirement. This reduces the cost of production and therefore contributes to an improvement in gross margin.

The completion of optimization activities and various other cost saving initiatives undertaken by the company, have contributed to a significant improvement in the results of the second half of 2006 as compared to the first half of 2006 which are explained below.

Gross margin improved $16.5 million between the first and second half of 2006 due to the combination of competing factors:

Controllable

+	Improved yield structure post shutdown
+	Decreased fuel consumption post shutdown
+	Decreased fuel cost post shutdown
+	Improved premiums negotiated on export products

Non controllable

+	Improved margins on domestic sales of distillates
–	Decreased margins versus benchmark prices on export sales
–	Decreasing price environment in second half versus increasing price environment in first half
–	Decreasing benchmark refining margin (Singapore Tapis Hydroskimming)
ü	Foreign exchange gains in the second half of 2006 were $4.5 million compared to $0.1 million for the first half of 2006. During the year we negotiated improved rates on our PGK to USD transactions.
ü	The effect of non-hedge accounted derivatives on earnings increased by $2.7 million from the first half to the second half of 2006. During the second half of the year we introduced a new derivative instrument into our risk management program. This instrument, coupled with the technique by which we utilize it, was deemed not to be subject to hedge accounting and as a result all movements on these derivative contracts are

Management Discussion and Analysis      INTEROIL CORPORATION     22

	recognized in the statement of operations below the gross margin level. Realized and unrealized gains from this new risk management instrument are largely responsible for the $2.7 million movement between the two periods.
ü	Borrowing costs increased by $0.7 million in the second half of 2006 due to the combination of increased LIBOR rates on our working capital facility and increased working capital borrowing requirements as a result of the refinery holding excess inventory through the shutdown period. These two factors were partially offset by decreased LC fees and the increased utilization of the cash backing component of our working capital facility. The cash backing allows us to reduce the cost of our net borrowings.
ü	General and administrative expenses decreased by $0.8 million between first and second half of 2006 as a result of various cost saving initiatives undertaken by the refinery management team and a decrease in legal costs as a result of the settlement of our dispute with Clough Niugini Limited at the end of the first half of 2006.
ü	Depreciation increased by $0.3 million as a direct result of the capital revamp works undertaken during the year.

Outlook for 2007

2006 improvements set to show full year benefit in 2007

ü	Contract premium improvements to export products
ü	Improvement to negotiated foreign exchange rates on PGK and USD transactions
ü	Improvement to working capital interest rates
ü	Improved product yields
ü	Decreased fuel costs

2007 Initiatives:

ü	Conduct negotiations to reduce working capital costs
ü	Implement strategies to further improve foreign exchange rates
ü	Reduce direct operating costs
ü	Eliminate unplanned downtime
ü	Expand niche market for InterOil Power Fuel
ü	Reduce length of working capital cycle
ü	Seek out and exploit operational and tax planning synergies in conjunction with the newly expanded downstream business

Management Discussion and Analysis      INTEROIL CORPORATION     23

Midstream Refining and Marketing Annual Financial Results

Midstream
Refining and Marketing – Operating results	Years ended December 31,
($ thousands)	2006			2005(2)			2004(1),(2)
External sales		315,211			356,327			26,310
Inter-segment revenue		136,584			80,094			—
Interest and other revenue		360			245			(55	)
Total segment revenue		452,155			436,666			26,255
Cost of sales and operating expenses		(451,374	)		(436,491	)		(27,686	)
Office and administration and other expenses		(10,577	)		(9,747	)		(3,189	)
Gain on derivative contracts		2,560			542			34
Foreign exchange gain/(loss)		4,636			(1,434	)		22
Earnings before interest, taxes, depreciation and amortization (unaudited)		(2,600	)		(10,464	)		(4,563	)
Depreciation and amortization		(10,729	)		(10,598	)		(312	)
Interest expense		(10,881	)		(10,162	)		(844	)
Loss from ordinary activities before income taxes		(24,210	)		(31,224	)		(5,719	)
Income tax expense		—			—			—
Non controlling interest		259			362			69
Total net loss		(23,951	)		(30,862	)		(5,650	)

(1)	Our refinery began commercial operations on January 1, 2005. During 2004 we were still constructing and commissioning our refinery and the costs associated with the construction and commissioning of our refinery were capitalized rather than expensed. As a result of our refinery not having any commercial operations in 2004, our 2004 to 2005 and 2006 results are not comparable.
(2)	Our 2005 and 2004 segment results have been represented to confirm with the presentation adopted in 2006. Previously, interest revenue and non-controlling interest were allocated to the corporate segment. Amounts associated with these line items are now included in each operating segments result.

Midstream Refining and Marketing Annual Financial Results Analysis

During the year ended 2006, the midstream business had a net loss of $24.0 million as compared to a loss of $30.9 million in 2005. The key variances in the year ended 2006 as compared to the year ended 2005 are explained as follows:

ü	An increase to gross margin of $0.5 million for the year was primarily the result of the revamp improvements made in the second half of 2006 and price risk management activities over the year.
ü	Higher office and administration and other expenses of $0.8 million was due to a number of factors including increased repairs and maintenance, corporate allocations, travel costs, and management salaries and contractor costs.
ü	An increase to the gain on derivative contracts of $2.0 million due to increased price risk management activity that is deemed not to be subject to hedge accounting.
ü	An increase in foreign exchange gain/(loss) of $6.1 million was due to the strengthening of the PGK against USD and negotiating improved rates on our PGK to USD transactions during 2006.
ü	Higher depreciation expense of $0.1 million was due to the addition of depreciable assets from the refinery revamp program.
ü	An increase in interest expense of $0.7 million was due to increasing LIBOR rates and increased borrowing requirements due to higher oil prices partially offset by a decrease in line of credit (LC) fees.

Management Discussion and Analysis      INTEROIL CORPORATION     24

MIDSTREAM LIQUEFACTION YEAR IN REVIEW

A:

A facility that will produce 9 million tons per annum of liquefied natural gas

Q:

What type of liquefaction facility does InterOil currently envisage?

Midstream Liquefaction Operating Review

Our liquefaction segment is in the early stages of its development. In May, InterOil signed a Memorandum of Understanding with the Independent State of Papua New Guinea for natural gas development projects in Papua New Guinea and a tri-party agreement with Merrill Lynch Commodities (Europe) Limited and an affiliate of Clarion Finanz AG. The tri-party agreement relates to a proposal for the construction of a liquefaction plant to be built adjacent to our refinery. We are targeting a facility that will produce up to nine million tons per annum of Liquefied Natural Gas (LNG) and condensates. The infrastructure currently being contemplated includes condensate storage and handling, a gas pipeline from the Elk location as well as sourced suppliers of gas, and LPG storage and handling. The LNG facility will also interface with our existing refining facilities.

As at year end 2006, significant progress was made on the key components necessary to bring to fruition a successful LNG project. During 2007 the company anticipates entering into a shareholder agreement relating to the project and further development stage activities relating to the construction and financing of the plant.

Midstream Liquefaction Annual Financial Results

Midstream
Liquefaction – Operating results	Years ended December 31,
($ thousands)	2006			2005(1)		2004(1)
External sales		—			—		—
Inter-segment revenue		—			—		—
Total segment revenue		—			—		—
Cost of sales and operating expenses		—			—		—
Office and administration and other expenses		(694	)		—		—
Earnings before interest, taxes, depreciation and amortization (unaudited)		(694	)		—		—
Depreciation and amortization		—			—		—
Interest expense		—			—		—
Loss from ordinary activities before income taxes		(694	)		—		—
Income tax expense		—			—		—
Total net loss		(694	)		—		—

(1) Our liquefaction segment was formed in 2006 and as a result there is no comparative information for 2005 and 2004. The liquefaction segment is in its early stage of development.

Management Discussion and Analysis      INTEROIL CORPORATION     25

Midstream Liquefaction Annual Financial Results Analysis

All costs relating to the liquefaction segment are currently being expensed. These costs include expenses relating to employees, office premises, and consultants.

DOWNSTREAM YEAR IN REVIEW

Downstream Business Summary

Our wholesale and retail distribution business is the largest and most comprehensive asset distribution base in Papua New Guinea. It encompasses bulk storage, aviation refueling, and the wholesaling and retailing of refined petroleum products which, at the end of 2006, supplies approximately 67% of Papua New Guinea’s refined petroleum product needs. Our retail and wholesale distribution business distributes diesel, jet fuel, gasoline, kerosene, avgas, and fuel oil as well as Shell & BP branded commercial and industrial lubricants such as engine and hydraulic oils. In general, all of the refined products sold pursuant to our wholesale and retail distribution business are purchased from our refining and marketing business segment with the exception of lubricants, fuel oil and avgas.

A:

The InterOil name is associated with 49 service stations, 11 depots and 6 terminals. InterOil supplies 67% of Papua New Guinea’s refined petroleum product needs.

Q:

How prominent is InterOil’s wholesale and retail distribution business in Papua New Guinea.

As of 2006, we provided petroleum products to 49 retail service stations that now operate under the InterOil brand name. Of the 49 service stations that we supply, 21 are owned by us or head leased, with a sublease to company approved operators. The remaining 28 service stations are independently owned and operated. We supply products to each of these service stations pursuant to retail supply agreements. In addition to our retail distribution network, we supply petroleum products as a wholesaler to commercial clients and also operate 14 aviation locations throughout Papua New Guinea. We own and operate 6 larger terminals and 11 depots that we use to supply product throughout Papua New Guinea. More than two-thirds of the volume of petroleum products that we sold during 2006 was supplied to commercial customers. Although the volume of sales to commercial customers is far larger than through our retail distribution network, these sales have a lower margin.

Management Discussion and Analysis      INTEROIL CORPORATION     26

Downstream Operating Review

Key Downstream Metrics	2006			2005
Net income ($ millions)	$	3.0		$	6.4
EBITDA ($ millions)	$	6.3		$	9.6
Market share (1)		67	%		29	%
Sales volumes (millions of liters) (2)		291.8			210.4
Cost of distribution per liter ($  per liter) (3)	$	0.06		$	0.05

(1)	Market share has been calculated based on domestic purchases of product from the refinery during the final quarter of each year.
(2)	Sales volumes reflect the actual sales volumes achieved for the year and therefore only include the effect of the Shell acquisition from October 1, 2006.
(3)	Cost of distribution per liter includes land based freight costs and operational costs. It excludes depreciation and interest.

In January 2006, InterOil entered into an agreement with Shell Overseas Holdings Limited to purchase all of Shell’s retail and distribution assets in Papua New Guinea and all aviation facilities except Shell’s interest in the aviation facility in Port Moresby. The closing of this transaction was subject to the approval of several governmental authorities in Papua New Guinea. On October 1, 2006 the transfer of ownership occurred, adding 4 terminals, 4 depots, 17 retail sites and 14 aviation facilities to the existing downstream asset base. All of these assets now operate under the InterOil Products brand name. The purchase price of this business was $25.8 million, net of cash received, and is subject to adjustment pending verification of the acquired working capital.

The Shell acquisition makes InterOil the largest distribution business in Papua New Guinea. Other major commercial customer wins have also increased our presence in the Papua New Guinea market. Our market share has increased from 29% in the final quarter of 2005 to 67% in the final quarter of 2006 as a result of acquiring Shell and growing our commercial customer base.

Management Discussion and Analysis      INTEROIL CORPORATION     27

The increase in sales volume from commercial customers has resulted in a lower cost of distribution per litre. However, despite the significant increase in total sales made by the downstream business and a decline in the cost of distribution per litre, the net profit has declined. This is largely attributable to a substantial decline in the IPP price over the fourth quarter of 2006. In 2005, the company benefited from increases in the IPP prices.

The diesel IPP price fell from 1.65 PGK on October 8, 2006 to 1.49 PGK on January 8, 2007. . The IPP price is set on the eighth day of each month. In a market where IPP is declining, the price change results in all inventory being revalued to, and subsequently sold at, the lower amount. This in turn causes a decrease in the gross margin earned by the downstream business. During 2005 the diesel IPP price increased steadily from 1.10 PKG to 1.61 PGK.

In July 2006 the downstream business completed the construction of a 2 million litre diesel storage tank at our terminal Wewak, East Sepik, to augment storage availability at that location. The East Sepik province has experienced substantial growth in recent years. In addition, Mobil and Shell closed their operations in the town of Wewak. The additional infrastructure will place us in a strong position to continue to service the needs of the East Sepik market and take advantage of the changes that have occurred.

Management Discussion and Analysis      INTEROIL CORPORATION     28

Downstream Financial Results

Downstream Operating results	Years ended December 31,
($ thousands)	2006(1)			2005(2)			2004(2),(3)
External sales		195,877			124,854			62,410
Inter-segment revenue		22			6			489
Interest and other revenue		1,421			341			263
Total segment revenue		197,320			125,201			63,162
Cost of sales and operating expenses		(183,511	)		(110,857	)		(53,159	)
Office and administration and other expenses		(7,479	)		(4,725	)		(3,147	)
Earnings before interest, taxes, depreciation and amortization (unaudited)		6,330			9,619			6,856
Depreciation and amortization		(910	)		(204	)		(224	)
Interest expense		(152	)		(226	)		(455	)
Income from ordinary activities before income taxes		5,268			9,189			6,177
Income tax expenses		(2,273	)		(2,756	)		(1,900	)
Total net income		2,995			6,433			4,277

(1)	Our wholesale and retail distribution business segment acquired the business of Shell Papua New Guinea Limited on October 1, 2006 and contains the results of the Shell business from this date.
(2)	Our 2005 and 2004 segment results have been represented to confirm with the presentation adopted in 2006. Previously, interest revenue and non-controlling interest were allocated to the corporate segment. Amounts associated with these line items are now included in each operating segments result.
(3)	Our wholesale and retail distribution business segment was acquired on April 28, 2004 and only operated for eight months during 2004. As a result of our downstream results not having a full year of operations in 2004, our 2004 to 2005 and 2006 results are not comparable.

Downstream Financial Results Analysis

During the year ended December 31, 2006, the downstream business earned a net income of $2.9 million as compared to $6.4 million in 2005.

The key variances in the year ended 2006 as compared to the year ended 2005 are explained as follows:

ü	A decrease to gross margin of $1.6 million for the year 2006 over the year 2005 was most significantly the result of continuous drops in IPP over the fourth quarter of 2006. The IPP dropped from K1.65 in September to K1.49 at the beginning of January 2007. As the IPP declined each month, any inventory holdings purchased in preceding periods were sold at lower IPP prices, resulting in lower margins. The effect of this was compounded as our acquisition of Shell and its corresponding inventory balance coincided with the decline in IPP pricing.
ü	An increase in office and administration and other expenses of $2.8 million due to a number of factors including, higher insurance costs as a result of the acquisition of the Shell business and expansion of the aviation business, higher corporate allocations, increased repairs and maintenance costs, and increased travel costs.
ü	An increase in depreciation expense of $0.7 million over 2005 related primarily to the addition of the Shell assets on October 1 and the completion of the 2 million litre East Sepik tank project.
ü	Our income tax expense as a percentage of income from ordinary activities has increased during 2006 as the result of a reduction to the future income tax benefit being recognized on the revaluation of the Shell plant and equipment acquired on October 1.

Management Discussion and Analysis       INTEROIL CORPORATION       29

Outlook for 2007

2007capital spending plans

ü	Upgrades to terminal, depots and aviation sites
ü	Aviation upgrade and refueller vehicles
ü	New customer base pumps and tankage requirements
ü	Finance system software installation

2007 growth plans:

ü	Consider commercial bunkering opportunities
ü	Secure contracts to supply new mining and petroleum companies
ü	Pursue opportunities in organic growth agriculture sector
ü	Explore market opportunities in North Solomon’s Province, including strategic alliances with key distributors

CORPORATE YEAR IN REVIEW

Corporate Annual Financial Results

Corporate Operating results	Years ended December 31,
($ thousands)	2006(5)			2005			2004
External sales elimination		—			—			(18,075	)
Inter-segment revenue elimination(1)		(136,606	)		(80,101	)		(489	)
Interest revenue		(58	)		480			165
Other unallocated revenue		—			(1	)		91
Total segment revenue		(136,664	)		(79,622	)		(18,306	)
Cost of sales and operating expenses elimination(1)		135,391			80,101			15,500
Office and administration and other expenses(2)		(6,567	)		(6,193	)		(6,773	)
Earnings before interest, taxes, depreciation and amortization (unaudited)		(7,840	)		(5,714	)		(9,581	)
Depreciation and amortization(3)		92			79			(90	)
Interest expense(4)		(6,235	)		(599	)		(1,899	)
Income from ordinary activities before income taxes		(13,983	)		(6,234	)		(11,570	)
Income tax expenses		(69	)		(76	)		25
Non-controlling interest		4			6			1
Total net income		(14,048	)		(6,304	)		(11,544	)

(1)	Represents the elimination upon consolidation of our refinery sales to other segments and other minor inter-company product sales.
(2)	Includes the elimination of inter-segment administration service fees.
(3)	Represents the amortization of a portion of costs capitalized to assets on consolidation.
(4)	Includes the elimination of interest accrued between segments.
(5)	Our 2005 and 2004 segment results have been represented to confirm with the presentation adopted in 2006. Previously, interest revenue and non-controlling interest were allocated to the corporate segment. Amounts associated with these line items are now included in each operating segments result.

Management Discussion and Analysis       INTEROIL CORPORATION      30

Corporate Annual Results Analysis

Key movements in our corporate services segment between 2006 and 2005 were as follows:

ü	A decrease of $0.3 million in stock compensation expense recognized in office and administration and other expenses.
ü	An increase in interest expense of $5.6 million primarily relating to the increased borrowings made under the secured loan facility entered into in May 2006.

LIQUIDITY AND CAPITAL RESOURCES

Summary of Cash Flows

($ thousands)	2006			2005			2004
Net cash inflows/(outflows) from:
Operations		(3,246	)		(22,713	)		(79,767	)
Investing		(91,638	)		15,468			(29,024	)
Financing		66,964			38,302			128,119
Net cash movement		(27,920	)		31,057			19,328
Opening cash		59,601			28,544			9,216
Closing cash		31,681			59,601			28,544

Operating Activities

For the year ended 2006 cash used in our operating activities was $3.2 million compared with $22.7 million in 2005. Reasons for the $19.5 million improvement in net cash movements include:

ü

Our cash used in operations, prior to changes in non-cash working capital increased, by $6.2 million. This is primarily due to interest paid on the $130.0 million secured loan facility entered into in 2006.

ü

Our non-cash working capital provided a cash inflow from operations of $21 million in 2006 as compared to contributing $4.7 million to the cash outflows in 2005. This change of $25.7 million is primarily attributable to an increase in our accounts payable, accrued liabilities and income tax payable creating a cash inflow of $25.0 million, $19.2 million relating to movements in our inventories and an offsetting $19.2 million as a result of an increase in trade receivables.

Investing Activities

For the year 2006, cash used in our investing activities was $91.6 million compared with cash generated of $15.5 million for the year 2005. During these periods, the cash used on investing activities consisted primarily of:

ü	$15.9 million increase in our secured cash balances in 2006 versus an increase of $1.1 million in 2005.
ü	$25.8 million, net of cash received, used to acquire Shell Papua New Guinea on October 1.
ü	$42.6 million on oil and gas exploration expenditure in 2006 versus $43.0 million in 2005 mainly related to drilling and seismic activities.
ü	$13.6 million on plant and equipment in 2006 versus $5.6 million in 2005 which is primarily related to the revamp and optimization activities undertaken by the refinery and the additional diesel tank built by the downstream business in East Sepik.

In 2005, $80.4 million was provided by the indirect participation interest investors for the eight well drilling program.

Management Discussion and Analysis       INTEROIL CORPORATION       31

Financing Activities

For the year 2006, cash proceeds from our financing activities were $67.0 million. During 2006, the cash movements caused by financing activities were primarily due to:

ü	$125.3 million of net proceeds from our secured loan facility entered into in May 2006.
ü	$1.5 million from the issuance of common shares in 2006 as compared to $5.5 million received in 2005.
ü	$33.9 million of repayments on the crude import facility in 2006 versus $5.8 million of repayments made in the 2005 period.
ü	$21.5 million in repayments of unsecured loans in 2006. These proceeds were received in 2005.

In 2005, $22.7 million was received from the indirect participation interest investors relating to the conversion options included under the indirect participation interest agreement. No new indirect participation interest funds were received in 2006.

Capital Expenditures

Upstream Capital Expenditures

Our capital expenditures for exploration in Papua New Guinea for the year ended December 31, 2006 were $48.5 million compared with $43.8 million during the same periods in 2005. Our capital expenditures for 2006 consisted of:

ü	$33.1 million for the drilling and testing of the Elk-1 exploration well. The Elk-1 well expenditures were higher than expected as a result of encountering high pressure gas that required significant expenditures to control the well pressure before we could continue drilling the well. Our drilling progress was impeded for three months.
ü	$3.0 million of pre-drill costs on the Elk-2 structure, including site preparation, camp construction, rig mobilization and supplier standby costs.
ü	$1.0 million of demobilization costs from the Triceratops drill site.
ü	$5.6 million for seismic acquisition.
ü	$1.1 million for airborne gravity survey work.
ü	$3.8 million for rig equipment, primarily in relation to increasing the capacity of the mud circulation system.
ü	$0.6 million for inventory and other costs includes drilling consumables such as mud, casing and drill bits, as well as spare parts for all the rig equipment.
ü	$0.3 million of pre-drill costs for the Antelope-1 well which includes preliminary site clearing and the construction of a helicopter pad. We anticipate mobilizing to Antelope-1 wellsite immediately after rig release from Elk-2 well. The Antelope structure is located approximately 4 miles from of Elk-1 well and 8 miles from the Elk-2 well.

The increase in capital expenditures during 2006 compared to the same period of 2005 is due to the increased costs relating to drilling the Elk-1 well.

Midstream Capital Expenditures

Our capital expenditures for our refining and marketing business segment for the year 2006 were $12.0 million compared with $3.3 million during 2005. The increase in capital expenditures during 2006 is primarily related to our refinery optimization program that was completed during the third quarter of 2006.

Downstream Capital Expenditures

Our capital expenditures for our wholesale and retail distribution business segment for 2006 were $27.6 million compared with $14.0 million during the same period in 2005. Our 2006 capital expenditures consisted of costs associated with the completion of the East Sepik and the purchase of storage tanks, mine packs, new fuel

Management Discussion and Analysis       INTEROIL CORPORATION       32

distribution software and satellite storage. In addition we acquired commercial storage tanks and pumps for the Shell business. Also included in our capital expenditures for 2006 is $25.8 million, net of cash received, for the Shell Papua New Guinea acquisition. The 2005 expenditure primarily related to a $12.1 million payment made to BP International for the acquisition of InterOil Products Limited and $1.9 million for a storage tank, barge facility and a number of other smaller capital items.

Sources of Capital

Upstream

We currently fund all of our upstream capital expenditures using the proceeds of the $125.0 million Indirect Participation Interest Agreement that we entered into in February 2005.

Midstream

In August 2006, we renewed our Secured Revolving Crude Import Facility with BNP Paribas (Singapore Branch), increasing the facility from $150.0 million to $170.0 million. This crude import facility is used to finance purchases of crude feedstock for our refinery. Our ability to borrow additional amounts under this crude import facility expires on June 30, 2007, at which time we expect to have renewed the facility or entered into an alternate funding arrangement. As of December 31, 2006, $52.6 million remained outstanding under the crude import facility. The weighted average interest rate under the crude import facility was 7.3% for the year ended December 31, 2006.

In December 2006, our OPIC secured loan was amended. Under the amendment, the half year principal payments due in December 2006 and June 2007 of $4.5 million each have been deferred until December 31, 2007 and interest payments previously due on December 31, 2006 and June 30, 2007 have been deferred until September 30, 2007. Repayments of interest and principal will recommence on December 31, 2007.

Downstream

Our downstream working capital and capital programs are funded by cash provided by operating activities.

Corporate

On May 4, we entered into a $130.0 million two-year secured loan facility. The initial interest rate under this secured loan facility is 4%, increasing to 10% if we do not enter into an agreement with the lenders under this facility related to the development of a liquefied natural gas facility. We received $65.0 million in gross proceeds on the closing date of this secured loan facility and a further $35.0 million on June 29. A further drawdown of $18.0 million was made in September. A portion of these proceeds was used to repay $25.3 million in principal and interest outstanding under an unsecured loan that we entered into on January 28, 2005. On October 27, $12.0 million, representing the balance available under this facility, was drawn down.

Capital Requirements

The capital requirements for each of our business segments are discussed below. The oil and gas industry is capital intensive and our business plans involve raising additional capital. The availability and cost of such capital is highly dependent on market conditions at the time we raise such capital.

Upstream

We are obligated under our $125.0 million indirect participation agreement entered into in February 2005 to drill eight exploration wells. We completed our third exploration well (Elk-1) in November 2006, pursuant to this indirect participation interest agreement, where drilling costs have increased as a result of a discovery with high pressure gas and gas liquids. The higher costs incurred at the Elk-1 well may be partially offset by the payment of a pending insurance claim under our “Control of Well” policy. We believe the potential recovery under the insurance claim, combined with the funds remaining under the

Management Discussion and Analysis       INTEROIL CORPORATION      33

indirect participation agreement should be sufficient to meet our obligation to drill the remaining five wells under the program; however, in the event we do not recover on our insurance claim, we may require additional capital to complete the program. No assurance can be given that we will be successful in obtaining new sources of capital on terms that are acceptable to us if such new capital is needed. The cost of drilling exploration wells in Papua New Guinea is subject to numerous factors, including the location where such wells are drilled. We believe that we will be able to reduce the cost of future exploration wells; however, if we are unable to drill future exploration wells at a cost per well that is significantly lower than the current cost of the Elk discovery well drilled pursuant to this agreement, we may not have sufficient funds to satisfy our obligations under the indirect participation agreement, and would look to farmout or raise additional capital. However, we can provide no assurances that a farmout will be completed or that the terms of any such farmout will be acceptable to us. As of December 31, 2006, we had incurred $23.6 million in capital expenditures related to the drilling of exploration wells required to be drilled pursuant to the indirect participation interest agreement.

In order to evaluate the discovery of gas and gas liquids disclosed under “Results of Operations - Upstream -Exploration and Production,” we will be required to drill additional appraisal wells. We are not currently permitted to use proceeds raised under our indirect participation interest agreement to drill these wells. As a result, we will be required to obtain the consent of the investors under the indirect participation interest agreement to use these funds to drill non-exploration wells or we will be required to raise additional funds to support this development. We can provide no assurances that we will be able to obtain such approvals or financing on terms that are acceptable to us.

Midstream

We believe that we will have sufficient funds from the proceeds of our secured loan facility entered into on May 4, 2006 to pay our estimated capital expenditures for 2007. As of December 31, 2006, our primary lender for the midstream had agreed to defer interest payable until September 30, 2007 and principal until December 31, 2007 to assist our cash flows. We can give you no assurance that our primary lender will be willing to defer interest or, principal in the future. In addition, while cash flows from operations are expected to be sufficient to cover the costs of operating our refinery and the financing charges incurred under our crude import facility, our refinery may not generate sufficient cash flows to cover all of the interest and principal payments under our secured loan agreements. As a result, we may be required to raise additional capital and/or refinance these facilities in the future. We can provide no assurances that we will be able to obtain such additional capital or that our lenders will agree to refinance these facilities, or, if available, that the terms of any such capital raising or refinancing will be acceptable to us.

Downstream

We believe that our cash flows from operations will be sufficient to meet our estimated capital expenditures for our wholesale and retail distribution business segment for 2007.

Management Discussion and Analysis       INTEROIL CORPORATION       34

Contractual Obligations and Commitments

The following table contains information on payments for contracted obligations due for each of the next five years and thereafter and should be read in conjunction with our financial statements and the notes thereto:

	Payments Due by Period
													More
Contractual obligations			Less		1 – 2		2 – 3		3 – 4		4 – 5		than 5
($ thousands)	Total		than 1 year		years		years		years		years		years
Secured loan obligations		197,666		13,500		130,666		9,000		9,000		9,000		26,500
Accrued financing costs		1,450		363		1,087		—		—		—		—
Acquisition of subsidiary		1,771		1,771		—		—		—		—		—
Indirect participation interest(1)		1,744		731		1,031		—		—		—		—
Indirect participation interest(2)		49,289		12,461		21,087		15,740		—		—		—
Petroleum prospecting and retention licenses(3)		5,237		1,877		3,360		—		—		—		—
Total		257,157		30,703		157,213		24,740		9,000		9,000		26,500

(1)	These amounts represent the estimated cost of completing our commitment to drill exploration wells under our indirect participation interest agreement entered into in July 2003. See Note 18 to our unaudited financial statements for the years ended December 31, 2006, 2005 and 2004.
(2)	These amounts represent the estimated cost of completing our commitment to drill exploration wells under our indirect participation interest agreement entered into in February 2005. See Note 18 to our unaudited financial statements for the years ended December 31, 2006, 2005 and 2004.
(3)	The amount pertaining to the petroleum prospecting and retention licenses represents the amount InterOil has committed to spend to its joint venture partners. In addition to this amount, InterOil must drill an exploration well in Petroleum Prospecting License 237 prior to the end of March 2009 in order to retain this license. As the cost of drilling this well cannot be estimated, it is not included within the above table.

Off Balance Sheet Arrangements

As of December 31, 2006, we did not have any off balance sheet arrangements and did not enter into any during the year 2006, including any relationships with unconsolidated entities or financial partnerships to enhance perceived liquidity.

Transactions with Related Parties

Petroleum Independent and Exploration Corporation, a company owned by Mr. Mulacek, our Chairman and Chief Executive Officer, earned management fees of $150,000 during 2006 (2005 - $150,000). This management fee relates to Petroleum Independent and Exploration Corporation being appointed the General Manager of one of our subsidiaries, S.P. InterOil, LDC.

Breckland Limited provides technical and advisory services to us on normal commercial terms. Roger Grundy, one of our directors, is also a director of Breckland Limited and he provides consulting services to us as an employee of Breckland. Amounts paid or payable to Breckland during the year ended December 31, 2006 amounted to $140,165 (2005 — $179,608).

Amounts due to directors for directors’ fees totaled $18,000 at December 31, 2006 (2005 — $30,500). In 2005 there were executive bonuses of $573,571 (2004 — $320,000); however these were paid in 2006.

Management Discussion and Analysis       INTEROIL CORPORATION       35

Share Capital

Our authorized share capital consists of an unlimited number of common shares with no par value. As of February 28 2007, we had 29,897,847 common shares outstanding and 34,575,761 common shares on a fully diluted basis.

Share Capital	Number of shares
Balance December 31, 2005		29,163,320
Shares issued on exercise of options		132,285
Shares issued on amendment of indirect participation interest (PNGDV)		575,575
Balance December 31, 2006		29,871,180
Shares issued on exercise of options		—
Shares issued on conversion of indirect participation interest		26,667
Balance February 28, 2007		29,897,847
Remaining stock options authorized		1,026,000
Remaining shares issuable upon exercise of warrants		340,247
Remaining conversion rights authorized(1)		3,306,667
Other		5,000
Balance February 28, 2007 Diluted		34,575,761

(1) In 2005, we sold indirect participation working interests in our exploration program. Some of the investors under our indirect participation interest agreement entered into in February 2005 have the right to convert, under certain circumstances, their interest to our common shares. If 100% of the investors under our indirect participation interest agreement choose to convert their interests, we would be required to issue an additional 3,306,667 common shares.

Derivative Instruments

Our revenues are derived from the sale of refined products. Prices for refined products and crude feedstocks are extremely volatile and sometimes experience large fluctuations over short periods of time as a result of relatively small changes in supplies, weather conditions, economic conditions and government actions. Due to the nature of our business, there is always a time difference between the purchase of a crude feedstock and its arrival at the refinery and the supply of finished products to the various markets.

Generally, we are required to purchase crude feedstock two months forward, whereas the supply/export of finished products will take place after the crude feedstock is discharged and processed. Because of this timing difference, there is an impact on our cost of crude feedstocks and the revenue from the proceeds of the sale of products, due to the fluctuation in prices during the time period. Therefore, we use various derivative instruments as a tool to reduce the risks of changes in the relative prices of our crude feedstocks and refined products. Such an activity is better known as Hedging and Risk Management. These derivatives, which we use to manage our price risk, effectively enable us to lock-in the refinery margin such that we are protected in the event that the difference between our sale price of the refined products and the acquisition price of our crude feedstocks contracts are reduced. On the flip side, when we have locked-in the refinery margin and if the difference between our sales price of the refined products vis-à-vis our acquisition price of crude feedstocks expands or increase, then the benefits would be limited to the locked-in margin.

The derivatives instrument which we generally use is the over-the-counter (OTC) swap. The swaps transactions are concluded between counterparties in the derivatives swaps market, unlike futures which are transacted on the IPE and Nymex Exchanges. It is common place among refiners and trading companies in the Asia Pacific market to use derivatives swaps as a tool to hedge their price exposures and margins. Due to the wide usage of derivatives tools in the Asia Pacific region, the swaps market generally provides sufficient liquidity for the hedging and risk management activities. The derivatives swaps instrument covers commodities or products such as jet and kerosene, diesel, naphtha, and also crudes such as Tapis and Dubai. Using these tools, InterOil

Management Discussion and Analysis       INTEROIL CORPORATION       36

actively engages in hedging activities to lock in margins. Occasionally, there is insufficient liquidity in the crude swaps market and we then use other derivative instrument such as Brent futures on the IPE Exchange to hedge our crude costs.

For a description of our current derivative contracts as of December 31, 2006, see Note 7 to our financial statements for the years ended December 31, 2006, 2005, and 2004.

InterOil recognized a net gain of $4.8 million from the use of derivative instruments during 2006. These movements were recorded as a $2.7 million decrease to sales, a $4.9 million decrease to cost of goods sold and a $2.6 million decrease to office and administrative and other expenses.

The fair value of financial instruments are determined by marking the open contracts to market, based on pricing information provided to us by BNP Paribas. As a December 31, 2006, there were no material contracts on which a gain or loss had been deferred. In 2005, there were $0.7 million of contracts on which a gain had been deferred. These contracts settled during 2006 and the actual gains and losses realized are included in the net income movement of $4.8 million described above.

We will continue with our hedging and risk management program in 2007 and we will continue to evaluate new approaches to enhance our hedging arrangement and margin protection.

CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in accordance with Canadian GAAP requires our management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The following accounting policies involve estimates that are considered critical due to the level of sensitivity and judgment involved, as well as the impact on our consolidated financial position and results of operations. The information about our critical accounting estimates should be read in conjunction with Note 2 of the notes to our consolidated financial statements for the year ended December 31, 2006, which summarizes our significant accounting policies.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under the asset and liability method, future tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Future tax assets and liabilities are measured using enacted or substantively enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on future tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the date of enactment or substantive enactment. A valuation allowance is provided against any portion of a future tax asset which will more than likely not be recovered. If actual results differ from the estimates or we adjust the estimates in future periods, we may need to record a valuation allowance. The net deferred income tax assets as of December 31, 2006 and 2005 were $1.4 million and $1.1 million, respectively.

Oil and Gas Properties

We use the successful-efforts method to account for our oil and gas exploration and development activities. Under this method, costs are accumulated on a field-by-field basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred. We continue to carry as an asset the cost of drilling exploratory wells if the required capital expenditure is made and drilling of additional exploratory wells is underway or firmly planned for the near future, or when exploration and evaluation activities have not yet reached a stage to allow reasonable assessment regarding the existence of economical reserves. Capitalized costs for producing wells will be subject to depletion using the units-of-production method. Geological and geophysical costs are expensed as incurred. If our plans change or we adjust our estimates in future periods, a reduction in our oil and gas properties asset will result in a corresponding increase in the amount of our

Management Discussion and Analysis       INTEROIL CORPORATION       37

exploration expenses. The net costs of drilling exploratory wells carried as an asset as of December 31, 2006 and 2005 were $19.2 million and $1.3 million.

Asset Retirement Obligations

Estimated costs of future dismantlement, site restoration and abandonment of properties are provided based upon current regulations and economic circumstances at year end. Management estimates there are no material obligations associated with the retirement of the refinery or with its normal operations relating to future restoration and closure costs. The refinery is located on land leased from the Independent State of Papua New Guinea. The lease expires on July 26, 2097. Future legislative action and regulatory initiatives could result in changes to our operating permits which may result in increased capital expenditures and operating costs.

Environmental Remediation

Remediation costs are accrued based on estimates of known environmental remediation exposure. Ongoing environmental compliance costs, including maintenance and monitoring costs, are expensed as incurred. Provisions are determined on an assessment of current costs, current legal requirements and current technology. Changes in estimates are dealt with on a prospective basis. We currently do not have any amounts accrued for environmental remediation obligations. Future legislative action and regulatory initiatives could result in changes to our operating permits which may result in increased capital expenditures and operating costs.

Impairment of Long-Lived Assets

We are required to review the carrying value of all property, plant and equipment, including the carrying value of oil and gas assets, for potential impairment. We test long-lived assets for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable by the future undiscounted cash flows. If impairment is indicated, the amount by which the carrying value exceeds the estimated fair value of the long-lived asset is charged to earnings. In order to determine fair value, our management must make certain estimates and assumptions including, among other things, an assessment of market conditions, projected cash flows, investment rates, interest/equity rates and growth rates, that could significantly impact the fair value of the asset being tested for impairment. Due to the significant subjectivity of the assumptions used to test for recoverability and to determine fair value, changes in market conditions could result in significant impairment charges in the future, thus affecting our earnings. Our impairment evaluations are based on assumptions that are consistent with our business plans. However, providing sensitivity analysis if other assumptions were used in performing the impairment evaluations is not practicable due to the significant number of assumptions involved in the estimates.

Fair Value of Financial Instruments

We utilize derivative financial instruments in the management of our price exposures for our refined products and crude feedstocks. We disclose the estimated fair value of outstanding hedging contracts as of the end of a reporting period. The estimation of the fair value of certain hedging derivatives requires considerable judgment. The estimate of fair value for our derivative contracts is determined primarily through quotes from financial institutions. Accounting rules for transactions involving derivative instruments are complex and subject to a range of interpretation. The Financial Accounting Standards Board has established the Derivative Implementation Group Task Force, which, on an ongoing basis, considers issues arising from interpretation of these accounting rules. The potential exists that the task force may promulgate interpretations that differ from ours. In this event, our policy would be modified and our deferred hedge gain may be adjusted with a corresponding increase to revenues and expenses. The deferred hedge gains as of December 31, 2006 and 2005 were $nil million and $1.0 million, respectively.

We accounted for $125 million in proceeds received under the indirect participation interest agreement signed in on February 28, 2005 as a non-financial liability with an equity component. In determining the split between liabilities and equity, our management estimated the fair value of the liability and equity components and

Management Discussion and Analysis       INTEROIL CORPORATION      38

allocated the $125.0 million in proceeds from the agreement based on the pro rata share of the fair market value of each component. The calculation of the fair market value of each component was based on a wide range of variables, including the expected timing of expenditures, total overall expenditure, and applicable interest rates. If the liability and equity components were allocated in different amounts, our December 31, 2006 and 2005 accounts may have presented a different accretion expense and/or increased amounts of exploration expenditures. We are currently discussing the accounting treatment adopted with the SEC.

Management is currently liaising with the Securities Exchange Commission (‘SEC’ or ‘Commission’) in relation to comments initially raised by the SEC staff in July 2006 on the Form 40-F filed for the year ended December 31, 2005. The queries are primarily in relation to the accounting treatment of the Indirect Participation Interest agreement # 3 (refer to note 18) as a conveyance in accordance with SFAS 19 — ‘Financial Accounting and Reporting by Oil and Gas Producing Companies’. The SEC staff have also raised comments about other issues related to the accounting treatment of Indirect Participation Interest agreement # 3 such as the bifurcation of the derivative, the fair value methodologies applied and the application of accretion expense. Discussions regarding the 2005 Form 40-F are ongoing and may result in modifications to that document or to this Form 40-F. The Company will continue to work with the SEC to reach resolution of any outstanding issues and will provide updates if any material developments occur. Any changes based on the revised accounting treatment, if made, will not affect the cash position of the Company.

Legal and Other Contingent Matters

We are required to determine whether a loss is probable based on judgment and interpretation of laws and regulations and whether the loss can reasonably be estimated. When the amount of a contingent loss is determined it is charged to earnings. Our management continually monitor known and potential contingent matters and make appropriate provisions by charges to earnings when warranted by circumstances.

NEW ACCOUNTING STANDARDS

Comprehensive Income, Financial Instruments and Hedges

In April 2005, the CICA released three new Handbook sections which deal with the recognition and measurement of financial instruments:

• Section 1530, Comprehensive Income;

• Section 3855, Financial Instruments — Recognition and Measurement; and

• Section 3865, Hedges.

The new standards are an attempt to harmonize Canadian GAAP with U.S. GAAP. Initial measurement of all financial instruments is to be based on their fair values. The subsequent measurement of the financial instrument will depend on whether it is classified as a loan or receivable; held to maturity investment; available for sale financial asset; held for trading asset or liability; or, other financial liability. Available for sale financial assets and held for trading assets or liabilities are measured at fair value on an ongoing basis. The other financial instruments are recognized at amortized cost using the effective interest method. The gains and losses on held for trading financial instruments are recognized immediately in net income. The gains and losses on available for sale financial assets will be recognized in other comprehensive income and are transferred to net income when the asset is derecognized.

Other comprehensive income is a new equity category where revenues, expenses, gains and losses are temporarily presented outside of net income but included in comprehensive income. Unrealized gains or losses on qualifying hedging instruments and available for sale financial assets are included in other comprehensive income and reclassified to net income when realized.

Hedge accounting continues to be an option and the new Handbook section provides detailed guidance on the application of hedge accounting and the required disclosures.

These new standards are effective for fiscal years beginning on or after October 1, 2006. We expect to adopt the pending accounting standards on January 1, 2007. The impact of this standard on our financial statements will be as follows:

Management Discussion and Analysis       INTEROIL CORPORATION      39

Section 1530, Comprehensive Income:

The new standard would require InterOil to present comprehensive income and its components in a financial statement with the same prominence as other financial statements. Effective January 1, 2007, all quarterly and annual financial statements issued by InterOil would display a new statement — ‘Statement of Comprehensive Income’ which would reconcile the net income/loss for the period to the Comprehensive Income for the period.

Statement of Comprehensive Income	Years ended December 31,
($ thousands)	2006			2005			2004
Net Loss		(43,386	)		(39,282	)		(52,940	)
Foreign currency translation reserve, net of tax		1,019			14			463
Deferred hedge gain, net of tax		—			—			—
Other Comprehensive Income		1,019			14			463
Comprehensive Income		(42,367	)		(39,268	)		(52,477	)

As per the transitional provisions of the standard, only the foreign currency translation reserve will be disclosed in the periods prior to 2007. In 2007, deferred hedge gain/losses will also be reported as a separate line item under other comprehensive income.

Section 3855, Financial Instruments — Recognition and Measurement:

InterOil will provide some additional disclosures relating to financial instruments as a result of this new standard and will also change its method for accounting for hedges described below.

Section 3865, Hedges:

This standard will require InterOil to reclassify the deferred hedge gains/(losses) line item from the liabilities section to shareholder’s equity as accumulated other comprehensive income. The new standard also requires that the portion of the hedge gain or loss that is effective be recognized in other comprehensive income while the ineffective portion of the gain or loss would be recognized immediately in net income. Currently, InterOil defers the full amount of the gain or loss. The standard will be prospectively applied from January 1, 2007 and in accordance with the transitional provisions the prior period comparatives will not be restated.

Management Discussion and Analysis       INTEROIL CORPORATION       40

NON-GAAP MEASURES RECONCILIATION

The following table reconciles net income (loss), a Canadian generally accepted accounting principles measure, to EBITDA, a non-GAAP measure for each of the last eight quarters.

Quarters ended	2006(2),(3)												2005 (adjusted)(1),(2)
($ thousands) (unaudited)	Dec 31			Sep 30			Jun 30			Mar 31			Dec 31			Sep 30			Jun 30			Mar 31
Earnings before interest, taxes, depreciation and amortization		6,541			1,140			(10,257	)		(9,105	)		(5,566	)		3,486			(6,856	)		(5,858	)
Upstream		(1,051	)		(1,337	)		(2,262	)		(2,227	)		(2,362	)		(1,655	)		(2,615	)		(1,603	)
Midstream — Refining and Marketing		9,144			1,674			(8,188	)		(5,230	)		(6,333	)		6,070			(6,796	)		(3,405	)
Midstream — Liquefaction		(396	)		(298	)		—			—			—			—			—			—
Downstream		1,143			1,954			3,559			(326	)		3,963			2,522			2,550			584
Corporate & Consolidated		(2,299	)		(853	)		(3,366	)		(1,322	)		(834	)		(3,451	)		5			(1,434	)
Subtract:
Interest expense		5,649			5,349			3,609			2,666			2,989			2,455			2,996			2,547
Upstream		2			1			1			1			(6	)		2			2			2
Midstream — Refining and Marketing		2,479			3,329			2,731			2,342			2,756			2,320			2,735			2,351
Midstream — Liquefaction		—			—			—			—			—			—			—			—
Downstream		37			38			39			38			44			42			140			—
Corporate & Consolidated		3,131			1,981			838			285			195			91			119			194
Income taxes & non-controlling interest		1,049			244			1,031			(245	)		910			1,000			301			253
Upstream		—			—			—			—			—			—			—			—
Midstream — Refining and Marketing		42			(46	)		(137	)		(118	)		(129	)		19			(333	)		81
Midstream — Liquefaction		—			—			—			—			—			—			—			—
Downstream		996			416			1,005			(144	)		1,062			965			570			159
Corporate & Consolidated		11			(126	)		163			17			(23	)		16			64			13
Depreciation & amortization		3,554			3,100			2,862			2,837			2,700			2,943			2,699			2,695
Upstream		233			202			173			198			96			213			2			3
Midstream — Refining and Marketing		2,805			2,700			2,626			2,598			2,662			2,663			2,641			2,632
Midstream — Liquefaction		—			—			—			—			—			—			—			—
Downstream		537			222			89			62			55			55			51			43
Corporate & Consolidated		(21	)		(24	)		(26	)		(21	)		(113	)		12			5			17
Net income (loss) per segment(1)		(3,711	)		(7,553	)		(17,759	)		(14,363	)		(12,165	)		(2,912	)		(12,852	)		(11,353	)
Upstream		(1,286	)		(1,540	)		(2,436	)		(2,426	)		(2,452	)		(1,870	)		(2,619	)		(1,608	)
Midstream — Refining and Marketing		3,818			(4,309	)		(13,408	)		(10,052	)		(11,622	)		1,068			(11,839	)		(8,469	)
Midstream — Liquefaction		(396	)		(298	)		—			—			—			—			—			—
Downstream		(427	)		1,278			2,426			(282	)		2,802			1,460			1,789			382
Corporate & Consolidated		(5,420	)		(2,684	)		(4,341	)		(1,603	)		(893	)		(3,570	)		(183	)		(1,658	)

Management Discussion and Analysis       INTEROIL CORPORATION       41

(1)	Comparative quarterly results for all quarters during 2005 have been adjusted and re-presented to include the adopted accounting treatment for exploration expenses associated with our $125 million Indirect Participation Interest Agreement entered into in February 2005 as reviewed by our auditors in the third quarter of 2005. The adjusted results present the quarterly financial information as if the indirect participation interest accounting policy we adopted during the third quarter of 2005 had been adopted at the inception of the agreement. See Note 23 to our unaudited financial statements for the three and nine month periods ended September 30, 2006 and 2005.
(2)	Our comparative quarterly results for all quarters during 2005 and 2006 have been represented to conform with the presentation adopted at December 31, 2006. Previously, interest revenue and non-controlling interest were allocated to the corporate segment. Amounts associated with these line items are now included in each operating segments result.
(3)	Our September 2006 quarterly results have been represented to separate out our Midstream-Liquefaction segment from the Midstream Refining and Marketing segment.

STATEMENT REGARDING DISCLOSURE CONTROLS

As of December 31, 2006, an evaluation was carried out, under the supervision of and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures as defined under Multilateral Instrument 52-109. Based on the evaluation, the Chief Executive Officer and Chief Financial Officer identified three control deficiencies in the Company’s internal controls over financial reporting as of December 31 2006. These control deficiencies, their potential effects on the financial statements, and the Company’s plans for remediation have been described in Management’s S404 Certification.

PUBLIC SECURITIES FILINGS

You may access additional information about us, including our Annual Information Form, which is filed with the Canadian Securities Administrators at www.sedar.com, and our Form 40-F, which is filed with the U.S. Securities and Exchange Commission at www.sec.gov.

GLOSSARY OF TERMS

Barrel, Bbl (petroleum) Unit volume measurement used for petroleum and its products; 1 barrel = 42 US gallons, 35 Imperial gallons (approx.), or 159 liters (approx.); 7.3 barrels = 1 ton (approx.); 6.29 barrels = 1 cubic meter = 35.32 cubic feet.

Condensate A component of natural gas which is a liquid at surface conditions.

Crack spread The simultaneous purchase or sale of crude against the sale or purchase of refined petroleum products. These spread differentials which represent refining margins are normally quoted in dollars per barrel by converting the product prices into dollars per barrel and subtracting the crude price.

EBITDA Earnings before interest, taxes, depreciation and amortization. EBITDA represents net income/(loss) plus total interest expense (excluding amortization of debt issuance costs), income tax expense, depreciation and amortization expense. EBITDA is used to analyze operating performance.

Farmout A contractual agreement with an owner who holds a working interest in an oil and gas lease to assign all or part of that interest to another party in exchange for fulfilling contractually specified conditions. The farmout agreement often stipulates that the other party must drill a well to a certain depth, at a specified location, within a certain time frame; furthermore, the well typically must be completed as a commercial producer to earn an assignment. The assignor of the interest usually reserves a specified overriding royalty interest, with the option to convert the overriding royalty interest to a specified working interest upon payout of drilling and production expenses

Management Discussion and Analysis       INTEROIL CORPORATION       42

Feedstock Raw material used in a processing plant.

GAAP Generally accepted accounting principles.

IPF InterOil Power Fuel. InterOil’s marketing name for low sulphur waxy residue oil.

IPP Import Parity Price. For each refined product produced and sold locally in Papua New Guinea, IPP is calculated by adding the costs that would typically be incurred to import such product to the average posted price for such product in Singapore as reported by Platts. The costs that are added to the reported Platts price include freight costs, insurance costs, landing charges, losses incurred in the transportation of refined products, demurrage and taxes.

LNG Liquefied natural gas. Natural gas converted to a liquid state by pressure and severe cooling, then returned to a gaseous state to be used as fuel. Acceptable first reference abbreviation. LNG is moved in tankers, not via pipelines. LNG, which is predominantly methane, artificially liquefied, is not to be confused with NGLs, natural gas liquids, heavier fractions which occur naturally as liquids. See also natural gas.

LPG Liquefied petroleum gas, typically ethane, propane butane and isobutane. Usually produced at refineries or natural gas processing plants, including plants that fractionate raw natural gas plant liquids. LPG can also occur naturally as a condensate.

LSWR Low sulfur waxy residual fuel oil.

Mark-to-market To revalue futures/option positions using current market prices to determine profit/loss. The profit/loss can then be paid, collected or simply tracked daily.

Naphtha That portion of the distillate obtained in the refinement of petroleum which is intermediate between the lighter gasoline and the heavier benzene, and has a specific gravity of about 0.7, used as a solvent for varnishes, illuminant, etc.

Natural gas A naturally occurring mixture of hydrocarbon and non-hydrocarbon gases found in porous geological formations beneath the earth’s surface, often in association with petroleum. The principal constituent is methane.

Natural gas measurements The following are some of the standard abbreviations used in natural gas measurement.

Mcf: standard abbreviation for 1,000 cubic feet.
Bil cu ft: Billion cubic feet. Also abbreviated to bcf.
Tcf: trillion cubic feet.

PGK Currency of Papua New Guinea

PPL Petroleum Prospecting License. The tenement given by the Independent State of Papua New Guinea to explore for oil and gas.

PRL Petroleum Retention License. The tenement given by the Independent State of Papua New Guinea to allow the licensee holder to evaluate the commercial and technical options for the potential development of an oil and/or gas field.

Sweet/sour crude Definitions which describe the degree of a given crude’s sulfur content. Sour crudes are high in sulfur, sweet crudes are low.

Management Discussion and Analysis       INTEROIL CORPORATION       43

EX-99.4

 
PricewaterhouseCoopers

ABN 52 780 433 757

Freshwater Place

2 Southbank Boulevard

SOUTHBANK VIC 3006

GPO Box 1331L

MELBOURNE VIC 3001

DX 77

Website:www.pwc.com/au

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Annual Report on Form 40-F and the incorporation by reference in the Registration Statements on Form S-8 (No. 333-124167), Form F-10/A (No. 333-120383) and Form F-10/A (No. 333-124641) of Interoil Corporation of our report dated March 30, 2007 relating to the consolidated balance sheet as of December 31, 2006 and the consolidated statements of operations, shareholders’ equity and cash flows for the year ended December 31, 2006, which are incorporated by reference to Exhibit 4 of the Annual Report on Form 40-F dated March 30, 2007.

PricewaterhouseCoopers
Melbourne, Australia
March 30, 2007

EX-99.5

Consent of Independent Registered Public Accounting Firm
 

The Board of Directors
InterOil Corporation

We consent to the use of our report dated March 4, 2005 included in this annual report on Form 40-F, to be filed with the United States Securities and Exchange Commission pursuant to the Securities and Exchange Act of 1934, as amended, and as incorporated by reference in registration statements (No.333-120383 and No.333-124641) on Form F-10 and registration statement on Form S-8 (No.333-124617) of InterOil Corporation.

KPMG

Brisbane, Australia
March 30, 2007

EX-99.6

EXECUTION COPY

CREDIT AGREEMENT

by and among

INTEROIL CORPORATION
as Borrower

The LENDERS Party Hereto

MERRILL LYNCH CAPITAL CORPORATION
as Administrative Agent

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
and
CLARION FINANZ AG
as Co-Lead Arrangers and Co-Bookrunners, and

MERRILL LYNCH CAPITAL CORPORATION
as Collateral Agent

May 4, 2006

US $100,000,000 Senior Secured Tranche A Loan Facility
US $30,000,000 Senior Secured Tranche B Loan Facility

TABLE OF CONTENTS

		Page
ARTICLE 1 DEFINITIONS			1
Section 1.1	Definitions		1
Section 1.2	Accounting Terms and Determinations		18
Section 1.3	Types of Borrowings		18
ARTICLE 2 THE LOANS			19
Section 2.1	Commitments to Lend		19
Section 2.2	Loans and Borrowings		20
Section 2.3	Notice of Borrowing		20
Section 2.4	Notice to Lenders; Funding of Loans		20
Section 2.5	Administration of Notes		21
Section 2.6	Maturity of Loans		21
Section 2.7	Interest Rates		21
Section 2.8	Fees		22
Section 2.9	Termination or Reduction of Commitment		22
Section 2.10	Optional Prepayments		22
Section 2.11	Mandatory Prepayment		23
Section 2.12	General Provisions as to Payments		23
Section 2.13	Funding Losses		24
Section 2.14	Computation of Interest and Fees		24
ARTICLE 3 CONDITIONS			24
Section 3.1	Closing		24
Section 3.2	Each Credit Event		25
ARTICLE 4 REPRESENTATIONS AND WARRANTIES			26
Section 4.1	Existence and Business; Power and Authorization; Enforceable Obligations		26
Section 4.2	No Violation		27
Section 4.3	Litigation		27
Section 4.4	Financial Information		27
Section 4.5	Material Adverse Change		27
Section 4.6	Use of Proceeds; Margin Regulations		27
Section 4.7	Governmental Approvals		27
Section 4.8	Investment Company Act		28
Section 4.9	No Default		28
Section 4.10	Taxes		28
Section 4.11	Foreign Taxes		28
Section 4.12	Ownership of Property; Liens		28
Section 4.13	Accuracy and Completeness of Information		28
Section 4.14	Environmental Matters		28
Section 4.15	Significant Subsidiaries		29
Section 4.16	Solvency		29

i

		Page
Section 4.17	Existing Committed Facilities; Existing Clarion Facility		29
Section 4.18	Capitalization and Assets of Certain Subsidiaries		29
ARTICLE 5 AFFIRMATIVE COVENANTS			29
Section 5.1	Information Covenants		30
Section 5.2	Books, Records and Inspections		31
Section 5.3	Payment of Taxes		31
Section 5.4	Compliance with Law		31
Section 5.5	Existence, Etc		32
Section 5.6	Insurance		32
Section 5.7	Maintenance of Property		32
Section 5.8	Ownership of Subsidiaries		32
Section 5.9	Repayment of Existing Clarion Facility		32
Section 5.10	New Subsidiaries		32
Section 5.11	Performance of LNG/NGL Project MOU		33
Section 5.12	IPL Secutrity Documents and SPI Pledge Agreement		33
ARTICLE 6 NEGATIVE COVENANTS			33
Section 6.1	Restriction on Fundamental Changes		33
Section 6.2	Transactions with Affiliates		34
Section 6.3	Indebtedness		34
Section 6.4	Liens		34
Section 6.5	Use of Proceeds; Margin Regulations		34
Section 6.6	Environmental Matters		34
Section 6.7	Leverage Ratio		34
Section 6.8	Fixed Charge Coverage Ratio		34
Section 6.9	S.P.I. Distribution Limited Accounts		35
ARTICLE 7 LNG/NGL PROJECT PARTICIPATION			35
Section 7.1	LNG/NGL Project MOU		35
Section 7.2	Definitive LNG/NGL Project Agreement		35
ARTICLE 8 NOTICE OF AMENDMENTS AND WAIVERS			35
Section 8.1	Solicitation of Lenders		35
ARTICLE 9 EVENTS OF DEFAULT; REMEDIES			36
Section 9.1	Events of Default		36
Section 9.2	Rights and Remedies		37
Section 9.3	Additional Rights and Remedies		37
ARTICLE 10 THE AGENTS			38
Section 10.1	Appointment and Authorization		38
Section 10.2	Administrative Agent and Affiliates		38
Section 10.3	Action by Administrative Agent		38
Section 10.4	Consultation with Experts		38
Section 10.5	Liability of Administrative Agent		39
Section 10.6	Indemnification		39

ii

		Page
Section 10.7	Credit Decision		39
Section 10.8	Successor Administrative Agent		39
Section 10.9	Agents/Fees		40
Section 10.10	Other Agents		40
ARTICLE 11 CHANGE IN CIRCUMSTANCES			40
Section 11.1	Increased Cost and Reduced Return		40
Section 11.2	Taxes		41
ARTICLE 12 MISCELLANEOUS			42
Section 12.1	Notices		42
Section 12.2	No Waivers		43
Section 12.3	Expenses; Indemnification		43
Section 12.4	Sharing of Set-offs		43
Section 12.5	Amendments and Waivers		44
Section 12.6	Successors and Assigns		44
Section 12.7	Collateral		46
Section 12.8	Governing Law; Submission to Jurisdiction		46
Section 12.9	Counterparts; Integration; Effectiveness		46
Section 12.10	WAIVER OF JURY TRIAL		46
Section 12.11	Usury Savings Clause		46

Schedules:

    Commitment Schedule

Schedule 1.1	–	Significant Subsidiaries
Schedule 2.2(c)	–	Use of Proceeds
Schedule 4.3	–	Litigation
Schedule 4.7	–	Governmental Approvals
Schedule 6.2	–	Transactions With Affiliates

Exhibits:

Exhibit A-1	–	Form of Tranche A Note
Exhibit A-2	–	Form of Tranche B Note
Exhibit B	–	Form of Assignment and Assumption Agreement
Exhibit C	–	Form of Engagement Letter
Exhibit D-1	–	Form of Guaranty Agreement
Exhibit D-2	–	Form of IPL Guaranty Agreement
Exhibit E	–	Form of Pledge Agreement
Exhibit F	–	Form of IPL Security Agreement (Fixed and Floating Charge)
Exhibit G	–	Form of LNG/NGL Project MOU

iii

     THIS CREDIT AGREEMENT is dated as of May 4, 2006 by and among INTEROIL CORPORATION, as Borrower, the LENDERS party hereto, MERRILL LYNCH CAPITAL CORPORATION, as Administrative Agent, MERRILL LYNCH PIERCE, FENNER & SMITH INCORPORATED and CLARION FINANZ AG, as Co-Lead Arrangers and Co-Bookrunners, and MERRILL LYNCH CAPITAL CORPORATION, as Collateral Agent.

RECITALS

     A. The Borrower has requested that the Lenders establish a credit facility providing for the Tranche A Loans and the Tranche B Loans, the proceeds of which are to be used in accordance with Section 2.2(c), all as further described herein; and

     B. The Lenders are willing to make such credit facility available upon and subject to the terms and conditions hereinafter set forth, including the obligation of the Guarantors to provide the Guaranty Agreements in accordance with Section 3.1(c);

          NOW, THEREFORE, the parties hereto agree as follows:

ARTICLE 1
DEFINITIONS

     Section 1.1 Definitions. The following terms, as used herein, have the following meanings:

     “Adjusted Consolidated Debt” means, without duplication, (a) Indebtedness which is or should be reflected on a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, minus (b) to the extent reflected as assets on a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, the sum of all (a) direct obligations of the United States of America, or of any agency thereof, or obligations guaranteed as to principal and interest by the United States of America, or of any agency thereof, in either case maturing not more than 180 Days from the date of acquisition thereof by such Person; (b) cash; (c) time deposits, bankers acceptances or certificates of deposit issued by a Restricted Lender maturing not more than 180 Days from the date of acquisition thereof; (d) commercial paper rated A-2 or better or P-2 or better by S&P or Moody’s, respectively, maturing not more than 180 Days from the date of acquisition thereof; and (e) other debt obligations rated at least A- by S&P or A3 by Moody’s maturing not more than 180 Days from the date of acquisition thereof.

     “Administrative Questionnaire” means, with respect to each Lender, an administrative questionnaire in the form prepared by the Administrative Agent, completed by such Lender and returned to the Administrative Agent (with a copy to the Borrower).

     “Affiliate” means, with respect to any Person, any other Person directly or indirectly controlling, controlled by, or under direct or indirect common control with such Person. For purposes of this definition, a Person will be deemed to control another Person if such Person possesses, directly or indirectly, the power to (a) vote 50% or more of the securities having ordinary voting power for the election of directors of such other Person or (b) direct or cause the direction of the management and policies of such other Person, whether through the ownership of voting securities, by contract or otherwise.

     “Administrative Agent” means Merrill Lynch in its capacity as administrative agent for the Lenders hereunder, and its successors in such capacity.

     “Agent” means either of the Administrative Agent, the Syndication Agent or the Collateral Agent.

     “Applicable Interest Rate” means, (a) in respect of the period commencing on the Effective Date and ending on the fourth Quarterly Payment Date thereafter, the rate of four percent (4%) per annum; and (b) for the period commencing on the first Day following the fourth Quarterly Payment Date, the rate of ten percent (10%) per annum; provided however, that in the event that the Definitive LNG/NGL Project Agreement is executed and delivered on or prior to the fourth Quarterly Payment Date, the Applicable Interest Rate for the period referenced in sub-clause (b) above shall be the rate of four percent (4%) per annum.

     “Applicable Lending Office” means, with respect to any Lender, its office located at its address set forth in its Administrative Questionnaire (or identified in its Administrative Questionnaire as its Applicable Lending Office) or such other office as such Lender may hereafter designate as its Applicable Lending Office by notice to the Borrower and the Administrative Agent.

     “Approved Private Offering” has the meaning set forth in Section 9.3.

     “Approved Public Offering” has the meaning set forth in Section 9.3.

     “Assignee” has the meaning set forth in Section 12.6(c).

     “Authorized Officer” means (a) with respect to any Person that is a corporation, the chief executive officer, the president, any executive vice president, any senior vice president, any vice president, the treasurer, or the chief financial officer of such Person, (b) with respect to any Person that is a partnership, the president, any executive vice president, any senior vice president, any vice president, the treasurer or the chief financial officer of a general partner of such Person, (c) with respect to any Person that is a limited liability company, the president, any executive vice president, any senior vice president, any vice president, the treasurer or the chief financial officer of a member of such Person, or (d) with respect to any other Person, such representative of such Person that is approved by the Administrative Agent in writing. No Person will be deemed to be an Authorized Officer until named on a certificate of incumbency of such Person delivered to the Administrative Agent on or after the Effective Date.

     “Bankruptcy Law” means any applicable Law relating to bankruptcy or insolvency (including any Law providing for the reorganization of a debtor that has become bankrupt or insolvent), which in the United States means Title 11, Section 101 et seq. of the United States Code titled “Bankruptcy,” as amended from time to time, and any successor statute thereto.

     “Beneficiary” means the Administrative Agent, the Collateral Agent and the Lenders.

     “Borrower” means InterOil Corporation, a Canadian corporation, and its successors.

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     “Borrower Pledge Agreement” means that certain Pledge Agreement dated as of May 4, 2006 made by the Borrower in favor of the Collateral Agent, and covering all of the Borrower’s ownership interests in S.P.I. Distribution Limited, in substantially the form attached as Exhibit E.

     “Borrower’s 2005 Form 40-F” means the Borrower’s annual report on Form 40-F for 2005, as filed with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934.

     “Borrowing” has the meaning set forth in Section 1.3.

     “Business Day” means any Day except a Saturday, Sunday or other Day on which commercial Lenders in New York City are authorized or required by law to close.

     “Capital Lease” means any lease which in accordance with GAAP is required to be capitalized on a consolidated balance sheet of the Borrower and its Consolidated Subsidiaries, and for purposes of this Agreement, the amount of these obligations will be the amount so capitalized.

     “Change of Control” will be deemed to have occurred at such time as any Person or any Persons acting together which would constitute a “group” (a “Group”) for purposes of Section 13(d) of the Securities Exchange Act becomes the beneficial owner of 50% or more of the total voting power of all classes of voting shares of the Borrower or such Person or Group succeeds in having sufficient of its nominees elected to the board of directors of the Borrower such that such nominees, when added to any existing director remaining on the board of directors of the Borrower after such election who is an Affiliate of such Group, will constitute a majority of the board of directors of the Borrower.

     “Clarion Finanz” means Clarion Finanz AG, a corporation organized under the laws of Switzerland, together with its nominee Pacific LNG Operations Ltd., a British Virgin Islands corporation, and their respective successors and assigns.

     “Closing Date” means the date of the initial Borrowing of Tranche A Loans.

     “Code” means the Internal Revenue Code of 1986, as amended from time to time, and any successor statute.

     “Collateral Agency Agreement” means the Collateral Agency Agreement dated as of May 4, 2006 by and between the Borrower, the Debt Service Reserve Agent, the Administrative Agent and the Collateral Agent.

     “Collateral Agent” means Merrill Lynch, in its capacity as collateral agent pursuant to the Collateral Agency Agreement.

     “Commitment” means, collectively, the Tranche A Loan Commitment and the Tranche B Loan Commitment.

     “Commitment Fee” means an amount equal to 3.5% of the Tranche A Loan Commitment and 3.5% of each Borrowing of Tranche B Loans.

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     “Commitment Increase” means any increase in the committed amount of loans and letters of credit available to the applicable borrower under any of the Existing Committed Facilities. For purposes of clarity, no increase in (i) the borrowing base or similar borrowing formula, if any, or (ii) the outstanding amount of loans or letters of credit, shall be or be deemed to be a “Commitment Increase” hereunder so long as such increased amounts remain less than or equal to the commitment amount existing as of the Effective Date under each applicable Existing Committed Facility.

     “Consolidated Cash Interest Expense” means, for any period, Consolidated Interest Expense excluding, however, interest expense not payable in cash (including amortization of discount).

     “Consolidated EBITDA” means, for any period, the sum of (a) Consolidated Net Income for such period plus (b) to the extent deducted in the determination of such Consolidated Net Income, (i) provisions for taxes based on income, (ii) Consolidated Interest Expense, (iii) depreciation, (iv) amortization, (v) exploration costs, (vi) impairment expenses, and (vii) accretion expenses, all as determined on a consolidated basis for the Borrower and its Consolidated Subsidiaries.

     “Consolidated Interest Expense” means, for any period, total interest expense (including that portion attributable to Capital Leases in accordance with GAAP and capitalized interest that is payable in cash), net of interest income, of the Borrower and its Consolidated Subsidiaries on a consolidated basis with respect to all outstanding Indebtedness of the Borrower and its Consolidated Subsidiaries, including without limitation, all commissions, discounts, other fees and charges owed with respect to letters of credit and bankers acceptance financing.

     “Consolidated Net Income” means, for any period, the net income (or loss) of the Borrower and its Consolidated Subsidiaries for such period; provided that there shall be excluded from such calculation (a) any after-tax gains or losses attributable to asset sales (other than sales in the ordinary course of business) or returned surplus assets of any employee benefit plan and (b) to the extent not included in clause (a), any net extraordinary gains or net extraordinary losses.

     “Consolidated Net Tangible Assets” means at any date the total consolidated assets of the Borrower and its Consolidated Subsidiaries less all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangible items.

     “Consolidated Net Worth” means, at any date, the sum of the consolidated shareholders’ equity of the Borrower and its Consolidated Subsidiaries (including the conversion option associated with the IPI Agreements), determined as of such date, all computed in conformity with GAAP.

     “Consolidated Subsidiary” means at any date any Subsidiary or other entity the accounts of which would be consolidated with those of the Borrower in its consolidated financial statements if such statements were prepared as of such date.

     “Contest” means, with respect to any tax, Lien, or claim, a contest pursued in good faith and by appropriate proceedings diligently conducted or pursued by other reasonable methods, so

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long as the failure to pay or discharge any such tax, Lien or claim during the pendency of such contest would not otherwise have a Material Adverse Effect on the Person subject to any such tax, Lien or claim.

     “Contingent Obligation” means, with respect to any Person, any obligation of such Person guaranteeing or intended to guarantee any Indebtedness (“primary obligations”) of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor from the primary obligee, (b) to advance or supply funds (i) for the payment of any such primary obligation or (ii) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the primary obligee of the ability of the primary obligor to make payment of such primary obligation but excluding agreements on the part of such Person to supply crude oil or petroleum products or feedstock, or (iv) otherwise to assure or hold harmless the primary obligee against loss in respect of such primary obligation; provided, however, that the term Contingent Obligation does not include endorsements of instruments for deposit or collection in the ordinary course of business.

     “Currency Agreement” means any foreign exchange contract, currency swap agreement, futures contract, option contract, synthetic cap or other similar agreement or arrangement, each of which is for the purpose of hedging the foreign currency risk associated with the Borrower’s and its Subsidiaries’ operations and not for speculative purposes.

     “Day” or “Daily” shall mean a 24-hour period commencing at 12:01 A.M. local time and extending until 12:01 A.M. local time on the following Day.

     “Debt Service Reserve Account” means the account established and maintained pursuant to the Collateral Agency Agreement and entitled “Debt Service Reserve Account.”

     “Debt Service Reserve Amount” means the cash sum of the next two scheduled payments of interest at the Applicable Interest Rate on the applicable Quarterly Payment Dates pursuant to this Agreement.

     “Debt Service Reserve Agent” means Merrill Lynch, Pierce, Fenner & Smith Incorporated, and its successors and assigns.

     “Default” means any event, act or condition which constitutes an Event of Default or which with notice or lapse of time, or both, would constitute an Event of Default.

     “Default Rate” means the lower of (a) the Applicable Interest Rate plus 4% and (b) the Highest Lawful Rate.

     “Definitive LNG/NGL Project Agreement” has the meaning set forth in Section 7.2.

     “Dollars” and “US$” each mean lawful money of the United States.

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     “Effective Date” means the date this Agreement becomes effective in accordance with Section 12.9.

     “Engagement Letter” means the engagement agreement to be entered into by and among the Borrower and Merrill Lynch, Pierce, Fenner & Smith Incorporated or its designated Affiliate, and Clarion Finanz, relating to certain potential securities offerings by the Borrower or its Subsidiaries, with such Engagement Letter to be in the form attached as Exhibit C.

     “Environmental Approvals” means any Governmental Approvals required under applicable Environmental Laws.

     “Environmental Claim” means any written notice, claim, demand or similar communication by any Person alleging potential liability (including, without limitation, potential liability for investigatory costs, cleanup costs, governmental response costs, natural resources damages, property damages, personal injuries, fines or penalties) arising out of, based on or resulting from (a) the presence, or release into the environment, of any Material of Environmental Concern at any location, whether or not owned by such Person or (b) circumstances forming the basis of any violation, or alleged violation, of any Environmental Law or Environmental Approval.

     “Environmental Laws” means all Laws relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata), including, without limitation, Laws relating to emissions, discharges, releases or threatened releases of Materials of Environmental Concern, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environmental Concern.

     “Equity Interests” means shares of capital stock, partnership interests, membership interests in a limited liability company, beneficial interests in a trust or other equity ownership interests in a Person.

     “Event of Bankruptcy” means, with respect to any Person, the occurrence of any of the following events:

     (a) the commencement by such Person of a voluntary case concerning itself under a Bankruptcy Law or similar Law;

     (b) an involuntary case is commenced against such Person and the petition is not controverted within 30 Days, or is not dismissed within 60 Days, after commencement of the case;

     (c) a custodian (as defined in the applicable Bankruptcy Law) is appointed for, or takes charge of, all or substantially all of the property of such Person or such Person commences any other proceedings under any reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar Law of any jurisdiction whether now or hereafter in effect relating to such Person or there is commenced against such Person any such proceeding which remains undismissed for a period of 60 Days;

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     (d) the entrance of any order for relief or other order approving any such case or proceeding involving such Person;

     (e) such Person is adjudicated insolvent or bankrupt;

     (f) such Person suffers any appointment of any custodian or the like for it or any substantial part of its property to continue undischarged or unstayed for a period of 60 Days;

     (g) such Person makes a general assignment for the benefit of creditors;

     (h) such Person shall fail to pay, or shall state that it is unable to pay, or shall be unable to pay, its debts generally as they become due; or

     (i) such Person shall by any act or failure to act consent to, approve of or acquiesce in any of the foregoing for a period of 60 Days.

     “Event of Default” means the occurrence of any of the events described in Section 9.1.

     “Existing Clarion Facility” means the letter loan agreement entered into on or about January 28, 2005, as amended by letter amendment dated July 21, 2005, by and between Clarion Finanz and the Borrower.

     “Existing Committed Facilities” means (a) the Existing Revolver Facility and (b) the Existing OPIC Facility.

     “Existing OPIC Facility” means the Loan Agreement dated as of June 12, 2001 by and between E.P. InterOil, Ltd. and OPIC, and all other security agreements, mortgages, pledge agreements, guaranties, documents, instruments, and other agreements executed and delivered in connection therewith or relating thereto, as the same may be amended, modified or supplemented from time to time, and any successor credit facility refinancing all or a portion thereof, in all cases subject to Section 6.3.

     “Existing Revolver Facility” means the Credit Agreement dated as of August 12, 2005, by and between E.P. InterOil, Ltd. and BNP Paribas, Singapore Branch thereto and Morgan Guaranty Trust, and all other security agreements, mortgages, pledge agreements, guaranties, documents, instruments, and other agreements executed and delivered in connection therewith or relating thereto as the same may be amended, modified, or supplemented from time to time, and any successor credit facility refinancing all or a portion thereof, in all cases subject to Section 6.3.

     “Facility Agency Fee” means an annual fee equal to $100,000, and paid by the Borrower to the Administrative Agent in accordance with Section 2.8(b).

     “Federal Funds Rate” means, for any day, the rate per annum (rounded upward, if necessary, to the nearest 1/100th of 1%) equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the

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Domestic Business Day next succeeding such day; provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (ii) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate used and quoted by Merrill Lynch, Pierce, Fenner & Smith Incorporated and its Affiliates on such day on overnight Federal funds transactions as determined by the Agent.

     “Fiscal Quarter” means a fiscal quarter of the Borrower.

     “Fiscal Year” means a fiscal year of the Borrower.

     “Fixed Charge Coverage Ratio” means, with respect to any fiscal period, the ratio of (a) Consolidated EBITDA to (b) the sum of Consolidated Cash Interest Expense, scheduled principal payments on Indebtedness (excluding unscheduled principal payments and payments at maturity on the Loans, the Existing Committed Facilities and the IPI Agreements), and cash income taxes, plus payments for shares repurchases, in each case required to be paid during such period.

     “GAAP” means generally accepted accounting principles as in effect in Canada (or in the United States immediately following the Borrower’s filing of a Quarterly Report on Form 10-Q or Annual report on Form 10-K with the SEC) from time to time, applied on a basis consistent (except for changes with respect to which the Borrower’s independent public accountants concur) with the most recent audited consolidated financial statements of the Borrower and its Consolidated Subsidiaries delivered to the Lenders.

     “Governmental Approval” means any authorization, consent, approval, license, lease, ruling, permit, certification, exemption or filing for registration by or with any Governmental Authority.

     “Governmental Authority” means any nation, state, sovereign, or government, any federal, regional, state, local or political subdivision and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, including the PNG Government.

     “Group of Loans” means, at any time, a group of Loans consisting of (a) all Tranche A Loans, and (b) all Tranche B Loans.

     “Guarantors” means, collectively, S.P.I. Distribution Limited and InterOil Products Limited, and any other guarantor under a guaranty required to be provided pursuant to Section 5.10.

     “Guaranty Agreements” means, collectively, the IPL Guaranty Agreement, the SPI Guaranty Agreement and any other guaranty required to be provided pursuant to Section 5.10.

     “Highest Lawful Rate” means the maximum lawful interest rate, if any, that at any time or from time to time may be contracted for, charged, or received under the Laws applicable to any Lender which are presently in effect or, to the extent allowed by Law, under such applicable

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Laws which may hereafter be in effect and which allow a higher maximum nonusurious interest rate than applicable Laws now allow.

     “Indebtedness” means, of any Person, without duplication, (a) all obligations of such Person for borrowed money or for the deferred purchase price of property or services (other than current trade payables within credit terms normally prevailing in the industry and accrued liabilities incurred in the ordinary course of business of such Person), (b) all obligations of such Person in respect of principal evidenced by a note, bond, debenture or similar instrument, (c) the obligations of such Person which are capitalized under Capital Leases, (d) all non-contingent obligations (and, for purposes of Section 6.3, all contingent obligations) of such Person to reimburse any Lender or other Person in respect of amounts paid under a letter of credit or similar instrument, (e) all Indebtedness of any other Person secured by any Lien on any property owned by such Person, whether or not such Indebtedness has been assumed by such Person, (f) all obligations of such Person in respect of surety bonds, appeal bonds or other similar instruments, and (g) all Contingent Obligations of such Person. Indebtedness shall exclude, however, any conversion obligations associated with the IPI Agreements and deferred hedging gains.

     “Indemnitee” has the meaning set forth in Section 12.3(b).

     “Interest Rate Agreement” means any interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedging agreement or other similar agreement or arrangement, each of which is for the purpose of hedging the interest rate exposure associated with the Borrower’s and its Subsidiaries’ operations and Indebtedness and not for speculative purposes.

     “Investment” means any investment in any Person, whether by means of share purchase, capital contribution, loan, guarantee, time deposit or otherwise (but not including any demand deposit or deposits made in the ordinary course of business for the purchase or sale of goods or services on customary trade terms).

     “IPI Agreements” means the Amended and Restated Indirect Participation Interest Agreement dated as of February 25, 2005, between the Borrower and the investors signatory thereto; the Amended Indirect Participation Interest Agreement dated May 12, 2004, between the Borrower and PNG Energy Investors, LLC; and the Drilling Participation Agreement dated July 21, 2003, between the Borrower and PNG Drilling Ventures Limited.

     “IPL Guaranty” means that certain Guaranty to be executed by InterOil Products Limited, which will be substantially in the form of Exhibit D-2.

     “IPL Security Agreement” means that certain Fixed and Floating Charge in the form of Exhibit F.

     “IPL Security Documents” means the IPL Guaranty and the IPL Security Agreement, which will be executed and delivered to the Administrative Agent pursuant to Section 5.12.

     “Law” means, with respect to any Governmental Authority, any constitutional provision, law, statute, rule, regulation, ordinance, treaty, order, decree, judgment, decision, certificate,

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holding, injunction, Governmental Approval or requirement of such Government Authority along with the interpretation and administration thereof by any Governmental Authority charged with the interpretation or administration thereof. Unless the context clearly indicates otherwise, the term “Law” includes each of the foregoing (and each provision thereof) as in effect at the time in question, including any amendments, supplements, replacements, or other modifications thereto or thereof, and whether or not in effect at the date of this Agreement.

     “Lender” means each Lender listed on the signature pages hereof, each Assignee which becomes a Lender pursuant to Section 12.6(c), and their respective successors.

     “Lien” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest, option, warrant, claim or encumbrance of any kind, or any other type of preferential arrangement that has substantially the same practical effect as a security interest, in respect of such asset. For the purposes of this Agreement, the Borrower or any Subsidiary will be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, Capital Lease or other title retention agreement relating to such asset.

     “LNG/NGL Project” has the meaning set forth in Section 7.1.

     “LNG/NGL Project MOU” has the meaning set forth in Section 7.1.

     “Loan” means a loan made by a Lender pursuant to Section 2.1.

     “Loan Documents” means this Agreement, the Notes, the Guaranty Agreements, the Pledge Agreements, and the Security Documents.

     “Majority Lenders” means at any time Lenders having at least 50% of the aggregate amount of the sum of the total unused Commitments at such time or, if the Commitments shall have terminated, holding Notes evidencing at least 50% of the aggregate unpaid principal amount of the Loans.

     “Margin Stock” has the meaning provided such term in Regulation U.

     “Material Adverse Effect” means a material adverse effect upon (a) the business, results of operations or financial condition of the Borrower and its Consolidated Subsidiaries taken as a whole, (b) the ability of the Borrower to perform under any Loan Document or (c) the ability of any of the Lenders to enforce any of the Obligations or any of their material rights and remedies against the Borrower under the Loan Documents.

     “Material Financial Obligation” means a principal or face amount of Indebtedness and/or payment or collateralization obligations in respect of Interest Rate Agreements of the Borrower and/or one or more of its Subsidiaries, arising in one or more related or unrelated transactions, exceeding in the aggregate $5,000,000.

     “Materials of Environmental Concern” means all materials, substances and wastes regulated as hazardous under Environmental Laws.

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     “Maturity Date” means the Tranche A Loan Maturity Date and the Tranche B Loan Maturity Date, or, if such Day is not a Business Day, the next following Business Day.

     “Measurement Date” has the meaning set forth in Section 6.8.

     “Measurement Period” has the meaning set forth in Section 6.8.

     “Merrill Lynch” means Merrill Lynch Capital Corporation, and its successors and assigns.

     “Moody’s” means Moody’s Investors Service, Inc.

     “Net Cash Proceeds” means, with respect to any event (a) the cash proceeds received in respect of such event including (i) any cash received in respect of any non-cash proceeds, but only as and when received, (ii) in the case of a casualty, insurance proceeds, and (iii) in the case of a condemnation or similar event, condemnation awards and similar payments, net of (b) the sum of (i) all reasonable fees and out-of-pocket expenses paid by the Borrower and its Subsidiaries to third parties (other than Affiliates) in connection with such event, (ii) in the case of a sale, transfer or other disposition of an asset (including pursuant to a sale and leaseback transaction or a casualty or a condemnation or similar proceeding), the amount of all payments required to be made by the Borrower and its Subsidiaries as a result of such event to repay Indebtedness (other than Loans) secured by such asset or otherwise subject to mandatory prepayment as a result of such event, and (iii) the amount of all taxes paid (or reasonably estimated to be payable) by the Borrower and its Subsidiaries, and the amount of any reserves established by the Borrower and its Subsidiaries to fund contingent liabilities reasonably estimated to be payable, in each case during the year that such event occurred or the next succeeding year and that are directly attributable to such event (as determined reasonably and in good faith by an Authorized Officer of the Borrower).

     “Notes” means, collectively, the Tranche A Notes and the Tranche B Notes.

     “Notice of Borrowing” has the meaning set forth in Section 2.3.

     “Obligations” means all obligations, liabilities and indebtedness of every nature of the Borrower from time to time owing to the Administrative Agent or any Lender under any Loan Document including, without limitation, (a) all principal, interest, and fees, (b) any amounts the Administrative Agent or any Lender expends on behalf of the Borrower because the Borrower under the Loan Documents fails to make any such payment when required under the terms of any Loan Document, (c) all amounts required to be paid under any indemnification or similar provision and (d) all fees and expenses required to be paid pursuant to Section 12.3 of this Agreement.

     “OPIC” means the Overseas Private Investment Corporation, an agency of the United States.

     “Parent” means, with respect to any Lender, any Person controlling such Lender.

     “Participant” has the meaning set forth in Section 12.6(b).

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     “Permitted Commitment Increase” means (i) any increase of up to $75,000,000 in the existing $150,000,000 committed amount (for a total commitment of $225,000,000) for loans and letters of credit available under the Existing Revolver Facility, and/or (ii) any increase in the principal amount of loans available under the Existing OPIC Facility so long as the aggregate principal amount of loans outstanding under such Existing OPIC Facility does not exceed $85,000,000.

     “Permitted Indebtedness” means: (a) the Obligations; (b) Indebtedness in respect of the Existing Committed Facilities (including any Permitted Commitment Increase but excluding any other Commitment Increase); (c) unsecured Indebtedness (i) incurred in the ordinary course of business (including open accounts extended by suppliers on normal trade terms in connection with purchases of goods and services that are not overdue for a period of more than 90 days or, if overdue for more than 90 days, as to which a dispute exists and adequate reserves in conformity with the reporting requirements of the SEC have been established on the books of the Borrower) and (ii) in respect of performance, surety, or appeal bonds provided in the ordinary course of business of the Borrower or its Subsidiaries, but excluding (in each case), Indebtedness incurred through the borrowing of money or the incurrence of guarantee obligations in respect thereof; (d) Indebtedness (i) evidencing the deferred purchase price of newly acquired property or incurred to finance the acquisition of equipment or other property of the Borrower or its Subsidiaries (pursuant to any purchase money mortgages or otherwise, whether owed to the seller or a third party) used in the ordinary course of business of the Borrower and its Subsidiaries (provided, that such Indebtedness is incurred within 180 days of the acquisition of such property), (ii) in respect of Capital Lease Obligations, (iii) which is subordinated to the Obligations pursuant to customary subordination terms and provisions, and (iv) not otherwise permitted under the foregoing provisions, in an aggregate amount outstanding at any time not to exceed $3,000,000; provided however, that none of the foregoing Indebtedness shall in any event constitute Permitted Indebtedness to the extent that the incurrence thereof shall result in a default by the Borrower in the observance of its obligations under this Agreement.

     “Permitted Liens” means the following: (a) Liens securing obligations under the Existing Committed Facilities (including, without limitation, Liens securing any Permitted Commitment Increase), and other Liens existing on the date hereof which are not otherwise permitted under paragraphs (b) through (m) below; (b) Liens for taxes not yet delinquent or which are subject to a Contest; (c) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen, and other similar Liens and any other Liens imposed by Law (other than any Lien imposed by an employee benefit plan or Liens pursuant to any Environmental Law) or created in the ordinary course of business for amounts not yet delinquent or which are subject to a Contest; (d) Liens (other than any Lien imposed by an employee benefit plan or pursuant to any Environmental Law) incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, trade contracts, government contracts, performance and return-of-money bonds, and other similar obligations (exclusive of obligations for the payment of borrowed money); (e) easements, rights-of-way, zoning, and similar restrictions and other similar charges or encumbrances that do not materially interfere with the conduct of the business of the Borrower or any of its Subsidiaries and which do not detract materially from the value of the property to which they attach or impair materially the use thereof by the Borrower or any of its Subsidiaries or have a

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Material Adverse Effect; (f) purchase money Liens not to exceed 100% of the applicable purchase price; provided that such Lien shall attach within 180 Days of the acquisition of the related asset and in no event shall such Lien attach to any accounts receivable of the Borrower or any of its Significant Subsidiaries; (g) any Lien existing on any asset prior to the acquisition thereof by the Borrower or any of its Subsidiaries, whether by purchase, consolidation, merger, exchange or otherwise and not created in contemplation of such acquisition; (h) Liens securing Environmental Claims or arising pursuant to Environmental Laws (which, for the purposes of this sub-clause (h) shall be limited to undetermined or inchoate Liens arising pursuant to applicable Environmental Laws, arising in the ordinary course of business of the Borrower or its Subsidiaries, and in respect of which no steps or proceedings have been taken to enforce such Lien); (i) Liens imposed by an employee benefit plan or any Law applicable thereto which could not reasonably be expected to have a Material Adverse Effect; (j) Liens on time deposit, demand, custodial or other banking accounts of the Borrower or any Subsidiary, if such accounts exist for the purpose of funding or securing insurance obligations of any Subsidiary engaged in the business of providing commercial insurance or reinsurance and which are in accordance with prudent business practices and industry standards; (k) Liens on commingled stored crude oil and product inventory existing to secure obligations of parties with which the Borrower or its Subsidiaries have entered into crude oil processing and crude oil and product storage agreements; (l) extensions, renewals and replacements of Liens referred to in paragraphs (a) through (k); provided, that any such extension, renewal or replacement Lien shall be limited to the property or assets covered by the Lien extended, renewed or replaced and that the obligations secured by any such extension, renewal or replacement Lien shall be in an amount not greater than the amount of the obligations secured by the Lien extended, renewed or replaced; and (m) Liens other than those described in paragraphs (a) through (l) above; provided that the aggregate outstanding principal amount of Indebtedness secured by such Liens shall at no time exceed 10% of Consolidated Net Worth.

     “Permitted Transaction” has the meaning set forth in Section 6.1(a).

     “Person” means an individual, a corporation, a limited liability company, a partnership, an association, a trust or any other entity or organization, including a government or political subdivision or an agency or instrumentality thereof.

     “Pledge Agreements” means, collectively, the Borrower Pledge Agreement, the SPI Pledge Agreement and any other pledge agreement required to be provided pursuant to Section 5.10.

     “PNG Government” has the meaning set forth in Section 7.1.

     “Prepayment Event” means:

     (a) any sale, lease or other disposition (including any such transaction effected by way of merger or consolidation) by the Borrower or any of its Significant Subsidiaries of any asset, including without limitation any sale-leaseback transaction, whether or not involving a Capital Lease, but excluding (i) dispositions of temporary cash investments, inventory and used, surplus or worn out equipment in the ordinary course of business, (ii) dispositions to the Borrower or a wholly-owned Subsidiary of the Borrower;

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provided that a disposition of assets not excluded by clauses (i) through (ii) above after the Effective Date shall not constitute a Prepayment Event unless and until (and only to the extent that) the aggregate Net Cash Proceeds from such disposition, when combined with all other such dispositions previously made after the Effective Date, exceeds $5,000,000;

     (b) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of the Borrower or any of its Significant Subsidiaries, but only to the extent that the Net Cash Proceeds therefrom that have not been applied to repair, restore or replace such property or asset within 180 Days after such event exceed $5,000,000;

     (c) (i) the issuance by the Borrower or any Significant Subsidiary of any Equity Interests, or the receipt by the Borrower or any of its Significant Subsidiaries of any capital contribution, other than (x) any such issuance of Equity Interests to, or receipt of any such capital contribution from, the Borrower or any of its Significant Subsidiaries; and (y) the issuance by the Borrower of common shares held through the Borrower’s existing stock incentive plan and other similar plans or programs; or (ii) the issuance of Equity Interests or receipt of capital contributions by the Borrower for the purpose of financing the activities of S.P.I. Exploration & Production Corp., or any of its direct or indirect Subsidiaries; provided however, that in the case of this subsection (c)(ii), only 50% of such amounts shall be required to be prepaid under this Agreement;

     (d) the incurrence by the Borrower or any if its Significant Subsidiaries of any Indebtedness, other than (i) Indebtedness under the Existing Committed Facilities (including any Permitted Commitment Increases thereof) and (ii) issuance by the Borrower of non-recourse commercial paper backstopped by the Existing Committed Facilities (including any Permitted Commitment Increases thereof);

     (e) any amendment to or replacement after the Effective Date of any of the Existing Committed Facilities which provides for (i) a Commitment Increase other than a Permitted Commitment Increase, or (ii) the release of any cash collateral that is posted by the borrower pursuant to any of the Existing Committed Facilities, other than cash collateral that is posted from time-to-time on a temporary or interim basis and is not required to be posted and maintained throughout the commitment period under such Existing Committed Facilities; or

     (f) the receipt by Borrower of any distribution in respect of its equity ownership interest in S.P.I. Exploration & Production Corp.; provided however, that in the case of any such distribution, only 50% of such distribution shall be required to be prepaid under this Agreement;

     provided however, that the term “Prepayment Event” shall not include (i) any issuances by the Borrower of common shares in connection with the exercise of any warrants or options outstanding on the Effective Date, (ii) any issuance of Equity Interests, receipt of capital contributions or disposition of assets, in any of the foregoing cases as required or permitted under the IPI Agreements, or (iii) the $10,000,000 payment to be made by Clarion Finanz or its nominee Pacific LNG Operations Ltd to Borrower as partial consideration for Borrower entering

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into the LNG/NGL Project MOU with Clarion Finanz or its nominee Pacific LNG Operations Ltd.

     “ProjectCo” has the meaning set forth in Section 7.2.

     “Quarterly Payment Dates” means each March 31, June 30, September 30 and December 31.

     “Regulation S-X” means Regulation S-X of the SEC and any successor to all or any portion thereof.

     “Required Lenders” means at any time Lenders having at least 65% of the aggregate amount of the sum of the total unused Commitments at such time or, if the Commitments shall have terminated, holding Notes evidencing at least 65% of the aggregate unpaid principal amount of the Loans.

     “Restricted Lender” means (a) any Lender, (b) any “Lender” under the Existing Revolver Facility, (c) OPIC and (d) any other commercial lender whose unsecured long-term debt is rated BBB+ or better by S&P and Baa1 or better by Moody’s.

     “S & P” means Standard & Poor’s Ratings Services.

     “SEC” means the United States Securities and Exchange Commission.

     “Secured Parties” has the meaning assigned to that term in the Pledge and Security Agreements.

     “Securities Exchange Act” means the Securities Exchange Act of 1934, as amended from time to time.

     “Security Documents” means the Collateral Agency Agreement, the IPL Security Agreement and the Pledge Agreements.

     “Significant Subsidiary” means (a) each of the Subsidiaries set forth in Schedule 1.1 and their respective successors and (b) any other Subsidiary of the Borrower (other than any Subsidiary of the Borrower primarily engaged in the exploration for and production of oil and gas) which is or would hereafter be classified as a “significant subsidiary” of the Borrower under Regulation S-X of the Securities and Exchange Commission as in effect on the date hereof.

     “Solvent” when used with respect to any Person, means that, as of any date of determination, (a) the amount of the “present fair saleable value” of the assets of such Person will, as of such date, exceed the amount of all “liabilities of such Person, contingent or otherwise”, as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they

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mature. For purposes of this definition, (i) “debt” means liability on a “claim”, and (ii) “claim” means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured.

     “SPI Guaranty Agreement” means that certain Guaranty dated as of May 4, 2006 made by S.P.I. Distribution Limited in favor of the Collateral Agent, in substantially the form attached as Exhibit D-1.

     “SPI Pledge Agreement” means that certain Pledge Agreement to be executed by S.P.I. Distribution Limited, which will be substantially in the form of Exhibit E and will be executed and delivered to the Administrative Agent pursuant to Section 5.12.

     “Subsidiary” means, with respect to any Person, (a) any corporation 50% or more of whose shares of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time shares of any class or classes of such corporation have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (b) any partnership, limited liability company, association, joint venture, trust or other entity in which such Person, directly or indirectly through Subsidiaries, is either a general partner, has a 50% or greater equity interest at the time or otherwise owns a controlling interest.

     “Tranche A Lender” means each holder of a Tranche A Note.

     “Tranche A Loan” has the meaning set forth in Section 2.1(a).

     “Tranche A Loan Advance” means an advance by the Administrative Agent on an advance date of a Tranche A Loan.

     “Tranche A Loan Commitment” means (a) in the case of any Lender that is a Lender on the date hereof, the amount set forth opposite such Lender’s name on the Commitment Schedule as such Lender’s “Tranche A Loan Commitment,” and (b) in the case of any Lender that becomes a Lender after the date hereof, the amount specified as such Lender’s “Tranche A Loan Commitment” in the Lender Assignment Agreement pursuant to which such Lender assumed a portion of the Total Tranche A Loan Commitment, in each case as the same may be changed from time to time pursuant to the terms hereof.

     “Tranche A Loan Commitment Percentage” means at any time, for each Lender, the percentage obtained by dividing (a) such Lender’s Tranche A Loan Commitment by (b) the Total Tranche A Loan Commitment; provided, that at any time after the Effective Date, each Lender’s Tranche A Loan Commitment Percentage shall be the percentage which the aggregate principal amount of such Lender’s Tranche A Loans then outstanding constitutes of the aggregate principal amount of all of the Tranche A Loans then outstanding.

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     “Tranche A Loan Commitment Period” means the period commencing on the Effective Date and ending on the date following 60 Days from the Effective Date.

     “Tranche A Loan Notes” means the collective reference to any promissory note evidencing the Tranche A Loans.

     “Tranche A Loan Maturity Date” means the date occurring 24 months after the Effective Date.

     “Total Tranche A Loan Commitment” means the sum of the Tranche A Loan Commitments of all Lenders. The Total Tranche A Loan Commitment as of the date hereof is equal to $100,000,000.

     “Tranche B Lender” means each holder of a Tranche B Note.

     “Tranche B Loan” has the meaning set forth in Section 2.1(b).

     “Tranche B Loan Advance” means an advance by the Administrative Agent on an advance date of a Tranche B Loan.

     “Tranche B Loan Commitment” means (a) in the case of any Lender that is a Lender on the date hereof, the amount set forth opposite such Lender’s name on the Commitment Schedule as such Lender’s “Tranche B Loan Commitment,” and (b) in the case of any Lender that becomes a Lender after the date hereof, the amount specified as such Lender’s “Tranche B Loan Commitment” in the Lender Assignment Agreement pursuant to which such Lender assumed a portion of the Total Trance B Loan Commitment, in each case as the same may be changed from time to time pursuant to the terms hereof.

     “Tranche B Loan Commitment Percentage” means at any time, for each Lender, the percentage obtained by dividing (a) such Lender’s Tranche B Loan Commitment by (b) the Total Tranche B Loan Commitment; provided, that at any time after the Tranche B Loan Commitments have expired or terminated, each Lender’s Tranche B Loan Commitment Percentage shall be the percentage which the aggregate principal amount of such Lender’s Tranche B Loans then outstanding constitutes of the aggregate principal amount of all of the Tranche B Loans then outstanding.

     “Tranche B Loan Commitment Period” means (a) for the initial Tranche B Loan Advance of up to $10,000,000, the Effective Date, (b) for the second Tranche B Loan Advance of up to $10,000,000, the period commencing on the Tri-Party Agreement Effective Date and ending on the date following 15 Days from and after the Tri-Party Agreement Effective Date and (c) for the third Tranche B Loan Advance of up to $10,000,000, the period commencing on the Tri-Party Agreement Effective Date and ending on the date following 45 Days from and after the Tri-Party Agreement Effective Date.

     “Tranche B Loan Notes” means the collective reference to any promissory note evidencing the Tranche B Loans.

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     “Tranche B Loan Maturity Date” means the date following 24 months after the Effective Date.

     “Transaction Documents” means the Loan Documents and the Engagement Letter.

     “Tri-Party Agreement” means that certain Memorandum of Understanding by and among the Borrower, the participating Lenders (including Merrill Lynch or its designee) and the PNG Government that provides the basic obligations and understandings among the parties thereto for the official recognition and endorsement of the LNG/NGL Project by the PNG Government, and the commitment of the parties thereto to negotiate a definitive project agreement that is intended to authorize ProjectCo to undertake the LNG/NGL Project, as the same may be modified, supplemented or amended from time to time in accordance with the terms and provisions thereof.

     “Tri-Party Agreement Effective Date” means the date that the Tri-Party Agreement shall have been executed and delivered by the Borrower, the participating Lenders and the PNG Government.

     “Total Tranche B Loan Commitment” means the sum of the Tranche B Loan Commitments of all Lenders. The Total Tranche B Loan Commitment as of the date hereof is equal to $30,000,000.

     “United States” means the United States of America, including the States and the District of Columbia, but excluding its territories and possessions.

     “U.S.A. PATRIOT Act” means United States Public Law 107-56, 115 Stat. 272 (2001) Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) of 2001, and the rules and regulations promulgated thereunder from time to time in effect.

     Section 1.2 Accounting Terms and Determinations. Unless otherwise specified herein, all accounting terms used herein shall be interpreted, all accounting determinations hereunder shall be made, and all financial statements required to be delivered hereunder shall be prepared in accordance with GAAP; provided that, if the Borrower notifies the Administrative Agent that the Borrower wishes to amend any covenant in Article 5 or Article 6 or the definition of any term used therein to eliminate the effect of any change in GAAP on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Required Lenders wish to amend Article 5 or Article 6 or any such definition for such purpose), then the Borrower’s compliance with such covenant shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant or definition is amended in a manner satisfactory to the Borrower and the Required Lenders.

     Section 1.3 Types of Borrowings. The term “Borrowing” denotes the aggregation of Loans to be made by the Lenders to the Borrower pursuant to Article 2 on the same Day. Borrowings are classified for purposes of this Agreement by reference to the applicable tranche of Loans comprising such Borrowing (e.g., a “Tranche A Borrowing” is a Borrowing comprised of Tranche A Loans).

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ARTICLE 2
THE LOANS

     Section 2.1 Commitments to Lend.

     (a) Tranche A Loans. Subject to and upon the terms and subject to the conditions set forth in this Agreement, each Lender having a Tranche A Loan Commitment severally agrees to make loans (each a “Tranche A Loan”) in Dollars to the Borrower, which Tranche A Loans (i) shall not exceed, for any such Lender, the Tranche A Loan Commitment of such Lender, (ii) shall not exceed, in the aggregate, the Total Tranche A Loan Commitment, (iii) shall be requested and advanced in an amount not less than 65% of the Total Tranche A Loan Commitment on the Effective Date (the “Initial Tranche A Loan Borrowing”) and not less than 35% of the Total Tranche A Loan Commitment on the thirtieth day following the Effective Date, (iv) shall be available until the expiration of the Tranche A Loan Commitment Period, after which time the Tranche A Loan Commitments of each Tranche A Loan Lender and the Total Tranche A Loan Commitments shall each be reduced to zero, and (v) may be repaid, or prepaid in increments of $1,000,000, each in accordance with the provisions hereof, but once repaid or prepaid may not be reborrowed. The obligation of Borrower to repay to each Lender the aggregate amount of all Tranche A Loans made by such Lender, together with interest accruing in connection therewith at the Applicable Interest Rate, shall be evidenced by a single promissory note (herein called such Lender’s “Tranche A Loan Note”) made by Borrower payable to the order of such Lender in the form of Exhibit A-1 with appropriate insertions. The amount of principal owing on any Lender’s Tranche A Loan Note at any given time shall be the aggregate amount of all Tranche A Loans theretofore made by such Lender minus all payments of principal theretofore received by such Lender on such Tranche A Loan Note. Interest on each Tranche A Loan Note shall accrue and be due and payable as provided herein and therein. Each Tranche A Loan Note shall be due and payable as provided herein and therein, and shall be due and payable in full on the Tranche A Loan Maturity Date.

     (b) Tranche B Loans. Subject to and upon the terms and subject to the conditions set forth in this Agreement, each Lender having a Tranche B Loan Commitment agrees to make loans (each a “Tranche B Loan”) in Dollars to the Borrower, which Tranche B Loans (i) shall not exceed, for any such Lender, the Tranche B Loan Commitment of such Lender, (ii) shall not exceed, in the aggregate, the Total Tranche B Loan Commitment, (iii) shall be made only after the sum of all Tranche A Loans advanced to the Borrower pursuant to Section 2.1(a) equals the Total Tranche A Loan Commitment, (iv) shall be made only in multiples of $5,000,000, and (v) may be repaid or prepaid in accordance with the provisions hereof, but once repaid or prepaid may not be reborrowed. The obligation of Borrower to repay to each Lender the aggregate amount of all Tranche B Loans made by such Lender, together with interest accruing in connection therewith, shall be evidenced by a single promissory note (herein called such Lender’s “Tranche B Note”) made by Borrower payable to the order of such Lender in the form of Exhibit A-2 with appropriate insertions. The amount of principal owing on any Lender’s Tranche B Note at any given time shall be the aggregate amount of all Tranche B Loans theretofore made by such Lender minus all payments of principal

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theretofore received by such Lender on such Tranche B Note. Interest on each Tranche B Note shall accrue and be due and payable as provided herein and therein. Each Tranche B Note shall be due and payable as provided herein and therein, and shall be due and payable in full on the last day of the Tranche B Loan Maturity Date.

     Section 2.2 Loans and Borrowings.

     (a) Each Loan shall be made as part of a Borrowing consisting of Loans made by the Lenders ratably in accordance with their respective Tranche A Loan Commitments and/or Tranche B Loan Commitments, as applicable. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder; provided that the respective Commitments of the Lenders are several and no Lender shall be responsible for any other Lender’s failure to make Loans as required.

     (b) Each Borrowing shall be made entirely in Tranche A Loans or Tranche B Loans, as the Borrower may request in accordance herewith. Each Borrowing may be in an aggregate amount that is equal to the entire unused balance of the Tranche A Commitment Amount or the Tranche B Commitment Amount, as applicable. Both Tranche A Loans and Tranche B Loans may be outstanding at the same time.

     (c) Tranche A Loans shall be used by the Borrower in the amounts and for the purposes set forth in Part 1 of Schedule 2.2(c). Tranche B Loans shall be used by the Borrower in the amounts and for the purposes set forth in Part 2 of Schedule 2.2(c). Any modification, amendment or waiver of this Section 2.2(c) and/or the related Schedule 2.2(c) shall require Required Lender consent.

     Section 2.3 Notice of Borrowing. The Borrower shall give the Administrative Agent notice (a “Notice of Borrowing”) not later than 11:00 A.M. (New York City time) on the date of each Borrowing, specifying:

     (a) the date of such Borrowing, which shall be a Business Day on or after the Effective Date but on or prior to the Maturity Date;

     (b) the aggregate amount of such Borrowing; and

     (c) whether the Loans comprising such Borrowing are to be Tranche A Loans or Tranche B Loans as provided in Section 2.1, and if such Borrowing is in respect of Tranche B Loans, the specific, itemized use of the proceeds of such Borrowing.

     Section 2.4 Notice to Lenders; Funding of Loans.

     (a) Promptly after receiving a Notice of Borrowing, the Administrative Agent shall notify each Lender of the contents thereof and of such Lender’s share of such Borrowing and such Notice of Borrowing shall not thereafter be revocable by the Borrower.

     (b) Not later than 1:00 P.M. (New York City time) on the date of each Borrowing, each Lender shall make available its share of such Borrowing, in Federal or

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other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 12.1. Unless the Administrative Agent determines that any applicable condition specified in Article 3 has not been satisfied, the Administrative Agent will make the funds so received from the Lenders available to the Borrower at the Administrative Agent’s aforesaid address.

     (c) Unless the Administrative Agent shall have received notice from a Lender before the date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available to the Administrative Agent on the date of such Borrowing in accordance with subsection (b) of this Section and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have so made such share available to the Administrative Agent, such Lender and, if such Lender shall have failed to do so within three Business Days of demand therefor by the Administrative Agent, the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each Day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent, at the Federal Funds Rate. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount so repaid shall constitute such Lender’s Loan included in such Borrowing for purposes of this Agreement.

     Section 2.5 Administration of Notes. Promptly after receiving each Lender’s Note pursuant to Section 3.1(a), the Administrative Agent shall forward such Note to such Lender. Each Lender shall record the date, amount and type of each Loan made by it and the date and amount of each payment of principal made by the Borrower with respect thereto, and may, if such Lender so elects in connection with any transfer or enforcement of its Note, endorse on the schedule forming a part thereof appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding; provided that a Lender’s failure to make any such recordation or endorsement shall not affect the Borrower’s obligations hereunder or under the Notes. Each Lender is hereby irrevocably authorized by the Borrower so to endorse its Note and to attach to and make a part of its Note a continuation of any such schedule as and when required.

     Section 2.6 Maturity of Loans. Each Loan shall mature, and the principal amount thereof shall be due and payable (together with interest accrued thereon), on the Maturity Date.

     Section 2.7 Interest Rates. The unpaid principal amount of each Loan shall bear interest on the outstanding principal amount thereof, for each Day from the date such Loan is made until it becomes due, at a rate per annum equal to the Applicable Interest Rate for such Day. Such interest shall be payable (i) quarterly in arrears on each Quarterly Payment Date, and (ii) on the Maturity Date. Any overdue principal of or interest on any Loan shall bear interest, payable on demand, for each Day until paid at a rate per annum equal to the Default Rate.

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     Section 2.8 Fees.

     (a) The Borrower shall pay to the Administrative Agent, for the account of the Lenders, the Commitment Fee. Such Commitment Fee shall be payable on the date of each advance of Loans calculated on the amount of the Loans being then advanced. Eighty (80%) of such Commitment Fee shall be allocated among the Lenders ratably in proportion to their respective Commitments, with the remaining twenty percent (20%) to be retained and shared by the Co-Arrangers.

     (b) The Borrower shall pay to the Administrative Agent the Facility Agency Fee on the Effective Date and thereafter on each anniversary of the Effective Date until the Loans are repaid in their entirety.

     Section 2.9 Termination or Reduction of Commitment.

     (a) The Borrower may, upon at least three Business Days’ notice to the Administrative Agent, (i) terminate the Commitments at any time, or (ii) ratably reduce the Commitments from time to time by an amount of $1,000,000 or any larger multiple of $1,000,000. Promptly after receiving a notice pursuant to this subsection, the Administrative Agent shall notify each Lender of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable; provided that a notice of termination of the Commitments delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied.

     (b) If the Borrower or any of its Subsidiaries shall at any time, or from time to time, after the Effective Date but prior to the Maturity Date receive any Net Cash Proceeds of any Prepayment Event, then the Commitments shall at such time be reduced in an aggregate amount equal to the amount of such Net Cash Proceeds. Each such reduction of Commitments shall be applied ratably to the respective Commitment of each Lender until all such Commitments have been reduced to zero. The Borrower shall give the Administrative Agent prompt notice of each reduction in Commitments pursuant to this Section and promptly thereafter the Administrative Agent shall notify each Lender thereof.

     (c) Unless previously terminated, the Commitments shall terminate in their entirety at the close of business on the Maturity Date.

     Section 2.10 Optional Prepayments.

     (a) On any Quarterly Payment Date, the Borrower may, upon at least one Business Day’s notice to the Administrative Agent, without penalty or premium, prepay any Group of Loans, in whole at any time, or from time to time in part in amounts aggregating $1,000,000 or any larger multiple of $1,000,000, by paying the principal amount to be prepaid together with interest accrued thereon to the date of prepayment. Each such optional prepayment shall be applied to prepay ratably the Loans of the several Lenders included in such Group of Loans.

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     (b) Promptly upon receiving a notice of prepayment pursuant to this Section 2.10, the Administrative Agent shall notify each Lender of the contents thereof and of such Lender’s ratable share of such prepayment, and such notice shall not thereafter be revocable by the Borrower.

     Section 2.11 Mandatory Prepayment.

     (a) In the event and on each occasion on and after the Closing Date that any Net Cash Proceeds are received by or on behalf of the Borrower or any Subsidiary in respect of any Prepayment Event while any Loans remain unpaid, the Borrower shall, within three Business Days after such Net Cash Proceeds are received, prepay the Loans in an aggregate amount equal to such Net Cash Proceeds (or 50% of such Net cash Proceeds to the extent such Prepayment Event arises under the provisos in sub-clauses (c) and/or (f) of the definition of the term “Prepayment Event”) together with interest accrued thereon to the date of prepayment. Each such mandatory prepayment shall be applied to prepay ratably the Loans of the several Lenders.

     (b) Prior to any mandatory prepayment of the Loans pursuant to this Section, the Borrower shall select the Group or Groups of Loans to be prepaid and shall notify the Administrative Agent by telephone (confirmed by telecopy) of such prepayment, not later than 11:00 A.M., New York City time, one Business Day before the date of prepayment.

     (c) Promptly upon receiving a notice of prepayment pursuant to this Section, the Administrative Agent shall notify each Lender of the contents thereof and of such Lender’s ratable share of such prepayment, and such notice shall not thereafter be revocable by the Borrower; provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitments as contemplated by Section 2.9, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.9. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.7.

     Section 2.12 General Provisions as to Payments.

     (a) The Borrower shall make each payment of principal of, and interest on, the Loans and of fees hereunder, without set-off, counterclaim or other deduction, not later than 1:00 P.M. (New York City time) on the date when due, in Federal or other funds immediately available in New York City, to the Administrative Agent at its address referred to in Section 12.1. The Administrative Agent will promptly distribute to each Lender its ratable share of each such payment received by the Administrative Agent for the account of the Lenders. Whenever any payment of principal of, or interest on, the Loans or of fees shall be due on a Day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time.

     (b) Unless the Borrower notifies the Administrative Agent before the date on which any payment is due to the Lenders hereunder that the Borrower will not make such

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payment in full, the Administrative Agent may assume that the Borrower has made such payment in full to the Administrative Agent on such date and the Administrative Agent may, in reliance on such assumption, cause to be distributed to each Lender on such due date an amount equal to the amount then due such Lender. If and to the extent that the Borrower shall not have so made such payment, each Lender shall repay to the Administrative Agent forthwith on demand such amount distributed to such Lender together with interest thereon, for each Day from the date such amount is distributed to such Lender until the date such Lender repays such amount to the Administrative Agent, at the Federal Funds Rate.

     Section 2.13 Funding Losses. If the Borrower fails to borrow or prepay any Loans after notice has been given to any Lender in accordance with Section 2.4(a) or Section 2.10(a) (as applicable), by reason of a failure to satisfy a condition thereto or otherwise, the Borrower shall reimburse each Lender within 15 Days after demand for any resulting loss or expense incurred by it (or by a Participant in the related Loan), including (without limitation) any loss incurred in obtaining, liquidating or employing deposits from third parties, but excluding loss of margin for the period after such payment or failure to borrow, or prepay; provided that such Lender shall have delivered to the Borrower a certificate as to the amount of such loss or expense, which certificate shall be conclusive in the absence of manifest error.

     Section 2.14 Computation of Interest and Fees. Interest based on the Applicable Interest Rate hereunder shall be computed on the basis of a year of 365 Days (or 366 Days in a leap year) and paid for the actual number of Days elapsed (including the first Day but excluding the last Day). All other interest and fees shall be computed on the basis of a year of 360 Days and paid for the actual number of Days elapsed (including the first Day but excluding the last Day).

ARTICLE 3
CONDITIONS

     Section 3.1 Closing. The obligation of any Lender to make a Loan hereunder shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 12.5):

     (a) receipt by the Administrative Agent of a duly executed Tranche A Loan Note for the account of each Lender dated the Closing Date and complying with the provisions of Section 2.5;

     (b) receipt by the Administrative Agent of an opinion (or opinions) of counsel to the Borrower, S.P.I. Distribution Limited and InterOil Products Limited, covering such matters relating to the transactions contemplated hereby, in form and substance reasonably acceptable to the Administrative Agent;

     (c) receipt by the Administrative Agent of each of the SPI Guaranty Agreement, the Borrower Pledge Agreement, the Collateral Agency Agreement and the Engagement Letter, each duly executed by the Borrower or the applicable counterparty(ies);

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     (d) receipt by the Administrative Agent of a properly completed and duly executed Form U-1 with respect to the Loans and this Agreement;

     (e) receipt by the Administrative Agent of all documents the Administrative Agent may reasonably request relating to the existence of the Borrower and/or the Guarantors, the corporate authority for and the validity of this Agreement, the Notes and the other Loan Documents, and any other matters relevant hereto, all in form and substance reasonably satisfactory to the Administrative Agent;

     (f) receipt by the Administrative Agent, for its own account or for the account of the Lenders, as the case may be, all fees, costs and expenses due and payable pursuant to Section 2.8;

     (g) receipt by the Administrative Agent of all documentation and other information required by bank regulatory authorities under applicable “know your customer” and anti-money-laundering rules and regulations, including the U.S.A. PATRIOT Act; and

     (h) receipt by the Administrative Agent of the LNG/NGL Project MOU, in the form of Exhibit G, duly executed by the Borrower and the applicable participating Lenders.

     The obligations of the Lenders to make Loans hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 12.5) at or prior to 5:00 P.M., New York City time, on May 31, 2006 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time).

     Section 3.2 Each Credit Event. The obligation of each Lender to make or continue a Loan on the occasion of any Borrowing is subject to the satisfaction of the following conditions:

     (a) receipt by the Administrative Agent of a Notice of Borrowing as required by Section 2.3;

     (b) the Debt Service Reserve Account shall be fully funded to the applicable Debt Service Reserve Amount (or will be so funded with the proceeds of such Loan contemporaneously with the making thereof);

     (c) the fact that, immediately after such Borrowing, (i) the aggregate outstanding principal amount of the Tranche A Loans will not exceed the Total Tranche A Commitments, and (ii) the aggregate outstanding principal amount of the Tranche B Loans will not exceed the Total Tranche B Commitments;

     (d) the fact that, immediately before and after such Borrowing, no Event of Default shall have occurred and be continuing; and

     (e) the fact that the representations and warranties of the Borrower contained in this Agreement and the representations and warranties of each of the Borrower, S.P.I. Distribution Limited and InterOil Products Limited contained in the Transaction

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Agreements to which each of them are parties shall be true on and as of the date of such Borrowing.

     Each Borrowing shall be deemed to be a representation and warranty by the Borrower on the date of such Borrowing as to the facts specified in clauses (b), (c), (d), and (e) of this Section 3.2.

ARTICLE 4
REPRESENTATIONS AND WARRANTIES

     In order to induce the Agents and the Lenders to enter into this Agreement and to make the Loans, the Borrower makes the following representations and warranties:

     Section 4.1 Existence and Business; Power and Authorization; Enforceable Obligations.

     (a) It is a corporation duly organized in accordance with the Laws of New Brunswick, Canada, and it (i) has the corporate power and authority to own its property and assets and to transact the business in which it is engaged or presently proposes to engage and (ii) is authorized to do business as a corporation and is in good standing in each jurisdiction in which it is required to be authorized to do business, except where the failure to be so authorized or in good standing could not reasonably be expected to have a Material Adverse Effect. No Governmental Approval (other than those already obtained) is necessary in connection with its formation and continued existence, except where the failure to obtain such Governmental Approval could not reasonably be expected to have a Material Adverse Effect.

     (b) It has the corporate power and authority to execute, deliver, and perform its obligations under this Agreement and the other Transaction Documents to which it is a party, and it has the corporate power and authority to borrow hereunder.

     (c) It has taken all necessary corporate action to authorize the execution, delivery and performance of the Transaction Documents to which it is a party. No consent or authorization of, filing with or other act by or in respect of any Governmental Authority or other Person is required in connection with its execution, delivery and performance of the Transaction Documents to which it is a party or the validity and enforceability of the Transaction Documents to which it is a party.

     (d) This Agreement and each other Transaction Documents to which it is a party have been duly executed and delivered on behalf of the Borrower and are legal, valid and binding obligations of the Borrower enforceable in accordance with their terms except as the enforcement thereof may be limited by applicable bankruptcy, insolvency or similar Laws affecting the enforcement of rights of creditors generally and except to the extent that enforcement of rights and remedies set forth therein may be limited by equitable principles (regardless of whether enforcement is considered in a court of law or a proceeding in equity).

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     Section 4.2 No Violation. Neither its execution, delivery or performance of the Transaction Documents to which it is a party, nor compliance by it with the terms and provisions thereof nor the consummation of the transactions contemplated thereby, (a) will contravene in any material respect any applicable provision of Law, (b) will conflict with or result in any breach of any of the terms and conditions of, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of its property or assets pursuant to the terms of, any material agreement or instrument to which it is a party or by which it or any of its property or assets is bound, or (c) will violate any provision of its certificate of incorporation or by-laws or other organizational documents. Without in any way limiting the foregoing, (a) the use of the proceeds of the Loans by the Borrower will not violate the Trading with the Enemy Act, as amended, or any of the foreign assets control regulations of the United States Treasury Department (31 C.F.R., Subtitle B, Chapter V, as amended) or any enabling legislation or executive order relating thereto, and (b) the Borrower is not and will not become (i) a Person or entity described by section 1 of Executive Order 13224 of September 24, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (12 C.F.R. 595), and the Borrower does not engage in dealings or transactions with any such Persons or entities, or (ii) in violation of the U.S.A. PATRIOT Act.

     Section 4.3 Litigation. Except as disclosed on Schedule 4.3, there are no actions, suits, investigations or proceedings by or before any Governmental Authority or arbitrator pending or, to the best knowledge of the Borrower, threatened which could reasonably be expected to have a Material Adverse Effect.

     Section 4.4 Financial Information. The consolidated balance sheet of the Borrower and its Consolidated Subsidiaries as of December 31, 2005, and the related consolidated statements of operations and cash flows for the Fiscal Year then ended, reported on by Price Waterhouse Coopers, LLP and set forth in the Borrower’s 2005 Form 40-F, a copy of which has been delivered to each of the Lenders, fairly present, in conformity with GAAP the consolidated financial position of the Borrower and its Consolidated Subsidiaries as of such date and their consolidated results of operations and cash flows for such Fiscal Year.

     Section 4.5 Material Adverse Change. Since March 31, 2006, there has occurred no event, act or condition which has had, or could reasonably be expected to have, a Material Adverse Effect.

     Section 4.6 Use of Proceeds; Margin Regulations. Following application of the proceeds of each Loan, not more than 25 percent of the value of the assets which are subject to any arrangement with the Administrative Agent or any Lender (herein or otherwise) whereby the Borrower’s right or ability to sell, pledge or otherwise dispose of assets in any way is restricted (or pursuant to which the exercise of any such right is or may be cause for accelerating the maturity of all or any portion of the Loans or any other amount payable hereunder or under any such other arrangement) will be Margin Stock. No proceeds of any Loan have been used in violation of Section 2.2(c).

     Section 4.7 Governmental Approvals. Except as disclosed on Schedule 4.7, all Governmental Approvals which under applicable Law are required to have been obtained prior to the date this representation is made or deemed made in connection with the due execution,

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delivery and performance by the Borrower of the Transaction Documents to which it is a party have been obtained.

     Section 4.8 Investment Company Act. The Borrower is not (a) an “investment company” or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

     Section 4.9 No Default. No Default has occurred and is continuing.

     Section 4.10 Taxes. The Borrower and each of its Subsidiaries have filed all United States Federal income tax returns and all other material United States tax returns which to their knowledge are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by them, except for those subject to a Contest.

     Section 4.11 Foreign Taxes. The Borrower and each of its Subsidiaries have filed or caused to be filed all income tax returns in all relevant foreign jurisdictions and all other material foreign tax returns which are to their knowledge required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by the Borrower or any of its Subsidiaries, except for those subject to a Contest.

     Section 4.12 Ownership of Property; Liens. The Borrower and each of its Significant Subsidiaries has good and marketable title to all of its property except for any defects or failure of title which could not reasonably be expected to have a Material Adverse Effect, and such property is subject to no Lien of any kind except Permitted Liens.

     Section 4.13 Accuracy and Completeness of Information. All historical information heretofore or contemporaneously furnished by the Borrower or any of its Subsidiaries in writing to any Agent or Lender for purposes of or in connection with this Agreement or any of the Transaction Documents is, to the knowledge of the Borrower, true and accurate in all material respects on the date as of which such information is dated and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not materially misleading at such time.

     Section 4.14 Environmental Matters.

     (a) Except in each case as could not reasonably be expected to have a Material Adverse Effect (i) the Borrower and its Subsidiaries are in compliance with all applicable Environmental Laws, (ii) the Borrower and its Subsidiaries have all Environmental Approvals required to operate its business as presently conducted and are in compliance with the terms and conditions thereof, and (iii) the Borrower and its Subsidiaries have not received any communication (written or oral) from a Governmental Authority that alleges that the Borrower or such Subsidiary is not in compliance with all Environmental Laws and Environmental Approvals.

     (b) There is no Environmental Claim pending or, to the Borrower’s knowledge, threatened against the Borrower or any Subsidiary which could reasonably be expected to have a Material Adverse Effect.

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     (c) Without in any way limiting the generality of the foregoing, except in each case as could not reasonably be expected to have a Material Adverse Effect there are no on-site or off-site locations in which the Borrower or any Subsidiary have stored, disposed or arranged for the disposal of Materials of Environmental Concern in violation of any Environmental Law.

     Section 4.15 Significant Subsidiaries. Each of the Borrower’s Significant Subsidiaries is a corporation, partnership, limited liability company, association or other entity duly organized, validly existing and in good standing under the laws of its jurisdiction of organization, and has all powers and all government licenses, authorizations, consents and approvals required to carry on its business as now conducted except for such powers, licenses, authorizations, consents or approvals the absence of which could not reasonably be expected to have a Material Adverse Effect.

     Section 4.16 Solvency. The Borrower is, and after giving effect to the incurrence of all Indebtedness and obligations being incurred in connection herewith and to the use of proceeds of the Loans as provided in Section 2.2(c), will be Solvent. Each of the Guarantors is, and after giving effect to the incurrence of its obligations under the respective Guaranty Agreements, will be Solvent.

     Section 4.17 Existing Committed Facilities; Existing Clarion Facility. As of May 4, 2006, (a) the outstanding principal amount of loans under the Existing OPIC Facility is $80,500,000, (b) the commitment amount under the Existing Revolver Facility is $150,000,000, of which $98,281,404 in loans and letters of credit are outstanding, and (c) the outstanding principal amount of loans under the Existing Clarion Facility is $22,856,684.

     Section 4.18 Capitalization and Assets of Certain Subsidiaries.

     (a) The capitalization of S.P.I. Distribution Limited consists of 50,000 common shares, of which 10,000 common shares are issued and outstanding. The shares have been duly authorized and validly issued and are fully paid and nonassessable, and no action has been taken to subject the shares of capital stock of such entity to any Liens, except for Liens created by, or arising under, the Loan Documents. The shares of S.P.I. Distribution Limited are owned 100% by the Borrower. The assets of S.P.I. Distribution Limited consist solely of the capital shares of InterOil Products Limited.

     (b) The capitalization of InterOil Products Limited consists of 100 ordinary shares, no par value, which are issued and outstanding. The shares have been duly authorized and validly issued and are fully paid and nonassessable, and no action has been taken to subject the shares of capital stock of such entity to any Liens, except for Liens created by, or arising under, the Loan Documents.

ARTICLE 5
AFFIRMATIVE COVENANTS

     The Borrower covenants and agrees that, so long as any Lender has any Commitment hereunder or any Obligation remains unpaid unless otherwise agreed by the Required Lenders:

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     Section 5.1 Information Covenants. The Borrower will furnish to each Lender:

     (a) Quarterly Financial Statements. Within 60 Days after the close of each Fiscal Quarter (other than the fourth Fiscal Quarter) in each Fiscal Year of the Borrower, the unaudited consolidated balance sheet of the Borrower as at the end of such quarterly period and the related consolidated statements of income and cash flows for such quarterly period and for the elapsed portion of the Fiscal Year ended with the last Day of such quarterly period, and in each case setting forth comparative figures for the related periods in the prior Fiscal Year;

     (b) Annual Financial Statements. Within 120 Days after the close of each Fiscal Year of the Borrower, the audited consolidated balance sheet of the Borrower as at the end of such Fiscal Year and the related consolidated statements of income and cash flows for such Fiscal Year, setting forth in each case in comparative form the figures for the previous Fiscal Year, all reported on in a manner acceptable to the SEC by independent public accountants of nationally recognized standing;

     (c) Officer’s Certificate. At the time of the delivery of the financial statements referred to in Section 5.1(a) and 5.1(b) above, a certificate of an Authorized Officer of the Borrower which certifies (x) that such financial statements fairly present the financial condition and the results of operations of the Borrower on the dates and for the period indicated, except as disclosed in the notes thereto, in accordance with GAAP, subject, in the case of interim financial statements, to normally recurring year-end adjustments, (y) the detailed calculations made pursuant to Sections 6.7 and 6.8 as of the last Day of such period and (z) that such Authorized Officer has reviewed the terms of the Loan Documents and has made, or caused to be made under his or her supervision, a review in reasonable detail of the business and financial condition of the Borrower during the accounting period covered by such financial statements, and that as a result of such review such Authorized Officer has concluded that no Default has occurred and is continuing as of the date of such certificate or, if any Default has occurred and is continuing, specifying the nature and extent thereof and the action the Borrower proposes to take in respect thereof;

     (d) Notice of Default, Litigation or Other Event. Promptly and in any event within three Business Days after the Borrower obtains knowledge thereof, notice of (i) the occurrence of any Event of Default and (ii) any litigation or governmental proceeding pending or threatened against the Borrower or any Subsidiary which could reasonably be expected to have a Material Adverse Effect;

     (e) Environmental Matters. Promptly and in any event within ten Business Days after the existence of any of the following conditions, a certificate of an Authorized Officer of the Borrower specifying in detail the nature of such condition and the Borrower’s proposed response thereto, in each case if the occurrence of such event could reasonably be expected to have a Material Adverse Effect: (i) the receipt by the Borrower of any communication (written or oral), whether from a Governmental Authority or other Person that alleges that the Borrower or any Subsidiary is not in compliance with applicable Environmental Laws or Environmental Approvals, (ii) any Authorized Officer

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of the Borrower shall obtain actual knowledge that there exists any Environmental Claim pending or threatened against the Borrower or any Subsidiary, or (iii) any release, emission, discharge or disposal of any Material of Environmental Concern that could reasonably be expected to form the basis of any Environmental Claim against the Borrower or any Subsidiary. The Borrower will also maintain and make available for inspection by the Administrative Agent and the Lenders and their agents and employees, upon reasonable prior notice during normal business hours, accurate and complete records of all investigations, studies, sampling and testing conducted, and any and all remedial actions taken, by the Borrower or, to its knowledge and to the extent obtained by the Borrower, by any Governmental Authority or other Person in respect of Materials of Environmental Concern on or affecting the properties of the Borrower and its Subsidiaries.

     (f) Other Information. From time to time, such other information or documents (financial or otherwise) as the Administrative Agent or any Lender may reasonably request.

     (g) Document Delivery. Documents required to be delivered pursuant to Section 5.1(a) or (b) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower’s website on the Internet; or (ii) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent).

     Section 5.2 Books, Records and Inspections. The Borrower will keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all requirements of Law shall be made of all dealings and transactions in relation to its business and activities. The Borrower will permit officers and designated representatives of the Administrative Agent or any Lender to visit and inspect any of the properties of the Borrower and its Subsidiaries, and to examine the books of record and account of the Borrower and its Subsidiaries, and discuss the affairs, finances and accounts of the Borrower and its Subsidiaries with, and be advised as to the same by, its and their officers, and the Borrower shall provide access to its independent accountants for the purpose of discussing the affairs, finances and accounts of the Borrower and its Subsidiaries, all upon reasonable notice and at such reasonable times and intervals during normal business hours as the Administrative Agent or such Lender may desire.

     Section 5.3 Payment of Taxes. The Borrower will, and will cause its Subsidiaries to, pay and discharge all material taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its property prior to the date on which penalties attach hereto, except that neither the Borrower nor any such Subsidiary will be required hereby to pay any such tax, assessment, charge or levy the payment of which is the subject of a Contest.

     Section 5.4 Compliance with Law.

     (a) The Borrower will own, operate and maintain its business in compliance with all Laws, except such noncompliance as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

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     (b) The Borrower will keep each of its property and assets free of any Lien imposed pursuant to Environmental Laws which could reasonably be expected to have a Material Adverse Effect and is not the subject of a Contest, and will pay or cause to be paid when due any and all costs necessary to accomplish the foregoing, including, without limitation, the cost of identifying the nature and extent of the presence of any such Materials of Environmental Concern on any real property owned or leased by the Borrower, and the cost of delineation, removal, treatment and disposal of any such Materials of Environmental Concern.

     Section 5.5 Existence, Etc.. The Borrower will preserve and maintain its corporate existence, and all material rights and material franchises, and cause each of its Significant Subsidiaries to preserve and maintain its material rights and material franchises except as permitted under Section 6.1; provided that neither the Borrower nor any of its Subsidiaries shall be required to maintain any such rights or franchises, the maintenance of which is determined by it in good faith not to be in its best interest in the conduct of business.

     Section 5.6 Insurance. The Borrower will maintain or cause to be maintained with financially sound and reputable insurers, insurance with respect to its properties and business, and the properties and business of its Significant Subsidiaries, against loss or damages of the kinds customarily insured against by reputable companies in the same or similar businesses, such insurance to be of such types and in such amounts (with such deductible amounts or other forms of self-insurance) as is customary for such companies under similar circumstances.

     Section 5.7 Maintenance of Property. The Borrower will keep, and cause each of its Significant Subsidiaries to keep, all property necessary to their respective businesses in good working order and condition (ordinary wear and tear excepted); provided that neither the Borrower nor any of its Subsidiaries shall be required to maintain any property, the maintenance of which is determined by it in good faith not to be in its best interest in the conduct of business.

     Section 5.8 Ownership of Subsidiaries. The Borrower shall own, directly or indirectly, at least 99% of the outstanding voting securities of each of the Guarantors.

     Section 5.9 Repayment of Existing Clarion Facility. The Borrower shall immediately repay all outstanding principal and interest under the Existing Clarion Facility out of the proceeds of the initial Tranche A Loan Borrowing, and the Borrower shall promptly provide the Administrative Agent evidence in a form reasonably acceptable to the Administrative Agent that such facility has been terminated and any security provided in respect thereof has been released.

     Section 5.10 New Subsidiaries. The Borrower shall promptly cause (a) any new Subsidiary, with the exception of ProjectCo and its Subsidiaries, which is acquired using the proceeds of any Loans to execute (i) a guaranty agreement in favor of the Collateral Agent and the Lenders in the form attached as Exhibit D-1, and (ii) a security agreement granting to the Collateral Agent a first priority, perfected security interest in all of such new Subsidiary’s assets in form and substance acceptable to the Collateral Agent (which, if such new Subsidiary is located in PNG, shall be in the form of Exhibit F), (b) the immediate parent of such new Subsidiary to execute in favor of the Collateral Agent a pledge agreement in the form attached as

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Exhibit E, and (c) a joinder to this Agreement and the Collateral Agency Agreement in a form acceptable to the Administrative Agent.

     Section 5.11 Performance of LNG/NGL Project MOU. The parties to the LNG/NGL Project MOU shall faithfully and punctually perform their respective obligations under the LNG/NGL Project MOU.

     Section 5.12 IPL Security Documents and SPI Pledge Agreement. Promptly after the Effective Date, the Borrower will lodge requests for approval of the IPL Security Documents and the SPI Pledge Agreement with the Bank of Papua New Guinea (“Bank of PNG”) pursuant to the Central Banking (Foreign Exchange and Gold) Regulation. Thereafter, the Borrower will use good faith efforts to obtain the approval of the IPL Security Documents and the SPI Pledge Agreement from the Bank of PNG and will notify the Administrative Agent in writing at least fortnightly of the progress of obtaining such approval. Within 180 Days after the Effective Date, the Borrower will cause the IPL Security Documents and the SPI Pledge Agreement to be executed, duly registered (with all applicable stamp taxes and other registration fees duly paid), and delivered, together with applicable officers certificates and opinions of counsel concerning such documents as would be required hereunder if such documents had been executed on the Effective Date, to the Administrative Agent.

ARTICLE 6
NEGATIVE COVENANTS

     The Borrower covenants and agrees that, so long as any Lender has any Commitment hereunder or any Obligation remains unpaid, unless otherwise agreed by the Required Lenders:

     Section 6.1 Restriction on Fundamental Changes.

     (a) The Borrower will not enter into any merger or consolidation, liquidate, wind-up or dissolve (or suffer any liquidation or dissolution), discontinue substantially all of its business or convey, lease, sell, transfer or otherwise dispose of, in one transaction or series of transactions, all or substantially all of its business or property; provided that the Borrower may effect such a merger, consolidation or sale (a “Permitted Transaction”) so long as after giving effect to such transaction, (x) no Default shall exist, (y) the surviving entity or purchaser, if other than the Borrower, assumes, pursuant to the terms of such transaction, each of the obligations of the Borrower under the Loan Documents and (z) such assumption is expressly evidenced by an agreement executed and delivered to the Lenders within 30 Days of such transaction in a form reasonably satisfactory to the Administrative Agent. Without limiting the generality of the foregoing, the transfer of more than 50% of the Borrower’s Consolidated Net Tangible Assets shall be deemed, for the purposes of this Section 6.1(a), a transfer of all or substantially all of the assets of the Borrower.

     (b) No transaction permitted by this Section 6.1 shall result in a discharge or novation of the Borrower under the Loan Documents. The Administrative Agent may require as a condition to any transaction permitted by this Section 6.1 evidence (including

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legal opinions) reasonably satisfactory to the Administrative Agent establishing satisfaction of the conditions set forth in this Section 6.1.

     Section 6.2 Transactions with Affiliates. Except as set forth on Schedule 6.2, neither the Borrower nor any Subsidiary will enter into any transaction or series of related transactions, whether or not in the ordinary course of business, with any Affiliate (other than in any such Affiliate’s capacity as a director or executive officer of the Borrower) on terms that are less favorable to the Borrower than those terms that could be obtained in a comparable arms-length transaction at the time from a Person who is not an Affiliate, in each case excluding transactions among the Borrower and its Subsidiaries.

     Section 6.3 Indebtedness. Neither the Borrower, the Guarantors nor any Significant Subsidiary shall create, assume, incur, or otherwise become or remain directly or indirectly obligated in respect of, or permit to be outstanding, any Indebtedness, except Permitted Indebtedness.

     Section 6.4 Liens. Neither the Borrower nor any Significant Subsidiary will create, incur, assume or suffer to exist, directly or indirectly, any Lien on any of its assets now owned or hereinafter acquired, except Permitted Liens.

     Section 6.5 Use of Proceeds; Margin Regulations. The Borrower shall not use the proceeds of any Loan in a manner that will violate or be inconsistent with the provisions of any law or regulation, including without limitation, Regulations T, U or X.

     Section 6.6 Environmental Matters. The Borrower shall not violate any Environmental Law, except for such violations which could not reasonably be expected to have a Material Adverse Effect.

     Section 6.7 Leverage Ratio. Adjusted Consolidated Debt will at no time exceed 75% of the sum of Adjusted Consolidated Debt and Consolidated Net Worth.

     Section 6.8 Fixed Charge Coverage Ratio. The Fixed Charge Coverage Ratio, calculated as of the end of each Fiscal Quarter set forth below (each, a “Measurement Date”) for the period set forth below (each, a “Measurement Period”) shall not be less than the ratio set forth below for the periods specified:

Measurement Date	Measurement Period	Minimum Ratio
December 31, 2006	Quarter then ended	1.10:1.00
March 31, 2007	Two quarters then ended	1.20:1.00
June 30, 2007	Three quarters then ended	1.30:1.00
September 30, 2007, and each Fiscal Quarter thereafter	Four quarters then ended	1.40:1.00

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     Section 6.9 S.P.I. Distribution Limited Accounts. The Borrower shall not permit S.P.I. Distribution Limited to establish or maintain any bank or investment accounts of any kind without the prior written consent of the Administrative Agent.

ARTICLE 7
LNG/NGL PROJECT PARTICIPATION

     Section 7.1 LNG/NGL Project MOU. In consideration of making the Loans available at the Applicable Interest Rate, each Lender shall have the right to become a party to a memorandum of agreement or similar contract (the “LNG/NGL Project MOU”), a form of which is attached as Exhibit G, to be executed by and among the Borrower and the applicable Lenders or their Affiliates on or prior to the Effective Date, which LNG/NGL Project MOU shall outline the terms under which the parties thereto shall have the right to participate in any LNG/NGL Project in Papua New Guinea (the “LNG/NGL Project”) that the Borrower or any of its Affiliates obtains the right to develop from the Government of Papua New Guinea (the “PNG Government”).

     Section 7.2 Definitive LNG/NGL Project Agreement. Pursuant to the LNG/NGL Project MOU, the Borrower and the Lender parties or Affiliates thereto shall promptly negotiate a joint venture agreement/project development agreement (the “Definitive LNG/NGL Project Agreement”) that will provide the definitive contractual terms and conditions under which the parties to the LNG/NGL Project MOU will undertake the formation of a new, special purpose joint venture project entity (“ProjectCo”) in order to pursue the LNG/NGL Project, and which contains the respective rights and obligations of the ProjectCo shareholders in connection with such matters as capital funding, equity issuances, corporate governance, share transfers, development budgeting, and other matters as may be mutually agreed. In the event the Definitive LNG/NGL Project Agreement is executed and delivered on or prior to the fourth Quarterly Payment Date, the Applicable Interest Rate shall be adjusted from and after such date in accordance with the definition of “Applicable Interest Rate” set forth in Section 1.1. In the event that the Borrower and the applicable Lenders that are parties to the LNG/NGL Project MOU fail to execute and deliver the Definitive LNG/NGL Project Agreement on or prior to the fourth Quarterly Payment Date, (a) the Applicable Interest Rate shall be increased to 10% from and after such fourth Quarterly Payment Date in accordance with the definition of “Applicable Interest Rate” set forth in Section 1.1, and (b) the LNG/NGL Project MOU shall immediately terminate without further action by any party thereto and the parties thereto shall have no further obligations thereunder.

ARTICLE 8
NOTICE OF AMENDMENTS AND WAIVERS

     Section 8.1 Solicitation of Lenders. The Borrower will not enter into any proposed amendment, modification or waiver of any affirmative or negative covenant or event of default contained in any Existing Committed Facility (including by way of replacement thereof) unless the Administrative Agent shall be informed thereof by the Borrower as soon as reasonably practicable, but in no event after the execution and delivery of such amendment, modification or waiver; and notwithstanding the foregoing, the Borrower will not enter into any proposed Commitment Increase (other than a Permitted Commitment Increase) in any Existing Committed

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Facility without the prior written consent of the Administrative Agent, which it shall be at liberty to withhold in its sole discretion.

ARTICLE 9
EVENTS OF DEFAULT; REMEDIES

     Section 9.1 Events of Default. Each of the following events, acts, occurrences or conditions shall constitute an Event of Default under this Agreement, regardless of whether such event, act, occurrence or condition is voluntary or involuntary or results from the operation of Law or pursuant to or as a result of compliance by any Person with any judgment, decree, order, rule or regulation of any Governmental Authority:

     (a) Failure to Make Payments. The Borrower shall (i) default in the payment when due of any principal on the Loans or (ii) default in the payment when due of any interest or fees hereunder for a period of five Business Days after such interest or fees are due and payable.

     (b) Breach of Representation or Warranty. Any representation or warranty made in any Loan Document or in any certificate or statement delivered pursuant thereto shall prove to be false or misleading in any material respect on the date as of which made or deemed made.

     (c) Breach of Covenants. (i) The Borrower shall fail to perform or observe any covenant or obligation arising under Section 5.9, 5.12, 6.1, 6.3, 6.5, 6.7, 6.8, or any Loan Document shall cease to be in full force and effect and enforceable against the parties thereto in accordance with its terms, or (ii) the Borrower, the Guarantors shall fail to perform or observe any other covenant or obligation arising under this Agreement or under any other Loan Document and, in the case of this sub-clause (ii), such failure shall continue for a period of 30 Days.

     (d) Default Under Other Agreements. The Borrower or any Subsidiary shall default in the payment when due (whether by scheduled maturity, required prepayment, acceleration, demand or otherwise) of any amount owing in respect of principal or interest (subject, in the case of interest, to any applicable grace period) in respect of any Material Financial Obligation, including the Existing Revolver Facility and the Existing OPIC Facility; or the Borrower or any Subsidiary shall default in the performance or observance of any other obligation or condition with respect to any Material Financial Obligation or any other event shall occur or condition exist, if, as a result, such Material Financial Obligation has become or can then be declared to be due and payable prior to its stated maturity other than as a result of a regularly scheduled payment; provided however, that in each of the cases described in the foregoing provisions of this Section 9.1(d), the Borrower shall have an additional 10-Day period from and after the occurrence of such default to effect a cure of such default, unless (i) the applicable lender counterparty accelerates (or notifies the Borrower or such Subsidiary of its intention to accelerate) the repayment of indebtedness under such Material Financial Obligation, or (ii) the applicable lender counterparty makes a demand against the Borrower for payment under any guaranty securing, in whole or in part, such Material Financial Obligation, in either of such cases

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such additional 10-Day cure period (or any remaining portion of such 10-Day cure period) shall no longer apply.

     (e) Bankruptcy, Etc. Any Event of Bankruptcy shall occur with respect to the Borrower or any Significant Subsidiary.

     (f) Dissolution. Any order, judgment, or decree shall be entered against the Borrower or any Significant Subsidiary decreeing its involuntary dissolution or split up and such order shall remain undischarged and unstayed for a period in excess of 30 Days; or the Borrower shall otherwise dissolve or cease to exist (except as permitted by Section 6.1).

     (g) Judgments. Any judgment or decree shall be entered by a court or courts of competent jurisdiction against the Borrower or any Significant Subsidiary and such judgment or decree (i) shall be in an amount greater than or equal to $5,000,000 and (ii) has not been discharged, bonded, or vacated within 30 Days from entry.

     (h) Change of Control. A Change of Control shall occur.

     Section 9.2 Rights and Remedies.

     (a) Upon the occurrence of any Event of Default described in Section 9.1(e), the Commitments shall automatically and immediately terminate and the unpaid principal amount of and any and all accrued interest on the Loans and any and all accrued fees and other Obligations shall automatically become immediately due and payable, with all additional interest from time to time accrued thereon and without presentation, demand, or protest or other requirements of any kind (including, without limitation, diligence, presentment, notice of intent to demand or accelerate and notice of acceleration), all of which are hereby expressly waived by the Borrower, and the obligation of each Lender to make any Loan hereunder shall thereupon terminate.

     (b) Upon the occurrence and during the continuance of any Event of Default (other than an Event of Default described in Section 9.1(e)), the Administrative Agent shall at the request of the Required Lenders, by notice to the Borrower (i) declare that the Commitments are terminated, whereupon the Commitments and the obligation of each Lender to make any Loan hereunder shall immediately terminate, and (ii) declare the unpaid principal amount of and any and all accrued and unpaid fees and other Obligations to be, and the same shall thereupon be, immediately due and payable with all additional interest from time to time accrued thereon and without presentation, demand, or protest or other requirements of any kind (including, without limitation, diligence, presentment, notice of intent to demand or accelerate and notice of acceleration), all of which are hereby expressly waived by the Borrower.

     Section 9.3 Additional Rights and Remedies. In addition to the rights and remedies set forth in Section 9.2, in the event that (a) an Event of Default has occurred pursuant to Section 9.1(c), or (b) in the event that the Borrower shall not have sufficient unrestricted funds available to repay the Loans in full at least 60 Days prior to the Maturity Date, if requested by the Majority Lenders, the Administrative Agent shall promptly notify Merrill Lynch, who shall have the right

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(but not the obligation) to require the Borrower to undertake an Approved Private Offering or an Approved Public Offering, at the Borrower’s election, in order to generate sufficient funds to repay all outstanding Obligations. Any exercise of the right granted to Merrill Lynch in the previous sentence does not constitute an election of remedies, and in the event the Approved Private Offering or Approved Public Offering, as applicable, is not consummated, then the Lenders will have the continuing right to exercise any of the other remedies available to the Lenders in this Article 9. In any contemplated transaction, the terms and conditions of the Engagement Letter shall control. For the purposes of this Section 9.3, the term “Approved Private Offering” means the offering in the U.S. or Canadian securities markets (as determined by Merrill Lynch after consultation with the Borrower) of shares or any convertible securities or other rights to acquire shares, for cash through an investment bank acting as initial purchaser (in the case of a U.S. offering exempt from registration under Rule 144A of the Securities Act) or using an investment bank as placement agent (in the case of a U.S offering exempt from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder), and anticipated in good faith to raise at least the amount of the then-outstanding Obligations; and the term “Approved Public Offering” means the firm commitment underwritten public offering in the U.S. or Canadian securities markets (as determined by Merrill Lynch after consultation with the Borrower) pursuant to a Registration Statement that became effective after the date hereof covering the offer and sale of shares for the account of the Borrower to the public with an anticipated aggregate offering price (before any underwriting discounts and commissions) anticipated in good faith to be at least the amount of the then-outstanding Obligations.

ARTICLE 10
THE AGENTS

     Section 10.1 Appointment and Authorization. Each Lender irrevocably appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement and the Notes as are delegated to the Administrative Agent by the terms hereof or thereof, together with all such powers as are reasonably incidental thereto.

     Section 10.2 Administrative Agent and Affiliates. The party serving as Administrative Agent hereunder shall have the same rights and powers under this Agreement as any other Lender and may exercise or refrain from exercising the same as though it were not the Administrative Agent, and such Lender and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if it were not the Administrative Agent.

     Section 10.3 Action by Administrative Agent. The obligations of the Administrative Agent hereunder are only those expressly set forth herein. Without limiting the generality of the foregoing, the Administrative Agent shall not be required to take any action with respect to any Default, except as expressly provided in Article 9.

     Section 10.4 Consultation with Experts. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent public accountants and other experts selected by it and shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with the advice of such counsel, accountants or experts.

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     Section 10.5 Liability of Administrative Agent. Neither the Administrative Agent nor any of its affiliates nor any of their respective directors, officers, agents or employees shall be liable for any action taken or not taken by it in connection herewith (a) with the consent or at the request of the Required Lenders (or such different number of Lenders as any provision hereof expressly requires for such consent or request) or (b) in the absence of its own gross negligence or willful misconduct. Neither the Administrative Agent nor any of its Affiliates nor any of their respective directors, officers, agents or employees shall be responsible for or have any duty to ascertain, inquire into or verify (1) any statement, warranty or representation made in connection with this Agreement or any borrowing hereunder; (2) the performance or observance of any of the covenants or agreements of the Borrower; (3) the satisfaction of any condition specified in Article 3, except receipt of items required to be delivered to the Administrative Agent; or (4) the validity, effectiveness or genuineness of this Agreement, the Notes or any other instrument or writing furnished in connection herewith. The Administrative Agent shall not incur any liability by acting in reliance upon any notice, consent, certificate, statement or other writing (which may be a Lender wire, telex, facsimile or similar writing) believed by it to be genuine or to be signed by the proper party or parties. Without limiting the generality of the foregoing, the use of the term “agent” in this Agreement with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable Law. Instead, such term is used merely as a matter of market custom and is intended to create or reflect only an administrative relationship between independent contracting parties.

     Section 10.6 Indemnification. Each Lender shall, ratably in accordance with its Commitment, indemnify the Administrative Agent, its affiliates and their respective directors, officers, agents and employees (to the extent not reimbursed by the Borrower) against any cost, expense (including counsel fees and disbursements), claim, demand, action, loss or liability (except such as result from such indemnitees’ gross negligence or willful misconduct) that such indemnitees may suffer or incur in connection with this Agreement or any action taken or omitted by such indemnitees hereunder.

     Section 10.7 Credit Decision. Each Lender acknowledges that it has, independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon any Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking any action under this Agreement.

     Section 10.8 Successor Administrative Agent. The Administrative Agent may resign at any time by giving notice thereof to the Lenders and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent. If no successor Administrative Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 Days after the retiring Administrative Agent gives notice of resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which shall be a commercial Lender or other financial institution organized or licensed under the Laws of the United States or of any State thereof and having a combined capital and surplus of at least $100,000,000. Upon the acceptance of its

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appointment as Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After any retiring Administrative Agent resigns as Administrative Agent hereunder, the provisions of this Article shall inure to its benefit as to actions taken or omitted to be taken by it while it was Administrative Agent.

     Section 10.9 Agents/Fees. The Borrower shall pay to each Agent for its own account fees in the amounts and at the times previously agreed upon by the Borrower and such Agent.

     Section 10.10 Other Agents. Nothing in this Agreement shall impose upon any Agent other than the Administrative Agent, in such capacity, any duty or responsibility whatsoever.

ARTICLE 11
CHANGE IN CIRCUMSTANCES

     Section 11.1 Increased Cost and Reduced Return.

     (a) If on or after the date hereof, the adoption of any applicable Law, rule or regulation, or any change in any applicable Law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or its Applicable Lending Office) with any request or directive (whether or not having the force of Law) of any such authority, central Lender or comparable agency shall impose, modify or deem applicable any reserve (including, without limitation, any such requirement imposed by the Board of Governors of the Federal Reserve System), special deposit, insurance assessment or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (or its Applicable Lending Office), and the result of any of the foregoing is to increase the cost to such Lender (or its Applicable Lending Office) of making or maintaining any Loan, or to reduce the amount of any sum received or receivable by such Lender (or its Applicable Lending Office) under this Agreement or under its Note with respect thereto, by an amount deemed by such Lender to be material, then, within 15 Days after demand by such Lender (with a copy to the Administrative Agent), the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduction.

     (b) If any Lender shall have determined that, after the date hereof, the adoption of any applicable Law, rule or regulation regarding capital adequacy, or any change in any such Law, rule or regulation, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or any request or directive regarding capital adequacy (whether or not having the force of Law) of any such authority, central Lender or comparable agency, has or would have the effect of reducing the rate of return on capital of such Lender as a consequence of such Lender’s obligations hereunder to a level below that which such Lender could have achieved but for such adoption, change, request or directive (taking into consideration its policies with respect

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to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, within 15 Days after demand by such Lender (with a copy to the Administrative Agent), the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction.

     (c) Each Lender will promptly notify the Borrower and the Administrative Agent of any event of which it has knowledge, occurring after the date hereof, which will entitle such Lender to compensation pursuant to this Section and will designate a different Lending Office if such designation will avoid the need for, or reduce the amount of, such compensation and will not, in the judgment of such Lender, be otherwise disadvantageous to such Lender. A certificate of any Lender claiming compensation under this Section and setting forth the additional amount or amounts to be paid to it hereunder shall be conclusive in the absence of manifest error. In determining such amount, such Lender may use any reasonable averaging and attribution methods.

Section 11.2 Taxes.

          (a) For the purposes of this Section, the following terms have the following meanings:

     (i) “Taxes” means any and all present or future taxes, duties, levies, imposts, deductions, charges or withholdings with respect to any payment by the Borrower pursuant to this Agreement or under any Note, and all liabilities with respect thereto, excluding (i) in the case of each Lender and Agent, taxes imposed on its income, and franchise or similar taxes imposed on it, by a jurisdiction under the Laws of which such Lender or Agent (as the case may be) is organized or in which its principal executive office is located or, in the case of each Lender, in which its Applicable Lending Office is located and (ii) in the case of each Lender, any United States withholding tax imposed on such payment at a rate up to (but not exceeding) the rate at which United States withholding tax would have been imposed on such a payment to such Lender under the Laws and treaties in effect when such Lender first became a party to this Agreement.

     (ii) “Other Taxes” means any present or future stamp or documentary taxes and any other excise or property taxes, or similar charges or levies, which arise from any payment made pursuant to this Agreement or under any Note or from the execution or delivery of, or otherwise with respect to, this Agreement or any Note.

     (b) All payments by the Borrower to or for the account of any Lender or Agent hereunder or under any Note shall be made without deduction for any Taxes or Other Taxes; provided that, if the Borrower shall be required by Law to deduct any Taxes or Other Taxes from any such payment, (i) the sum payable shall be increased as necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section) such Lender or Agent (as the case may be) receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions, (iii) the Borrower shall pay the full

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amount deducted to the relevant taxation authority or other authority in accordance with applicable Law and (iv) the Borrower shall furnish to the Administrative Agent, at its address referred to in Section 12.1, the original or a certified copy of a receipt evidencing payment thereof.

     (c) The Borrower agrees to indemnify each Lender and Agent for the full amount of Taxes and Other Taxes (including, without limitation, any Taxes or Other Taxes imposed or asserted by any jurisdiction on amounts payable under this Section) paid by such Lender or Agent (as the case may be) and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto. This indemnification shall be paid within 15 Days after such Lender or Agent (as the case may be) makes demand therefor.

     (d) Each Lender organized under the Laws of a jurisdiction outside the United States, before it signs and delivers this Agreement in the case of each Lender listed on the signature pages hereof and before it becomes a Lender in the case of each other Lender, and from time to time thereafter if requested in writing by the Borrower (but only so long as such Lender remains lawfully able to do so), shall provide the Borrower and the Administrative Agent with Internal Revenue Service form W-8BEN or W-8ECI, as appropriate, or any successor form prescribed by the Internal Revenue Service, certifying that such Lender is entitled to benefits under an income tax treaty to which the United States is a party which exempts the Lender from United States withholding tax or reduces the rate of withholding tax on payments of interest for the account of such Lender or certifying that the income receivable pursuant to this Agreement is effectively connected with the conduct of a trade or business in the United States.

     (e) For any period with respect to which a Lender has failed to provide the Borrower or the Administrative Agent with the appropriate form pursuant to Section 11.2(d) (unless such failure is due to a change in treaty, Law or regulation occurring after the date on which such form originally was required to be provided), such Lender shall not be entitled to indemnification under Sections 12.3(a) or 12.3(b) with respect to Taxes imposed by the United States; provided that if a Lender, which is otherwise exempt from or subject to a reduced rate of withholding tax, becomes subject to Taxes because of its failure to deliver a form required hereunder, the Borrower shall take such steps as such Lender shall reasonably request to assist such Lender to recover such Taxes.

     (f) If the Borrower is required to pay additional amounts to or for the account of any Lender pursuant to this Section, then such Lender will change the jurisdiction of its Applicable Lending Office if, in the judgment of such Lender, such change (i) will eliminate or reduce any such additional payment which may thereafter accrue and (ii) is not otherwise disadvantageous to such Lender.

ARTICLE 12
MISCELLANEOUS

     Section 12.1 Notices. All notices, requests and other communications to any party hereunder shall be in writing (including Lender wire, telex, facsimile or similar writing) and shall

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be given to such party: (a) in the case of the Borrower, any of the Guarantors or the Administrative Agent, at its address, facsimile number or telex number set forth on the signature pages hereof, (b) in the case of any Lender, at its address, facsimile number or telex number set forth in its Administrative Questionnaire or (c) in the case of any party, at such other address, facsimile number or telex number as such party may hereafter specify for the purpose by notice to the Administrative Agent and the Borrower. Each such notice, request or other communication shall be effective (i) if given by telex, when such telex is transmitted to the telex number referred to in this Section and the appropriate answerback is received, (ii) if given by facsimile, when transmitted to the facsimile number referred to in this Section and confirmation of receipt is received, (iii) if given by mail, 72 hours after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (iv) if given by any other means, when delivered at the address referred to in this Section; provided that notices to the Administrative Agent under Article 2 or Article 11 shall not be effective until received.

     Section 12.2 No Waivers. No failure or delay by any Agent or any Lender in exercising any right, power or privilege hereunder or under any Note shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any other right, power or privilege. The rights and remedies herein provided shall be cumulative and not exclusive of any rights or remedies provided by Law.

     Section 12.3 Expenses; Indemnification.

     (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses of the Administrative Agent, including reasonable fees and disbursements of special counsel for the Administrative Agent, in connection with the preparation and administration of this Agreement, any waiver or consent hereunder or any amendment hereof or any Default or alleged Default hereunder and (ii) if an Event of Default occurs, all reasonable out-of-pocket expenses incurred by the Administrative Agent and each Lender, including the reasonable fees and disbursements of counsel, in connection with such Event of Default and collection, Bankruptcy, insolvency and other enforcement proceedings resulting therefrom.

     (b) The Borrower agrees to indemnify each Agent and Lender, their respective affiliates and the respective directors, officers, agents and employees of the foregoing (each an “Indemnitee”) and hold each Indemnitee harmless from and against any and all liabilities, losses, damages, costs and expenses of any kind, including, without limitation, the reasonable fees and disbursements of counsel, which may be incurred by such Indemnitee in connection with any investigative, administrative or judicial proceeding (whether or not such Indemnitee shall be designated a party thereto) brought or threatened relating to or arising out of this Agreement or any actual or proposed use of proceeds of Loans hereunder; provided that no Indemnitee shall have the right to be indemnified hereunder for such Indemnitee’s (i) own gross negligence or willful misconduct or (ii) default in the performance of its own express contractual duties to the Borrower, in each case as determined by a court of competent jurisdiction.

     Section 12.4 Sharing of Set-offs. Each Lender agrees that if it shall, by exercising any right of set-off or counterclaim or otherwise, receive payment of a proportion of the aggregate

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amount of principal and interest then due with respect to any Note held by it which is greater than the proportion received by any other Lender in respect of the aggregate amount of principal and interest then due with respect to any Note held by such other Lender, the Lender receiving such proportionately greater payment shall purchase such participations in the Notes held by the other Lenders, and such other adjustments shall be made, as may be required so that all such payments of principal and interest with respect to the Notes held by the Lenders shall be shared by the Lenders pro rata; provided that nothing in this Section shall impair the right of any Lender to exercise any right of set-off or counterclaim it may have and to apply the amount subject to such exercise to the payment of indebtedness of the Borrower other than its indebtedness hereunder. The Borrower agrees, to the fullest extent it may effectively do so under applicable Law, that any holder of a participation in a Note, whether or not acquired pursuant to the foregoing arrangements, may exercise rights of set-off or counterclaim and other rights with respect to such participation as fully as if such holder of a participation were a direct creditor of the Borrower in the amount of such participation.

     Section 12.5 Amendments and Waivers. Any provision of this Agreement or the Notes may be amended or waived if, but only if, such amendment or waiver is in writing and is signed by the Borrower and the Required Lenders (and, if the rights or duties of any Agent are affected thereby, by such Agent); provided that no such amendment or waiver shall, unless signed by all the Lenders, (i) increase or decrease the Commitment of any Lender (except for a ratable decrease in the Commitments of all Lenders) or subject any Lender to any additional obligation, (ii) reduce the principal of or rate of interest on any Loan or any interest thereon or any fees hereunder, (iii) postpone the date fixed for any scheduled payment (but not any prepayment) of principal of or interest on any Loan or interest thereon or any fees hereunder or for the termination of any Commitment, (iv) change the definition of “Required Lenders” under Section 1.1 or (v) change the percentage of the Commitments or of the aggregate unpaid principal amount of the Notes, or the number of Lenders, which shall be required for the Lenders or any of them to take any action under this Section or any other provision of this Agreement.

     Section 12.6 Successors and Assigns.

     (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrower may not assign or otherwise transfer (other than pursuant to a Permitted Transaction) any of its rights under this Agreement without the prior written consent of all Lenders.

     (b) Any Lender may at any time grant to one or more Lenders or other institutions (each a “Participant”) participating interests in its Commitment or any or all of its Loans. If a Lender grants any such participating interest to a Participant, whether or not upon notice to the Borrower and the Administrative Agent, such Lender shall remain responsible for the performance of its obligations hereunder, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement. Any agreement pursuant to which any Lender may grant such a participating interest shall provide that such Lender shall retain the sole right and responsibility to enforce the Borrower’s obligations hereunder including, without limitation, the right to approve any

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amendment, modification or waiver of any provision of this Agreement; provided that such participation agreement may provide that such Lender will not agree to any modification, amendment or waiver of this Agreement described in clause (i), (ii) or (iii) of Section 12.5 without the consent of the Participant. The Borrower agrees that each Participant shall, to the extent provided in its participation agreement, be entitled to the benefits of Article 11 with respect to its participating interest. An assignment or other transfer which is not permitted by Section 12.6(c) or Section 12.6(d) below shall be given effect for purposes of this Agreement only to the extent of a participating interest granted in accordance with this subsection.

     (c) Any Lender may at any time assign to one or more Lenders or other institutions (each an “Assignee”) all, or a proportionate part (equivalent to an initial Commitment of not less than $10,000,000) of all, of its rights and obligations under this Agreement and the Notes, and such Assignee shall assume such rights and obligations, pursuant to an Assignment and Assumption Agreement in substantially the form of Exhibit B hereto signed by such Assignee and such transferor Lender, with (and subject to) the subscribed consent of the Borrower, which shall not be unreasonably withheld, and the Administrative Agent; provided that (i) if an Assignee is an affiliate of such transferor Lender or was a Lender immediately before such assignment, no such consent of the Borrower or the Administrative Agent shall be required and (ii) if an Event of Default has occurred and is continuing, no such consent of the Borrower shall be required. When such instrument has been signed and delivered by the parties thereto and such Assignee has paid to such transferor Lender the purchase price agreed between such transferor Lender and such Assignee, such Assignee shall be a Lender party to this Agreement and shall have all the rights and obligations of a Lender with a Commitment as set forth in such instrument of assumption, and the transferor Lender shall be released from its obligations hereunder to a corresponding extent, and no further consent or action by any party shall be required. Upon the consummation of any assignment pursuant to this subsection, the transferor Lender, the Administrative Agent and the Borrower shall make appropriate arrangements so that, if required, a new Note is issued to the Assignee. In connection with any such assignment, the transferor Lender shall pay to the Administrative Agent an administrative fee for processing such assignment in the amount of $3,500. If the Assignee is not incorporated under the Laws of the United States or a state thereof, it shall deliver to the Borrower and the Agent certification as to exemption from deduction or withholding of any United States federal income taxes in accordance with Section 11.2.

     (d) Any Lender may at any time assign all or any portion of its rights under this Agreement and its Note to a Federal Reserve Lender. No such assignment shall release the transferor Lender from its obligations hereunder.

     (e) No Assignee, Participant or other transferee of any Lender’s rights shall be entitled to receive any greater payment under Section 11.1 than such Lender would have been entitled to receive with respect to the rights transferred, unless such transfer is made with the Borrower’s prior written consent or by reason of the provisions of Section 11.1 or Section 12.2 requiring such Lender to designate a different Applicable Lending Office

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under certain circumstances or at a time when the circumstances giving rise to such greater payment did not exist.

     (f) Notwithstanding anything contained in this Section 12.6, the parties hereto acknowledge and agree that for purposes of this Agreement Clarion Finanz may act through its nominee Pacific LNG Operations Ltd.

     Section 12.7 Collateral. Each of the Lenders represents to each Agent and each of the other Lenders that it in good faith is not relying upon any Margin Stock as collateral in the extension or maintenance of the credit provided for in this Agreement.

     Section 12.8 Governing Law; Submission to Jurisdiction. This Agreement and each Note shall be governed by and construed in accordance with the Laws of the State of New York. The Borrower hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Agreement or the transactions contemplated hereby. The Borrower irrevocably waives, to the fullest extent permitted by Law, any objection which it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.

     Section 12.9 Counterparts; Integration; Effectiveness. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement constitutes the entire agreement and understanding among the parties hereto and supersedes any and all prior agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective when the Administrative Agent has received from each of the parties hereto a counterpart hereof signed by such party or facsimile or other written confirmation satisfactory to the Administrative Agent confirming that such party has signed a counterpart hereof.

     Section 12.10 WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE AGENTS AND THE LENDERS HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

     Section 12.11 Usury Savings Clause. Notwithstanding any other provision herein, the aggregate interest rate charged with respect to any of the Obligations, including all charges or fees in connection therewith deemed in the nature of interest under applicable law shall not exceed the Highest Lawful Rate. If the rate of interest (determined without regard to the preceding sentence) under this Agreement at any time exceeds the Highest Lawful Rate, the outstanding amount of the Loans made hereunder shall bear interest at the Highest Lawful Rate until the total amount of interest due hereunder equals the amount of interest which would have been due hereunder if the stated rates of interest set forth in this Agreement had at all times been in effect. In addition, if when the Loans made hereunder are repaid in full the total interest due hereunder (taking into account the increase provided for above) is less than the total amount of

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interest which would have been due hereunder if the stated rates of interest set forth in this Agreement had at all times been in effect, then to the extent permitted by law, the Borrower shall pay to Administrative Agent an amount equal to the difference between the amount of interest paid and the amount of interest which would have been paid if the Highest Lawful Rate had at all times been in effect. Notwithstanding the foregoing, it is the intention of the Lenders and the Borrower to conform strictly to any applicable usury laws. Accordingly, if any Lender contracts for, charges, or receives any consideration which constitutes interest in excess of the Highest Lawful Rate, then any such excess shall be cancelled automatically and, if previously paid, shall at such Lender’s option be applied to the outstanding amount of the Loans made hereunder or be refunded to the Borrower.

[signatures on following pages]

47

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the Day and year first above written.

INTEROIL CORPORATION, as Borrower
By:
	Name:
	Title:
		Address:
		[                                                            ]
		[                                                            ]
		[                                                            ]
		Facsimile: [                                        ]

MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
as Co-Lead Arranger and Co-Bookrunner,

By:
	Name:
	Title:
		Address:
		[                                                            ]
		[                                                            ]
		[                                                            ]

CLARION FINANZ AG,
as Lender, and as Co-Lead Arranger and Co-Bookrunner

By:
	Name:
	Title:
		Address:
		Gerbergasse 5
		P.O. Box 7427
		CH-8023 Zurich
		Switzerland
		Facsimile: +41-1-227-6010

MERRILL LYNCH CAPITAL CORPORATION,
as Lender, Administrative Agent and Collateral Agent

By:
	Name:
	Title:
		Address:
		[                                                            ]
		[                                                            ]
		[                                                            ]
		Facsimile: [                                        ]

COMMITMENT SCHEDULE
Tranche A Loans:

Name of Lender	Commitment
Merrill Lynch	$	50,000,000
Clarion Finanz	$	50,000,000
Total:	$	100,000,000

Tranche B Loans:

Name of Lender	Commitment
Merrill Lynch	$	20,000,000
Clarion Finanz	$	10,000,000
Total:	$	30,000,000

SCHEDULE 1.1
Significant Subsidiaries

S.P.I. Distribution Limited
InterOil Products Limited
SPI InterOil LDC
EP InterOil Limited
InterOil Limited

SCHEDULE 2.2(c)
USE OF PROCEEDS

Part 1

Tranche A Use of Funds (figures in US$millions)
Acquisition of Shell Assets and downstream working capital:	30.0
Repayment of Existing Clarion Facility:	23.5
Refinery Revamp works:	10.0
Midstream and downstream working capital:	20.0
Tranche A general corporate uses:	14.0
LNG/NGL Project Development Costs:	2.5
TOTAL:	100.00

SCHEDULE 2.2(c)
USE OF PROCEEDS

Part 2

Tranche B Use of Funds (figures in US$ millions)
LNG/NGL Project Development Costs:	22.5
Tranche B General Corporate Purposes:	7.5
TOTAL:	30.0

SCHEDULE 4.3
LITIGATION

1.	Ongoing arbitration between InterOil Limited and Clough Niugini Limited.
2.	Warranty dispute between InterOil Limited and Clough Niugini Limited.
3.	Incentive payment dispute between InterOil Corporation and Clough Niugini Limited.

SCHEDULE 4.7
GOVERNMENTAL APPROVALS

Approval of the Bank of Papua New Guinea pursuant to the Central Banking (Foreign Exchange and Gold) Regulation in order for InterOil Products Limited to enter into the IPL Guaranty Agreement and the IPL Security Agreement and for S.P.I. Distribution Limited to enter into the SPI Pledge Agreement.

SCHEDULE 6.2
TRANSACTIONS WITH AFFILIATES

1. Petroleum Independent and Exploration Corporation, a company controlled by Mr. Mulacek, the Borrower’s Chief Executive Officer, was paid a management fee of $150,000, $150,410, and $150,000 during 2005, 2004 and 2003, respectively. This management fee relates to Petroleum Independent and Exploration Corporation being appointed the General Manager of S.P. InterOil, LDC. The Borrower will continue to pay this management fee to Petroleum Independent and Exploration Corporation.

2. Breckland Limited (“Breckland”) provides technical and advisory services to the Borrower and its Subsidiaries on normal commercial terms. Roger Grundy, one of the Borrower’s directors, is also a director of Breckland and he provides consulting services to the Borrower and its Subsidiaries as an employee of Breckland. Breckland was paid $179,608, $120,426 and $131,250 during 2005, 2004 and 2003, respectively. The Borrower and its Subsidiaries anticipate that they will continue to retain Breckland for these technical and advisory services.

EXHIBIT A-1
Tranche A Loan Note

US$[                                        ] New York, New York May [                    ], 2006

     For value received, INTEROIL CORPORATION, a Canadian corporation (the “Borrower”), promises to pay to the order of [                    ] (the “Lender”), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Lender to the Borrower pursuant to the Loan Agreement referred to below on the maturity date provided for in the Loan Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Loan Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Merrill Lynch, [                                        ], New York, New York.

     All Loans made by the Lender, the respective types thereof and all repayments of the principal thereof shall be recorded by the Lender and, if the Lender so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Lender on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Lender to make any such recordation or endorsement shall not affect the Borrower’s obligations hereunder or under the Loan Agreement.

     This note is one of the Tranche A Loan Notes referred to in the Credit Agreement dated as of May 4, 2006 among InterOil Corporation, the Lenders party thereto, Merrill Lynch, as Lender, Administrative Agent, Co-Lead Arranger, Co-Bookrunner and Collateral Agent, Clarion Finanz AG, as Lender and Co-Lead Arrranger and Co-Bookrunner (as the same may be amended from time to time, the “Loan Agreement”). Terms defined in the Loan Agreement are used herein with the same meanings. Reference is made to the Loan Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof.

INTEROIL CORPORATION
By:
	Name:
	Title:

Loans and Payments of Principal

	Amount	Type	Amount of
	of	of	Principal	Notation
Date	Loan	Loan	Repaid	Made By

EXHIBIT A-2
Tranche B Loan Note

US$[                                        ] New York, New York                      [                    ], 2006

     For value received, INTEROIL CORPORATION, a Canadian corporation (the “Borrower”), promises to pay to the order of [                    ] (the “Lender”), for the account of its Applicable Lending Office, the unpaid principal amount of each Loan made by the Lender to the Borrower pursuant to the Loan Agreement referred to below on the maturity date provided for in the Loan Agreement. The Borrower promises to pay interest on the unpaid principal amount of each such Loan on the dates and at the rate or rates provided for in the Loan Agreement. All such payments of principal and interest shall be made in lawful money of the United States in Federal or other immediately available funds at the office of Merrill Lynch, [                                        ], New York, New York.

     All Loans made by the Lender, the respective types thereof and all repayments of the principal thereof shall be recorded by the Lender and, if the Lender so elects in connection with any transfer or enforcement hereof, appropriate notations to evidence the foregoing information with respect to each such Loan then outstanding may be endorsed by the Lender on the schedule attached hereto, or on a continuation of such schedule attached to and made a part hereof; provided that the failure of the Lender to make any such recordation or endorsement shall not affect the Borrower’s obligations hereunder or under the Loan Agreement.

     This note is one of the Tranche B Loan Notes referred to in the Credit Agreement dated as of May 4, 2006 among InterOil Corporation, the Lenders party thereto, Merrill Lynch, as Lender, Administrative Agent, Co-Lead Arranger, Co-Bookrunner and Collateral Agent, Clarion Finanz AG, as Lender and Co-Lead Arrranger and Co-Bookrunner (as the same may be amended from time to time, the “Loan Agreement”). Terms defined in the Loan Agreement are used herein with the same meanings. Reference is made to the Loan Agreement for provisions for the prepayment hereof and the acceleration of the maturity hereof.

INTEROIL CORPORATION
By:
	Name:
	Title:

Loans and Payments of Principal

	Amount	Type	Amount of
	of	of	Principal	Notation
Date	Loan	Loan	Repaid	Made By

EXHIBIT B

Form of Assignment and Assumption Agreement

ASSIGNMENT AND ASSUMPTION AGREEMENT

     THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the “Agreement”) dated as of [                    ], 200[_] among [NAME OF ASSIGNOR] (the “Assignor”), [NAME OF ASSIGNEE] (the “Assignee”), INTEROIL CORPORATION (the “Borrower”) and MERRILL LYNCH CAPITAL CORPORATION, as Administrative Agent (the “Administrative Agent”).

     WHEREAS, this Assignment and Assumption Agreement (the “Agreement”) relates to the Credit Agreement dated as of May 4, 2006, among the Borrower, the Assignor and the other Lenders party thereto, as Lenders, and the Administrative Agent (as amended from time to time, the “Loan Agreement”);

     [WHEREAS, as provided under the Loan Agreement, the Assignor has a Commitment to make Loans to the Borrower in an aggregate principal amount at any time outstanding not to exceed $                    ; and]

     [WHEREAS, Loans made to the Borrower by the Assignor under the Loan Agreement in the aggregate principal amount of $                     are outstanding at the date hereof; and]

     WHEREAS, the Assignor proposes to assign to the Assignee all of the rights of the Assignor under the Loan Agreement in respect of a portion of its [Commitment] [Loans] thereunder in an amount equal to $                     (the “Assigned Amount”), and the Assignee proposes to accept assignment of such rights and assume the corresponding obligations from the Assignor on such terms;

     NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereto agree as follows:

     SECTION 1. Definitions. All capitalized terms not otherwise defined herein have the respective meanings set forth in the Loan Agreement.

     SECTION 2. Assignment. The Assignor hereby assigns and sells to the Assignee all of the rights of the Assignor under the Loan Agreement to the extent of the Assigned Amount, and the Assignee hereby accepts such assignment from the Assignor and assumes all of the obligations of the Assignor under the Loan Agreement to the extent of the Assigned Amount. Upon the execution and delivery hereof by the Assignor, the Assignee, [the Borrower, and the Administrative Agent] and the payment of the amounts specified in Article 3 required to be paid on the date hereof [(i)] the Assignee shall, as of the date hereof, succeed to the rights and be obligated to perform the obligations of a Lender under the Loan Agreement with [a Commitment][outstanding Loans] in an amount equal to the Assigned Amount, [and (ii) the Commitment of the Assignor shall, as of the date hereof, be reduced by a like amount and] the Assignor released from its obligations under the Loan Agreement to the extent such obligations

have been assumed by the Assignee. The assignment provided for herein shall be without recourse to the Assignor.

     SECTION 3. Payments. As consideration for the assignment and sale contemplated in Article 2 hereof, the Assignee shall pay to the Assignor on the date hereof in Federal funds the amount heretofore agreed between them. (1) It is understood that commitment and/or facility fees accrued before the date hereof are for the account of the Assignor and such fees accruing on and after the date hereof are for the account of the Assignee. Each of the Assignor and the Assignee agrees that if it receives any amount under the Loan Agreement which is for the account of the other party hereto, it shall receive the same for the account of such other party to the extent of such other party’s interest therein and promptly pay the same to such other party.

     SECTION 4. Consent of the [Borrower and the Administrative Agent]. This Agreement is conditioned upon the consent of [the Borrower and the Administrative Agent] pursuant to Section 12.06(c) of the Loan Agreement. The execution of this Agreement by such Persons is evidence of their consent. [Pursuant to Section 12.06(c), the Borrower agrees to execute and deliver a Note payable to the order of the Assignee to evidence the assignment and assumption provided for herein.]

     SECTION 5. Non-reliance on Assignor. The Assignor makes no representation or warranty in connection with, and shall have no responsibility with respect to, the solvency, financial condition, or statements of the Borrower, or the validity and enforceability of the Borrower’s obligations under the Loan Agreement or any Note. The Assignee acknowledges that it has, independently and without reliance on the Assignor, and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement and will continue to be responsible for making its own independent appraisal of the business, affairs and financial condition of the Borrower.

     (1) Amount should combine principle together with accrued interest and breakage compensation, if any, to be paid by the Assignee, net of any portion of any upfront fee to be paid by the Assignor to the Assignee. It may be preferable in an appropriate case to specify these amounts generically or by formula rather than as a fixed sum.

     SECTION 6. Governing Law. This Agreement shall be governed by and construed in accordance with the Laws of the State of New York.

     SECTION 7. Counterparts. This Agreement may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

     IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered by their duly authorized officers as of the date first above written.

[NAME OF ASSIGNOR]

By:

Name:

Title:

[NAME OF ASSIGNEE]

By:

Name:

Title:

INTEROIL CORPORATION

By:

Name:

Title:

MERRILL LYNCH CAPITAL CORPORATION,

as Administrative Agent

By:

Name:

Title:

EXHIBIT C

Form of Engagement Letter

[Letterhead of Merrill Lynch & Co.]

May 4, 2006

InterOil Corporation
Suite 2, Level 2
Orchid Plaza, 79-88 Abbott Street
Cairns, QLD 4870
Australia

Attention:	Mr. Phil E. Mulacek,
	Chairman of the Board,
	Chief Executive Officer and President

Dear Phil:

     1. Offering. Merrill Lynch, Pierce, Fenner & Smith Incorporated, on behalf of itself and its affiliate Merrill Lynch & Co. (collectively, “Merrill Lynch”), is pleased to have been granted the exclusive mandate to act as global coordinator, sole lead manager or placement agent, as appropriate, and sole book-runner in connection with any proposed Offering by InterOil Corporation (which together with any subsidiaries or affiliates is hereinafter referred to as the “Company”) during the term of this letter agreement, including without limitation, an offering initiated pursuant to Section 9.3 of that certain Credit Agreement, dated as of May 4, 2006 (the “ML-IOC Credit Agreement”) by and among InterOil Corporation, as Borrower, the Lenders party thereto, Merrill Lynch Capital Corporation, as Administrative Agent, Merrill Lynch Pierce, Fenner & Smith Incorporated and Clarion Finanz AG, as Co-Lead Arrangers and Co-Bookrunners, and Merrill Lynch Capital Corporation, as Collateral Agent. For the purposes of this letter agreement, the term “Offering” means the proposed issue, offer and sale by the Company of any of the following (whether individually or in combination, and whether in a single or multiple offerings): common shares, preferred shares, bonds, notes or similar instruments (collectively, the “Securities”), including an Offering whereby the existing owners and holders of equity interests in the Company are first offered the right to purchase or acquire such Securities on the same terms as those being used in connection with any Offering; provided however, that the term “Securities” shall not include any promissory notes made by the Company in connection with the refinancing of any of the Existing Committed Facilities (as such term is defined in the ML-IOC Credit Agreement) or any interests created in connection with the farm-in or farm-out of upstream oil and gas exploration properties or prospects. The particular form of Securities in any Offering, as well as the market(s) in which such Securities are issued, shall be determined by Merrill Lynch and the Company after joint consultation. For the purposes of clarification, this letter agreement does not constitute, and should not be construed as, an agreement or commitment by or on behalf of Merrill Lynch with respect to any Offering or otherwise to underwrite, sell or purchase any Securities or to enter into any other such transaction; it being agreed that Merrill Lynch may, in its sole judgment and discretion,

1

determine at any time not to proceed with any Offering. Any such agreement will be made only by the execution by Merrill Lynch of an underwriting, Securities purchase or other applicable type of agreement.

     Except as otherwise specifically provided in this letter agreement, no other entity or person will participate in any Offering as manager, placement agent or initial purchaser without the mutual agreement of Merrill Lynch and the Company, and the Company agrees that Merrill Lynch may form (in consultation with the Company) a syndicate of investment banks to act as co-managers or other participants in connection with any Offering. Notwithstanding the foregoing, Merrill Lynch agrees that Clarion Finanz AG (“Clarion Finanz”) may be afforded the right to act as co-manager and to otherwise participate with Merrill Lynch in connection with any Offering on terms whereby it receives a portion of any fee or underwriting discount (as applicable) that is designed to reflect its total participation in the Tranche A Loans and Tranche B Loans pursuant to the Credit Agreement, which as of the date of this letter agreement equals 46%; provided however, that in no event shall the fees or underwriting discounts to Merrill Lynch be less than 54% of the total fees or underwriting discounts applicable to such Offering.

     Notwithstanding the foregoing, at any time during the term of this letter agreement that an Event of Default (as defined in the Credit Agreement) has not occurred and/or is not continuing (and with respect to the period beginning 60 days prior to the Maturity Date (as defined in the Credit Agreement) in the event InterOil Corporation has sufficient unrestricted funds available to repay the Loans (as defined in the Credit Agreement) in full at the Maturity Date), the Company may present to Merrill Lynch in writing the general terms and conditions of a proposed Offering in which one or more third-parties (collectively, the “Third Party”) have expressed an interest to underwrite, sell or purchase any Securities of the Company (the “Proposed Offering”). If, within fifteen (15) Business Days of receipt of such proposal, Merrill Lynch notifies the Company in writing of its intention to act as global coordinator, sole lead manager or placement agent, as appropriate, and sole book-runner in connection with such Proposed Offering, then Merrill Lynch shall so act to the exclusion of such Third Party, and such Proposed Offering shall be deemed to be an Offering subject to and governed by the terms and conditions of this letter agreement. If, within fifteen (15) Business Days of receipt of such proposal, Merrill Lynch either fails to respond in writing or it notifies the Company in writing that it does not intend to act as global coordinator, sole lead manager or placement agent, as appropriate, and sole book-runner in connection with such Proposed Offering, the Company shall be free to retain such Third-Party to underwrite, sell or purchase any Securities on the terms and conditions set forth in the original written notification of such Proposed Offering. In the event of any material change in the terms and conditions of the Proposed Offering from and after the date of original written notification to Merrill Lynch up to the date of closing and funding of such Proposed Offering, such Proposed Offering, together with the subject amendment or modification, shall be re-offered to Merrill Lynch in writing as provided in this paragraph, and Merrill Lynch shall have another five (5) Business Days to notify the Company in writing whether it intends to act as global coordinator, sole lead manager or placement agent, as appropriate, and sole book-runner in connection with such Proposed Offering, as so amended or modified. The Company undertakes to ensure that its activities and conduct with any Third Party, the terms and conditions of any Proposed Offering, are consistent with Merrill Lynch’s rights under this letter agreement.

2

     2. Fees and Expenses. The Company shall pay to Merrill Lynch the following fees and expenses:

     (a) Fees / Underwriting Discounts. Upon the closing and funding of any Offering (excluding, however, any Proposed Offering which is timely and properly presented to Merrill Lynch but in which Merrill Lynch does not act as global coordinator, sole lead manager or placement agent, as appropriate, and sole book-runner), the Company shall pay, or cause to be paid, to Merrill Lynch fees or underwriting discounts, as applicable, (measured by a % of the gross proceeds received by the Company) in the amount in respect of such Offering as set forth in the Pricing Grid attached as Annex B. If, during the Term (as defined in Section 7) of this letter agreement, the Company or its affiliates shall effect any public offering or private placement of any debt or equity Securities, or Securities convertible or exchangeable for debt or equity Securities of the Company or any of its affiliates (excluding, however, any Proposed Offering which is timely and properly presented to Merrill Lynch but in which Merrill Lynch does not act as global coordinator, sole lead manager or placement agent, as appropriate, and sole book-runner), pursuant to an agreement in principle reached or entered into by the parties thereto during the term of this letter agreement (whether or not in writing or binding upon the parties thereto or subject to conditions precedent), Merrill Lynch shall be entitled to receive, and the Company agrees to pay or cause to be paid to Merrill Lynch, a fee upon the closing and funding of such transaction calculated in accordance with this Section 2(i) as if Merrill Lynch had underwritten or placed all of such Securities.

     (b) Reimbursement of Expenses. All costs and expenses associated with any Offering are for the account of the Company, whether or not any Offering is consummated. These expenses will include, but are not limited to, expenses relating to the preparations, printing and delivery of any offering materials and registration statement for any Offering, and trustee, depositary, fiscal agent, transfer agent or registrar’s fees, listing or filing fees, roadshow expenses, and the fees and expenses of accountants, rating agencies, and legal counsel to the Company and the managers. In addition to the fees, the Company agrees to reimburse Merrill Lynch, upon request made from time to time, for its reasonable expenses, whether or not any Offering is consummated. These expenses generally include travel costs, preparation, printing and delivery of any offering materials and registration statement for any Offering, any trustee, depositary, fiscal agent, transfer agent or registrar’s fees, listing or filing fees, roadshow expenses, and other customary expenses for this type of transaction, including the reasonable fees and disbursements of legal counsel.

     (c) Payments in U.S. Dollars. The Company will pay to Merrill Lynch the fees and expenses referred to in this letter agreement and any other amounts due hereunder in U.S. dollars in same day funds through a money transfer to an account to be designated in writing by Merrill Lynch. All fees and expenses payable hereunder are net of all applicable withholding and similar taxes.

     3. Information. The Company shall furnish, or arrange to have furnished to, Merrill Lynch, all information that is required to be disclosed in any registration statement, prospectus, offering memorandum or other offering materials, or is material in the context of any Offering and all financial and other information concerning the Company that Merrill Lynch

3

believes appropriate to its engagement (all such information so furnished being the “Information”). Merrill Lynch (a) will use and rely on the accuracy and completeness of the Information supplied or otherwise made available to Merrill Lynch, discussed with or reviewed by or for Merrill Lynch or publicly available without having any obligation to independently verify the same, (b) does not assume responsibility for the accuracy or completeness of the Information or such other information, and (c) with respect to any financial forecasts that may be furnished to or discussed with Merrill Lynch by the Company, will assume that they have been reasonably prepared and reflect the best then currently available estimates and judgment of the Company’s management. The Company will notify Merrill Lynch promptly if any information previously provided becomes inaccurate or is required to be updated.

     4. Indemnity. The Company agrees to the provisions with respect to the indemnification of Merrill Lynch and the other matters set forth in Annex A. Annex A is incorporated by reference in its entirety into this letter agreement.

     5. Independent Contractor. In its capacity hereunder, Merrill Lynch shall act as independent contractor, and any duties of Merrill Lynch arising out of its engagement pursuant to this letter agreement shall be owed solely to the Company.

     6. Public Announcements. Merrill Lynch may, after consummation of any Offering, at its option and expense, place an announcement in such newspapers, periodicals and electronic media as it may choose, stating that Merrill Lynch has acted as the global coordinator, sole lead manager or placement agent, as appropriate, and sole book-runner to the Company in connection with any Offering. The Company agrees that except as required by applicable law, any reference to Merrill Lynch or the fees payable to Merrill Lynch in any offering circular, registration statement or other disclosure document, or in any press release or other document or communication, is subject to prior approval by Merrill Lynch.

     7. Term and Termination. The appointment of Merrill Lynch hereunder may be terminated by at any time by Merrill Lynch upon written notice thereof to that effect, and by the Company at any time after the Loans advanced pursuant to the ML-IOC Credit Agreement shall have been indefeasibly paid in full by the Company (such period being hereinafter referred to as the “Term”) upon written notice to that effect to Merrill Lynch, it being understood that the provisions of Sections 2 (Fees and Expenses), 4 (Indemnity), 7 (Term and Termination), and 9 (Miscellaneous) shall survive termination of this agreement, without regard to which of the parties initiated such termination, or the reason (if any) therefor.

     8. Acknowledgements. Merrill Lynch is not, and does not hold itself out to be, an advisor as to legal, tax, accounting or regulatory matters in any jurisdiction. The Company shall consult with its own advisors concerning such matters and shall be responsible for making its own independent investigation and appraisal of the risks, benefits and suitability of the transactions contemplated by this letter agreement, and Merrill Lynch shall have no responsibility or liability to the Company with respect thereto. The Company also acknowledges and agree that (a) each transaction contemplated hereby is and shall be an arm’s-length commercial transaction between the Company, on the one hand, and Merrill Lynch, on the other hand, (b) in connection with each such transaction and the process leading thereto Merrill Lynch

4

will act solely as a principal and not as agent (except as otherwise provided herein) or fiduciary of the Company or its stockholders, affiliates, creditors, employees or any other party, (c) Merrill Lynch will not assume an advisory or fiduciary responsibility in favor of the Company with respect to any of the transactions contemplated hereby or the process leading thereto (irrespective of whether Merrill Lynch has advised or is currently advising the Company on other matters) and Merrill Lynch will not have any obligation to the Company with respect to the transactions contemplated in this letter agreement except the obligations expressly set forth herein, and (d) Merrill Lynch may be engaged in a broad range of transactions that involve interests that differ from those of the Company.

     9. Miscellaneous.

     (a) No waiver, amendment or other modification of this letter agreement shall be effective unless in writing and signed by each party to be bound thereby. This letter agreement shall inure to the benefit of and be binding on the Company, Merrill Lynch and their respective successors.

     (b) In case any provision of this letter agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions of this letter agreement shall not in any way be affected or impaired thereby.

     (c) This letter agreement shall be governed by, and construed and interpreted in accordance with, the laws of the State of New York. All actions and proceedings arising out of or relating to this letter agreement shall be heard and determined in any New York state or federal court sitting in the Borough of Manhattan of the City of New York, to whose jurisdiction the Company hereby irrevocably submits. The Company hereby irrevocably waives, to the fullest extent it may effectively do so, the defense of an inconvenient forum to the maintenance of all such actions and proceedings.

     (d) The Company also irrevocably consents to the service of any and all process in all such actions and proceedings by the mailing of copies of such process to the Company at InterOil Corporation, 25025 I-45 North, Suite 420, The Woodlands, Texas, 77380, Attention: General Counsel.

     (e) Each of Merrill Lynch and the Company (on its own behalf and, to the extent permitted by applicable law, on behalf of its shareholders) waives all right to trial by jury in any action, proceeding or counterclaim (whether based upon contract, tort or otherwise) related to or arising out of this letter agreement.

     (f) Each party hereto waives to the fullest extent permitted by applicable law, all immunity (whether on the basis of sovereignty or otherwise) from jurisdiction, attachment (both before and after judgment) and execution to which it might otherwise be entitled in any action or proceeding in courts of any country or jurisdiction, relating in any way to this letter agreement or any Offering and agrees that it will not raise, claim or cause to be pleaded any such immunity at or in respect of any such action or proceeding.

5

     Please confirm that the foregoing correctly sets forth our agreement by signing and returning to Merrill Lynch the enclosed duplicate copy of this letter agreement.

Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
By:
	Name:
	Title:

Accepted and Agreed
to as of the date first
written above:

INTEROIL CORPORATION
By:
	Name: Title:

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ANNEX A

     The Company agrees to indemnify and hold harmless Merrill Lynch and its affiliates, and its and their respective directors, officers, employees, agents and controlling persons (Merrill Lynch and each such person being an “Indemnified Party”) from and against any and all losses, claims, damages and liabilities and expenses, joint or several, to which such Indemnified Party may become subject under any applicable federal, state or foreign law (including Canadian federal or provincial law) or otherwise, and related to, arising out of or in connection with (i) any untrue statement or alleged untrue statement of a material fact contained in any information (whether oral or written) or documents including without limitation, any Information or offering document, furnished or made available by the Company, directly or through Merrill Lynch or otherwise, to any prospective offeree or any of its representatives of Securities included in any Offering, or the omission or the alleged omission to state therein a material fact necessary in order to make the statements therein not misleading, in the light of the circumstances under which they were made (other than any information provided by Merrill Lynch to the Company), or (ii) any matters contemplated hereby or the engagement of Merrill Lynch pursuant to, and the performance by Merrill Lynch of the services contemplated by, this letter agreement, and will reimburse any Indemnified Party for all expenses (including counsel fees and expenses) as they are incurred by an Indemnified Party in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party and whether or not such claim, action or proceeding is initiated or brought by or on behalf of the Company. The Company will not be liable under clause (ii) above to the extent that any loss, claim, damage, liability or expense is found in a final judgment by a court of competent jurisdiction to have resulted from Merrill Lynch’s bad faith or gross negligence. No Indemnified Party shall have any liability (whether direct or indirect, in contract or tort or otherwise) to the Company or its security holders or creditors related to, arising out of or in connection with, the engagement of Merrill Lynch pursuant to, or the performance by Merrill Lynch of the services contemplated by, this letter agreement except to the extent that any loss, claim, damage or liability is found in a final judgment by a court of competent jurisdiction to have resulted from Merrill Lynch’s bad faith or gross negligence.

     If the indemnification of an Indemnified Party provided for in this letter agreement is for any reason unavailable or insufficient to hold harmless an Indemnified Party, then the Company agrees to contribute to the aggregate amount of any losses, claims, damages, liabilities and expenses incurred by such Indemnified Party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits to the Company, on the one hand, and Merrill Lynch and any other underwriters, on the other hand, from any Offering (whether or not such Offering is consummated) or (ii) if (but only if) the allocation provided for in clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Company, on the one hand, and Merrill Lynch and any other underwriters, on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. For the purposes of this paragraph the relative benefits to the Company and Merrill Lynch from any Offering as contemplated shall be deemed to be in the same respective proportions as the total net proceeds (before deducting expenses) from any

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Offering received or contemplated to be received by the Company for any Offering and the total underwriting discount received by Merrill Lynch and any other underwriters bear to aggregate offering price as set forth in any offering document; provided however, that, to the extent permitted by applicable law, in no event shall the Indemnified Parties be required to contribute any amount in excess of the amount by which the total price at which the Securities underwritten and distributed by it exceeds the amount of any damages which such underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission.

     The Company agrees that, without Merrill Lynch’s prior written consent, it will not settle, compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding in respect of which indemnification could be sought under the indemnification provision of this letter agreement (whether or not Merrill Lynch or any other Indemnified Party is an actual or potential party to such claim, action or proceeding), unless such settlement, compromise or consent includes an unconditional release of each Indemnified Party from all liability arising out of such claim, action or proceeding and does not include a statement as to or an admission of fault, culpability or failure to act by or on behalf of any Indemnified Party.

     In the event that an Indemnified Party is requested or required to appear as a witness in any action brought by or on behalf of or against the Company or any of its affiliates in which such Indemnified Party is not named as a defendant, the Company agrees to reimburse Merrill Lynch for all expenses incurred by it in connection with such Indemnified Party’s appearing and preparing to appear as such a witness, including, without limitation, the fees and disbursements of its legal counsel, and to compensate Merrill Lynch in an amount to be mutually agreed upon.

     The Company agrees to indemnify Merrill Lynch against any loss incurred by Merrill Lynch as a result of any judgment or order being given or made for any amount due hereunder and such judgment or order being expressed and paid in a currency (the “Judgment Currency”) other than United States dollars and as a result of any variation as between (i) the rate of exchange at which the United States dollar amount is converted into the Judgment Currency for the purpose of such judgment or order, and (ii) the rate of exchange at which Merrill Lynch is able to purchase United States dollars with the amount of the Judgment Currency actually received by Merrill Lynch. The foregoing indemnity shall constitute a separate and independent obligation of the Company and shall continue in full force and effect notwithstanding any such judgment or order as aforesaid. The term “rate of exchange” shall include any premiums and costs of exchange payable in connection with the purchase of, or conversion into, the relevant currency.

     The Company agrees that the indemnification and contribution provisions contained in this letter agreement are in addition to and not in lieu of, any indemnification and contribution provisions contained in any underwriting, purchase or other placement agent agreement entered into by the parties.

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ANNEX B

Transaction Pricing Grid

	Registration	Fees / Underwriting Discount
Offering Type	Rights (Y/N)	(% of Proceeds Received by the Company)
Private*
Equity Securities Offering	N	6%
Convertible Securities Offering	N	5%
Debt Securities Offering	N	3%
Public**
Equity Securities Offering	Y	6%
Convertible Securities Offering	Y	3%
Debt Securities Offering	Y	3%
Other***	[?]	Market fee /underwriting discount in an amount comparable to recent similar transactions, as agreed by Merrill Lynch and the Company

NOTES:

*	Private Offering in the U.S. or Canadian Securities markets of shares or any convertible Securities or other rights to acquire shares, for cash through an investment bank acting as initial purchaser (in the case of a U.S. offering exempt from registration under Rule 144A of the Securities Act) or using an investment bank as placement agent (in the case of a U.S offering exempt from registration under Section 4(2) of the Securities Act or Regulation D promulgated thereunder).
**	Firm commitment underwritten public Offering in the U.S. or Canadian Securities markets pursuant to a Registration Statement that became effective after the date of this letter agreement covering the offer and sale of shares for the account of the Company to the public.
***	Any other contemplated Securities Offering that does not fit within the categories set forth in this pricing grid.

EXHIBIT D-1

Form of Guaranty Agreement

GUARANTY

     THIS GUARANTY (the “Guaranty”), dated as of May [___], 2006 (the “Effective Date”), made by [                     ] (the “Guarantor”) in favor of MERRILL LYNCH CAPITAL CORPORATION (“Merrill Lynch”), as Administrative Agent (“Administrative Agent”) on behalf of the Beneficiaries (defined below).

W I T N E S S E T H :

     WHEREAS, Guarantor’s ultimate parent entity, InterOil Corporation (the “Borrower”), various financial institutions from time to time party thereto (the “Lenders”), Merrill Lynch, as Administrative Agent (the “Administrative Agent”), Merrill Lynch and Clarion Finanz AG, as Co-Arrangers and Co-Bookrunners (collectively, the “Co-Arrangers”), and Merrill Lynch, as Collateral Agent (“Collateral Agent”) have entered into a Credit Agreement, dated as of May 4, 2006 (as amended, modified or supplemented from time to time, the “Credit Agreement”), providing for the making of Loans as contemplated therein (the Lenders, the Co-Arrangers, the Administrative Agent, and the Collateral Agent are herein collectively called the “Beneficiaries”;

     WHEREAS, it is a condition to the making of Loans under the Credit Agreement that the Guarantor shall have executed and delivered this Guaranty in favor of the Beneficiaries; and

     WHEREAS, the Guarantor will obtain benefits from the incurrence of Loans by the Borrower under the Credit Agreement and, accordingly, desires to execute this Guaranty in order to satisfy the conditions described in the preceding paragraph and to induce the Lenders to make Loans to the Borrower;

     NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to each Guarantor, the receipt and sufficiency of which are hereby acknowledged, the Guarantor hereby makes the following representations and warranties to the Beneficiaries and hereby covenants and agrees with each Beneficiary as follows:

     Section 1. Definitions. Capitalized terms used but not defined herein have the meanings ascribed to such terms in the Credit Agreement. All other capitalized terms used herein shall have the meanings defined herein.

     Section 2. Guaranty of the Obligations. Subject to the provisions of Section 3, Guarantor hereby irrevocably and unconditionally guarantees to the Administrative Agent for the ratable benefit of the Beneficiaries the due and punctual payment in full of all Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of any automatic stay provision of any applicable law governing bankruptcy) (collectively, the “Guaranteed Obligations”).

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     Section 3. Payment by Guarantor. Guarantor hereby agrees, in furtherance of the foregoing and not in limitation of any other right that any Beneficiary may have at law or in equity against Guarantor by virtue hereof, that upon the failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under any automatic stay provision of any applicable law governing bankruptcy), Guarantor will upon demand pay, or cause to be paid, in Cash, to the Administrative Agent for the ratable benefit of the Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guaranteed Obligations then due as aforesaid, accrued and unpaid interest on such Guaranteed Obligations (including interest that, but for the Borrower’s becoming the subject of any bankruptcy proceeding, would have accrued on such Guaranteed Obligations, whether or not a claim is allowed against the Borrower for such interest in the related bankruptcy case) and all other Guaranteed Obligations then owed to the Beneficiaries as aforesaid.

     Section 4. Liability of Guarantor Absolute. Guarantor agrees that its obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance that constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guaranteed Obligations. In furtherance of the foregoing and without limiting the generality thereof, Guarantor agrees as follows:

     (a) this Guaranty is a guaranty of payment when due and not of collectability;

     (b) the Administrative Agent may enforce this Guaranty upon the occurrence of an Event of Default notwithstanding the existence of any dispute between the Borrower and any Beneficiary with respect to the existence of such Event of Default;

     (c) the obligations of Guarantor hereunder are independent of the obligations of the Borrower and the obligations of any other guarantor of the obligations of the Borrower, and a separate action or actions may be brought and prosecuted against Guarantor whether or not any action is brought against the Borrower or any of such other guarantors and whether or not the Borrower is joined in any such action or actions;

     (d) payment by Guarantor of a portion, but not all, of the Guaranteed Obligations shall in no way limit, affect, modify or abridge Guarantor’s liability for any portion of the Guaranteed Obligations, which has not been paid. Without limiting the generality of the foregoing, if the Administrative Agent is awarded a judgment in any suit brought to enforce Guarantor’s covenant to pay a portion of the Guaranteed Obligations, then such judgment shall not be deemed to release Guarantor from its covenant to pay the portion of the Guaranteed Obligations that is not the subject of such suit, and such judgment shall not, except to the extent satisfied by Guarantor, limit, affect, modify or abridge any other guarantor’s liability hereunder in respect of the Guaranteed Obligations;

     (e) any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability hereof or giving rise to any reduction, limitation, impairment, discharge or termination of Guarantor’s liability

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hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guaranteed Obligations; (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guaranteed Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guaranteed Obligations and take and hold security for the payment hereof or the Guaranteed Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guaranteed Obligations, any other guaranties of the Guaranteed Obligations, or any other obligation of any Person (including any other guarantor) with respect to the Guaranteed Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of Beneficiaries in respect hereof or the Guaranteed Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that the Beneficiaries may have against any such security, in each case as the Beneficiaries in their discretion may determine consistent herewith and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against the Borrower or any security for the Guaranteed Obligations; and (vi) exercise any other rights available to it under the Loan Documents; and

     (f) this Guaranty and the obligations of Guarantor hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guaranteed Obligations), including the occurrence of any of the following, whether or not Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents, at law, in equity or otherwise) with respect to the Guaranteed Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guaranteed Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including provisions relating to events of default) hereof, any of the Loan Documents or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guaranteed Obligations, in each case whether or not in accordance with the terms hereof or such Loan Documents, or any agreement relating to such other guaranty or security; (iii) the Guaranteed Obligations, or any agreement relating thereto, at any time being found to be invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the Loan Documents or from the proceeds of any security for the Guaranteed Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guaranteed Obligations) to the payment of indebtedness other than the Guaranteed Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guaranteed Obligations; (v) any Beneficiary’s consent to the change, reorganization or termination of the corporate structure or existence of the

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Borrower or any of its Subsidiaries and to any corresponding restructuring of the Guaranteed Obligations; (vi) any failure to perfect or continue perfection of a security interest in any collateral that secures any of the Guaranteed Obligations; (vii) any defenses, set-offs or counterclaims that the Borrower may allege or assert against any Beneficiary in respect of the Guaranteed Obligations, including failure of consideration, breach of warranty, statutes of fraud, statutes of limitation and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of Guarantor as an obligor in respect of the Guaranteed Obligations.

     Section 5. Waivers by Guarantor. Guarantor hereby waives, for the benefit of the Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by such Guarantor, to (i) proceed against the Borrower, any other guarantor of the Guaranteed Obligations or any other Person, (ii) proceed against or exhaust any security held from the Borrower, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in favor of the Borrower or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of the Borrower or any other guarantor including any defense based on or arising out of the lack of validity or the unenforceability of the Guaranteed Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of the Borrower or any other guarantor from any cause other than payment in full of the Guaranteed Obligations; (c) any defense based upon any statute or rule of law that provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary’s errors or omissions in the administration of the Guaranteed Obligations, except behavior that amounts to bad faith; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms hereof and any legal or equitable discharge of Guarantor’s obligations hereunder, (ii) the benefit of any statutes of limitation affecting Guarantor’s liability hereunder or the enforcement hereof, (iii) any rights to set-offs, recoupments and counterclaims, and (iv) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance hereof, notices of default hereunder, or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guaranteed Obligations or any agreement related thereto, notices of any extension of credit to the Borrower and notices of any of the matters referred to in Section 4 and any right to consent to any thereof; and (g) any defenses or benefits that may be derived from or afforded by law, which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms hereof.

     Section 6. Guarantor’s Rights of Subrogation, Contribution, etc. Until the Guaranteed Obligations have been indefeasibly paid in full and the Commitments have terminated, Guarantor hereby waives any claim, right or remedy, direct or indirect, that Guarantor now has or may hereafter have against the Borrower or any other guarantor or any of its assets in connection with this Guaranty or the performance by Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including without limitation (a) any right of

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subrogation, reimbursement or indemnification that Guarantor now has or may hereafter have against the Borrower with respect to the Guaranteed Obligations, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against the Borrower, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guaranteed Obligations have been indefeasibly paid in full and the Commitments have terminated, Guarantor shall withhold exercise of any right of contribution Guarantor may have against any other guarantor of the Guaranteed Obligations, including, without limitation, any right of contribution. Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification Guarantor may have against the Borrower or against any collateral or security, and any rights of contribution Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against the Borrower, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount is paid to Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guaranteed Obligations have not been finally and indefeasibly paid in full, such amount shall be held in trust for the Administrative Agent on behalf of the Beneficiaries and shall forthwith be paid over to the Administrative Agent for the benefit of the Beneficiaries to be credited and applied against the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms hereof and of the Credit Agreement.

     Section 7. Subordination of Other Obligations. Any Indebtedness of the Borrower or Guarantor now or hereafter held by Guarantor is hereby subordinated in right of payment to the Guaranteed Obligations, and any such indebtedness collected or received by Guarantor after an Event of Default has occurred and is continuing shall be held in trust for the Administrative Agent on behalf of the Beneficiaries and shall forthwith be paid over to the Administrative Agent for the benefit of the Beneficiaries to be credited and applied against the Guaranteed Obligations but without affecting, impairing or limiting in any manner the liability of Guarantor under any other provision hereof or the Credit Agreement.

     Section 8. Continuing Guaranty. This Guaranty is a continuing guaranty and shall remain in effect until all of the Guaranteed Obligations have been paid in full and the Commitments have terminated. Guarantor hereby irrevocably waives any right to revoke this Guaranty as to future transactions giving rise to any Guaranteed Obligations.

     Section 9. Authority of Guarantor. It is not necessary for any of the Beneficiaries to inquire into the capacity or powers of Guarantor or the officers, directors or any agents acting or purporting to act on its behalf.

     Section 10. Financial Condition of the Guarantor. Any Loan may be made to the Borrower from time to time in accordance with the provisions of the Credit Agreement, without notice to or authorization from Guarantor regardless of the financial or other condition of the Borrower or any other guarantor at the time of any such Loan. No Beneficiary shall have any obligation to disclose or discuss with Guarantor its assessment, or Guarantor’s assessment, of the

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financial condition of the Borrower or any other guarantor. Guarantor has adequate means to obtain information from the Borrower and each other guarantor on a continuing basis concerning the financial condition of the Borrower and the other guarantors and their respective abilities to perform their respective obligations under the Loan Documents, and Guarantor assumes the responsibility for being and keeping informed of the financial condition of the Borrower and the other guarantors and of all circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations. Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of the Borrower and any other guarantor now known or hereafter known by any Beneficiary.

     Section 11. Bankruptcy, etc.

     (a) So long as any Guaranteed Obligations remain outstanding, Guarantor shall not, without the prior written consent of the Administrative Agent acting pursuant to the instructions of the Required Lenders, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency case or proceeding of or against the Borrower or any other guarantor. The obligations of the Guarantor hereunder shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any case or proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of the Borrower or any other guarantor or by any defense the Borrower or any other guarantor may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding.

     (b) Guarantor acknowledges and agrees that any interest on any portion of the Guaranteed Obligations, which accrues after the commencement of any case or proceeding referred to in clause (a) above (or, if interest on any portion of the Guaranteed Obligations ceases to accrue by operation of law by reason of the commencement of such case or proceeding, such interest as would have accrued on such portion of the Guaranteed Obligations if such case or proceeding had not been commenced) shall be included in the Guaranteed Obligations, because it is the intention of Guarantor and the Beneficiaries that the Guaranteed Obligations guaranteed hereunder should be determined without regard to any rule of law or order that may relieve the Borrower of any portion of such Guaranteed Obligations. Guarantor will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay the Administrative Agent, or allow the claim of the Administrative Agent in respect of, any such interest accruing after the date on which such case or proceeding is commenced.

     (c) In the event that all or any portion of the Guaranteed Obligations are paid by the Borrower, the obligations of Guarantor hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments that are so rescinded or recovered shall constitute Guaranteed Obligations for all purposes hereunder.

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     Section 12. Governing Law; Jurisdiction; Waiver of Jury Trial.

     (a) This Guaranty shall be governed by and construed in accordance with the Laws of the State of New York. Guarantor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Guaranty or the transactions contemplated hereby. Guarantor irrevocably waives, to the fullest extent permitted by Law, any objection it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.

     (b) GUARANTOR HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY.

     Section 13. Representations and Warranties of Guarantor. In order to induce the Agents and the Lenders to enter into the Credit Agreement and to make the Loans thereunder, Guarantor makes the following representations and warranties:

     (a) it is a company duly organized in accordance with the Laws of the Commonwealth of the Bahamas and it (i) has the corporate power and authority to own its property and assets and to transact the business in which it is engaged or presently proposes to engage and (ii) is authorized to do business as a corporation and is in good standing in each jurisdiction in which it is required to be authorized to do business, except where the failure to be so authorized or in good standing could not reasonably be expected to have a Material Adverse Effect. No Governmental Approval (other than those already obtained) is necessary in connection with its formation and continued existence, except where failure to obtain such Governmental Approval could not reasonably be expected to have a Material Adverse Effect;

     (b) it has the corporate power and authority to execute, deliver, and perform its obligations under this Agreement and the other Loan Documents to which it is a party, and it will receive a material benefit by making the guarantee hereunder;

     (c) it has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Documents to which it is a party. No consent or authorization of, filing with or other act by or in respect of any Governmental Authority or other Person is required in connection with its execution, delivery and performance of the Loan Documents to which it is a party or the validity and enforceability of the Loan Documents to which it is a party;

     (d) this Guaranty and each other Loan Document to which it is a party has been duly executed and delivered on behalf of Guarantor and is a legal, valid and binding obligation of Guarantor enforceable in accordance with its terms except as the enforcement thereof may be limited by applicable bankruptcy, insolvency or similar

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Laws affecting the enforcement of rights of creditors generally and except to the extent that enforcements of rights and remedies set forth therein may be limited by equitable principles (regardless of whether enforcement is considered in a court of law or a proceeding in equity);

     (e) neither its execution, delivery or performance of the Loan Documents to which it is a party, nor compliance by it with the terms and provisions thereof nor the consummation of the transactions contemplated thereby, (i) will contravene in any material respect any applicable provision of Law, (ii) will conflict with or result in any breach of any of the terms and conditions of, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of its property or assets pursuant to the terms of, any material agreement or instrument to which it is a party or by which it or any of its property or assets in bound, or (iii) will violate any provision of its charter documents, by-laws or other organizational documents;

     (f) except as disclosed on Schedule 13(f), there are no actions, suits investigations or proceedings by or before any Governmental Authority or arbitrator pending or, to the best knowledge of Guarantor, threatened which could reasonably be expected to have a Material Adverse Effect. Since March 31, 2006, there has occurred no event, act or condition which has had, or could reasonably be expected to have, a Material Adverse Effect;

     (g) except as disclosed on Schedule 13(g), all Governmental Approvals that, under applicable Law, are required to have been obtained prior to the date this representation is made or deemed made in connection with the due execution, delivery and performance by Guarantor of the Loan Documents to which it is a party have been obtained;

     (h) Guarantor has filed or caused to be filed all income tax returns in all relevant jurisdictions and all other material foreign tax returns which are to its knowledge required to be filed by it, and has paid all taxes due pursuant to such returns or pursuant to any assessment received by Guarantor, except for those subject to a Contest;

     (i) Guarantor has good and marketable title to all of its property except for any defects or failure of title which could not reasonably be expected to have a Material Adverse Effect, subject to no Lien of any kind except Permitted Liens pursuant to the Credit Agreement;

     (j) all historical information heretofore or contemporaneously furnished by Guarantor in writing to any Agent or Lender for purposes of or in connection with this Guaranty or the Credit Agreement is, to the knowledge of Guarantor, true and accurate in all material respects on the date as of which such information is dated and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not materially misleading at such time;

     (k) except in each case as could not reasonably be expected to have a Material Adverse Effect (i) Guarantor is in compliance with all applicable Environmental Laws,

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     (ii) Guarantor has all Environmental Approvals required to operate its business as presently conducted and is in compliance with the terms and conditions thereof, and (iii) Guarantor has not received any communication (written or oral) from a Governmental Authority that alleges Guarantor is not in compliance with all Environmental Laws and Environmental Approvals. There is no Environmental Claim pending or, to Guarantor’s knowledge, threatened against Guarantor which could reasonably be expected to have a Material Adverse Effect. Without in any way limiting the generality of the foregoing, except in each case as could not reasonably be expected to have a Material Adverse Effect there are no on-site or off-site locations in which Guarantor has stored, disposed or arranged for the disposal of Materials of Environmental Concern in violation of any Environmental Law;

     (l) Guarantor is, and after giving effect to the incurrence of all obligations being incurred in connection with this Guaranty, will be Solvent; and

     (m) the capitalization of Guarantor consists of 100 ordinary shares, no par value, which are issued and outstanding. The shares have been duly authorized and validly issued and are fully paid and non-assessable, and no action has been taken to subject the shares of capital stock of such entity to any Lien, except for such Liens created or arising under the Loan Documents.

     Section 14. Implied Waiver. No failure on the part of any of the Beneficiaries to exercise, no delay in exercising, and no course of dealing with respect to, any right or remedy hereunder will operate as a waiver thereof; nor will any single or partial exercise of any right or remedy hereunder preclude any other further exercise of any other right or remedy.

     Section 15. Survival of Representations. All representations and warranties contained herein shall survive the execution and delivery of this Guaranty regardless of any investigation made by any of the Beneficiaries or any other Person.

     Section 16. Severable Provisions. To the fullest extent permitted by applicable law, any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or of any provision in any other Loan Document to which Guarantor is a party, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

     Section 17. Integration. This Guaranty and the other Loan Documents to which Guarantor is a party represent the agreement of Guarantor and the Beneficiaries with respect to the subject matter hereof, and there are no premises, undertakings, representations or warranties by Guarantor or any of the Beneficiaries relative to the subject matter hereof not expressly set forth or referred to herein or in such other documents.

     Section 18. No Third-Party Beneficiaries. This Guaranty shall be binding upon the successors and assigns of Guarantor and shall inure to the benefit of, and shall be enforceable by, the Beneficiaries to the fullest extent permitted by applicable laws. This Guaranty shall not be deemed to create any right in any Person except the Beneficiaries, and their successors and

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assigns and shall not be construed in any respect to be a contract in whole or in part for the benefit of any other Person; provided, however, that this Guaranty may be assigned in connection with any assignment of the Credit Agreement and the other Loan Documents.

     Section 19. Amendments Only in Writing. No amendment of or supplement to this Guaranty, or waiver or modification of, or consent under, the terms hereof, shall be effective unless evidenced by an instrument in writing signed by Guarantor and the Administrative Agent on behalf of the Beneficiaries.

     Section 20. Notices. Any notice or other communication to Guarantor hereunder must be in writing and may be given by hand, courier, or registered or certified mail (or a substantially similar form of mail), or by facsimile transmission addressed as follows:

[Guarantor]

[                                        ]

[                                        ]

Attn: [                                        ]

Fax No. [                                        ]

Guarantor may, by written notice to the Administrative Agent, change the address to which notices to it shall be directed. Any notice or other communication hereunder shall be deemed to have been given when received by the addressee.

     Section 21. No Assignment. Guarantor shall not be entitled to assign, in whole or in part, this Agreement or its rights and obligations hereunder.

     IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed as a deed by its Authorized Officer as of the Effective Date.

[GUARANTOR]

By:

Name:

Title:

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EXHIBIT D-2

Form of IPL Guaranty Agreement

GUARANTY

     THIS GUARANTY (the “Guaranty”), dated as of May [___], 2006 (the “Effective Date”), made by INTEROIL PRODUCTS LIMITED (the “Guarantor”) in favor of MERRILL LYNCH CAPITAL CORPORATION (“Merrill Lynch”), as Administrative Agent (“Administrative Agent”) on behalf of the Beneficiaries (defined below).

W I T N E S S E T H :

     WHEREAS, Guarantor’s ultimate parent entity, InterOil Corporation (the “Borrower”), various financial institutions from time to time party thereto (the “Lenders”), Merrill Lynch, as Administrative Agent (the “Administrative Agent”), Merrill Lynch and Clarion Finanz AG, as Co-Arrangers and Co-Bookrunners (collectively, the “Co-Arrangers”), and Merrill Lynch, as Collateral Agent (“Collateral Agent”) have entered into a Credit Agreement, dated as of May 4, 2006 (as amended, modified or supplemented from time to time, the “Credit Agreement”), providing for the making of Loans as contemplated therein (the Lenders, the Co-Arrangers, the Administrative Agent, and the Collateral Agent are herein collectively called the “Beneficiaries”;

     WHEREAS, it is a condition to the making of Loans under the Credit Agreement that the Guarantor shall have executed and delivered this Guaranty in favor of the Beneficiaries; and

     WHEREAS, the Guarantor will obtain benefits from the incurrence of Loans by the Borrower under the Credit Agreement and, accordingly, desires to execute this Guaranty in order to satisfy the conditions described in the preceding paragraph and to induce the Lenders to make Loans to the Borrower;

     NOW, THEREFORE, in consideration of the foregoing and other benefits accruing to each Guarantor, the receipt and sufficiency of which are hereby acknowledged, the Guarantor hereby makes the following representations and warranties to the Beneficiaries and hereby covenants and agrees with each Beneficiary as follows:

     Section 1. Definitions. Capitalized terms used but not defined herein have the meanings ascribed to such terms in the Credit Agreement. All other capitalized terms used herein shall have the meanings defined herein.

     Section 2. Guaranty of the Obligations. Subject to the provisions of Section 3, Guarantor hereby irrevocably and unconditionally guarantees to the Administrative Agent for the ratable benefit of the Beneficiaries the due and punctual payment of all Obligations, up to a maximum of $70,000,000.00 in the aggregate, when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of any automatic stay provision of any applicable law governing bankruptcy) (collectively, the “Guaranteed Obligations”).

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     Section 3. Payment by Guarantor. Guarantor hereby agrees, in furtherance of the foregoing and not in limitation of any other right that any Beneficiary may have at law or in equity against Guarantor by virtue hereof, that upon the failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under any automatic stay provision of any applicable law governing bankruptcy), Guarantor will upon demand pay, or cause to be paid, in Cash, to the Administrative Agent for the ratable benefit of the Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guaranteed Obligations then due as aforesaid, accrued and unpaid interest on such Guaranteed Obligations (including interest that, but for the Borrower’s becoming the subject of any bankruptcy proceeding, would have accrued on such Guaranteed Obligations, whether or not a claim is allowed against the Borrower for such interest in the related bankruptcy case) and all other Guaranteed Obligations then owed to the Beneficiaries as aforesaid. Notwithstanding anything contained in the foregoing that could be construed to the contrary, the maximum amount that Guarantor will be required to pay hereunder is $70,000,000.00 in the aggregate.

     Section 4. Liability of Guarantor Absolute. Guarantor agrees that its obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance that constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guaranteed Obligations. In furtherance of the foregoing and without limiting the generality thereof, Guarantor agrees as follows:

     (a) this Guaranty is a guaranty of payment when due and not of collectability;

     (b) the Administrative Agent may enforce this Guaranty upon the occurrence of an Event of Default notwithstanding the existence of any dispute between the Borrower and any Beneficiary with respect to the existence of such Event of Default;

     (c) the obligations of Guarantor hereunder are independent of the obligations of the Borrower and the obligations of any other guarantor of the obligations of the Borrower, and a separate action or actions may be brought and prosecuted against Guarantor whether or not any action is brought against the Borrower or any of such other guarantors and whether or not the Borrower is joined in any such action or actions;

     (d) payment by Guarantor of a portion, but not all, of the Guaranteed Obligations shall in no way limit, affect, modify or abridge Guarantor’s liability for any portion of the Guaranteed Obligations, which has not been paid. Without limiting the generality of the foregoing, if the Administrative Agent is awarded a judgment in any suit brought to enforce Guarantor’s covenant to pay a portion of the Guaranteed Obligations, then such judgment shall not be deemed to release Guarantor from its covenant to pay the portion of the Guaranteed Obligations that is not the subject of such suit, and such judgment shall not, except to the extent satisfied by Guarantor, limit, affect, modify or abridge any other guarantor’s liability hereunder in respect of the Guaranteed Obligations;

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     (e) any Beneficiary, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability hereof or giving rise to any reduction, limitation, impairment, discharge or termination of Guarantor’s liability hereunder, from time to time may (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guaranteed Obligations; (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guaranteed Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guaranteed Obligations and take and hold security for the payment hereof or the Guaranteed Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guaranteed Obligations, any other guaranties of the Guaranteed Obligations, or any other obligation of any Person (including any other guarantor) with respect to the Guaranteed Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of Beneficiaries in respect hereof or the Guaranteed Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that the Beneficiaries may have against any such security, in each case as the Beneficiaries in their discretion may determine consistent herewith and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or nonjudicial sales, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of Guarantor against the Borrower or any security for the Guaranteed Obligations; and (vi) exercise any other rights available to it under the Loan Documents; and

     (f) this Guaranty and the obligations of Guarantor hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guaranteed Obligations), including the occurrence of any of the following, whether or not Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents, at law, in equity or otherwise) with respect to the Guaranteed Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guaranteed Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including provisions relating to events of default) hereof, any of the Loan Documents or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guaranteed Obligations, in each case whether or not in accordance with the terms hereof or such Loan Documents, or any agreement relating to such other guaranty or security; (iii) the Guaranteed Obligations, or any agreement relating thereto, at any time being found to be invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the Loan Documents or from the proceeds of any security for the Guaranteed Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guaranteed Obligations) to the payment of indebtedness other than the Guaranteed

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Obligations, even though any Beneficiary might have elected to apply such payment to any part or all of the Guaranteed Obligations; (v) any Beneficiary’s consent to the change, reorganization or termination of the corporate structure or existence of the Borrower or any of its Subsidiaries and to any corresponding restructuring of the Guaranteed Obligations; (vi) any failure to perfect or continue perfection of a security interest in any collateral that secures any of the Guaranteed Obligations; (vii) any defenses, set-offs or counterclaims that the Borrower may allege or assert against any Beneficiary in respect of the Guaranteed Obligations, including failure of consideration, breach of warranty, statutes of fraud, statutes of limitation and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of Guarantor as an obligor in respect of the Guaranteed Obligations.

     Section 5. Waivers by Guarantor. Guarantor hereby waives, for the benefit of the Beneficiaries: (a) any right to require any Beneficiary, as a condition of payment or performance by such Guarantor, to (i) proceed against the Borrower, any other guarantor of the Guaranteed Obligations or any other Person, (ii) proceed against or exhaust any security held from the Borrower, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Beneficiary in favor of the Borrower or any other Person, or (iv) pursue any other remedy in the power of any Beneficiary whatsoever; (b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of the Borrower or any other guarantor including any defense based on or arising out of the lack of validity or the unenforceability of the Guaranteed Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of the Borrower or any other guarantor from any cause other than payment in full of the Guaranteed Obligations; (c) any defense based upon any statute or rule of law that provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (d) any defense based upon any Beneficiary’s errors or omissions in the administration of the Guaranteed Obligations, except behavior that amounts to bad faith; (e) (i) any principles or provisions of law, statutory or otherwise, which are or might be in conflict with the terms hereof and any legal or equitable discharge of Guarantor’s obligations hereunder, (ii) the benefit of any statutes of limitation affecting Guarantor’s liability hereunder or the enforcement hereof, (iii) any rights to set-offs, recoupments and counterclaims, and (iv) promptness, diligence and any requirement that any Beneficiary protect, secure, perfect or insure any security interest or lien or any property subject thereto; (f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance hereof, notices of default hereunder, or any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guaranteed Obligations or any agreement related thereto, notices of any extension of credit to the Borrower and notices of any of the matters referred to in Section 4 and any right to consent to any thereof; and (g) any defenses or benefits that may be derived from or afforded by law, which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms hereof.

     Section 6. Guarantor’s Rights of Subrogation, Contribution, etc. Until the Guaranteed Obligations have been indefeasibly paid in full and the Commitments have terminated, Guarantor hereby waives any claim, right or remedy, direct or indirect, that Guarantor now has or may hereafter have against the Borrower or any other guarantor or any of

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its assets in connection with this Guaranty or the performance by Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including without limitation (a) any right of subrogation, reimbursement or indemnification that Guarantor now has or may hereafter have against the Borrower with respect to the Guaranteed Obligations, (b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiary now has or may hereafter have against the Borrower, and (c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Beneficiary. In addition, until the Guaranteed Obligations have been indefeasibly paid in full and the Commitments have terminated, Guarantor shall withhold exercise of any right of contribution Guarantor may have against any other guarantor of the Guaranteed Obligations, including, without limitation, any right of contribution. Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement, indemnification and contribution as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification Guarantor may have against the Borrower or against any collateral or security, and any rights of contribution Guarantor may have against any such other guarantor, shall be junior and subordinate to any rights any Beneficiary may have against the Borrower, to all right, title and interest any Beneficiary may have in any such collateral or security, and to any right any Beneficiary may have against such other guarantor. If any amount is paid to Guarantor on account of any such subrogation, reimbursement, indemnification or contribution rights at any time when all Guaranteed Obligations have not been finally and indefeasibly paid in full, such amount shall be held in trust for the Administrative Agent on behalf of the Beneficiaries and shall forthwith be paid over to the Administrative Agent for the benefit of the Beneficiaries to be credited and applied against the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms hereof and of the Credit Agreement.

     Section 7. Subordination of Other Obligations. Any Indebtedness of the Borrower or Guarantor now or hereafter held by Guarantor is hereby subordinated in right of payment to the Guaranteed Obligations, and any such indebtedness collected or received by Guarantor after an Event of Default has occurred and is continuing shall be held in trust for the Administrative Agent on behalf of the Beneficiaries and shall forthwith be paid over to the Administrative Agent for the benefit of the Beneficiaries to be credited and applied against the Guaranteed Obligations but without affecting, impairing or limiting in any manner the liability of Guarantor under any other provision hereof or the Credit Agreement.

     Section 8. Continuing Guaranty. This Guaranty is a continuing guaranty and shall remain in effect until all of the Guaranteed Obligations have been paid in full and the Commitments have terminated. Guarantor hereby irrevocably waives any right to revoke this Guaranty as to future transactions giving rise to any Guaranteed Obligations.

     Section 9. Authority of Guarantor. It is not necessary for any of the Beneficiaries to inquire into the capacity or powers of Guarantor or the officers, directors or any agents acting or purporting to act on its behalf.

     Section 10. Financial Condition of the Guarantor. Any Loan may be made to the Borrower from time to time in accordance with the provisions of the Credit Agreement, without

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notice to or authorization from Guarantor regardless of the financial or other condition of the Borrower or any other guarantor at the time of any such Loan. No Beneficiary shall have any obligation to disclose or discuss with Guarantor its assessment, or Guarantor’s assessment, of the financial condition of the Borrower or any other guarantor. Guarantor has adequate means to obtain information from the Borrower and each other guarantor on a continuing basis concerning the financial condition of the Borrower and the other guarantors and their respective abilities to perform their respective obligations under the Loan Documents, and Guarantor assumes the responsibility for being and keeping informed of the financial condition of the Borrower and the other guarantors and of all circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations. Guarantor hereby waives and relinquishes any duty on the part of any Beneficiary to disclose any matter, fact or thing relating to the business, operations or conditions of the Borrower and any other guarantor now known or hereafter known by any Beneficiary.

     Section 11. Bankruptcy, etc.

     (a) So long as any Guaranteed Obligations remain outstanding, Guarantor shall not, without the prior written consent of the Administrative Agent acting pursuant to the instructions of the Required Lenders, commence or join with any other Person in commencing any bankruptcy, reorganization or insolvency case or proceeding of or against the Borrower or any other guarantor. The obligations of the Guarantor hereunder shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any case or proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of the Borrower or any other guarantor or by any defense the Borrower or any other guarantor may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding.

     (b) Guarantor acknowledges and agrees that any interest on any portion of the Guaranteed Obligations, which accrues after the commencement of any case or proceeding referred to in clause (a) above (or, if interest on any portion of the Guaranteed Obligations ceases to accrue by operation of law by reason of the commencement of such case or proceeding, such interest as would have accrued on such portion of the Guaranteed Obligations if such case or proceeding had not been commenced) shall be included in the Guaranteed Obligations, because it is the intention of Guarantor and the Beneficiaries that the Guaranteed Obligations guaranteed hereunder should be determined without regard to any rule of law or order that may relieve the Borrower of any portion of such Guaranteed Obligations. Guarantor will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar person to pay the Administrative Agent, or allow the claim of the Administrative Agent in respect of, any such interest accruing after the date on which such case or proceeding is commenced.

     (c) In the event that all or any portion of the Guaranteed Obligations are paid by the Borrower, the obligations of Guarantor hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiary as a preference, fraudulent transfer or otherwise, and any such payments that are so

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rescinded or recovered shall constitute Guaranteed Obligations for all purposes hereunder.

     Section 12. Governing Law; Jurisdiction; Waiver of Jury Trial.

     (a) This Guaranty shall be governed by and construed in accordance with the Laws of the State of New York. Guarantor hereby submits to the nonexclusive jurisdiction of the United States District Court for the Southern District of New York and of any New York State court sitting in New York City for purposes of all legal proceedings arising out of or relating to this Guaranty or the transactions contemplated hereby. Guarantor irrevocably waives, to the fullest extent permitted by Law, any objection it may now or hereafter have to the laying of the venue of any such proceeding brought in such a court and any claim that any such proceeding brought in such a court has been brought in an inconvenient forum.

     (b) GUARANTOR HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS GUARANTY OR THE TRANSACTIONS CONTEMPLATED HEREBY.

     Section 13. Representations and Warranties of Guarantor. In order to induce the Agents and the Lenders to enter into the Credit Agreement and to make the Loans thereunder, Guarantor makes the following representations and warranties:

     (a) it is a company duly organized in accordance with the Laws of the Independent State of Papua New Guinea and it (i) has the corporate power and authority to own its property and assets and to transact the business in which it is engaged or presently proposes to engage and (ii) is authorized to do business as a corporation and is in good standing in each jurisdiction in which it is required to be authorized to do business, except where the failure to be so authorized or in good standing could not reasonably be expected to have a Material Adverse Effect. No Governmental Approval (other than those already obtained) is necessary in connection with its formation and continued existence, except where failure to obtain such Governmental Approval could not reasonably be expected to have a Material Adverse Effect;

     (b) it has the corporate power and authority to execute, deliver, and perform its obligations under this Agreement and the other Loan Documents to which it is a party, and it will receive a material benefit by making the guarantee hereunder;

     (c) it has taken all necessary corporate action to authorize the execution, delivery and performance of the Loan Documents to which it is a party. No consent or authorization of, filing with or other act by or in respect of any Governmental Authority or other Person is required in connection with its execution, delivery and performance of the Loan Documents to which it is a party or the validity and enforceability of the Loan Documents to which it is a party;

     (d) this Guaranty and each other Loan Document to which it is a party has been duly executed and delivered on behalf of Guarantor and is a legal, valid and binding

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obligation of Guarantor enforceable in accordance with its terms except as the enforcement thereof may be limited by applicable bankruptcy, insolvency or similar Laws affecting the enforcement of rights of creditors generally and except to the extent that enforcements of rights and remedies set forth therein may be limited by equitable principles (regardless of whether enforcement is considered in a court of law or a proceeding in equity);

     (e) neither its execution, delivery or performance of the Loan Documents to which it is a party, nor compliance by it with the terms and provisions thereof nor the consummation of the transactions contemplated thereby, (i) will contravene in any material respect any applicable provision of Law, (ii) will conflict with or result in any breach of any of the terms and conditions of, or result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of its property or assets pursuant to the terms of, any material agreement or instrument to which it is a party or by which it or any of its property or assets in bound, or (iii) will violate any provision of its charter documents, by-laws or other organizational documents;

     (f) except as disclosed on Schedule 13(f), there are no actions, suits investigations or proceedings by or before any Governmental Authority or arbitrator pending or, to the best knowledge of Guarantor, threatened which could reasonably be expected to have a Material Adverse Effect. Since March 31, 2006, there has occurred no event, act or condition which has had, or could reasonably be expected to have, a Material Adverse Effect;

     (g) except as disclosed on Schedule 13(g), all Governmental Approvals that, under applicable Law, are required to have been obtained prior to the date this representation is made or deemed made in connection with the due execution, delivery and performance by Guarantor of the Loan Documents to which it is a party have been obtained;

     (h) Guarantor has filed or caused to be filed all income tax returns in all relevant jurisdictions and all other material foreign tax returns which are to its knowledge required to be filed by it, and has paid all taxes due pursuant to such returns or pursuant to any assessment received by Guarantor, except for those subject to a Contest;

     (i) Guarantor has good and marketable title to all of its property except for any defects or failure of title which could not reasonably be expected to have a Material Adverse Effect, subject to no Lien of any kind except Permitted Liens pursuant to the Credit Agreement;

     (j) all historical information heretofore or contemporaneously furnished by Guarantor in writing to any Agent or Lender for purposes of or in connection with this Guaranty or the Credit Agreement is, to the knowledge of Guarantor, true and accurate in all material respects on the date as of which such information is dated and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not materially misleading at such time;

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     (k) except in each case as could not reasonably be expected to have a Material Adverse Effect (i) Guarantor is in compliance with all applicable Environmental Laws, (ii) Guarantor has all Environmental Approvals required to operate its business as presently conducted and is in compliance with the terms and conditions thereof, and (iii) Guarantor has not received any communication (written or oral) from a Governmental Authority that alleges Guarantor is not in compliance with all Environmental Laws and Environmental Approvals. There is no Environmental Claim pending or, to Guarantor’s knowledge, threatened against Guarantor which could reasonably be expected to have a Material Adverse Effect. Without in any way limiting the generality of the foregoing, except in each case as could not reasonably be expected to have a Material Adverse Effect there are no on-site or off-site locations in which Guarantor has stored, disposed or arranged for the disposal of Materials of Environmental Concern in violation of any Environmental Law;

     (l) Guarantor is, and after giving effect to the incurrence of all obligations being incurred in connection with this Guaranty, will be Solvent; and

     (m) the capitalization of Guarantor consists of 100 ordinary shares, no par value, which are issued and outstanding. The shares have been duly authorized and validly issued and are fully paid and non-assessable, and no action has been taken to subject the shares of capital stock of such entity to any Lien, except for such Liens created or arising under the Loan Documents.

     Section 14. Implied Waiver. No failure on the part of any of the Beneficiaries to exercise, no delay in exercising, and no course of dealing with respect to, any right or remedy hereunder will operate as a waiver thereof; nor will any single or partial exercise of any right or remedy hereunder preclude any other further exercise of any other right or remedy.

     Section 15. Survival of Representations. All representations and warranties contained herein shall survive the execution and delivery of this Guaranty regardless of any investigation made by any of the Beneficiaries or any other Person.

     Section 16. Severable Provisions. To the fullest extent permitted by applicable law, any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or of any provision in any other Loan Document to which Guarantor is a party, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

     Section 17. Integration. This Guaranty and the other Loan Documents to which Guarantor is a party represent the agreement of Guarantor and the Beneficiaries with respect to the subject matter hereof, and there are no premises, undertakings, representations or warranties by Guarantor or any of the Beneficiaries relative to the subject matter hereof not expressly set forth or referred to herein or in such other documents.

     Section 18. No Third-Party Beneficiaries. This Guaranty shall be binding upon the successors and assigns of Guarantor and shall inure to the benefit of, and shall be enforceable by,

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the Beneficiaries to the fullest extent permitted by applicable laws. This Guaranty shall not be deemed to create any right in any Person except the Beneficiaries, and their successors and assigns and shall not be construed in any respect to be a contract in whole or in part for the benefit of any other Person; provided, however, that this Guaranty may be assigned in connection with any assignment of the Credit Agreement and the other Loan Documents.

     Section 19. Amendments Only in Writing. No amendment of or supplement to this Guaranty, or waiver or modification of, or consent under, the terms hereof, shall be effective unless evidenced by an instrument in writing signed by Guarantor and the Administrative Agent on behalf of the Beneficiaries.

     Section 20. Notices. Any notice or other communication to Guarantor hereunder must be in writing and may be given by hand, courier, or registered or certified mail (or a substantially similar form of mail), or by facsimile transmission addressed as follows:

InterOil Products Limited

[                                        ]

Port Moresby

Papua New Guinea

Attn: [                                        ]

Fax No. [                                        ]

Guarantor may, by written notice to the Administrative Agent, change the address to which notices to it shall be directed. Any notice or other communication hereunder shall be deemed to have been given when received by the addressee.

     Section 21. No Assignment. Guarantor shall not be entitled to assign, in whole or in part, this Agreement or its rights and obligations hereunder.

     IN WITNESS WHEREOF, Guarantor has caused this Guaranty to be duly executed as a deed by its Authorized Officer as of the Effective Date.

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THE COMMON SEAL of INTEROIL PRODUCTS LIMITED, the fixing of which was witnessed by:
Signature of director	Signature of director/secretary
Name	Name
OR
SIGNED, SEALED and DELIVERED for INTEROIL PRODUCTS LIMITED under power of attorney in the presence of:
	Signature of attorney
Signature of witness	Name
Name	Date of power of attorney

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EXHIBIT E

Form of Pledge Agreement

PLEDGE AND SECURITY AGREEMENT

     THIS PLEDGE AND SECURITY AGREEMENT, dated as of May [___], 2006, is made by [PLEDGOR], a [                    ], in favor of MERRILL LYNCH CAPITAL CORPORATION, in its capacity as Collateral Agent for the benefit of the Secured Parties (as defined in that certain Credit Agreement, dated as of the date hereof (as amended, restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), among INTEROIL CORPORATION, as Borrower, the lenders from time to time a party thereto (the “Lenders”), MERRILL LYNCH CAPITAL CORPORATION, in its capacity as Administrative Agent for the Lenders, MERRILL LYNCH CAPITAL CORPORATION and CLARION FINANZ AG, as Co-Lead Arrangers and Co-Bookrunners, and MERRILL LYNCH CAPITAL CORPORATION, in its capacity as Collateral Agent).

W I T N E S S E T H:

     WHEREAS, pursuant to the Credit Agreement, the Borrower has requested that the Lenders establish a credit facility providing for the Tranche A Loans and the Tranche B Loans (collectively, the “Loans”);

     WHEREAS, the Borrower will use the proceeds of the Loans for the purposes set forth in the Credit Agreement, and for no other purpose;

     WHEREAS, the Pledgor owns, as of the date hereof, all of the [issued and outstanding] shares (the “[___] Shares”) of [                    ], a [                    ] corporation (“[___]”); and

     WHEREAS, it is a condition precedent to the making of the Loans by the Lenders under the Credit Agreement and the making of the other extensions of credit by the Secured Parties under the Loan Documents that the Pledgor shall have executed and delivered this Agreement and granted the pledge and security interest contemplated by this Agreement.

     NOW, THEREFORE, in consideration of the premises and in order to induce the Lenders to enter into the Credit Agreement and to induce the Lenders and the other Secured Parties to make the extensions of credit to the Borrower under the Loan Documents, the Pledgor hereby agrees with the Collateral Agent for the benefit of the Secured Parties as follows:

ARTICLE 1 - DEFINITIONS.

     (a) Unless otherwise defined herein, terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. Unless otherwise defined in this ARTICLE 1, terms used in the New York UCC as in effect from time to time, which are used herein, shall have the meanings given to those terms in the New York UCC as in effect from time to time.

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     (b) The following terms shall have the following meanings:

     “Agreement” means this Pledge and Security Agreement, as the same may be amended, supplemented or otherwise modified from time to time.

     “Credit Agreement” has the meaning ascribed to that term in the preamble hereof.

     “Investment Property” means the collective reference to (i) all “investment property” as such term is defined in Section 9-102(a)(49) of the New York UCC and (ii) whether or not constituting “investment property” as so defined, all Pledged Interests (as defined in Article 1(a) of this Agreement).

     “[___]” means [                    ], a [                    ].

     “[___] Organic Documents” means the articles of incorporation, by-laws and other organizational documents, as amended from time to time, of [___].

     “[___] Shares” has the meaning ascribed to that term in the recitals hereof.

     “Lenders” has the meaning ascribed to that term in the preamble hereof.

     “Loans” has the meaning ascribed to that term in the recitals hereof.

     “Pledged Collateral” has the meaning ascribed to that term in Section 2.

     “Pledged Interests” has the meaning ascribed to that term in Section 2.

     “Pledgor” means [                    ], a [                    ].

     “Proceeds” means all “proceeds” as such term is defined in Section 9-102(a)(64) of the UCC and, in any event, shall include, without limitation, all dividends or other income from the Investment Property, collections thereon or Distributions or payments with respect thereto.

     “New York UCC” means the Uniform Commercial Code as from time to time in effect in the State of New York.

     “Securities Act” means the Securities Act of 1933, as amended.

     “USA PATRIOT Act” means United States Public Law 107-56, 115 Stat. 272 (2001) Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) of 2001, and the rules and regulations promulgated thereunder from time to time in effect.

GRANT OF SECURITY INTEREST.

     The Pledgor hereby pledges, collaterally assigns and transfers to the Collateral Agent, and hereby grants to the Collateral Agent, for the ratable benefit of the Secured Parties, a first

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lien on and continuing first priority security interest in, all of the following property now owned or at any time hereafter acquired by the Pledgor or in which the Pledgor now has or at any time in the future acquires any right, title or interest (collectively, the “Pledged Collateral”), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations:

     (i) the [___] Shares identified in Schedule l hereto, or other ownership interests of whatever class or character of [___], now or hereafter owned by the Pledgor, together with, in each case, any certificates evidencing the same (collectively, the “Pledged Interests”) and all of the Pledgor’s rights under the [___] Organic Documents (including all of its right, title and interest to participate in the operation or management of [___] and all of the Pledgor’s right, title and interest to property, assets and distributions under such [___] Organic Documents, but not any of the obligations of a shareholder of [___] (unless the Collateral Agent or any Secured Party shall become a shareholder as a result of its exercise of remedies pursuant to the terms hereof);

     (ii) all interests, shares, securities, moneys or property representing a distribution on any of the Pledged Interests, or resulting from a split-up, revision, reclassification or any change of the Pledged Interests or otherwise received in exchange therefor, and any and all non-cash dividends, cash, stock splits, reclassifications, rights, instruments, subscription warrants, options or other investment property and other property or Proceeds from time to time received, receivable or otherwise distributed or issued to the holders of, in respect of, or in exchange for, the Pledged Interests, including all accounts, general intangibles and present and future rights to receive money or other distributions or payments arising out of or in connection with the Pledged Interests or the Pledgor’s rights under the [___] Organic Documents;

     (iii) without affecting the obligations of the Pledgor under any provision prohibiting such action hereunder or under the Loan Documents in the event of any consolidation or merger involving [___] in which [___] is not the surviving corporation, all ownership interests of any class or character of the successor entity owned by the Pledgor formed by or resulting from such consolidation or merger; and

     (iv) all Proceeds of and to any of the property of the Pledgor described in this Article (including all causes of action, claims and warranties now or hereafter held by the Pledgor or to which the Pledgor may in the future be entitled in respect of any of the items listed above), and, to the extent related to any property described in said clauses or such Proceeds, all books, correspondence, credit files, records, invoices and other papers.

ARTICLE 2 REPRESEANTATIONS AND WARRANTIES.

     The Pledgor represents and warrants to the Collateral Agent and the Secured Parties as follows:

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     Section 2.1 Organization; Powers; Compliance with Law and Contractual Obligations.

     The Pledgor (a) is validly organized and existing and in good standing under the laws of the Commonwealth of the Bahamas, (b) is duly qualified to do business as is now being conducted and as is proposed to be conducted and is in good standing as a foreign corporation in each jurisdiction where the nature of its business requires such qualification; (c) has all requisite power and authority and holds all material requisite Governmental Approvals to enter into and perform its obligations under each Loan Document to which it is a party, to grant the security interests on the Pledged Collateral pursuant to this Agreement and to conduct its business substantially as currently conducted by it and (d) is in compliance with all Laws, governmental regulations, court decrees, orders and contractual obligations applicable to it, except, with respect to clauses (b) and (d) to the extent that the failure to comply therewith would not reasonably be expected to have a Material Adverse Effect.

     Section 2.2 Due Authorization; Non-Contravention.

     The execution, delivery and performance by the Pledgor of each Loan Document to which it is a party are within the Pledgor’s corporate powers, have been duly authorized by all necessary corporate action and do not:

     (a) contravene the Pledgor’s organizational documents;

     (b) contravene any Law, governmental regulation, court decree or order or material contractual obligation binding on or affecting the Pledgor; or

     (c) result in, or require the creation or imposition of, any Lien on any of the Pledgor’s properties other than Liens created by the Security Documents.

     Section 2.3 Governmental Approvals.

     Except as may be disclosed on Schedule 4.7 of the Credit Agreement, other than the filing of financing statements in the appropriate filing office with respect to the perfection of the security interest created hereunder, no consent, authorization, approval or other action by, and no filing with, any Governmental Authority is required either for the grant by the Pledgor of the security interest granted hereby or for the execution, delivery or performance of any Loan Document to which the Pledgor is a party.

     Section 2.4 Validity.

     Each Loan Document to which the Pledgor is a party constitutes the legal, valid and binding obligation of the Pledgor enforceable in accordance with their respective terms (except as may be limited by bankruptcy, insolvency or other similar laws affecting the enforcement of creditors’ rights generally and general principles of equity).

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     Section 2.5 Litigation.

     Except as disclosed in the Credit Agreement, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the best knowledge of the Pledgor, threatened against or affecting the Pledgor or any of its properties, rights, revenues or assets, which could reasonably be expected to impair the value of the Pledged Collateral.

     Section 2.6 Foreign Assets Control Regulations.

     The Pledgor (a) is not and will not become a Person or entity described by section 1 of Executive Order 13224 of September 24, 2001 Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (12 C.F.R. 595), and the Pledgor does not knowingly engage in dealings or transactions with any such Persons or entities and (b) is not in violation of the USA PATRIOT Act.

     Section 2.7 Title; No Other Liens.

     Except for the security interest granted to the Collateral Agent for the ratable benefit of the Secured Parties pursuant to this Agreement, the Pledgor is the sole record and beneficial owner of, and has good and marketable title to, the Pledged Collateral, free and clear of any and all Liens or claims of others. No financing statement or other public notice with respect to all or any part of the Pledged Collateral is on file or of record in any public office, except such as have been filed in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, pursuant to this Agreement.

     Section 2.8 Perfected First Priority Liens.

     The security interests granted pursuant to this Agreement (a) upon completion of the actions specified on Schedule 2 will constitute valid perfected security interests in all of the [___] Shares in favor of the Collateral Agent, for the ratable benefit of the Secured Parties, as collateral security for the Obligations, enforceable in accordance with the terms hereof against all creditors of the Pledgor and any other Persons and (b) are the only Liens on the Pledged Collateral.

     Section 2.9 Jurisdiction of Organization; Chief Executive Office.

     On the date hereof, the Pledgor’s jurisdiction of organization, identification number from the jurisdiction of organization (if any) and the location of the Pledgor’s registered office in its jurisdiction of organization are specified on Schedule 3.

     Section 2.10 Investment Property.

     (a) The Pledged Interests are, and any Pledged Interests owned by Pledgor hereafter will be, duly authorized, and none of such Pledged Interests is or will be subject to any contractual restriction, or any restriction under the [___] Organic Documents, upon the transfer of such Pledged Interests (except for any such restriction contained herein).

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     (b) The Pledged Interests constitute: (i) all of the issued and outstanding interests, shares or other ownership interests of any class or character of [___], and (ii) all of the interests, shares or other ownership interests of any class or character of [___] beneficially owned by the Pledgor on the date hereof (whether or not registered in the name of the Pledgor) and Schedule 1 correctly identifies, as of the date hereof, the [___] Shares constituting the Pledged Interests.

     Section 2.11 Assets.

     The assets of the Pledgor consist solely of the [___] Shares.

ARTICLE 3 COVENANTS

     The Pledgor hereby covenants and agrees with the Collateral Agent and the Secured Parties that, while this Agreement is in effect:

     Section 3.1 Delivery of Instruments, Certificated Securities and Chattel Paper.

     If any Pledged Collateral, including any of the [___] Shares identified on Schedule 1, or any amount payable under or in connection with any of the Pledged Collateral shall be or become evidenced by any instrument, certificated security or chattel paper, such instrument, certificated security or chattel paper shall be immediately delivered to the Collateral Agent, duly indorsed in a manner satisfactory to the Collateral Agent, to be held as Pledged Collateral pursuant to this Agreement.

     Section 3.2 Maintenance of Perfected Security Interest; Further Documentation.

     (a) The Pledgor shall maintain the security interest created by this Agreement as a perfected first priority security interest and shall defend such security interest against the claims and demands of all Persons whomsoever (other than Permitted Liens).

     (b) At any time and from time to time, upon the written request of the Collateral Agent and at the sole expense of the Pledgor, the Pledgor will promptly and duly execute and deliver, and have recorded, such further instruments and documents, and take all further action, that the Collateral Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and the rights and remedies herein granted, including, without limitation, (i) filing any financing or continuation statements under the New York UCC (or other similar laws) with respect to the security interests created hereby and (ii) taking any actions necessary to enable the Collateral Agent to obtain “control” (within the meaning of the New York UCC) with respect thereto.

     Section 3.3 Changes in Name, etc.

     The Pledgor will not, except upon 15 days’ prior written notice to the Collateral Agent and delivery to the Collateral Agent of all additional executed financing statements and other documents reasonably requested by the Collateral Agent to maintain the validity, perfection and

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priority of the security interests provided for herein, (i) change its jurisdiction of organization or the location of its registered office from that referred to in Section 2.9 or (ii) change its name.

     Section 3.4 Notices.

     The Pledgor will advise the Collateral Agent and the Secured Parties promptly, in reasonable detail, of:

     (a) any Lien (other than security interests created hereby and any other Permitted Lien) on any of the Pledged Collateral; and

     (b) of the occurrence of any other event that could reasonably be expected to have a material adverse effect on the aggregate value of the Pledged Collateral or on the security interests created hereby.

     Section 3.5 Books and Records.

     The Pledgor shall keep full and accurate records relating to the Pledged Collateral, and stamp or otherwise mark such books and records in order to reflect the security interests granted by this Agreement.

     Section 3.6 Inspection.

     The Pledgor shall permit representatives of the Collateral Agent, upon reasonable notice, at any time during normal business hours to inspect and make abstracts from its books and records pertaining to the Pledged Collateral, and to receive copies of all communications and remittances relating to the Pledged Collateral, and Pledgor shall forward copies of any material notices or communications received by the Pledgor with respect to the Pledged Collateral, all in such manner as the Collateral Agent may require.

     Section 3.7 No Transfer of Interest in [___].

     Except as permitted by this Agreement and the other Loan Documents, the Pledgor shall not cause, suffer or permit any sale, assignment, conveyance, pledge or other transfer of all or any portion of the Pledgor’s ownership interest in any portion of the Pledged Collateral unless the applicable transferee executes a pledge agreement in a form substantially similar to this Agreement.

     Section 3.8 Distributions.

     Unless and until an Event of Default has occurred and is continuing, the Pledgor shall be entitled to receive and retain any and all distributions on the Pledged Collateral paid in cash in compliance with the Credit Agreement. If the Pledgor in its capacity as a shareholder of [___] receives any distribution that is not permitted by the Loan Documents, the Pledgor shall hold such distribution as trustee for, and shall promptly deliver the same to, the Collateral Agent.

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     Section 3.9 Amendments to [___] Organic Documents.

     The Pledgor shall not authorize, seek to cause or permit any amendment, supplement, modification or waiver of any provision of the [___] Organic Documents in any material respect unless the Collateral Agent shall have received a certificate of any Authorized Officer of the Pledgor certifying that such amendment, supplement, modification or waiver, as the case may be, could not reasonably be expected to impair, in any material respect, the Pledged Collateral or the rights of the Collateral Agent therein or thereto.

     Section 3.10 Bankruptcy of [___].

     The Pledgor shall not authorize, seek to cause or permit [___] to commence a voluntary case or other proceeding seeking liquidation, reorganization or other similar relief with respect to itself or its debts under any bankruptcy, insolvency or similar law now or hereafter in effect or seeking the appointment of a trustee, receiver, liquidator, custodian or other similar official of it or of any substantial part of its property or to consent to any such relief or to the appointment of or taking possession by any such official in an involuntary case or other proceeding commenced against it, or to make a general assignment for the benefit of creditors.

     Section 3.11 Voting; Powers.

     So long as no Event of Default shall have occurred and be continuing, the Pledgor shall have the right to exercise all voting, consensual and other powers of ownership pertaining to the Pledged Collateral for all purposes; provided, that the Pledgor agrees that it will not (i) vote the Pledged Collateral, exercise rights or take any other action in any manner that would materially impair the Pledged Collateral or the rights of the Collateral Agent therein or with respect thereto or that is inconsistent with the terms of this Agreement or the Loan Documents, (ii) vote to enable, or take any other action to permit, [___] to issue any equity securities of any nature or to issue any other securities convertible into, or granting the right to purchase or exchange for any equity security, securities of any nature of [___], except as expressly permitted by the Credit Agreement, (iii) create, incur or permit to exist any Lien or option in favor of, or any claim of any Person with respect to, any of the Pledged Collateral, or any interest therein, except for the security interests created by this Agreement or (iv) enter into any agreement or undertaking restricting the right or ability of the Pledgor or the Collateral Agent to sell, assign or transfer any of the Pledged Collateral except as expressly provided in the Credit Agreement; and the Collateral Agent shall execute and deliver to the Pledgor or cause to be executed and delivered to the Pledgor all such proxies, powers of attorney, dividends and other orders, and all such instruments, without recourse, as the Pledgor may reasonably request for the purpose of enabling the Pledgor to exercise the rights and powers that it is entitled to exercise pursuant to this Section 3.11.

     Section 3.12 Bank and Investment Accounts.

     The Pledgor shall not establish or maintain any bank or investment accounts without the consent of the Collateral Agent, which consent will only be given if a security interest is granted over such account(s) in form and substance acceptable to the Collateral Agent.

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     Section 3.13 Maximum Monetary Amount of Obligations.

     The Parties acknowledge that the maximum monetary amount of Obligations payable by the Pledgor and secured by this Agreement is $70,000,000 in the aggregate.

ARTICLE 4 REMEDIAL PROVISIONS

     Section 4.1 Pledged Interests.

     (a) If any Event of Default shall have occurred, then so long as such Event of Default shall continue, and whether or not any Secured Party exercises any available right to declare any of the Obligations due and payable or seeks or pursues any other relief or remedy available to it under applicable Law or under this Agreement or the other Loan Documents, (i) unless such Event of Default and the requirements of this clause (i) have been waived by the Required Lenders, all distributions on the Pledged Collateral shall be paid directly to the Collateral Agent and retained by it as part of the Pledged Collateral, and, if the Collateral Agent shall so request in writing, the Pledgor agrees to execute and deliver to the Collateral Agent appropriate additional dividend, distribution and other orders and documents to that end, and (ii) upon the Collateral Agent’s request, any or all of the Pledged Collateral shall be registered in the name of the Collateral Agent or its nominee, and the Collateral Agent or its nominee may thereafter exercise (x) all voting and other rights pertaining to such Pledged Collateral at any meeting of officers of [___] or otherwise and (y) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Pledged Collateral as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Pledged Collateral upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate or other organizational structure of [___], or upon the exercise by the Pledgor or the Collateral Agent of any right, privilege or option pertaining to such Pledged Collateral, and in connection therewith, the right to deposit and deliver any and all of the Pledged Collateral with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Collateral Agent may determine), all without liability except to account for property actually received by it, but the Collateral Agent shall have no duty to the Pledgor to exercise any such right, privilege or option and shall not be responsible for any failure to do so or delay in so doing; provided, that if such Event of Default is waived or cured, any such distribution theretofore paid to the Collateral Agent shall, upon request of the Pledgor and except to the extent theretofore applied to the Obligations by the Collateral Agent, be returned by the Collateral Agent to the Pledgor.

     (b) In furtherance of the foregoing, the Pledgor shall further execute and deliver to the Collateral Agent a proxy in the form attached hereto as Exhibit A with respect to the Pledged Interests owned by the Pledgor.

     (c) The Pledgor hereby authorizes and instructs [___] to comply with any instruction received by it from the Collateral Agent in writing that (x) states that an Event of Default has occurred and is continuing and (y) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from the Pledgor.

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     Section 4.2 Proceeds to be Turned Over to Collateral Agent or Depositary Bank.

     If any Event of Default shall have occurred and be continuing, all payments thereafter received by the Pledgor under or in connection with the Pledged Collateral shall be received in trust for the benefit of the Collateral Agent, shall be segregated from other funds of the Pledgor and shall be forthwith paid over to the Collateral Agent in the same form as so received (with any necessary endorsement).

     Section 4.3 Application of Proceeds.

     If an Event of Default shall have occurred and be continuing, at any time at the Collateral Agent’s election, the Collateral Agent may apply all or any part of Proceeds constituting Pledged Collateral in payment of the Obligations in the following order:

     First, to pay incurred and unpaid fees and expenses of the Administrative Agent and the Collateral Agent under the Loan Documents;

     Second, to the Administrative Agent, for the benefit of the Lenders, for application by it towards payment of amounts then due and owing and remaining unpaid in respect of the Obligations, pro rata among the Secured Parties according to the amounts of the Obligations then due and owing and remaining unpaid to the Secured Parties;

     Third, to the Administrative Agent, for the benefit of the Lenders, for application by it towards prepayment of the Obligations, pro rata among the Secured Parties according to the amounts of the Obligations then held by the Secured Parties; and

     Fourth, any balance remaining after the Obligations shall have been paid in full shall be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive the same.

     Section 4.4 Code and Other Remedies.

     (a) If an Event of Default shall occur and be continuing, the Collateral Agent, on behalf of the Secured Parties, may exercise, in addition to all other rights and remedies granted to them in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations, all rights and remedies of a secured party under the New York UCC or any other applicable Law. Without limiting the generality of the foregoing, the Collateral Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by Law referred to below) to or upon the Pledgor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Pledged Collateral (including by application of any of the monies held by or on behalf of it as part of the Pledged Collateral, for the purposes and in the order provided in Section 4.3), or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Pledged Collateral or any part thereof (or contract to do

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any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of the Collateral Agent or any Secured Party or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Collateral Agent or any Secured Party shall have the right upon any such public sale or sales, and, to the extent permitted by Law, upon any such private sale or sales, to purchase the whole or any part of the Pledged Collateral so sold, free of any right or equity of redemption in the Pledgor, which right or equity is hereby waived and released. The Pledgor further agrees, at the Collateral Agent’s request, to assemble the Pledged Collateral and make it available to the Collateral Agent at places which the Collateral Agent shall reasonably select, whether at the Pledgor’s premises or elsewhere. The Collateral Agent shall apply the net Proceeds of any action taken by it pursuant to this Section 4.4, after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Pledged Collateral or in any way relating to the Pledged Collateral or the rights of the Collateral Agent and the Secured Parties hereunder, including, without limitation, reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Obligations, in such order as the Collateral Agent may elect, and only after such application and after the payment by the Collateral Agent of any other amount required by any provision of Law, including, without limitation, Section 9-615(a)(3) of the New York UCC, need the Collateral Agent account for the surplus, if any, to the Pledgor. To the extent permitted by applicable Law, the Pledgor waives all claims, damages and demands it may acquire against the Collateral Agent or any Secured Party arising out of the exercise by them of any rights hereunder. If any notice of a proposed sale or other disposition of Pledged Collateral shall be required by Law, such notice shall be deemed reasonable and proper if given at least ten days before such sale or other disposition.

     (b) Instead of exercising the power of sale provided in Section 4.4(a), the Collateral Agent may proceed by a suit or suits at law or in equity to foreclose the security interest under this Agreement and sell the Pledged Collateral or any portion thereof under a judgment or decree of a court or courts of competent jurisdiction.

     (c) The Collateral Agent, as attorney-in-fact pursuant to ARTICLE 5 hereof, may, in the name and stead of the Pledgor, make and execute all conveyances, assignments and transfers of the Pledged Collateral sold pursuant to Section 4.4(b) or Section 4.4(c) hereof, and the Pledgor hereby ratifies and confirms all that the Collateral Agent, as said attorney-in-fact, shall do by virtue hereof. Nevertheless, the Pledgor shall, if so requested by the Collateral Agent, ratify and confirm any sale or sales by executing and delivering to the Collateral Agent, or to such purchaser or purchasers, all such instruments as may, in the judgment of the Collateral Agent, be advisable for such purpose.

     (d) The receipt of the Collateral Agent for the purchase money paid at any sale made by it shall be a sufficient discharge therefor to any purchaser of the Pledged Collateral, or any portion thereof, sold as aforesaid; and no such purchaser (or the representatives or assigns of such purchaser), after paying such purchase money and receiving such receipt, shall be bound to see to the application of such purchase money or any part thereof or in any manner whatsoever be answerable for any loss, misapplication or nonapplication of any such purchase money, or any

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part thereof, or be bound to inquire as to the authorization, necessity, expediency or regularity of any such sale.

     (e) The Collateral Agent shall incur no liability as a result of the sale of the Pledged Collateral, or any part thereof, at any private sale conducted in accordance with the provisions of the Loan Documents and otherwise in a commercially reasonable manner. The Pledgor hereby waives, to the full extent permitted by applicable Laws, any claims against the Collateral Agent and/or any Secured Party arising by reason of the fact that the price at which the Pledged Collateral, or any part thereof, may have been sold at a private sale was less than the price that might have been obtained at a public sale or was less than the aggregate amount of the Obligations, even if the Collateral Agent accepts the first offer received which the Collateral Agent in good faith deems to be commercially reasonable under the circumstances and does not offer the Pledged Collateral to more than one offeree. To the fullest extent permitted by Law, the Pledgor shall have the burden of proving that any such sale of the Pledged Collateral was conducted in a commercially unreasonable manner.

     (f) No sale or disposition of all or any part of the Pledged Collateral by the Collateral Agent pursuant to this Section 4.4 shall be deemed to relieve the Pledgor of its obligations in respect of the Obligations, except to the extent that the Proceeds thereof are applied by the Collateral Agent to the payment of such Obligations. All rights and remedies of the Collateral Agent are cumulative and in addition to every other right, power and remedy given hereunder or under any other Loan Document now or hereafter existing at law or in equity or otherwise.

     (g) The Pledgor hereby agrees that in respect of any sale of the Pledged Collateral pursuant to the terms hereof, the Collateral Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of applicable Laws, or in order to obtain any required approval of the sale or of the purchaser by any Governmental Authority or official, and the Pledgor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Collateral Agent be liable or accountable to the Pledgor for any discount allowed by reason of the fact that such Pledged Collateral is sold in compliance with any such limitation or restriction.

     Section 4.5 Registration Rights.

     (a) If the Collateral Agent shall determine to exercise its right to sell any or all of the Pledged Collateral pursuant to ARTICLE 4 of this Agreement, and if in the opinion of the Collateral Agent it is necessary or advisable to have the Pledged Collateral, or that portion thereof to be sold, registered under the provisions of the Securities Act, the Pledgor will cause [___] to (i) execute and deliver, and cause the directors and officers of [___] to execute and deliver, all such instruments and documents, and do or cause to be done all such other acts as may be, in the opinion of the Collateral Agent, necessary or advisable to register the Pledged Collateral, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) use its best efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of the Pledged

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Collateral, or that portion thereof to be sold, and (iii) make all amendments thereto and/or to the related prospectus which, in the opinion of the Collateral Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the SEC applicable thereto. The Pledgor agrees to cause [___] to comply with the provisions of the securities or “Blue Sky” laws of any and all jurisdictions that the Collateral Agent shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited), which will satisfy the provisions of Section 11(a) of the Securities Act.

     (b) The Pledgor recognizes that the Collateral Agent may be unable to effect a public sale of any or all the Pledged Collateral, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers, which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. The Pledgor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Collateral Agent shall be under no obligation to delay a sale of any of the Pledged Collateral for the period of time necessary to permit [—} to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if [___] would agree to do so.

     (c) The Pledgor agrees to use its best efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Pledged Collateral pursuant to this Section 4.5 valid and binding and in compliance with any and all other applicable requirements of Law.

     (d) The Pledgor further agrees that a breach of any of the covenants contained in this ARTICLE 4 will cause irreparable injury to the Collateral Agent and the Lenders, that the Collateral Agent and the Lenders have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this ARTICLE 4 shall be specifically enforceable against the Pledgor, and the Pledgor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred.

ARTICLE 5 THE COLLATERAL AGENT

     Section 5.1 Collateral Agent Appointed Attorney-in-Fact.

     (a) The Pledgor hereby irrevocably constitutes and appoints the Collateral Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of the Pledgor and in the name of the Pledgor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments, which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, the Pledgor hereby gives the Collateral Agent the power

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and right, on behalf of the Pledgor, without notice to or assent by the Pledgor, to do any or all of the following:

     (i) in the name of the Pledgor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under the [___] Organic Documents, or any account or general intangible arising thereunder or out of the Pledged Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Collateral Agent for the purpose of collecting any and all such moneys due under the [___] Organic Documents or any account or general intangible arising thereunder or out of the Pledged Collateral whenever payable;

     (ii) pay or discharge taxes and Liens levied or placed on or threatened against the Pledged Collateral;

     (iii) exercise all rights, powers and principles to the same extent as an officer of [___];

     (iv) execute, in connection with any sale provided for in Section 4.4 any indorsements, assignments or other instruments of conveyance or transfer with respect to the Pledged Collateral; and

     (v) (A) direct [___] to make payment of any and all moneys due or to become due in respect of the Pledged Collateral to make such payment directly to the Collateral Agent or as the Collateral Agent shall direct; (B) ask or demand for, collect and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Pledged Collateral; (C) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Pledged Collateral or any portion thereof and to enforce any other right in respect of any Pledged Collateral; (D) defend any suit, action or proceeding brought against the Pledgor with respect to any Pledged Collateral; (E) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Collateral Agent may deem appropriate; and (F) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Pledged Collateral as fully and completely as though the Collateral Agent were the absolute owner thereof for all purposes, and do, at the Collateral Agent’s option and the Pledgor’s expense, at any time, or from time to time, all acts and things that the Collateral Agent deems necessary to protect, preserve or realize upon the Pledged Collateral and the Collateral Agent’s and the Secured Parties’ security interests therein and to effect the intent of this Agreement, all as fully and effectively as the Pledgor might do.

     Anything in this Section 5.1(a) to the contrary notwithstanding, the Collateral Agent agrees that it will not exercise any rights under the power of attorney provided for in this Section 5.1(a) unless an Event of Default shall have occurred and be continuing.

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     (b) If the Pledgor fails to perform or comply with any of its agreements contained herein, unless pursuant to a dispute contested in good faith, then the Collateral Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement.

     (c) The expenses of the Collateral Agent incurred in connection with actions undertaken as provided in this Section 5.1, together with interest thereon at a rate per annum equal to the highest rate per annum at which interest would then be payable on any category of past-due Loans under the Credit Agreement, from the date of payment by the Collateral Agent to the date reimbursed by the Pledgor, shall be payable by the Pledgor to the Collateral Agent on demand.

     (d) The Pledgor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the security interests created hereby are released.

     Section 5.2 Duty of Collateral Agent.

     The Collateral Agent’s sole duty with respect to the custody, safekeeping and physical preservation of the Pledged Collateral in its possession, under Section 9-207 of the New York UCC or otherwise, shall be to deal with it with reasonable care and in the same manner as the Collateral Agent deals with similar property for its own account. Neither the Collateral Agent, any Secured Party nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of the Pledged Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Pledged Collateral upon the request of the Pledgor or any other Person or to take any other action whatsoever with regard to the Pledged Collateral or any part thereof. The powers conferred on the Collateral Agent and the Secured Parties hereunder are solely to protect the Collateral Agent’s and the Secured Parties’ interests in the Pledged Collateral and shall not impose any duty upon the Collateral Agent or any Secured Party to exercise any such powers. The Collateral Agent and the Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to the Pledgor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.

     Section 5.3 Execution of Financing Statements.

     Pursuant to any applicable Law, the Pledgor authorizes the Collateral Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Pledged Collateral without the signature of the Pledgor in such form and in such offices as the Collateral Agent determines appropriate to perfect the security interests of the Collateral Agent under this Agreement. The Pledgor hereby ratifies and authorizes the filing by the Collateral Agent of any financing statement with respect to the Pledged Collateral made prior to the date hereof.

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     Section 5.4 Authority of Collateral Agent.

     The Pledgor acknowledges that the rights and responsibilities of the Collateral Agent under this Agreement with respect to any action taken by the Collateral Agent or the exercise or non-exercise by the Collateral Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Collateral Agent and the Secured Parties, be governed by the CAMA and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Collateral Agent and the Pledgor, the Collateral Agent shall be conclusively presumed to be acting as agent for the Secured Parties with full and valid authority so to act or refrain from acting, and the Pledgor shall be under no obligation, or entitlement, to make any inquiry respecting such authority.

ARTICLE 6 MISCELLANEOUS

     Section 6.1 Amendments in Writing.

     None of the terms or provisions of this Agreement may be waived, amended, supplemented or otherwise modified except in accordance with Section 13.5 of the Credit Agreement.

     Section 6.2 Notices.

     All notices, requests and demands to or upon the Collateral Agent or the Pledgor hereunder shall be effected in the manner provided for in Section 13.1 of the Credit Agreement; provided, that any such notice, request or demand to or upon the Collateral Agent shall be addressed to the Collateral Agent at its address specified in the CAMA and any such notice, request or demand to or upon the Pledgor shall be addressed to the Pledgor at its address specified on Schedule 3 hereto.

     Section 6.3 No Waiver by Course of Conduct; Cumulative Remedies; Waivers.

     (a) Neither the Collateral Agent nor any Secured Party shall by any act (except by a written instrument pursuant to Section 5.1), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No failure to exercise, nor any delay in exercising, on the part of the Collateral Agent or any Secured Party, any right, power or privilege hereunder shall operate as a waiver thereof. No single or partial exercise of any right, power or privilege hereunder shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege. A waiver by the Collateral Agent or any Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy the Collateral Agent or such Secured Party would otherwise have on any future occasion. The rights and remedies herein provided are cumulative, may be exercised singly or concurrently and are not exclusive of any other rights or remedies provided by Law.

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     (b) The Pledgor hereby waives and relinquishes, to the maximum extent permitted by applicable Law, all rights and remedies accorded to pledgors, sureties or guarantors and agrees not to assert or take advantage of any such rights or remedies, including: (i) any right to require the Collateral Agent or the other Secured Parties at any time to pursue any other remedy in the Collateral Agent’s or any other Secured Party’s power before proceeding against the Pledgor; (ii) any defense that may arise by reason of the incapacity, lack of power or authority, death, dissolution, merger, termination or disability of the Pledgor, [___] or any other Person or the failure of the Collateral Agent or any other Secured Party to file or enforce a claim against the estate (in administration, bankruptcy or any other proceeding) of the Pledgor, [___] or any other Person; (iii) any right to require the Collateral Agent to give any notices of any kind, including notices of nonpayment, nonperformance, protest, dishonor, default, delinquency or acceleration, or to make any presentments, demands or protests, except as set forth herein or expressly provided in the other Loan Documents; (iv) any right under any Law purporting to reduce the Pledgor’s obligations hereunder if the Obligations are reduced other than as a result of payment of such Obligations; (v) any defense based on the repudiation of the Loan Documents by the Pledgor or any other Person, the failure by the Collateral Agent or the other Secured Parties to enforce any claim against the Pledgor, [___] or any other Person or the unenforceability in whole or in part of any Loan Documents; (vi) any right to insist upon, plead or in any manner whatever claim or take the benefit or advantage of, any appraisal, valuation, stay, extension, marshaling of assets, redemption or similar Law, or exemption, whether now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance by the Pledgor of its obligations under, or the enforcement by the Collateral Agent of, this Agreement; (vii) any defense based upon an election of remedies by the Collateral Agent or the other Secured Parties, including an election to proceed by non-judicial rather than judicial foreclosure, which destroys or otherwise impairs the subrogation rights of the Pledgor, the right of the Pledgor to proceed against [___] or the failure by [___] to do any act or thing or to observe or perform any covenant, condition or agreement to be observed or performed by it under the Loan Documents; (viii) any defense, setoff or counterclaim, which may at any time be available to or asserted by the Pledgor against the Collateral Agent, the other Secured Parties or any other Person under the Loan Documents; (ix) any duty on the part of the Collateral Agent or any other Secured Party to disclose to the Pledgor any facts the Collateral Agent or any other Secured Party may now or hereafter know about [___], regardless of whether the Collateral Agent or any other Secured Party has reason to believe that any such facts materially increase the risk beyond that which the Pledgor intends to assume, or has reason to believe that such facts are unknown to the Pledgor, or has a reasonable opportunity to communicate such facts to the Pledgor; and (x) any defense based on any change in the time, manner or place of any payment under, or in any other term of, the Loan Documents or any other amendment, renewal, extension, acceleration, compromise or waiver of or any consent or departure from the terms of the Loan Documents.

     (c) To the extent permitted by applicable Law, the Pledgor waives the posting of any bond otherwise required of the Collateral Agent in connection with any judicial process or proceeding to obtain possession of, replevy, attach or levy upon the Pledged Collateral, to enforce any judgment or other security for the Obligations, to enforce any judgment or other court order entered in favor of the Collateral Agent, or to enforce by specific performance, temporary restraining order, preliminary or permanent injunction, this Agreement or any other

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agreement or document between the Pledgor, the Collateral Agent and the Secured Parties. The Pledgor further agrees that upon the occurrence and during the existence of an Event of Default, the Collateral Agent may elect to nonjudicially or judicially foreclose against any real or personal property security it holds for the Obligations or any part thereof, or to exercise any other remedy against the Pledgor or any other Person, any security or any guarantor, even if the effect of that action is to deprive the Pledgor of the right to collect reimbursement from [___] or any other Person for any sums paid by the Pledgor to the Collateral Agent for the benefit of the Secured Parties.

     Section 6.4 Enforcement Expenses; Indemnification.

     (a) The Pledgor agrees to pay or reimburse each Secured Party and the Collateral Agent for all its reasonable costs and expenses incurred in collecting against the Pledged Collateral or otherwise enforcing or preserving any rights under this Agreement, including, without limitation, the fees and disbursements of counsel to each Secured Party and of counsel to the Collateral Agent.

     (b) The Pledgor agrees to pay, and to save the Collateral Agent and the Secured Parties harmless from, any and all liabilities with respect to, or resulting from any delay in paying, any and all stamp, excise, sales or other taxes, which may be payable or determined to be payable with respect to any of the Pledged Collateral or in connection with any of the transactions contemplated by this Agreement.

     (c) The Pledgor agrees to cause [___] to pay, and to save the Collateral Agent and the Secured Parties harmless from, any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, other than those resulting from the gross negligence or willful misconduct of the Collateral Agent or any Secured Party.

     (d) The agreements in this Section 6.4 shall survive repayment of the Obligations and all other amounts payable under the Credit Agreement and the other Loan Documents.

     Section 6.5 Successors and Assigns.

     This Agreement shall be binding upon the successors and assigns of the Pledgor and shall inure to the benefit of the Collateral Agent and the Secured Parties and their successors and assigns; provided, that, the Pledgor may not assign, transfer or delegate any of its rights or obligations under this Agreement without the prior written consent of the Collateral Agent.

     Section 6.6 Subrogation.

     While this Agreement is in effect, (i) the Pledgor shall not have any right of subrogation and waives all rights to enforce any remedy that the Secured Parties may now have or hereafter have against [___], and waives the benefit of, and all rights to participate in, any security now or hereafter held by the Collateral Agent or any other Secured Party from [___] and (ii) the Pledgor

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waives any claim, right or remedy that the Pledgor may now have or hereafter acquire against [___], which arises hereunder and/or from the performance by the Pledgor’s contribution, indemnification or participation in any claim, right or remedy of the Secured Parties against [___], or any security that the Secured Parties now have or hereafter acquire, whether or not such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise. Any amount paid to the Pledgor on account of any such subrogation rights while this Agreement is in effect shall be held in trust for the benefit of the Collateral Agent and shall immediately thereafter be paid to the Collateral Agent for the benefit of the Secured Parties.

     Section 6.7 Security Interest Absolute.

     All rights of the Collateral Agent and the Secured Parties and the security interest hereunder, and all obligations of the Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of the Loan Documents or any other agreement or instrument relating thereto; (b) the failure of any Secured Party (i) to assert any claim or demand or to enforce any right or remedy against the Pledgor, any Affiliate of the Pledgor or any other Person under the provisions of the Loan Documents or otherwise or (ii) to exercise any right or remedy against any other guarantor of, or collateral securing, any of the Obligations; (c) any change in the time, manner or place of payment of, or in any other term of the Obligations (including any increase in the amount thereof), or any other amendment or waiver of or any consent to any departure from the Loan Documents; (d) any reduction, limitation, impairment or termination of any of the Obligations for any reason other than the indefeasible payment in full in cash of the Obligations or the written agreement of the Secured Parties to terminate the Obligations in full, but including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to, and the Pledgor hereby waives any right to or claim of, any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality, non-genuineness, irregularity, compromise, unenforceability of or any other event or occurrence affecting, any Obligation of the Pledgor, any Affiliate of the Pledgor or otherwise; (e) any amendment to, rescission, waiver or other modification of, or any consent to depart from, any of the terms of the Loan Documents; (f) any exchange, surrender, release or non-perfection of any Pledged Collateral, or any release, amendment or waiver or addition of or consent to departure from any other security interest held by any Secured Party securing any of the Obligations; (g) any bankruptcy or insolvency of [___], the Pledgor or any other Person; or (h) any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Pledgor (other than the defense of payment).

     Section 6.8 Counterparts.

     This Agreement may be executed by one or more of the parties to this Agreement on any number of separate counterparts (including by telecopy), and all of said counterparts taken together shall be deemed to constitute one and the same instrument.

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     Section 6.9 Severability.

     Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.

     Section 6.10 Section Headings.

     The Section headings used in this Agreement are for convenience of reference only and are not to affect the construction hereof or be taken into consideration in the interpretation hereof.

     Section 6.11 Integration.

     This Agreement and the other Loan Documents represent the agreement of the Pledgor, the Collateral Agent and the Secured Parties with respect to the subject matter hereof and thereof, and there are no promises, undertakings, representations or warranties by the Collateral Agent or any Secured Party relative to the subject matter hereof and thereof not expressly set forth or referred to herein or in the other Loan Documents.

     Section 6.12 GOVERNING LAW.

     THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK, EXCEPT AS REQUIRED BY MANDATORY PROVISIONS OF LAW AND EXCEPT TO THE EXTENT THE VALIDITY, PERFECTION OR PRIORITY OF THE SECURITY INTERESTS HEREUNDER ARE GOVERNED BY THE LAWS OF ANY JURISDICTION OTHER THAN THE STATE OF NEW YORK.

     Section 6.13 Submission To Jurisdiction; Waivers.

     The Pledgor hereby irrevocably and unconditionally:

     (a) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof;

     (b) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same;

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     (c) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Pledgor at its address referred to in Section 6.2 or at such other address of which the Collateral Agent shall have been notified pursuant thereto;

     (d) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and

     (e) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages.

     Section 6.14 Acknowledgments.

     The Pledgor hereby acknowledges that:

     (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party;

     (b) neither the Collateral Agent nor any Secured Party has any fiduciary relationship with or duty to the Pledgor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Pledgor, on the one hand, and the Collateral Agent and Secured Parties, on the other hand, in connection herewith or therewith is solely that of debtor (or guarantor of debtor) and creditor; and

     (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Secured Parties or among the Pledgor and the Secured Parties.

     Section 6.15 Releases.

     (a) At such time as the Loans and the other Obligations shall have been paid in full, the Pledged Collateral shall be released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Collateral Agent and the Pledgor hereunder shall terminate, all without delivery of any instrument or performance of any act by any party, and all rights to the Pledged Collateral shall revert to the Pledgor. At the request and sole expense of the Pledgor following any such termination, the Collateral Agent shall deliver to the Pledgor any Pledged Collateral held by the Collateral Agent hereunder, and execute and deliver to the Pledgor such documents as the Pledgor shall reasonably request to evidence such termination.

     (b) If any of the Pledged Collateral shall be sold, transferred or otherwise disposed of by the Pledgor in a transaction permitted by the Credit Agreement, then the Collateral Agent, at the request and sole expense of the Pledgor, shall execute and deliver to the Pledgor all releases or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Pledged Collateral.

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     Section 6.16 WAIVER OF JURY TRIAL.

     THE PLEDGOR HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN.

     Section 6.17 Reinstatement.

     This Agreement and the obligations of the Pledgor hereunder shall continue to be effective or be automatically reinstated, as the case may be, if at any time any payment pursuant to this Agreement is rescinded or must otherwise be restored or returned upon the insolvency, bankruptcy, reorganization or liquidation of the Pledgor, [___] or any other Person a party to the Loan Documents or upon the dissolution of, or appointment of any intervenor or conservator of, or trustee or similar official for, the Pledgor, [___] or any other Person a party to the Loan Documents or any substantial part of the Pledgor’s, [___]’s or any other such Person’s assets, or otherwise, all as though such payments had not been made, and the Pledgor shall pay the Collateral Agent on demand all reasonable costs and expenses (including reasonable fees of counsel) incurred by the Collateral Agent in connection with such rescission or restoration.

     Section 6.18 Limitation of Liability.

          No claim shall be made by the Pledgor against the Collateral Agent or the Secured Parties or any of their Affiliates, directors, employees, attorneys or agents for any loss of profits, business or anticipated savings, special or punitive damages or any indirect or consequential loss whatsoever in respect of any breach or wrongful conduct (whether or not the claim therefor is based on contract, tort or duty imposed by law), in connection with, arising out of or in any way related to the transactions contemplated by this Agreement or the other Loan Documents or any act or omission or event occurring in connection therewith; and the Pledgor and [___] hereby waive, release and agree not to sue upon any such claim for any such damages, whether or not accrued and whether or not known or suspected to exist in their favor, which are not the result of the gross negligence or willful misconduct by the Collateral Agent.

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     IN WITNESS WHEREOF, the parties hereto, by their officers duly authorized, have caused this Agreement to be duly executed and delivered as of the date first above written.

[PLEDGOR]
By:
	Name:
	Title:
Address for Notices: Attention: Phone: Fax:
MERRILL LYNCH CAPITAL CORPORATION, as Collateral Agent
By:
	Name:
	Title:
By:
	Name:
	Title:
Address for Notices: Attention: Phone: Fax:

EXHIBIT A

IRREVOCABLE PROXY

          The undersigned hereby appoints                                          not in its individual capacity, but solely as Collateral Agent under the Pledge and Security Agreement, dated as of [                    ], 200[___], between [Pledgor], a [                    ] (the “Pledgor”) and Merrill Lynch Capital Corporation (the “Collateral Agent”), to act as Proxy with full power of substitution, and hereby authorizes the Collateral Agent to represent and vote all of the shares in [                                        ] owned by the undersigned on the date of exercise hereof after the occurrence and during the existence of an Event of Default under, and as defined in the Credit Agreement, among InterOil Corporation, as Borrower, the Lenders from time to time a party thereto, Merrill Lynch Capital Corporation, in its capacity as Administrative Agent for the Lenders, Merrill Lynch Capital Corporation and Clarion Finanz AG, as Co-Lead Arrangers and Co-Bookrunners, and Merrill Lynch Capital Corporation in its capacity as Collateral Agent.

     Date:                                                             

[PLEDGOR]
By:
	Name:
	Title:

SCHEDULE 1

PLEDGED INTERESTS

Owner	Ownership Interest in [__] Shares
[Pledgor]	100%

SCHEDULE 2

ACTIONS REQUIRED TO PERFECT SECURITY INTERESTS

     Delivery by the Pledgor of the [___] Shares to the Collateral Agent.

SCHEDULE 3

NOTICE ADDRESS OF PLEDGOR;

LOCATION OF JURISDICTION OF ORGANIZATION AND REGISTERED OFFICE

     [Pledgor], a [                    ], with its registered office located at [                                         ].

EXHIBIT F

Form of IPL Security Agreement (Fixed and Floating Charge)

Fixed and Floating
Charge

InterOil Products Limited

Merrill Lynch Capital Corporation

© Blake Dawson Waldron 2006

CONTENTS

1.  INTERPRETATION		0
	1.1 Definitions	0
	1.2 Rules for interpreting this document	7
	1.3 Business Days	8
2.  CHARGE		8
	2.1 Charging provision	8
	2.2 Priority	8
	2.3 Fixed and floating charge	8
	2.4 Licence to deal with Floating Charge Property	8
	2.5 Crystallisation	9
	2.6 Floating nature of charge restored	9
	2.7 Priorities	10
	2.8 Exception	10
3.  RESTRICTIONS ON DEALING WITH CHARGED PROPERTY		10
4.  REPRESENTATIONS AND WARRANTIES		10
	4.1 General representations and warranties	10
	4.2 Representations and warranties regarding Charged Property	12
	4.3 Repetition of representations and warranties	12
	4.4 Reliance on representations and warranties	12
	4.5 No representations by the Chargee	13
5.  CHARGOR’S UNDERTAKINGS		13
	5.1 General undertakings	13
	5.2 Financial undertakings	14
	5.3 Undertakings regarding Charged Property	14
6.  CHARGEE’S POWERS		15
	6.1 Chargee may exercise powers without notice	15
	6.2 Chargee's right to make good a default	16
	6.3 Powers on enforcement	16
	6.4 Inspection	16
	6.5 Calls	16
7.  POWER OF ATTORNEY		17
	7.1 Appointment of Attorneys	17
	7.2 General	18
8.  ENFORCEMENT		19
	8.1 Circumstances when this document may be enforced	19
	8.2 Enforcement despite earlier payment	19
9.  DEFAULT INTEREST		19
	9.1 Chargor must pay interest	19
	9.2 Interest after judgment	19
	9.3 Accrual and calculation of interest	20
10.  APPOINTMENT OF RECEIVER		20
	10.1 Appointment	20
	10.2 Receiver other than as Chargor’s agent	20
	10.3 Powers of Receiver	21
11.  PROTECTION OF CHARGEE AND APPOINTEES		23
	11.1 Protection of Chargee and Receiver	23
	11.2 Conflict of interests	23
	11.3 Liability for loss	24
12.  PROTECTION OF THIRD PARTIES		24

	12.1 Dealings under this document	24
	12.2 Receipts	24
13. APPLICATION OF MONEY		25
	13.1 Order	25
	13.2 Only actual receipts credited	25
	13.3 Compensation	26
14. CONTINUING SECURITY AND THIRD PARTY PROVISIONS		26
	14.1 Nature of obligations and enforcement	26
	14.2 Preservation of Chargor’s obligations	26
	14.3 Continuity	28
	14.4 Limitations on Chargor’s rights	28
	14.5 No marshalling	29
	14.6 Effect of Insolvency Event	29
15. INDEMNITIES		30
	15.1 Indemnity for breach or preservation of rights	30
	15.2 Indemnity for exercise of rights or proceedings	30
	15.3 Recovery from Charged Property	31
16. DISCHARGE		31
17. CONSENT TO DISCLOSURE		31
18. NOTICES		32
	18.1 How to give a notice	32
	18.2 When a notice is given	32
	18.3 Address for notices	33
19. AMENDMENT AND ASSIGNMENT		33
	19.1 Amendment	33
	19.2 Assignment	33
20. GENERAL		34
	20.1 Governing law	34
	20.2 Liability for expenses	34
	20.3 Giving effect to this document	34
	20.4 Waiver of rights	35
	20.5 Operation of this document	35
	20.6 Operation of indemnities	35
	20.7 Consents	36
	20.8 Statements by Chargee	36
	20.9 Set-off	36
	20.10       No merger	36
	20.11       Exclusion of contrary legislation	36
	20.12       Tax	37
	20.13       Counterparts	37
	20.14       Attorneys	37

ii.

FIXED AND FLOATING CHARGE

DATE 2006

PARTIES

          InterOil Products Limited, a Papua New Guinea company (Chargor)

          Merrill Lynch Capital Corporation (Chargee)

     OPERATIVE PROVISIONS

1. INTERPRETATION

1.1 Definitions

     The following definitions apply in this document.

Accounts means, for a period, a profit and loss statement (or statement of financial performance) and statement of cashflows for that period, and a balance sheet (or statement of financial position) as at the end of that period, together with any notes to them and any statement or report (including any directors’ declaration and any auditors’ report) that is required by applicable law to be prepared in relation to them.

Attorney means an attorney appointed under this document.

Authorisation means:

(a)	an authorisation, consent, declaration, exemption, notarisation or waiver, however it is described;
(b)	in relation to anything that could be prohibited or restricted by law if a Government Agency acts in any way within a specified period, the expiry of that period without that action being taken,

including any renewal or amendment.

Authorised Representative means, for a party:

(c)	a company secretary or director of the party or an employee of the party whose title includes the word “manager” or “director”;
(d)	a person who is acting temporarily in one of those positions; or

(e) a person, or a person holding a position, nominated by the party to the other party.

Business Day means:

(f)	for determining when a notice, consent or other communication is given, a day that is not a Saturday, Sunday or public holiday in the place to which the notice, consent or other communication is sent; and
(g)	for any other purpose, a day (other than a Saturday, Sunday or public holiday) on which banks are open for general banking business and the Chargee is open for business in Port Moresby.

Charge means the charge created by clause 2.

Charged Property means all the Chargor’s interest in all its property anywhere (real and personal, and present and future) including its uncalled capital and its called but unpaid capital for the time being.

Chargee means Merrill Lynch Capital Corporation, the person in whose favour this document is given.

Collateral Security means any Encumbrance or Guarantee (other than the Charge) from any person that secures or otherwise provides for payment of any Secured Money.

Companies Act means the Companies Act 1997.

Controller means, in relation to a person’s property:

(h)	a receiver or receiver and manager of that property; or
(i)	anyone else who (whether or not as agent for the person) is in possession, or has control, of that property to enforce an Encumbrance.

Credit Agreement means the credit agreement between InterOil Corporation, a corporation duly organised in accordance with the laws of New Brunswick, Canada, the Chargee and Clarion Finanz AG dated [4] May 2006.

Encumbrance means a mortgage, charge, pledge, lien, hypothecation or title retention arrangement, a right of set-off or right to withhold payment of a deposit or other money, a notice under section 356 of the Income Tax Act 1959 or any similar legislation, or an easement, restrictive covenant, caveat or similar restriction over property, or an agreement to create any of them or to allow any of them to exist.

Event of Default has the meaning given in the Credit Agreement.

1.

Excluded Tax means a Tax on net income in any jurisdiction, other than:

(a)	a Tax that is calculated on or by reference to the gross amount of any payment derived by a party under a IPL Document, or the transactions that a IPL Document contemplates; or
(b)	a Tax that is imposed because a party is regarded as being subject to tax in a jurisdiction solely because it is a party to a IPL Document or because it is participating in the transactions that a IPL Document contemplates.

Financial Indebtedness means an obligation (whether present or future, actual or contingent) to pay or deliver any money or commodity under or in respect of any financial accommodation including under or in respect of any:

(j)	money borrowed or raised;
(k)	redeemable or repurchaseable share or stock;
(l)	bill of exchange, promissory note or other financial instrument (whether or not transferable or negotiable);
(m)	put option or buyback or discounting arrangement in respect of any property;
(n)	lease, licence or other arrangement in respect of any property entered into primarily to raise finance or to finance the acquisition of that property (other than a lease, licence or arrangement which may be accounted for as an operating lease under applicable generally accepted accounting principles);
(o)	hire purchase or deferred payment obligation for any property or service;
(p)	interest or currency swap or hedge arrangement, financial option, futures contract or analogous transaction; or
(q)	arrangement which achieves the same or a similar commercial effect as or to any of the above,

and any Guarantee of Financial Indebtedness of another person.

Fixed Charge Property means all the Chargor’s right, title and interest (legal or equitable) both present and future in:

(r)	all real property (freehold and leasehold), all buildings and Fixtures on real property and all proceeds of sale of any of them;
(s)	fixed plant, machinery and equipment;
(t)	uncalled or unpaid capital;

2.

(u)	goodwill;
(v)	any marketable securities other than marketable securities that are acquired and disposed of in the course of the ordinary day to day business of the Chargor;
(w)	all benefits, claims and returns of premiums relating to Insurances;
(x)	all rights under documents or agreements of any kind, any Guarantee issued in its favour, all bills of exchange and other negotiable instruments held by it, and any Records concerning the Chargor’s business transactions;
(y)	all book and other debts payable to the Chargor, including the proceeds of those debts;
(z)	all Intellectual Property; and
(aa)	all money (including interest) standing to the credit of the Proceeds Account and the debt represented by that account.

Fixtures means all fixtures and fittings and fixed plant, machinery and equipment on any real property (freehold or leasehold) owned by the Chargor.

Floating Charge Property means all Charged Property that is not Fixed Charge Property.

Government Agency means:

(bb)	a government or government department or other body;
(cc)	a governmental, semi-governmental or judicial person; or
(dd)	a person (whether autonomous or not) who is charged with the administration of a law.

Guarantee means a guarantee, indemnity, letter of credit, performance bond, acceptance or endorsement, or other undertaking or obligation:

(ee)	to provide funds (including by the purchase of property), or otherwise to make property available, in or to enable payment or discharge of;
(ff)	to indemnify against the consequences of default in the payment of; or
(gg)	otherwise to be responsible for,

an obligation (whether or not it involves the payment of money), or otherwise to be responsible for the solvency or financial condition, of any other person.

3.

Guarantor means any person giving a Guarantee to the Chargee of the Chargor’s or the Borrower’s obligations relating to the Secured Money.

Insolvency Event means, in respect of a person:

(hh)	an order being made, or the person passing a resolution, for its winding up;
(ii)	an application being made to a court for an order for its winding up;
(jj)	an administrator being appointed to the person;
(kk)	(i) the person resolving to appoint a Controller or analogous person to the person or any of the person’s property;

(ii)	an application being made to a court for an order to appoint a Controller, provisional liquidator, trustee for creditors or in insolvency or bankruptcy or analogous person to the person or any of the person’s property; or
(iii)	an appointment of the kind referred to in subparagraph (ii) being made (whether or not following a resolution or application);

(ll)	the holder of a Security Interest taking possession of any of the person’s property;
(mm)	the person being taken under section 335 of the Companies Act to have failed to comply with a statutory demand;
(nn)	the person:

(i)	suspending payment of its debts, ceasing (or threatening to cease) to carry on all or a material part of its business, stating that it is unable to pay its debts or being or becoming otherwise insolvent; or
(ii)	being taken by applicable law to be (or if a court would be entitled or required to presume that the person is) unable to pay its debts or otherwise insolvent;

(oo)	the process of any court or authority being invoked against the person or any of its property to enforce any judgment or order for the payment of money or the recovery of any property;
(pp)	the person dying, ceasing to be of full legal capacity or otherwise becoming incapable of managing its own affairs for any reason;
(qq)	being adjudicated an insolvent under the Insolvency Act Chapter No. 253 or bankrupt under any analogous legislation;

4.

(rr)	the person taking any step toward entering into a compromise or arrangement with, or assignment for the benefit of, any of its members or creditors; or
(ss)	any analogous event,

unless this takes place as part of a solvent reconstruction, amalgamation, merger or consolidation that has been approved by the Chargee.

Insurances means all contracts and policies of insurance that are taken out by or on behalf of the Chargor or in which the Chargor has an interest.

Intellectual Property means software, copyrights, drawings, maps, patents, trade marks, trade secrets, technology rights, knowhow, formulae, recipes, mining information and data, confidential information, inventions and similar industrial, commercial and intellectual property in any form (including computer encoded or stored information) whether or not:

(tt)	registered;
(uu)	protected by statute; or
(vv)	reduced to writing.

IPL Document means:

(a)	this document;
(b)	the IPL Guaranty Agreement (as defined in the Credit Agreement);
(c)	any document that amends, supplements, replaces or novates any of the above; and
(ww)	any undertaking (whether or not in writing) by or to a party or its lawyers that is given under or relates to any of the above.

Material Adverse Effect has the meaning given in the Credit Agreement in relation to the Chargor.

Permitted Encumbrance means:

(xx)	an Encumbrance created under a IPL Document;
(yy)	a lien that arises by operation of law in the ordinary course of ordinary business, where the amount secured is not overdue or is being diligently contested in good faith;

5.

(zz)	an Encumbrance that the Chargee approves before it arises, where the amount secured does not increase, and the time for payment of that amount is not extended beyond the amount and time approved by the Chargee; or
(aaa)	any “Permitted Lien” as defined in the Credit Agreement.

Receiver means a receiver or a receiver and manager.

Records has the same meaning as records in the Companies Act.

Relevant Person means each of the Chargor, the Borrower, any Guarantor and any subsidiary of any of them.

Secured Money means all amounts (including damages) that are payable, owing but not payable, or that otherwise remain unpaid by the Chargor to the Chargee at any time pursuant to any IPL Document whether:

(bbb)	present or future, actual or contingent;
(ccc)	incurred alone, jointly, severally or jointly and severally;
(ddd)	the Chargor is liable on its own account or the account of, or as surety for, another person and without regard to the capacity in which the Chargor is liable;
(eee)	due to the Chargee alone or with another person;
(fff)	the Chargee is entitled for its own account or the account of another person;
(ggg)	arising from a banker and customer relationship or any other relationship;
(hhh)	originally contemplated by the Chargor or the Chargee or not; and
(iii)	the Chargee is the original person in whose favour the undertakings in this document or the Agreement were given or an assignee and, if the Chargee is an assignee:

(i)	whether or not the Chargor consented to or knew of the assignment;
(ii)	no matter when the assignment occurred; and
(iii)	whether or not the entitlements of that original person were assigned with the Charge.

Security Interest means an Encumbrance that secures the payment of money or the performance of an obligation, or any other interest or arrangement of any kind that gives a creditor priority over other creditors in relation to any property.

6.

Tax means a tax, levy, duty, charge, deduction or withholding, however it is described, that is imposed by law or by a Government Agency, together with any related interest, penalty, fine or other charge.

1.2 Rules for interpreting this document

Headings are for convenience only, and do not affect interpretation. The following rules also apply in interpreting this document, except where the context makes it clear that a rule is not intended to apply.

(a) A reference to:

(i)	legislation (including subordinate legislation) is to that legislation as amended, re-enacted or replaced, and includes any subordinate legislation issued under it;
(ii)	a document or agreement, or a provision of a document or agreement, is to that document, agreement or provision as amended, supplemented, replaced or novated;
(iii)	a party to this document or to any other document or agreement includes a permitted substitute or a permitted assign of that party;
(iv)	a person includes any type of entity or body of persons, whether or not it is incorporated or has a separate legal identity, and any executor, administrator or successor in law of the person; and
(v)	anything (including a right, obligation or concept) includes each part of it.

(b)	A singular word includes the plural, and vice versa.
(c)	A word which suggests one gender includes the other genders.
(d)	If a word is defined, another part of speech has a corresponding meaning.
(e)	If an example is given of anything (including a right, obligation or concept), such as by saying it includes something else, the example does not limit the scope of that thing.
(f)	The word agreement includes an undertaking or other binding arrangement or understanding, whether or not in writing.
(g)	The words subsidiary, holding company and related corporation have the same meanings as in the Companies Act.
(h)	A reference to kina or K is to an amount in Papua New Guinea currency.

7.

(i)	A reference to USD is to an amount in the currency of the United States of America.
(j)	In the event of any inconsistency between this document and the Credit Agreement, the Credit Agreement prevails to the extent of the inconsistency.

1.3 Business Days

If the day on or by which a person must do something under this document is not a Business Day:

(a)	if the act involves a payment that is due on demand, the person must do it on or by the next Business Day; and
(b)	in any other case, the person must do it on or by the previous Business Day.

2. CHARGE

2.1 Charging provision

The Chargor as legal and beneficial owner, charges all the Charged Property in favour of the Chargee to secure the due and punctual payment of the Secured Money.

2.2 Priority

The Charge is a first ranking charge.

2.3 Fixed and floating charge

The Charge operates:

(a)	as a fixed charge over all Fixed Charge Property; and
(b)	subject to clause 2.5, as a floating charge over all Floating Charge Property.

2.4 Licence to deal with Floating Charge Property

Subject to clause 2.5, the Chargee licenses the Chargor to dispose of or otherwise deal with Floating Charge Property in the ordinary course of its ordinary business, but subject to the restrictions set out in the Credit Agreement.

8.

2.5 Crystallisation

The Charge will cease to operate as a floating charge and will operate as a fixed charge, and the licence under clause 2.4 will be withdrawn and revoked, automatically and immediately:

(a) in relation to all Floating Charge Property, if:

(i)	the Chargor ceases or threatens to cease to carry on its business;
(ii)	an Insolvency Event occurs in respect of the Chargor; or
(iii)	this document is enforced;

(b) in relation to part of the Floating Charge Property, if:

(i)	the Chargor creates or takes any step towards creating any Encumbrance over that part of the Floating Charge Property in breach of clause 3;
(ii)	the Chargor disposes of or deals with or takes any step towards disposing of or dealing with that part of the Floating Charge Property in breach of clause 3;
(iii)	any step is taken to levy or enforce any distress or other execution on or against that part of the Floating Charge Property or to enforce any Encumbrance relating to that part of the Floating Charge Property; or
(iv)	after an Event of Default, the Chargee gives notice to the Chargor that the Charge is to crystallise in relation to that part of the Floating Charge Property;

(c)	in relation to any proceeds of any debt or other money included in Floating Charge Property that may be or become payable for any reason to the Chargor, if after the occurrence of an Event of Default the Chargee gives notice to the Chargor that the Charge is to crystallise in relation to those proceeds; or
(d)	in relation to any money included in Floating Charge Property that may now or in the future be or become due to or held for the Chargor, or any other part of the Floating Charge Property that any Government Agency may in any way rank for payment of Taxes ahead of a floating charge, when the Chargor fails to pay any Taxes.

2.6 Floating nature of charge restored

If the Charge has become a fixed charge under clause 2.5 in relation to Floating Charge Property, the Chargee may at its sole discretion and without prejudice to the continued application of the terms of this document, restore the licence under clause 2.4 by notice to

9.

the Chargor so that the Charge will again operate as a floating charge and not as a fixed charge in relation to that Floating Charge Property. The Chargee is not obliged to do so.

2.7 Priorities

For the purposes of fixing priorities between the Charge and any subsequent charge registered under the Companies Act and for no other purposes, the Charge secures a prospective liability (being the liability to pay the Secured Money and to indemnify the Chargee, any Receiver and any Attorney as provided in this document) up to a maximum amount of USD150,000,000. The Charge may also secure prospective liabilities in excess of this specified maximum amount.

2.8 Exception

The Charge only applies to rights under documents or agreements to the extent that the terms of such document or agreement does not prohibit the creation of a charge by way of security over rights arising under such document or agreement. Where the creation of the Charge by way of security is prohibited, to the extent required by the Chargee, the Chargor will use its best endeavours to obtain consent for the creation of the Charge, and upon obtaining consent the rights arising under the relevant document or agreement form part of the Charged Property.

3. RESTRICTIONS ON DEALING WITH CHARGED PROPERTY

Except as expressly permitted under the Credit Agreement, the Chargor must not:

(a)	create, attempt to create or permit to exist any Encumbrance in relation to the Charged Property (whether ranking ahead of, equally with or after, the Charge); or
(b)	subject to clause 2.4, dispose of, declare a trust over or otherwise create or permit the creation or existence of any interest in, or part with possession of, any Charged Property,

without the Chargee’s prior written consent.

4.	REPRESENTATIONS AND WARRANTIES
4.1	General representations and warranties

     The Chargor represents and warrants to the Chargee that:

(a)	(status) it and each of its subsidiaries is a company under the Companies Act;
(b)	(power) it has full legal capacity and power to:

(i) own its property and to carry on its business; and

10.

(ii) enter into this document and to carry out the transactions that it contemplates;

(c)	(corporate authority) it has taken all corporate action that is necessary or desirable to authorise its entry into this document and its carrying out the transactions that it contemplates;
(d)	(Authorisations) it holds each Authorisation that is necessary or desirable to:

(i)	enable it to properly execute this document and to carry out the transactions that they contemplate;
(ii)	ensure that this document is legal, valid, binding and admissible in evidence; or
(iii)	enable it to properly carry on its business,

and it is complying with any conditions to which any of these Authorisations is subject;

(e)	(documents effective) this document constitutes its legal, valid and binding obligations, enforceable against it in accordance with its terms (except to the extent limited by equitable principles and laws affecting creditors’ rights generally), and the Charge and each Collateral Security is an effective Security Interest over the property that is stated to be subject to it with the priority that it contemplates, subject to any necessary stamping or registration;
(f)	(ranking) its payment obligations under this document rank ahead of all its unsecured and unsubordinated payment obligations (whether present or future, actual or contingent), other than obligations that are mandatorily preferred by law;
(g)	(no contravention) neither its execution of this document, nor the carrying out by it of the transactions that they contemplate, does or will:

(i)	contravene any law to which it or its property is subject or any order of any Government Agency that is binding on it or its property;
(ii)	contravene any Authorisation;
(iii)	contravene any undertaking or instrument binding on it or its property;
(iv)	contravene its constitution; or
(v)	require it to make any payment or delivery in respect of any Financial Indebtedness before it would otherwise be obliged to do so;

11.

(h)	(no litigation) no litigation, arbitration, mediation, conciliation or administrative proceedings are taking place, pending, or to the knowledge of any of its officers after due inquiry, threatened which, if adversely decided, could have a Material Adverse Effect on it or any of its subsidiaries;
(i)	(no filings or Taxes) it is not necessary or desirable, to ensure that this document is legal, valid, binding or admissible in evidence, that this document or any other document be filed or registered with any Government Agency, or that any Taxes be paid (other than registration of this document with the Registrar of Companies and the payment of stamp duty on this document);
(j)	(no default) no Event of Default has occurred and is continuing, and it is not in breach of any document or agreement in a manner that could have a Material Adverse Effect on it;
(k)	(no Encumbrance) none of its property is subject to an Encumbrance other than a Permitted Encumbrance;
(l)	(no Controller) no Controller is currently appointed in relation to any of its property, or any property of any of its subsidiaries; and
(m)	(no trust) it is not entering into this document as trustee of any trust or settlement.

4.2 Representations and warranties regarding Charged Property

The Chargor represents and warrants that:

(a)	(title) it has good and full legal and beneficial right and title to, and full power to charge, the Charged Property in the manner provided in this document; and
(b)	(no Encumbrance) the Charged Property is free from all Encumbrances other than Permitted Encumbrances.

4.3 Repetition of representations and warranties

The representations and warranties in this clause are taken to be repeated on each date that the representations and warranties under the Credit Agreement are deemed to be repeated on the basis of the facts and circumstances as at that date, except for any such representations or warranties that relate to a certain, specified date.

4.4 Reliance on representations and warranties

The Chargor acknowledges that the Chargee has executed this document and agreed to take part in the transactions that this document contemplates in reliance on the representations and warranties that are made or repeated in this clause.

12.

4.5 No representations by the Chargee

The Chargor acknowledges that it has not relied and will not rely on any representation, statement or promise made by or on behalf of the Chargee in deciding to enter into this document or to exercise any right under it.

5. CHARGOR’S UNDERTAKINGS

5.1 General undertakings

The Chargor must:

(a)	(obligation to pay) punctually pay the Secured Money when it becomes payable in accordance with the terms of any written agreement between the Chargor and the Chargee or, in the absence of any agreement or after default under any agreement, on demand by the Chargee;
(b)	(maintain status) maintain, and ensure that each of its subsidiaries maintains, its status as a company under the Companies Act;
(c)	(comply with law) comply with, and ensure that each of its subsidiaries complies with, all applicable law including by paying when due all Taxes for which it or its property is assessed or liable (except to the extent that these are being diligently contested in good faith and by appropriate proceedings and it or the relevant subsidiary has made adequate reserves for them);
(d)	(hold Authorisations) obtain and maintain each Authorisation that is necessary or desirable to:

(i)	execute this document and to carry out the transactions that they contemplate;
(ii)	ensure that this document is legal, valid, binding and admissible in evidence; or
(iii)	enable it to properly carry on its business,

and must comply with any conditions to which any of these Authorisations is subject; and

(e) (registration and stamping) immediately at its own cost:

(i)	ensure that this document is registered (and not just provisionally) under section 222 of the Companies Act;
(ii)	register this document in any other places which the Chargee notifies to the Chargor if the Chargee is reasonably satisfied that registration is

13.

necessary or desirable to perfect the Charge or to protect the rights of the Chargee under this document; and

(iii) ensure that this document is stamped for the proper amount in Papua New Guinea and in each jurisdiction in which this document is required to be stamped.

5.2 Financial undertakings

Except as otherwise permitted under the terms of the Credit Agreement, the Chargor must:

(a)	(negative pledge) not create or permit to exist any Encumbrance over any Charged Property, other than a Permitted Encumbrance;
(b)	(no Financial Indebtedness) not incur Financial Indebtedness, and must ensure that none of its subsidiaries incurs Financial Indebtedness, without the consent of the Chargee; and
(c)	(no disposal of property) not dispose of, declare a trust over or otherwise create an interest in, and must ensure that none of its subsidiaries disposes of, declares a trust over or otherwise creates an interest in, all or a substantial part of its property (either in one or several transactions, whether or not related) except:

(i)	as permitted by paragraph (a);
(ii)	with the consent of the Chargee;
(iii)	at arm’s length and for full value in a transaction that is entered into in the ordinary course of its ordinary business; or

5.3 Undertakings regarding Charged Property

The Chargor must:

(a) (outgoings):

(i)	punctually pay all outgoings (including rent and Taxes) payable or deductible from it, other than any amount which it is contesting in good faith where failure to pay that amount will not have a Material Adverse Effect on it or prejudice the Charged Property;
(ii)	pay the contested amount after the final determination or settlement of the relevant contest; and
(iii)	on request by the Chargee, immediately hand to the Chargee evidence of every payment covered by this undertaking;

14.

(b) (maintenance):

(i)	maintain the Charged Property in good condition; and
(ii)	promptly remedy every material defect in the condition of the Charged Property (fair wear and tear excepted) if required to do so by the Chargee;

(c) (acquisition of real property):

(i)	if it becomes bound to complete the acquisition of any real property (freehold or leasehold), promptly notify the Chargee; and
(ii)	if it receives any deed or document of title relating to the real property, promptly hand them to the Chargee;

(d) (preserve and protect security) promptly do everything necessary or reasonably required by the Chargee to:

(i)	preserve and protect the value of Charged Property; or
(ii)	protect and enforce its title and the Chargee’s title as chargee to Charged Property;

(e)	(exercise rights) at the Chargee’s request, take any action reasonably required against any person to protect and enforce its rights relating to the Charged Property; and
(f)	(comply with obligations) do everything the Chargor is required to do under or in connection with Charged Property.

6. CHARGEE’S POWERS

6.1 Chargee may exercise powers without notice

To the full extent permitted by law but subject to the Credit Agreement and the IPL Documents, the Chargee is not required to give any notice or allow any time to elapse before:

(a)	enforcing an IPL Document;
(b)	appointing a Receiver; or
(c)	exercising any power, right, discretion or remedy given to the Chargee by any law,

and the Chargor waives any statutory requirements for notice or lapse of time.

15.

6.2 Chargee’s right to make good a default

(a)	If the Chargor breaches this document, the Chargee may do everything it considers to be necessary or desirable to attempt to remedy the breach to the Chargee’s satisfaction. The Chargee is not obliged to do so.
(b)	Paragraph (a) does not limit any other right the Chargee has under this document or at law.

6.3 Powers on enforcement

If this document has become enforceable, the Chargee or any of its Authorised Representatives, without notice to the Chargor, mayexercise any of the powers that might be exercised by a Receiver even if a Receiver has not been appointed.

6.4 Inspection

The Chargee or any of its Authorised Representatives may enter upon prior notice in accordance with clause 18 at any reasonable time on any land or building occupied by the Chargor or forming part of the Charged Property or in which any goods that form part of the Charged Property are located to:

(a)	inspect their state and condition; and
(b)	inspect and take copies of or extracts from any Records that in any way relate to Charged Property or the Chargor’s business.

6.5 Calls

(a) If this document has become enforceable, the Chargor authorises the Chargee, each of the Chargee’s Authorised Representatives and any Receiver to:

(i)	make calls on the members of the Chargor in relation to the Chargor’s uncalled capital;
(ii)	sue (in the name of the Chargor or otherwise) to recover money due in relation to calls; and
(iii)	give valid receipts for that money.

If this document has become enforceable, the Chargor’s directors may not do so.

(b) This authority is not terminated by any change in the Chargor’s directors and is assignable by the Chargee.

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7. POWER OF ATTORNEY

7.1 Appointment of Attorneys

The Chargor irrevocably appoints the Chargee and each Authorised Representative of the Chargee, and as an independent appointment appoints any Receiver, severally as its attorney (the “Attorney”) and whether in the name of the Chargor or otherwise, at any time an Event of Default has occurred and is continuing, to:

(a) (all acts necessary) do anything necessary or desirable in the opinion of the Chargee or the Attorney to:

(i)	give full effect to this document;
(ii)	better secure the Charged Property to the Chargee in a manner consistent with this document; or
(iii)	assist in the execution or exercise of any power,

including execute any transfer (including any transfer in blank) or other document;

(b)	(recover Charged Property) demand, sue for, recover and give discharge for Charged Property;
(c)	(commence actions) commence, carry on , enforce, settle, arrange and compromise any proceedings to obtain or enforce the payment or delivery of Charged Property;
(d)	(insolvency and winding up) take any necessary proceedings to procure a declaration of insolvency or the winding up of any Borrower of the Chargor in connection with the Charged Property, and attend and vote at meetings of creditors, receive dividends in any insolvency or winding up or appoint a proxy for any of these things;
(e)	(compound debts) compound, settle or compromise any debt of the Chargor in connection with the Charged Property;
(f)	(execute deeds) execute any deed of assignment, composition or release in connection with the Charged Property;
(g)	(exercise rights) exercise all or any powers, rights, discretions and remedies available under or in connection with the Charged Property (including rights available under the Companies Act or any other statute);

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(h) (sell) sell or agree to sell (whether or not the Attorney has taken possession), exchange or otherwise dispose of(absolutely or conditionally) Charged Property (or agree to do so):

(i)	by public auction, private sale or tender for cash or on credit;
(ii)	with or without special conditions,(such as conditions as to title or time or methos of payment of purchase money) including by allowing the money to remain:

(A)	outstanding on the security of a mortgage over the property sold or over any other property; or
(B)	owing without any security;
(C)	on other terms as the Attorney considers desirable,

(i)	without being responsible for any loss;and
(j)	(general) do anything else that the Chargor must or may do, or that the Chargee may do, under this document or by law,

at the Chargor’s cost.

Each Attorney may appoint and remove substitutes, and may delegate its powers (including this power of delegation) and revoke any delegation.

7.2 General

(a)	An Attorney may do anything contemplated by this clause even if the Attorney is affected by an actual or potential conflict of interest or duty, or might benefit from doing it.
(b)	An Attorney may do anything contemplated by this clause in its name, in the name of the Chargor or in the name of both of them.
(c)	The Chargor must ratify anything done by an Attorney under this clause.
(d)	The Chargor gives the power of attorney in this clause:

(i)	to secure performance by the Chargor of its obligations to the Chargee under this document and any property interest of the Chargee under this document; and
(ii)	for valuable consideration, receipt of which is acknowledged by the Chargor,

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which power of attorney shall remain irrevocable until full and unconditional payment and discharge of the Secured Money.

(e) The powers of attorney and authorisations given in this clause shall be in addition to and shall not in any way prejudice or affect or be in any way prejudiced or affected by all other powers of attorney and authorisations given to the Chargee or the Receiver (as the case may be) under the other provisions herein and under the other IPL Documents and under law.

8. ENFORCEMENT

8.1 Circumstances when this document may be enforced

The Secured Money will immediately become payable at the Chargee’s option (despite any delay or previous waiver of the right to exercise that option) without the need for any demand or notice, and this document will immediately become enforceable (whether or not the Secured Money has become payable in this manner), if an Event of Default occurs.

8.2 Enforcement despite earlier payment

This document may be enforced:

(a)	even if the Chargee accepts a payment of interest or other amount after any default; and
(b)	without the need for any notice to, or of any consent or agreement of, or enforcement of any rights against the Chargor or any other person.

9. DEFAULT INTEREST

9.1 Chargor must pay interest

The Chargor must pay interest on each amount that is not paid when due (unless the Chargor or the Borrower is already required to pay interest on the unpaid amount by the terms of an agreement between the Chargee and the Chargor or the Borrower), from (and including) the day on which it falls due to (but excluding) the day on which it is paid in full, at the rate calculated in accordance with the Credit Agreement. This interest must be paid on demand.

9.2 Interest after judgment

If a liability of the Chargor becomes merged in a judgment or order, the Chargor, as an independent obligation, must pay interest on the amount of that liability, from (and including) the date of the judgment or order until it is paid in full, at the higher of the rate that applies under the judgment or order and the rate calculated in accordance with clause 9.1.

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9.3	Accrual and calculation of interest
	Interest under this clause:

(a)	accrues daily; and
(b)	is calculated on the basis of the actual number of days on which interest has accrued and of a 365 day year.

10. APPOINTMENT OF RECEIVER

10.1	Appointment
	If this document has become enforceable (whether or not the Chargee has entered into possession of all or any of the Charged Property) the Chargee or any Authorised Representative of the Chargee may at any time:

(a)	appoint any person or any 2 or more persons jointly and severally to be a receiver or receiver and manager (or an additional receiver or receiver and manager) of Charged Property;
(b)	remove the Receiver and in case of the removal, retirement or death of any Receiver appoint another as a replacement; and
(c)	fix the remuneration of the Receiver.
	Subject to clause 10.2 and the next sentence, every Receiver appointed under this subclause will be the Chargor’s agent and the Chargor alone will be responsible for his acts and defaults and remuneration. The Chargee may by notice to the Chargor and the Receiver require the Receiver to act as the Chargee’s agent.

10.2	Receiver other than as Chargor’s agent
	The power to appoint a Receiver under this clause may be exercised even though:

(a)	at the time when this document becomes enforceable or when an appointment is made, an order may have been made or a resolution may have been passed to wind up the Chargor; or
(b)	a Receiver appointed in the circumstances specified in the preceding paragraph may not, or may not in some respects, act as the Chargor’s agent.

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10.3	Powers of Receiver
	The Receiver will have full power to do all or any of the following:

(a)	(take possession) take possession of, collect and get in Charged Property and for that purpose to take proceedings (in the name of the Chargor or otherwise);
(b)	(give up possession) give up possession of Charged Property;
(c)	(exercise Chargee’s rights):

(i)	exercise all or any of the Chargee’s powers, rights, discretions and remedies under this document; and
	comply with the directions given by the Chargee;

(d) (borrow from Chargee):

(i)	borrow from the Chargee any money that may be required for any of the purposes mentioned in paragraph (c); and
(ii)	(in the name of the Chargor or otherwise) secure any money borrowed by mortgage or charge over Charged Property so that the mortgage or charge may rank in priority to, equally with or after the Charge,

	without the Chargee being bound to enquire whether the borrowing is necessary or proper or responsible for the misapplication or non-application of any money borrowed;
(e)	(exercise rights) exercise all or any powers, rights, discretions and remedies available under or in connection with the Charged Property (including rights available under the Companies Act or any other statute);
(f)	(registration) do everything necessary to obtain registration of the Charged Property in the Chargee’s name or in the name of the Chargee’s nominee;
(g)	(settle disputes):

(i)	settle, arrange and compromise any accounts, claims, questions or disputes that may arise in connection with the Charged Property or in any way relating to this document; and
(ii)	execute releases or other discharges in relation to the settlement, arrangement, or compromise;

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(h) (sell) sell or agree to sell (whether or not the Receiver has taken possession), exchange or otherwise dispose of (absolutely or conditionally) Charged Property (or agree to do so):

(i)	by public auction, private sale or tender for cash or on credit;
(ii)	in one lot or in parcels;
(iii)	with or without special conditions, (such as conditions as to title or time or method of payment of purchase money) including by allowing the purchase money to remain:

(A)	outstanding on the security of a mortgage over the property sold or over any other property; or
(B)	owing without any security; and

(iv)	on other terms the Receiver considers desirable,
	without being responsible for any loss;

(i) (transfer on sale) execute transfers and assignments of Charged Property (including in the name of the Chargor), and do everything to complete any sale under paragraph (h) that the Receiver thinks necessary;

(j) (insure) insure Charged Property that is of an insurable nature against risks of destruction, loss or damage for the amounts and on the terms that the Receiver thinks appropriate;

(k) (employees and agents) engage employees, agents, advisers and contractors for any of the purposes of this clause on terms that the Receiver thinks appropriate;

(l) (give receipts) give receipts for all money and other property that may come into the hands of the Receiver in exercise of any power given by this document;

(m) (enforce contracts) carry out and enforce or otherwise obtain the benefit of all contracts:

(i)	entered into or held by the Chargor in connection with the Charged Property; or
(ii)	entered into in exercise of the powers given by this document;

(n) (have Borrowers declared insolvent) have Borrowers declared insolvent and wind up companies and do everything in connection with any insolvency or winding up that the Receiver thinks desirable to recover or protect Charged Property;

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(o)	(perform undertakings) do everything necessary to perform any undertaking of the Chargor in this document;
(p)	(receive money) receive all money or other property payable or deliverable to the Chargor from Charged Property;
(q)	(desirable or incidental matters):

(i)	do or cause to be done everything that the Receiver thinks desirable in the interests of the Chargee; and
(ii)	do anything incidental to the exercise of any other power;

(r)	(take legal proceedings) take proceedings (including in the name of the Chargor) in connection with any of the above; and
(s)	(delegate) with the Chargee’s consent delegate any of the powers given to the Receiver by this clause to any person.

11. PROTECTION OF CHARGEE AND APPOINTEES

11.1 Protection of Chargee and Receiver

(a) The Chargee is not obliged to:

(i)	notify any Borrower or member of the Chargor or any other person of this document; or
(ii)	enforce payment of any money payable to the Chargor, or take any step or proceeding for any similar purpose,
	but may do so if it so deems fit.

(b) None of the Chargee, any of its Authorised Representatives or any Receiver is liable for any omission or delay in exercising any power, right, discretion or remedy under this document or for any involuntary loss or irregularity that may occur in relation to the exercise or non-exercise of any of them except to the extent of its own fraud, gross negligence or wilful misconduct.

11.2	Conflict of interests
	The Chargee, an Authorised Representative of the Chargee or other person appointed by the Chargee under this document, an administrator of the Chargor appointed by the Chargee, an Attorney and a Receiver may exercise or agree to exercising a power given by this document or by law even though that person may have a conflict of interests in exercising the power.

23.

11.3 Liability for loss

(a) The Chargee is not liable for any loss that the Chargor suffers as a direct or indirect result of:

(i)	the exercise or attempted exercise of, or failure to exercise, any of its rights contained in this document; and
(ii)	any release or dealing with any other Guarantee or Encumbrance (including any prejudice to or loss of the Chargor’s rights of subrogation),
	except to the extent of its own fraud, gross negligence or wilful misconduct.

(b) If the Chargee or a Receiver enters into possession of Charged Property, none of the Chargee, any of its Authorised Representatives or any Receiver is liable:

(i)	to account as mortgagee in possession or for anything except actual receipts; or
(ii)	for any loss on realisation or for any default or omission for which a mortgagee in possession might be liable,
	except to the extent of its own fraud, gross negligence or wilful misconduct.

12.	PROTECTION OF THIRD PARTIES
12.1	Dealings under this document
	A purchaser or other party to a disposal or dealing in attempted exercise of a power contained in this document is not:

(a)	bound to enquire whether there has been a default, whether a Receiver has been properly appointed or about the propriety or regularity of a sale, disposal or dealing; or
(b)	affected by notice that a sale, disposal or dealing is unnecessary or improper.
	Despite any irregularity or impropriety in a sale, disposal or dealing, it is to be treated, for the protection of the purchaser or other party to the disposal or dealing, as being authorised by this document and valid.

12.2	Receipts
	A receipt that the Chargee, one of its Authorised Representatives or a Receiver gives for any money payable to or receivable by the Chargee or the Receiver because of this document will:

24.

(a) relieve the person paying or handing over money or other property from all liability:

(i)	for the application (or any loss or misapplication) of the money or other property;
(ii)	to enquire whether the Secured Money has become payable; and
(iii)	(where appropriate) as to the propriety or regularity of the appointment of the Receiver; and

(b) discharge the person paying that money from its liability to pay that money.

13.	APPLICATION OF MONEY
13.1	Order

(a) Money that the Chargee or a Receiver receives under or because of this document is to be applied in the following order:

(i)	(expenses) first in payment of all expenses that the Chargee or a Receiver incurs in or incidental to the exercise or attempted exercise of a power or otherwise in relation to any IPL Document;
(ii)	(outgoings) then in payment of any other outgoings that the Receiver or the Chargee thinks it appropriate to pay;
(iii)	(Receiver) then in payment to the Receiver of any remuneration (whether by way of commission or otherwise);
(iv)	(indemnities) then in payment to the Chargee or a Receiver of any amount necessary to give effect to any indemnity contained in this document; and
(v)	(Secured Money) then in payment to the Chargee of the Secured Money in such order and manner as the Chargee shall in its sole discretion deem fit.

(b) Any surplus will belong to the Chargor or other persons entitled to it. The Chargee or Receiver may pay the surplus to the credit of a bank account in the name of the Chargor or other person entitled to it and will then be under no further liability in relation to it. The surplus will not accrue interest.

13.2	Only actual receipts credited
	In applying any money towards the Secured Money, the Chargor’s account will be credited only with the amount of the money that the Chargee actually receives for that purpose. The credit will date from the time of receipt.

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13.3	Compensation
	If any compensation becomes payable for Charged Property, the Chargee may:

(a)	apply the sum received on account of any compensation, at the Chargee’s option, in or towards repayment of the Secured Money;
(b)	make, enforce, settle or compromise any claims relating to compensation; and
(c)	execute any necessary assurances and releases in the names of the Chargor and the Chargee.
	If any compensation comes into the hands of the Chargor before a final irrevocable discharge of this document, the Chargor must immediately pay it to the Chargee and pending such payment, shall hold the same on trust for and on behalf and for the sole benefit of the Chargee.

14.	CONTINUING SECURITY AND THIRD PARTY PROVISIONS
14.1	Nature of obligations and enforcement
	The Chargor’s obligations in this document:

(a) are principal obligations, and not ancillary or collateral to any other right or obligation; and

(i)	may be enforced against the Chargor without the Chargee first being required to
(ii)	enforce the Secured Money or any security it may hold relating to the Secured Money, against the Chargor or any other person.

14.2	Preservation of Chargor’s obligations
	The Chargor’s obligations in this document are absolute, unconditional and irrevocable. The liability of the Chargor under this document extends to and is not affected by any circumstance, act or omission which, but for this subclause, might otherwise affect it at law or in equity including:

(a)	the grant of any time, waiver or other indulgence or concession;
(b)	the discharge or release of the Chargor or any other person;
(c)	any transaction or arrangement that may take place between the Chargee and the Chargor or any other person;

26.

(d)	the occurrence of an Insolvency Event in relation to the Chargor or any other person;
(e)	the Chargee or any other person dealing or not dealing in any way with any other Guarantee, Encumbrance, document or agreement;
(f)	the Chargee or any other person:

(i)	exercising or not exercising any other Guarantee or Encumbrance or any right or remedy conferred on it by law or in equity or by any document or agreement; or
(ii)	not recovering any money owing by the Borrower;

(g) any variation (including a variation which increases, or extends the duration of, the Secured Money), replacement, extinguishment, unenforceability, failure, loss, abandonment or transfer of any document or agreement relating to the Secured Money (including this document and any other Guarantee or Encumbrance held by the Chargee from any person at any time);

(h) the obligations of the Chargor or any other person under this document or any other document or agreement relating to the Secured Money or this document (including any other Guarantee or Encumbrance) being or becoming illegal, void, voidable, unenforceable or disclaimed by a liquidator or trustee for creditors or in insolvency;

(i) the Chargee not giving the Chargor notice of any default by any person;

(j) the Chargee not disclosing any information to the Chargor;

(k) any representation made or information given by the Chargee to the Chargor;

(l) any change in the legal capacity, rights or obligations of, or other circumstance related to, the Chargor or any other person;

(m) any legal limitation, disability, incapacity or other circumstance related to the Chargor or any other person;

(n) any invalidity or irregularity in the execution of any IPL Document or any deficiency in the powers of the Chargor;

(o) any assignment by the Chargee, with or without the knowledge of or the Chargor;

(p) any obligation of the Chargor being discharged by operation of law;

(q) any person who was intended to be bound as a guarantor or surety in relation to the Secured Money not becoming bound or ceasing to be bound;

27.

(r)	any laches, acquiescence, delay, act, omission or mistake on the part of, or suffered by, the Chargee or any other person, in relation to this document or any other Guarantee, Encumbrance, document or agreement;
(s)	the receipt by the Chargee or any other person of any dividend or money after an Insolvency Event in relation to the Chargor or any other person;
(t)	any judgment or right which the Chargee may have or exercise against the Chargor or any other person;
(u)	the opening or operation of a new account by the Chargee or any other person;
(v)	the amendment of the constitution, trust deed or other constituent document of the Chargor;
(w)	if the Borrower or the Chargor is a member of a partnership, firm, joint venture or association, any change in the structure, membership, name or business of that partnership, firm, joint venture or association; and
(x)	if the or the Chargor is a trustee of a trust, any breach or variation of the terms of that trust.

14.3	Continuity
	The Charge:

(a)	is a continuing security, and remains in full force until a final irrevocable discharge of the Charge is given to the Chargor despite any transaction or other thing (including a settlement of account or intervening payment); and
(b)	will apply to the present and future balance of the Secured Money.

14.4	Limitations on Chargor’s rights
	Until the Secured Money has been irrevocably paid and discharged in full, the Chargor may not:

(a)	share in any Guarantee, Encumbrance or money received or receivable by the Chargee in relation to the Secured Money or stand in the place of the Chargee in relation to any Guarantee, Encumbrance or right to receive money;
(b)	take any steps to enforce a right or claim against the Borrower relating to any money paid by the Chargor to the Chargee under this document;
(c)	have or exercise any rights as surety in competition with the Chargee;

28.

(d)	receive, claim or have the benefit of any payment (including a payment under a Guarantee), distribution or Encumbrance from or on account of the Chargor or any other person;
(e)	in reduction of its liability under this document, raise a defence, set off or counterclaim available to itself, or a co-surety or co-indemnifier against the Chargee or claim a set off or make a counterclaim against the Chargee; or
(f)	claim to be entitled by way of contribution, indemnity, subrogation, marshalling or otherwise to the benefit of any document or agreement to which the Chargee is a party or under which the Chargee has an interest.

14.5	No marshalling
	The Chargee is not under any obligation to marshal or appropriate in favour of the Chargor or to exercise, apply, perfect or recover any Encumbrance that the Chargee holds at any time or any funds or property that the Chargee may be entitled to receive or have a claim on.

14.6 Effect of Insolvency Event

(a) If an Insolvency Event has occurred in relation to a Relevant Person, any amount paid by that Relevant Person (as the case may be) within the preceding 6 months (relevant payment) will only be applied against any Secured Money if:

(i)	the Chargee forms the opinion in good faith (which will be conclusively binding on the Chargor) that it will not be required to pay the relevant payment to any person under any law relating to insolvency, winding up or the protection of creditors; or
(ii)	a final judgment is given by a court of competent jurisdiction in favour of the Chargee that it is not required to pay the relevant payment to any person under any law relating to insolvency, winding up or the protection of creditors.

(b) If an amount is applied against any Secured Money and the Chargee forms the opinion in good faith that it is obliged to pay the relevant payment to any person under any law relating to insolvency, winding up or the protection of creditors:

(i)	the Chargee’s rights are to be reinstated and will be the same in relation to that amount as if the application, or the payment or transaction giving rise to it, had not been made; and
(ii)	the Chargor must immediately do anything (including the signing of documents) required by the Chargee to restore to the Chargee any Guarantee or Encumbrance to which it was entitled immediately before that application or the payment or transaction giving rise to it.

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(c) Any discharge or release between the Chargee and the Chargor is subject to reinstatement of the Chargee’s rights under this subclause.

15.	INDEMNITIES
15.1	Indemnity for breach or preservation of rights
	The Chargor must indemnify the Chargee against, and must pay the Chargee on demand the amount of, all losses, liabilities, expenses and Taxes (other than Excluded Taxes) incurred in connection with:

(a)	any Event of Default;
(b)	the administration, and any actual or attempted preservation or enforcement, of any rights under any IPL Document;
(c)	any amount required to be paid under any IPL Document not being paid on its due date including because of:

(i)	the cancellation, termination or alteration of any swap or other arrangement made by the Chargee to fund that amount; or
(ii)	any liquidation or re-employment of deposits or other funds acquired by the Chargee to fund that amount.

15.2

Indemnity for exercise of rights or proceedings

To the extent permitted by law, the Chargor must indemnify each of the Chargee, each Authorised Representative of the Chargee and each Receiver, Attorney, agent, administrator of the Chargor or other person appointed under this document or the Companies Act by or on behalf of the Chargee as chargee under this document against, and must pay each of them on demand the amount of all losses, liabilities, expenses and Taxes (other than Excluded Taxes) that they each incur:

(a)	(directly or indirectly) in the exercise or attempted exercise of any of the powers, rights, discretions or remedies (express or implied) vested in them under this document or the Companies Act; and
(b)	in connection with all proceedings, expenses, claims and demands in relation to anything done or omitted in any way relating to Charged Property,
	including legal expenses on a full indemnity basis and expenses incurred in engaging consultants.

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15.3	Recovery from Charged Property
	A person who is entitled to be indemnified for a loss, liability, expense or Tax under clause 15.1 or 15.2 may recover the amount to be indemnified direct from the Charged Property.
16.	DISCHARGE
	The Chargee shall at the request and sole cost and expense of the Chargor reconvey, surrender or release any remaining Charged Property (as appropriate) to the Chargor and the Charged Property will then be discharged from the Charge:

(a) when the Chargee is satisfied that:

(i)	all the Secured Money has been irrevocably and unconditionally paid and discharged in full or satisfied in accordance with this document and (without limiting this) that clause 14.6 will not later apply; and
(ii)	no amount remains contingently payable or may become payable on the security of the Charge (including under an indemnity) with respect to any losses, liabilities, expenses or Taxes arising from any then known claim or demand asserted against or threatened to be asserted against the Chargee or any other person entitled to indemnity hereunder; and

(b) on payment or retention of all expenses incurred by or payable to the Chargee, its Authorised Representatives or any Receiver or Attorney.

	Any discharge is subject to clause 14.6.
17.	CONSENT TO DISCLOSURE
	The Chargor hereby irrevocably consents to and authorises the Chargee to disclose any information relating to the Chargor, the Charged Property, this document and the transactions contemplated herein under each of the following circumstances:

(a)	(permitted by documents) the disclosure is expressly permitted by a IPL Document;
(b)	(public domain) the information is already in the public domain, unless it entered the public domain because of a breach of confidentiality by the Chargee hereunder;
(c)	(employees and advisers) the disclosure is made on a confidential basis to the party’s officers, employees, agents, financiers or professional advisers, and is necessary for the Chargee’s business;

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(d)	(comply with laws) the disclosure is necessary to comply with any applicable law, or an order of a court or tribunal;
(e)	(comply with directives) the disclosure is necessary to comply with a directive or request of any Government Agency or stock exchange (whether or not having the force of law);
(f)	(obtain Authorisations) the disclosure is necessary or desirable to obtain an Authorisation from any Government Agency or stock exchange; or
(g)	(discovery and litigation) the disclosure is necessary or desirable in relation to any discovery of documents, or any proceedings before a court, tribunal, other Government Agency or stock exchange.

18.	NOTICES
18.1	How to give a notice
	Without limiting the means by which service may be effected on a company pursuant to the Companies Act, a notice, consent or other communication under this document is only effective if it is :

(a)	in writing, signed by or on behalf of the person giving it;
(b)	addressed to the person to whom it is to be given; and
(c)	served by being:

(i)	left at the address of the person;
(ii)	delivered or sent by pre-paid mail (by airmail, if the addressee is overseas) to that person’s postal address; or
(iii)	sent by fax to the fax number of that person and the machine from which it is sent produces a report that states that it was sent in full.

18.2	When a notice is given
	A notice, consent or other communication that complies with this clause is regarded as given and received:

(a)	if any of the requirements of section 436(1) of the Companies Act apply, when those requirements are satisfied; or
(b)	in any other case if it is:

(i) delivered to a person or left at an address:

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(A)	by 5.00 pm (local time in the place of receipt) on a Business Day — on that day; or
(B)	after 5.00 pm (local time in the place of receipt) on a Business Day, or on a day that is not a Business Day — on the next Business Day;

(ii)	sent by mail — 5 days after it is posted; or
(iii)	sent by fax — on the day following the day on which it was sent.

18.3	Address for notices
	A person’s address, postal address, and fax number are those set out below, or as the person notifies the sender:

Chargor	InterOil Products Limited
Address:	Level 6, Defens Haus, cnr Champion Parade & Hunter Street, Port Moresby, National Capital District, Papua New Guinea
Fax number:	(675) 320 2599
Attention:
Chargee	Merrill Lynch Capital Corporation
Address:	[
Fax number:
Attention:	]

	or such other address as either party may notify the other or (in the case of notice, consent or communication to the Chargor) such address of the Chargor last known to the Chargee.
19.	AMENDMENT AND ASSIGNMENT
19.1	Amendment
	This document can only be amended, supplemented, replaced or novated by another document signed by the parties.
19.2	Assignment
	Subject to the provisions of the Credit Agreement:

(a) the Chargor may only assign, transfer, dispose of, declare a trust over or otherwise create an interest in its rights under any IPL Document with the prior consent consent of the Chargee; and

33.

(b) the Chargee may assign, transfer, dispose of, declare a trust over or otherwise create an interest in its rights under any IPL Document without the consent of the Chargor, and may disclose to any potential holder of the right or interest any information relating to any IPL Document or any party to any of them.

20.	GENERAL
20.1	Governing law

(a)

This document is governed by the law in force in Papua New Guinea.

(b)

Each party submits to the non-exclusive jurisdiction of the courts exercising jurisdiction in Papua New Guinea for any proceedings in connection with any IPL Document, and waives any right it might have to claim that those courts are an inconvenient forum. Provided that the Chargee shall have full liberty to resort to the courts of any other country where jurisdiction may exist or be established and the Chargor hereby further irrevocably agrees to submit to the jurisdiction of the courts in such other country. The Chargor hereby irrevocably waives any objections on the ground of venue or forum non conveniens or any other similar grounds in respect of any action or proceeding in any court brought or instituted by the Chargee.

20.2	Liability for expenses
	Subject to the provisions of the Credit Agreement, the Chargor must indemnify the Chargee against, and must pay the Chargee on demand the amount of, all Taxes and expenses incurred in connection with:

(a)	the negotiation, preparation, execution, stamping, perfection and registration of each this document;
(b)	the transactions that this document contemplates; and
(c)	any enforcement, preservation, amendment to, or any consent, approval, waiver, release or discharge of or under this document,
	including legal expenses on a full indemnity basis and expenses incurred in engaging consultants.

20.3	Giving effect to this document
	The Chargor must do anything, and must ensure that its employees and agents do anything, that the Chargee may reasonably require to:

(a) give full effect to this document;

34.

(b)	better secure the Charged Property to the Chargee in a manner consistent with this document; or
(c)	assist in the execution or exercise of any power,
	including execute any transfer (including any transfer in blank) or other document.

20.4	Waiver of rights
	A right may only be waived in writing, signed by the Chargee, and:

(a)	no other conduct of the Chargee (including a failure to exercise, or delay in exercising, the right) operates as a waiver of the right or otherwise prevents the exercise of the right;
(b)	a waiver of a right on one or more occasions does not operate as a waiver of that right if it arises again; and
(c)	the exercise of a right does not prevent any further exercise of that right or of any other right.

20.5 Operation of this document

(a)	This document contains the entire agreement between the parties about its subject matter. Any previous understanding, agreement, representation or warranty relating to that subject matter is replaced by this document and has no further effect.
(b)	Any right that the Chargee may have under this document is in addition to, and does not replace or limit, any other right that the Chargee may have.
(c)	Any provision of this document which is unenforceable or partly unenforceable is, where possible, to be severed to the extent necessary to make this document enforceable, unless this would materially change the intended effect of this document.

20.6 Operation of indemnities

(a)	Each indemnity in this document survives the expiry or termination of this document.
(b)	The Chargee may recover a payment under an indemnity in this document before it makes the payment in respect of which the indemnity is given.

35.

20.7	Consents
	Where this document contemplates that the Chargee may agree or consent to something (however it is described), the consent must be in writing and the Chargee may:

(a)	agree or consent, or not agree or consent, in its absolute discretion; and
(b)	agree or consent subject to conditions,
	unless this document expressly contemplates otherwise.

20.8	Statements by Chargee
	A statement by an Authorised Representative of the Chargee on any matter relating to this document (including any amount owing by the Chargor) is conclusive unless clearly wrong on its face.

20.9

Set-off

The Chargee may, without consent of or notice to the Chargor after the occurrence of an Event of Default, combine any account that the Chargor holds with the Chargee at any branch in any part of the world with, or set off any amount that is or may become owing by the Chargee to the Chargor against, any amount owing by the Chargor to the Chargee under any IPL Document. For this purpose the Chargee may:

(a)	change the terms (including the repayment date) of any account or other payment obligation between the parties;
(b)	convert amounts into different currencies in accordance with the Chargee’s usual practice; and
(c)	do anything (including execute any document) in the name of the Chargor that the Chargee considers necessary or desirable.
	This subclause overrides any other document or agreement to the contrary.

20.10	No merger
	Nothing in this document merges with any other Security Interest, or any Guarantee, judgment or other right or remedy, that the Chargee may hold at any time.

20.11	Exclusion of contrary legislation
	Any legislation that adversely affects an obligation of the Chargor, or the exercise by the Chargee of a right or remedy, under or relating to this document is excluded to the full extent permitted by law.

36.

20.12	Tax
	All payments made by the Chargor to the Chargee hereunder shall be made without any restriction, condition, set-off or counterclaim and shall be free and clear of any Tax. In the event that any Tax is required to be deducted or withheld from any payment made under this document, the Chargor shall pay to the Chargee such additional amount so as to ensure that the net amount received and retained by the Chargee will be the full amount which the Chargee would have received had no such deduction or withholding been made or required.
20.13	Counterparts
	This document may be executed in counterparts.
20.14	Attorneys
	Each person who executes this document on behalf of a party under a power of attorney declares that he or she is not aware of any fact or circumstance that might affect his or her authority to do so under that power of attorney.

37.

	EXECUTED as a deed.
	[Alternative execution blocks for Chargor]
THE COMMON SEAL of INTEROIL PRODUCTS
LIMITED, the fixing of which was
witnessed by:
	Signature of director	Signature of director/secretary
	Name	Name
SIGNED, SEALED and DELIVERED
for INTEROIL PRODUCTS LIMITED under
power of attorney in the presence of:
		Signature of attorney
	Signature of witness	Name
	Name	Date of power of attorney

38.

SIGNED for MERRILL LYNCH CAPITAL
CORPORATION, by its duly authorised
officer, in the presence of:
			Signature of office
	Signature of witness	Name
	Name

39.

EXHIBIT G

Form of LNG/NGL Project MOU

MEMORANDUM OF UNDERSTANDING

           This Memorandum of Understanding (“MOU”) is made and entered into this 4th day of May 2006, by and between InterOil Corporation, a company incorporated under the laws of New Brunswick, Canada, (“IOC”), Clarion FInanz AG, a company incorporated under the laws of Switzerland (“Clarion"), and Merrill Lynch Commodities (Europe) Limited, a company organized under the laws of England (“Merrill"). IOC, Clarion and Merrill are referred to in this MOU individually as a “Party” and collectively as the “Parties”.

           The Parties have reached an agreement in principle whereby Clarion and Merrill will provide advantageous financing to IOC for its midstream and downstream petroleum operations in Papua New Guinea (“PNG”) in consideration for IOC offering to Clarion and Merrill or their Affiliates and the other lenders under the Facility (as defined below) exclusive rights to acquire up to a 65% interest, subject to pro rata dilution in the event that the PNG Government exercises its backing or participation rights, in the following projects proposed to be developed by IOC in PNG: (i) a natural gas liquids (“NGL”) extraction facility, (ii) a liquefied natural gas (“LNG”) facility, and (iii) a gas pipeline from Kopi to Port Moresby (collectively, the “Project”). The interests in the Project would comprise the whole value chain from sourcing natural gas and NGLs through to processing, liquefaction, and offtake and international sale and supply of all produced LNG. In particular the Project, which is subject to the negotiation of gas supply, transportation and project agreements, currently contemplates:

• National Gas Development Company, a company which will be owned by the Parties in proportion to their ownership interests in the Project will seek to build and develop a natural gas liquids facility (“NGL”) and an onshore liquid natural gas (“LNG”) facility in Papua New Guinea.

• Execution of agreements with the Government of PNG and PNG gas producers providing the Project with irrevocable access, at fair market value, to sufficient gas supplies, currently estimated to be between 3.5 tcf to 7.0 tcf.

• Construction of a NGL extraction facility at Kopi, Gulf Province, PNG utilizing feed wet gas from the planned PNG gas pipeline project. The proposed NGL extraction facility is currently projected to have a capacity of 1.1 billion scf/d, and a by-pass system permitting 10% of the gas transported via the planned pipeline to pass through the extraction plant unstripped.

• Construction of a pipeline from Kopi to Napa Napa, PNG.

• Construction of a LNG facility at Napa Napa, PNG with a base load of 450 to 750 mm scf/d, which shall be operated by Natural Gas Development Company’s PNG subsidiary.

• International marketing and sales of LNG.

               Consistent with the above governing premise (“Premise”), the Parties will discuss the following principles in detail with a view to reaching an agreed position:

WHEREAS

1.

(A)	IOC wishes to perform a final study of the economic and technical feasibility (the “Final Study”) of developing a LNG facility and related infrastructure needed to develop the Project in PNG.
(B)	Merrill and Clarion desire to participate in the Project and to assist IOC in the preparation of the Final Study.
(C)	Merrill has developed particular expertise in LNG projects, particularly in the areas of transportation, financing and marketing, as well as having business relationships with reliable international LNG operators.
(D)	IOC wishes to create a practical plan for the Project as well as an initial pricing structure of LNG from the Project as promptly as possible. The Project plan and pricing structure will be further developed and refined during the Final Study and during the negotiation of a final contract. Merrill has financial expertise in developing LNG projects as well as the key pricing structure of LNG and, therefore, is able to provide such information regarding LNG projects and to provide advice based on its commercial background in dealing with existing LNG pricing formulas.
(E)	The Parties, or their Affiliates, have executed that certain Credit Agreement of even date herewith, wherein Merrill and Clarion (or their Affiliates) have agreed to extend loans to IOC totaling US$130,000,000 in the aggregate (“Facility”), with Merrill or its Affiliates committed to make US$70,000,000 available to IOC and Clarion or its Affiliates committed to make the remaining US$60,000,000 available to IOC. The proceeds of the Facility will be used for the purposes described in the Facility and will not be used to finance any portion of the Project other than any amounts allocated to the Final Study. In addition to the base rate of interest payable to the lenders under the Facility, the Facility gives Merrill and Clarion the right to participate in the Project based on the amounts loaned to IOC pursuant to the Facility. Based on the amounts Merrill and Clarion will make available to IOC under the Facility, the Parties will have the following interests in the Project:

IOC	35 %
Merrill	35 %
Clarion	30 %

Notwithstanding the foregoing, Clarion and IOC have separately agreed that if Clarion makes a payment to IOC in the amount of US$10,000,000 in addition to the amounts agreed to be provided by Clarion under the Facility, then IOC will transfer a 5% ownership interest in the Project to Clarion so that thereafter IOC will have a 30% ownership interest in the Project and Clarion will have a 35% ownership interest in the Project.

(F)

In addition to the rights described in Recital (E), Merrill and Clarion may be granted an option to acquire, in exchange for any amounts they loan to IOC (and, in the case of Clarion, the payment described in Recital (E)) pursuant to the Facility, to the extent permitted by IOC’s existing agreements, up to a 15% participation interest in IOC’s future exploration and development programs related to its Petroleum Prospecting Licenses in PNG, subject to pro rata dilution in the event that the PNG Government exercises its backing or participation rights.

2.

(G)	Merrill and Clarion will work with IOC to ensure that IOC has the financial capability to enter into an agreement with an EPC contractor for the Project. The funding details, which will include funding mechanisms for cost overruns that avoid dilution of equity participants, will be mutually agreed in the final project agreement (“Definitive LNG/NGL Project Agreement”) to be entered into between the Parties.
(H)	Merrill will look for opportunities for forward gas sales of the LNG products. In addition, Merrill will review the available options for securing the best pricing for the LNG to be produced pursuant to the Project, including the price estimates that can be secured by basing gas sales on securing gas contracts from the Atlantic basin. IOC is requesting a draft S curve pricing structure and core contract outlines for LNG offtakes using historical contract pricing and terms as a base starting point from Merrill. The pricing material provided by Merrill will include the old base contract formats from any other LNG projects with the pricing curves which they may have, and secure current pricing from regional projects including an estimated base pricing outline for current regional LNG estimates. Merrill will use its reasonable commercial efforts to secure the highest net back price for gas sales from the proposed LNG facility through Merrill’s marketing Affiliates.
(I)	In connection with the Project, the Parties are proposing to enter into an agreement whereby Merrill would commit to offtake a base volume of 1.75 million tones to 5 million tones per annum of LNG from the proposed LNG facility at market related prices for sale in Japan and/or the US markets. Notwithstanding the above, each Party will have the right to offtake quantities of LNG in proportion to their equity ownership in the Project, subject to the minimum credit requirements for offtake agreements imposed upon the Project by any potential lenders. Notwithstanding the foregoing, in the event any Party does not elect to enter into an offtake agreement, the quantity of LNG that such Party would have the right to offtake will vest pro rata in the other Parties who have entered into off-take agreements. The actual offtake amount of each Party will be determined in the definitive agreements and is subject to the size of the LNG facility.
(J)	Merrill and Clarion will use reasonable efforts to assist IOC in obtaining competitive financing needed to acquire producing gas properties in PNG that would be used to provide IOC with current cash flow and gas reserves to support the Project. Potential parties from whom IOC may acquire gas producing properties in PNG include, but are not limited to, Exxon-Mobil and Santos of Australia.
	NOW IT IS DECLARED AND AGREED AS FOLLOWS:
1.	General Principles for Cooperation.

1-1	The Parties agree to exchange information regarding the Project, the Final Study and the Parties’ activities relating to the Project to the extent that exchanging such information shall not violate any existing confidentiality agreement which any Party has entered into, or enters into in the future, with any third party.
1-2	Merrill and Clarion agree (i) to use commercially reasonable efforts to assist IOC in connection with the Final Study and (ii) to independently conduct their own studies of the feasibility of the Project and share such

3.

	results with the other Parties. The Parties shall work together to review and evaluate the viability of the Project which shall be determined principally on the economic, strategic, technical and commercial feasibility of the Project.
1-3	The Parties shall promptly negotiate a Definitive LNG/NGL Project Agreement that will provide the definitive contractual terms and conditions under which the Parties will undertake the formation of a new, special purpose joint venture project company (“ProjectCo") in order to pursue the Project, and which contains the respective rights and obligations of the ProjectCo shareholders in connection with such matters as capital funding, equity issuances, corporate governance, share transfers, development budgeting, and other matters to be mutually agreed.
1-4	During the currency of this MOU, IOC shall not be free to undertake independent discussions with other potential participant(s) in the Project (other than Sumitomo) and may not provide information to such third parties (other than Sumitomo) regarding Clarion’s and Merrill’s potential involvement without the prior written consent of Clarion and Merrill, such consent not to be unreasonably withheld. Neither Clarion nor Merrill shall enter into discussions or negotiations, or execute agreements with any other party regarding equity or debt participation in the construction or operation of a NGL extraction facility, LNG facility, or other facility similar to the proposed Project in PNG, without the prior written consent of IOC, such consent not to be unreasonably withheld.
1-5	Unless otherwise agreed to in writing by the Parties, each Party shall bear its own costs and expenses incurred in connection with or as a result of the transactions contemplated by this MOU.

2. Cooperation.

2-1	Unless the Parties agree otherwise, the Parties will use reasonable efforts to hold monthly meetings in Cairns, or Houston, or such other location as is agreed to between the Parties. The purpose of such meetings will be to (i) develop a common view with respect to the implementation of the Project, and (ii) exchange data, information and views of the Parties about particular technical and commercial subjects, such as the implementation plan for the Project, the development plan for any gas fields associated with the Project, engineering studies, potential participants in the Project, potential operators for the liquefaction plant contemplated by the Project, the preparation of an information memorandum relating to the Project, and LNG shipping issues.
2-2	The Parties agree to exchange information regarding the Project, the Final Study and the Parties’ activities relating to the Project to the extent that exchanging such information shall not violate any existing confidentiality agreement which any Party has entered into, or enters into in the future, with any third party.
2-3	The Parties will negotiate in good faith with an intention to agree upon and execute a Definitive LNG/NGL Project Agreement as to the scope of the Project and their respective participations, and that of relevant third parties, if any.

4.

2-4 The Parties will endeavour to work in good faith to obtain all necessary information needed in connection with the evaluation of and development of the Project, including without limitation, information related to: (i) the base reserves necessary to start the project and the reserves needed to expand the Project over the development period; (ii) the contractual framework for the Project; (iii) ownership; (iv) governmental relationships; (v) commercial/pricing/royalty terms; (vi) feed; (vii) environmental risks; (viii) political risks; (ix) security risks; (x) tax risks; (xi) NGLs; (xii) marketing strategies and studies; (xiv) outline consents; and (xv) necessary approvals and licenses. The Parties will endeavour to agree upon how any gaps in the available information may be filled and at whose risk and cost. The Parties will explore the optimum means from a commercial, legal and tax perspective of owning the Project assets, whether via a jointly owned corporation or unincorporated joint venture relationship. The anticipated equity participants in the Project, and their interests, are set forth in Recital E. If either Clarion or Merrill elect not to acquire an interest in the Project, other parties to be mutually agreed upon between IOC and the remaining Party that has elected to acquire an interest in the Project following the finalization of participation terms between IOC and the remaining Party will be given the opportunity to acquire an interest in the Project.

3. Confidential Information.

3-1

Without prejudice to Sections 3-2, 3-3 and 3-4 below, and notwithstanding any conflicting provision of the Confidentiality Agreement entered into between IOC and an Affiliate of Merrill dated in or about January 2006 (“Confidentiality Agreement”), all information exchanged and/or developed under this MOU shall be regarded as confidential between the Parties and shall not be disclosed to any third party or used for any other purpose other than as contemplated by this MOU without the prior written consent of the other Parties. The confidentiality obligations of the Parties shall be effective for the period of this MOU and for 2 years thereafter. If the Parties extend their co-operation under this MOU, the confidentiality obligations of the Parties under this MOU and the Confidentiality Agreement shall be automatically extend during the term of any extension of this MOU. In particular, no information provided to IOC or Clarion by Merrill regarding LNG pricing or other information whether or not contemplated by Recitals (D), (H), and (I) shall be disclosed by IOC or Clarion to any third party without the written consent of Merrill, unless the disclosure of such information is required by applicable securities laws or regulations, the rules of any stock exchange on which a Party is listed, or is properly in the public domain. In regards to public disclosure, Merrill recognizes that IOC is a public-traded company and Merrill will assist IOC in preparing, and consents to the release by IOC of, a press release of mutually agreed content, which may be a joint disclosure with Merrill, or other legally-required disclosure that discloses the basic terms of any agreement entered into between the Parties.

3-2

It is recognized that information of a confidential nature may be disclosed by the Parties in the course of discussions held hereunder. In consideration of any Party (the “Owner”) making available to the any other Party (the “Recipient”) information which is not publicly known concerning the Owner and its Affiliates (as defined below) and its and

5.

their respective businesses, future projects, and financial and other affairs, in whatever form supplied to the Recipient, whether orally or in writing, (collectively, “Confidential Information”), the Recipient agrees and undertakes as follows:

(i)

Confidential Information will only be used by it for its participation in bona fide discussions hereunder and for its assessment of any opportunities identified and for any associated negotiations; and

(ii)

Confidential Information will only be disclosed to such of the Recipient’s, or its Affiliates’, directors, officers, employees, professional advisers, counsel and lenders or other providers of funds (a) who are directly concerned with the matters referred to herein or in any associated negotiations, and (b) whose knowledge of such information is essential for such involvement, and (c) who agree to comply with the provisions of this MOU in respect of Confidential Information. The Recipient undertakes to use its reasonable endeavours to enforce such compliance.

3-3

The undertaking in Section 3-2 does not apply to Confidential Information (i) which, after disclosure to the Recipient, becomes generally available to third parties, other than through breach by the Recipient of any obligation arising from this MOU, or (ii) which was lawfully in the Recipient’s possession prior to such disclosure (as evidenced by its or its advisers’ written records) and which was not acquired directly or indirectly from it or an Affiliate, or (iii) which is lawfully received or obtained by the Recipient from a third party which has acquired it lawfully and is not bound by an obligation of confidentiality to the Owner or an Affiliate, or (iv) which the Recipient is obliged to disclose by law or by a regulator or other body or competent authority with jurisdiction over the Recipient concerned or the rules of a stock exchange upon which its, or an Affiliate’s, shares are listed or traded, in which case it shall, so far as practicable, consult with the Owner and take account of its reasonable requirements before making such disclosure.

3-4

No public announcement, communication or circular concerning any of the matters referred to in this MOU shall be made or dispatched at any time by any Party without the prior written consent of the other Parties (such consent not to be unreasonably withheld or delayed), save where such Party is required to make any announcement by law or by a regulator or other body of competent authority with jurisdiction over the Party concerned or the rules of a stock exchange upon which its, or an Affiliate’s, shares are listed or traded, in which case it shall, so far as practicable, consult with the other Parties and take account of its reasonable requirements before making or dispatching such announcement, communication or circular.

4.	Limitation. No Party shall be liable to the other Parties for damages of whatsoever nature, including, without limitation, indirect or consequential losses or damages (including, without limitation, loss of profit or loss of business opportunity) that may arise in connection with or result from this MOU.
5.	Assignment. Without the prior consent of the other Parties, no Party may assign

6.

	any of its rights or obligations hereunder other than to such Party’s Affiliates. “Affiliate” shall mean any company or legal entity which (a) controls, either directly or indirectly, a Party, or (b) which is controlled, directly or indirectly, by such Party, or (c) is, directly or indirectly, controlled by a company or entity which directly or indirectly controls such Party. “Control” shall mean the right to exercise more than 50% of the voting rights in the appointment of the directors or similar body of such company.
6.	Termination. This MOU shall remain effective for a period of one (1) year from the date hereof. Notwithstanding the above, the Parties may agree in writing to extend or shorten the term of this MOU.
7.	Settlement of Dispute. The Parties shall use all reasonable efforts to settle amicably, through negotiations, any dispute arising out of or in connection with this MOU or any breach, termination or invalidity thereof.
8.	Legal Effect. Except for the provisions of Section 1-4, Section 1-5, and Sections 3 through 11, which are legally binding on the Parties with effect from the date hereof, this MOU is not legally binding. Any legal obligations with respect to the transactions contemplated hereunder shall be subject to the negotiation and execution following respective board approvals of mutually acceptable definitive agreements relating to the Project.
9.	Business Principles. In relation to the Project, the Parties shall comply with the US Foreign Corrupt Practices Act and any sanctions imposed by law or executive order in respect of doing business with governments, corporations or nationals of any territory. Mindful of the principles of the US Foreign Corrupt Practices Act, no Party shall, and shall procure that its Affiliates and their respective employees shall not, make or cause to be made, in connection with the Project or the transaction referred to herein, any payments, loans or gifts or promises or offer of payments, loans or gifts of any money or anything of value, directly or indirectly:

(i)	to or for the use or benefit of any official or employee of any government, or the agency or instrumentalities of any such government;
(ii)	to any political party or official or candidate thereof;
(iii)	to any other person either as an advance or as a reimbursement if it knows or has reason to suspect that any part of such payment, loan or gift will be directly or indirectly given or paid by such other person, or will reimburse such other person for payments, gifts or loans previously made, to any such governmental official or political party or candidate or official thereof; or
(iv)	to any other person or entity if such payment would violate either the laws, decrees, regulations or policies having the force of law of England, PNG, the United States of America or any other relevant jurisdiction.

10.	Authority. Nothing in this MOU shall be construed to give any Party the authority or right to enter into any obligation on behalf of the other Parties unless specifically authorized by the other Parties in advance in writing.
11.	Governing law and Arbitration. This MOU shall be governed by and

7.

construed in accordance with the laws of England. Subject to Section 7, all disputes arising in connection with this Memorandum of Understanding shall be finally settled by arbitration under the Arbitration Act 1996 by one arbitrator, appointed by agreement or if not so agreed, in accordance with the said Act. The language to be used in the arbitral proceedings shall be English.

     IN WITNESS WHEREOF, the Parties have caused this MOU to be executed by their respective representatives hereunto duly authorized on the date set forth below such person’s signature.

INTER OIL CORPORATION

By:

Name:

Title:

CLARION FINANZ AG

By:

Name:

Title:

MERRILL LYNCH COMMODITIES (EUROPE) LIMITED

By:

Name:

Title:

Signature Page to MOU

EX-99.7

MEMORANDUM OF UNDERSTANDING

     This Memorandum of Understanding (“MOU”) is made and entered into this 4th day of May 2006, by and between InterOil Corporation, a company incorporated under the laws of New Brunswick, Canada, (“IOC”), Clarion Finanz AG, a company incorporated under the laws of Switzerland (“Clarion”), and Merrill Lynch Commodities (Europe) Limited, a company organized under the laws of England (“Merrill”). IOC, Clarion and Merrill are referred to in this MOU individually as a “Party” and collectively as the “Parties”.

     The Parties have reached an agreement in principle whereby Clarion and Merrill will provide advantageous financing to IOC for its midstream and downstream petroleum operations in Papua New Guinea (“PNG”) in consideration for IOC offering to Clarion and Merrill or their Affiliates and the other lenders under the Facility (as defined below) exclusive rights to acquire up to a 65% interest, subject to pro rata dilution in the event that the PNG Government exercises its backing or participation rights, in the following projects proposed to be developed by IOC in PNG: (i) a natural gas liquids (“NGL”) extraction facility, (ii) a liquefied natural gas (“LNG”) facility, and (iii) a gas pipeline from Kopi to Port Moresby (collectively, the “Project”). The interests in the Project would comprise the whole value chain from sourcing natural gas and NGLs through to processing, liquefaction, and offtake and international sale and supply of all produced LNG. In particular the Project, which is subject to the negotiation of gas supply, transportation and project agreements, currently contemplates:

• National Gas Development Company, a company which will be owned by the Parties in proportion to their ownership interests in the Project will seek to build and develop a natural gas liquids facility (“NGL”) and an onshore liquid natural gas (“LNG”) facility in Papua New Guinea.

• Execution of agreements with the Government of PNG and PNG gas producers providing the Project with irrevocable access, at fair market value, to sufficient gas supplies, currently estimated to be between 3.5 tcf to 7.0 tcf.

• Construction of a NGL extraction facility at Kopi, Gulf Province, PNG utilizing feed wet gas from the planned PNG gas pipeline project. The proposed NGL extraction facility is currently projected to have a capacity of 1.1 billion scf/d, and a by-pass system permitting 10% of the gas transported via the planned pipeline to pass through the extraction plant unstripped.

• Construction of a pipeline from Kopi to Napa Napa, PNG.

• Construction of a LNG facility at Napa Napa, PNG with a base load of 450 to 750 mm scf/d, which shall be operated by Natural Gas Development Company’s PNG subsidiary.

• International marketing and sales of LNG.

     Consistent with the above governing premise (“Premise”), the Parties will discuss the following principles in detail with a view to reaching an agreed position:

WHEREAS

(A) IOC wishes to perform a final study of the economic and technical feasibility (the “Final Study”) of developing a LNG facility and related infrastructure needed to develop the Project in PNG.

Signature Page to MOU

(B) Merrill and Clarion desire to participate in the Project and to assist IOC in the preparation of the Final Study.

(C) Merrill has developed particular expertise in LNG projects, particularly in the areas of transportation, financing and marketing, as well as having business relationships with reliable international LNG operators.

(D) IOC wishes to create a practical plan for the Project as well as an initial pricing structure of LNG from the Project as promptly as possible. The Project plan and pricing structure will be further developed and refined during the Final Study and during the negotiation of a final contract. Merrill has financial expertise in developing LNG projects as well as the key pricing structure of LNG and, therefore, is able to provide such information regarding LNG projects and to provide advice based on its commercial background in dealing with existing LNG pricing formulas.

(E) The Parties, or their Affiliates, have executed that certain Credit Agreement of even date herewith, wherein Merrill and Clarion (or their Affiliates) have agreed to extend loans to IOC totaling US$130,000,000 in the aggregate (“Facility”), with Merrill or its Affiliates committed to make US$70,000,000 available to IOC and Clarion or its Affiliates committed to make the remaining US$60,000,000 available to IOC. The proceeds of the Facility will be used for the purposes described in the Facility and will not be used to finance any portion of the Project other than any amounts allocated to the Final Study. In addition to the base rate of interest payable to the lenders under the Facility, the Facility gives Merrill and Clarion the right to participate in the Project based on the amounts loaned to IOC pursuant to the Facility. Based on the amounts Merrill and Clarion will make available to IOC under the Facility, the Parties will have the following interests in the Project:

IOC	35	%
Merrill	35	%
Clarion	30	%

Notwithstanding the foregoing, Clarion and IOC have separately agreed that if Clarion makes a payment to IOC in the amount of US$10,000,000 in addition to the amounts agreed to be provided by Clarion under the Facility, then IOC will transfer a 5% ownership interest in the Project to Clarion so that thereafter IOC will have a 30% ownership interest in the Project and Clarion will have a 35% ownership interest in the Project.

(F) In addition to the rights described in Recital (E), Merrill and Clarion may be granted an option to acquire, in exchange for any amounts they loan to IOC (and, in the case of Clarion, the payment described in Recital (E)) pursuant to the Facility, to the extent permitted by IOC’s existing agreements, up to a 15% participation interest in IOC’s future exploration and development programs related to its Petroleum Prospecting Licenses in PNG, subject to pro rata dilution in the event that the PNG Government exercises its backing or participation rights.

(G) Merrill and Clarion will work with IOC to ensure that IOC has the financial capability to enter into an agreement with an EPC contractor for the Project. The funding details, which will include funding mechanisms for cost overruns that avoid dilution of equity participants, will be mutually agreed in the final

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project agreement (“Definitive LNG/NGL Project Agreement”) to be entered into between the Parties.

(H)  Merrill will look for opportunities for forward gas sales of the LNG products. In addition, Merrill will review the available options for securing the best pricing for the LNG to be produced pursuant to the Project, including the price estimates that can be secured by basing gas sales on securing gas contracts from the Atlantic basin. IOC is requesting a draft S curve pricing structure and core contract outlines for LNG offtakes using historical contract pricing and terms as a base starting point from Merrill. The pricing material provided by Merrill will include the old base contract formats from any other LNG projects with the pricing curves which they may have, and secure current pricing from regional projects including an estimated base pricing outline for current regional LNG estimates. Merrill will use its reasonable commercial efforts to secure the highest net back price for gas sales from the proposed LNG facility through Merrill’s marketing Affiliates.

(I) In connection with the Project, the Parties are proposing to enter into an agreement whereby Merrill would commit to offtake a base volume of 1.75 million tones to 5 million tones per annum of LNG from the proposed LNG facility at market related prices for sale in Japan and/or the US markets. Notwithstanding the above, each Party will have the right to offtake quantities of LNG in proportion to their equity ownership in the Project, subject to the minimum credit requirements for offtake agreements imposed upon the Project by any potential lenders. Notwithstanding the foregoing, in the event any Party does not elect to enter into an offtake agreement, the quantity of LNG that such Party would have the right to offtake will vest pro rata in the other Parties who have entered into off-take agreements. The actual offtake amount of each Party will be determined in the definitive agreements and is subject to the size of the LNG facility.

(J) Merrill and Clarion will use reasonable efforts to assist IOC in obtaining competitive financing needed to acquire producing gas properties in PNG that would be used to provide IOC with current cash flow and gas reserves to support the Project. Potential parties from whom IOC may acquire gas producing properties in PNG include, but are not limited to, Exxon-Mobil and Santos of Australia.

	NOW IT IS DECLARED AND AGREED AS FOLLOWS:
1.	General Principles for Cooperation.

1-1

The Parties agree to exchange information regarding the Project, the Final Study and the Parties’ activities relating to the Project to the extent that exchanging such information shall not violate any existing confidentiality agreement which any Party has entered into, or enters into in the future, with any third party.

1-2

Merrill and Clarion agree (i) to use commercially reasonable efforts to assist IOC in connection with the Final Study and (ii) to independently conduct their own studies of the feasibility of the Project and share such results with the other Parties. The Parties shall work together to review and evaluate the viability of the Project which shall be determined principally on the economic, strategic, technical and commercial

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	feasibility of the Project.
1-3	The Parties shall promptly negotiate a Definitive LNG/NGL Project Agreement that will provide the definitive contractual terms and conditions under which the Parties will undertake the formation of a new, special purpose joint venture project company (“ProjectCo”) in order to pursue the Project, and which contains the respective rights and obligations of the ProjectCo shareholders in connection with such matters as capital funding, equity issuances, corporate governance, share transfers, development budgeting, and other matters to be mutually agreed.
1-4	During the currency of this MOU, IOC shall not be free to undertake independent discussions with other potential participant(s) in the Project (other than Sumitomo) and may not provide information to such third parties (other than Sumitomo) regarding Clarion’s and Merrill’s potential involvement without the prior written consent of Clarion and Merrill, such consent not to be unreasonably withheld. Neither Clarion nor Merrill shall enter into discussions or negotiations, or execute agreements with any other party regarding equity or debt participation in the construction or operation of a NGL extraction facility, LNG facility, or other facility similar to the proposed Project in PNG, without the prior written consent of IOC, such consent not to be unreasonably withheld.
1-5	Unless otherwise agreed to in writing by the Parties, each Party shall bear its own costs and expenses incurred in connection with or as a result of the transactions contemplated by this MOU.

2. Cooperation.

2-1	Unless the Parties agree otherwise, the Parties will use reasonable efforts to hold monthly meetings in Cairns, or Houston, or such other location as is agreed to between the Parties. The purpose of such meetings will be to (i) develop a common view with respect to the implementation of the Project, and (ii) exchange data, information and views of the Parties about particular technical and commercial subjects, such as the implementation plan for the Project, the development plan for any gas fields associated with the Project, engineering studies, potential participants in the Project, potential operators for the liquefaction plant contemplated by the Project, the preparation of an information memorandum relating to the Project, and LNG shipping issues.
2-2	The Parties agree to exchange information regarding the Project, the Final Study and the Parties’ activities relating to the Project to the extent that exchanging such information shall not violate any existing confidentiality agreement which any Party has entered into, or enters into in the future, with any third party.
2-3	The Parties will negotiate in good faith with an intention to agree upon and execute a Definitive LNG/NGL Project Agreement as to the scope of the Project and their respective participations, and that of relevant third parties, if any.
2-4	The Parties will endeavour to work in good faith to obtain all necessary

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information needed in connection with the evaluation of and development of the Project, including without limitation, information related to: (i) the base reserves necessary to start the project and the reserves needed to expand the Project over the development period; (ii) the contractual framework for the Project; (iii) ownership; (iv) governmental relationships; (v) commercial/pricing/royalty terms; (vi) feed; (vii) environmental risks; (viii) political risks; (ix) security risks; (x) tax risks; (xi) NGLs; (xii) marketing strategies and studies; (xiv) outline consents; and (xv) necessary approvals and licenses. The Parties will endeavour to agree upon how any gaps in the available information may be filled and at whose risk and cost. The Parties will explore the optimum means from a commercial, legal and tax perspective of owning the Project assets, whether via a jointly owned corporation or unincorporated joint venture relationship. The anticipated equity participants in the Project, and their interests, are set forth in Recital E. If either Clarion or Merrill elect not to acquire an interest in the Project, other parties to be mutually agreed upon between IOC and the remaining Party that has elected to acquire an interest in the Project following the finalization of participation terms between IOC and the remaining Party will be given the opportunity to acquire an interest in the Project.

3. Confidential Information.

3-1

Without prejudice to Sections 3-2, 3-3 and 3-4 below, and notwithstanding any conflicting provision of the Confidentiality Agreement entered into between IOC and an Affiliate of Merrill dated in or about January 2006 (“Confidentiality Agreement”), all information exchanged and/or developed under this MOU shall be regarded as confidential between the Parties and shall not be disclosed to any third party or used for any other purpose other than as contemplated by this MOU without the prior written consent of the other Parties. The confidentiality obligations of the Parties shall be effective for the period of this MOU and for 2 years thereafter. If the Parties extend their co-operation under this MOU, the confidentiality obligations of the Parties under this MOU and the Confidentiality Agreement shall be automatically extend during the term of any extension of this MOU. In particular, no information provided to IOC or Clarion by Merrill regarding LNG pricing or other information whether or not contemplated by Recitals (D), (H), and (I) shall be disclosed by IOC or Clarion to any third party without the written consent of Merrill, unless the disclosure of such information is required by applicable securities laws or regulations, the rules of any stock exchange on which a Party is listed, or is properly in the public domain. In regards to public disclosure, Merrill recognizes that IOC is a public-traded company and Merrill will assist IOC in preparing, and consents to the release by IOC of, a press release of mutually agreed content, which may be a joint disclosure with Merrill, or other legally-required disclosure that discloses the basic terms of any agreement entered into between the Parties.

3-2

It is recognized that information of a confidential nature may be disclosed by the Parties in the course of discussions held hereunder. In consideration of any Party (the “Owner”) making available to the any other Party (the “Recipient”) information which is not publicly known concerning the Owner and its Affiliates (as defined below) and its and

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	their respective businesses, future projects, and financial and other affairs, in whatever form supplied to the Recipient, whether orally or in writing, (collectively, “Confidential Information”), the Recipient agrees and undertakes as follows:
(i)	Confidential Information will only be used by it for its participation in bona fide discussions hereunder and for its assessment of any opportunities identified and for any associated negotiations; and
(ii)	Confidential Information will only be disclosed to such of the Recipient’s, or its Affiliates’, directors, officers, employees, professional advisers, counsel and lenders or other providers of funds (a) who are directly concerned with the matters referred to herein or in any associated negotiations, and (b) whose knowledge of such information is essential for such involvement, and (c) who agree to comply with the provisions of this MOU in respect of Confidential Information. The Recipient undertakes to use its reasonable endeavours to enforce such compliance.
3-3	The undertaking in Section 3-2 does not apply to Confidential Information (i) which, after disclosure to the Recipient, becomes generally available to third parties, other than through breach by the Recipient of any obligation arising from this MOU, or (ii) which was lawfully in the Recipient’s possession prior to such disclosure (as evidenced by its or its advisers’ written records) and which was not acquired directly or indirectly from it or an Affiliate, or (iii) which is lawfully received or obtained by the Recipient from a third party which has acquired it lawfully and is not bound by an obligation of confidentiality to the Owner or an Affiliate, or (iv) which the Recipient is obliged to disclose by law or by a regulator or other body or competent authority with jurisdiction over the Recipient concerned or the rules of a stock exchange upon which its, or an Affiliate’s, shares are listed or traded, in which case it shall, so far as practicable, consult with the Owner and take account of its reasonable requirements before making such disclosure.
3-4	No public announcement, communication or circular concerning any of the matters referred to in this MOU shall be made or dispatched at any time by any Party without the prior written consent of the other Parties (such consent not to be unreasonably withheld or delayed), save where such Party is required to make any announcement by law or by a regulator or other body of competent authority with jurisdiction over the Party concerned or the rules of a stock exchange upon which its, or an Affiliate’s, shares are listed or traded, in which case it shall, so far as practicable, consult with the other Parties and take account of its reasonable requirements before making or dispatching such announcement, communication or circular.

4. Limitation. No Party shall be liable to the other Parties for damages of whatsoever nature, including, without limitation, indirect or consequential losses or damages (including, without limitation, loss of profit or loss of business opportunity) that may arise in connection with or result from this MOU.

5. Assignment. Without the prior consent of the other Parties, no Party may assign

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any of its rights or obligations hereunder other than to such Party’s Affiliates. “Affiliate” shall mean any company or legal entity which (a) controls, either directly or indirectly, a Party, or (b) which is controlled, directly or indirectly, by such Party, or (c) is, directly or indirectly, controlled by a company or entity which directly or indirectly controls such Party. “Control” shall mean the right to exercise more than 50% of the voting rights in the appointment of the directors or similar body of such company.

6. Termination. This MOU shall remain effective for a period of one (1) year from the date hereof. Notwithstanding the above, the Parties may agree in writing to extend or shorten the term of this MOU.

7. Settlement of Dispute. The Parties shall use all reasonable efforts to settle amicably, through negotiations, any dispute arising out of or in connection with this MOU or any breach, termination or invalidity thereof.

8. Legal Effect. Except for the provisions of Section 1-4, Section 1-5, and Sections 3 through 11, which are legally binding on the Parties with effect from the date hereof, this MOU is not legally binding. Any legal obligations with respect to the transactions contemplated hereunder shall be subject to the negotiation and execution following respective board approvals of mutually acceptable definitive agreements relating to the Project.

9. Business Principles. In relation to the Project, the Parties shall comply with the US Foreign Corrupt Practices Act and any sanctions imposed by law or executive order in respect of doing business with governments, corporations or nationals of any territory. Mindful of the principles of the US Foreign Corrupt Practices Act, no Party shall, and shall procure that its Affiliates and their respective employees shall not, make or cause to be made, in connection with the Project or the transaction referred to herein, any payments, loans or gifts or promises or offer of payments, loans or gifts of any money or anything of value, directly or indirectly:

(i)	to or for the use or benefit of any official or employee of any government, or the agency or instrumentalities of any such government;
(ii)	to any political party or official or candidate thereof;
(iii)	to any other person either as an advance or as a reimbursement if it knows or has reason to suspect that any part of such payment, loan or gift will be directly or indirectly given or paid by such other person, or will reimburse such other person for payments, gifts or loans previously made, to any such governmental official or political party or candidate or official thereof; or
(iv)	to any other person or entity if such payment would violate either the laws, decrees, regulations or policies having the force of law of England, PNG, the United States of America or any other relevant jurisdiction.

10. Authority. Nothing in this MOU shall be construed to give any Party the authority or right to enter into any obligation on behalf of the other Parties unless specifically authorized by the other Parties in advance in writing.

11. Governing law and Arbitration. This MOU shall be governed by and

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construed in accordance with the laws of England. Subject to Section 7, all disputes arising in connection with this Memorandum of Understanding shall be finally settled by arbitration under the Arbitration Act 1996 by one arbitrator, appointed by agreement or if not so agreed, in accordance with the said Act. The language to be used in the arbitral proceedings shall be English.

     IN WITNESS WHEREOF, the Parties have caused this MOU to be executed by their respective representatives hereunto duly authorized on the date set forth below such person’s signature.

INTER OIL CORPORATION

By:	/s/ [ILLEGIBLE]
Name:	[ILLEGIBLE]
Title:	[ILLEGIBLE]
CLARION FINANZ AG
By:	/s/ [ILLEGIBLE]
Name:	[ILLEGIBLE]
Title:	[ILLEGIBLE]
MERRILL LYNCH COMMODITIES (EUROPE) LIMITED
By:	/s/ David Silbert
Name:	David Silbert
Title:	Director

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EX-99.8

CONFORMED COPY

LOAN AGREEMENT

between

E.P. INTEROIL, LTD.

and

OVERSEAS PRIVATE INVESTMENT CORPORATION

Dated as of June 12, 2001

OPIC/889-2000-218-DI

TABLE OF CONTENTS

	Page
ARTICLE 1
Definitions
Section 1.01. Definitions		1
Section 1.02. Interpretation		17
Section 1.03. Financial Plan		17
ARTICLE 2
Amount and Terms of the Loan
Section 2.01. Amount and Disbursement		18
Section 2.02. Commitment Fee		18
Section 2.03. Cancellation of the Commitment		18
Section 2.04. Interest		19
Section 2.05. Repayment of the Loan		19
Section 2.06. Voluntary Prepayment		19
Section 2.07. Mandatory Prepayment		20
Section 2.08. Facility Fee		20
Section 2.09. Maintenance Fee		20
Section 2.10. Waiver and Amendment Fees		21
Section 2.11. Taxes		21
Section 2.12. Miscellaneous		22
ARTICLE 3
Representations And Warranties
Section 3.01. Existence And Power Of The Companies		23
Section 3.02. Authority Of The Companies		23
Section 3.03. Financial Condition		23
Section 3.04. Capitalization of the Companies		24
Section 3.05. Subsidiaries		24
Section 3.06. Liens		25
Section 3.07. Taxes and Reports		25
Section 3.08. Defaults		25
Section 3.09. Litigation		25
Section 3.10. Compliance with Law; Corrupt Practices		25
Section 3.11. Easements, Property Interests, Utilities, Etc		26
Section 3.12. Environmental Matters		27

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	Page
Section 3.13. Project Cost and Project Completion		27
Section 3.14. Disclosure		27
Section 3.15. Suspension and Debarment		27
Section 3.16. Certain Contracts		27
Section 3.17. Specified Policies		28
ARTICLE 4
Conditions Precedent To First Disbursement
Section 4.01. Corporate Authorization		28
Section 4.02. Financing Documents		29
Section 4.03. Approved Financial Plan		31
Section 4.04. Government Approvals		32
Section 4.05. Land		32
Section 4.06. Insurance		32
Section 4.07. Approval of Construction Contract		32
Section 4.08. Due Diligence		33
Section 4.09. Appointment of Agent		33
Section 4.10. Legal Opinions		33
Section 4.11. Management Control		33
Section 4.12. Other Documents		34
Section 4.13. Debt Service Reserve Account		34
ARTICLE 5
Conditions Precedent to Each Disbursement
Section 5.01. Representations and Defaults		34
Section 5.02. Change in Circumstances		34
Section 5.03. Certification		34
Section 5.04. Financial Information and Construction Progress		35
Section 5.05. Payment or Reimbursement of Expenses		35
Section 5.06. Sponsor Investment		35
Section 5.07. Fulfillment of Conditions to Subordinated Loan		35
Section 5.08. Specified Policies		35
Section 5.09. Shell Contracts		36
Section 5.10. Other Documents; Opinions		36
ARTICLE 6
Affirmative Covenants
Section 6.01. Project Completion		36
Section 6.02. Company Operations		36
Section 6.03. Maintenance of Rights and Compliance with Laws		37
Section 6.04. Government Approvals; Foreign Exchange Consents		37
Section 6.05. Maintenance of Insurance		37

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	Page
Section 6.06. Accounting and Financial Management		38
Section 6.07. Financial Statements and Other Information		38
Section 6.08. Access to Records; Inspection; Meetings		40
Section 6.09. Notice of Default and Other Matters		40
Section 6.10. Security Documents		40
Section 6.11. Financial Ratios		41
Section 6.12. Environmental Compliance		41
Section 6.13. O&M Agreement		41
Section 6.14. Third-party Consents		41
ARTICLE 7
Third-party Consents
Section 7.01. Liens		42
Section 7.02. Indebtedness		42
Section 7.03. No Alteration of Agreements		42
Section 7.04. Dividends and Share Redemptions		43
Section 7.05. Conduct of Business with Sponsors		43
Section 7.06. Sale of Assets; Mergers		44
Section 7.07. Lease Obligations		44
Section 7.08. Hedging Arrangements		44
Section 7.09. Ordinary Conduct of Business		44
Section 7.10. Worker Rights		45
ARTICLE 8
Defaults And Remedies
Section 8.01. Events of Default		46
Section 8.02. Remedies upon Event of Default		49
Section 8.03. Jurisdiction and Consent to Suit		49
Section 8.04. Judgment		50
Section 8.05. Immunity		50
ARTICLE 9
Miscellaneous
Section 9.01. Notices		51
Section 9.02. English Language		52
Section 9.03. Governing Law		52
Section 9.04. Succession		52
Section 9.05. Survival of Agreements		52
Section 9.06. Integration; Amendments		52
Section 9.07. Severability		52
Section 9.08. No Waiver		53
Section 9.09. Waiver of Jury Trial		53

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	Page
Section 9.10. Waiver of Litigation Payments		53
Section 9.11. Indemnity		53
Section 9.12. No Third Party Reliance; No Assignment		54
Section 9.13. Further Assurances		54
Section 9.14. Counterparts		54

Schedule X	Contributed Equipment
Schedule Y	EPC Contract Requirements
Schedule 1.03	Preliminary Financial Plan
Schedule 2.05	Repayment Schedule
Schedule 2.05B	Physical Completion Certificate
Schedule 4.04	Government Approvals
Schedule 4.08	Due Diligence
Schedule 6.05	Maintenance of Insurance
Schedule 6.12	Environmental Compliance
Exhibit A	Form of Disbursement Request
Exhibit B	Form of Self-Monitoring Questionnaire
Exhibit C	Guidelines for Preparation of Financial Statements
Exhibit D	Uniform Credit Cash Flow
Exhibit E	Form of Promissory Note

iv

LOAN AGREEMENT

     LOAN AGREEMENT, dated as of June 12, 2001, between E.P. INTEROIL, LTD., a corporation organized and existing under the laws of the Cayman Islands (the “Borrower”) and OVERSEAS PRIVATE INVESTMENT CORPORATION, an agency of the United States of America (“OPIC”).

W I T N E S S E T H :

     WHEREAS, the Borrower and InterOil Limited, a corporation organized and existing under the laws of Papua New Guinea (“IL”, and together with the Borrower, the “Companies”) intend to construct and operate the Project (as hereinafter defined); and

     WHEREAS, to secure a portion of the financing for the Project, the Borrower has requested that OPIC provide a credit facility to the Borrower in an amount up to U.S. $85,000,000 pursuant to Section 234(b) of the Foreign Assistance Act of 1961, as amended, which OPIC is willing to do on the terms and conditions set forth herein;

     NOW, THEREFORE, in consideration of the premises and of the agreements contained herein, it is hereby agreed as follows:

ARTICLE 1

Definitions

     Section 1.01 . Definitions. Unless otherwise provided, capitalized terms used herein shall have the definitions specified below:

     “Account Bank” means Wells Fargo Bank Texas, N.A., as account bank and securities intermediary under the Collateral Account Agreement.

     “Additional Amount” has the meaning set forth in Section 2.11(a).

     “Adjusted Net Income” for any period means Net Income of the Companies, determined on a consolidated basis, for such period plus (it being understood that the adjustments in clauses (1) through (4) below shall be made only to the extent that (i) the relevant amounts are not otherwise included in determining such Net Income for such period and (ii) such adjustments are not duplicative of each other or of other adjustments to Net Income made elsewhere) (1) the sum of the amount of all net non-cash charges (including, without limitation, depreciation, amortization, deferred tax expense, non-cash interest expense and other non-cash charges) included in arriving at such Net Income for

such period plus (2) value added tax credits applied to reduce value added tax payable by the Companies during such period less (3) the sum of (x) the sum of the amount of all net non-cash gains or losses included in arriving at such Net Income for such period and (y) the amount of interest earned on amounts held in the Distribution Account plus (4) payments received under Business Interruption Insurance, Delayed Startup Insurance, Marine Cargo Delayed Startup Insurance (as such terms are used in part (B) of Schedule 6.05) or the Specified Policies during such period; provided that there shall be excluded:

     (a) any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of income accrued during such period,

     (b) any aggregate net gain (but not any aggregate net loss) during such period arising from the sale, conversion, exchange or other disposition of capital assets (such term to include, without limitation, (i) all non-current assets and, without duplication, (ii) the following, whether or not current: all fixed assets, whether tangible or intangible, all inventory sold in conjunction with the disposition of fixed assets, and all securities),

     (c) any net gain from the collection of the proceeds of life insurance policies,

     (d) any gain arising from the acquisition of any security, or the extinguishment, under U.S. GAAP, of any Indebtedness, of the Companies, and

     (e) any such Net Income or gain (but not any net loss) during such period from (i) any change in accounting principles in accordance with U.S. GAAP, (ii) any prior period adjustments resulting from any change in accounting principles in accordance with U.S. GAAP, (iii) any extraordinary items or (iv) any discontinued operations or the disposition thereof.

     “Affiliate” means, with respect to any Person, (i) any other Person that is directly or indirectly controlled by, under common control with or controlling such Person; (ii) any other Person owning beneficially or controlling five percent (5%) or more of the equity interest in such Person; (iii) any officer or director of such Person; or (iv) any spouse or relative of such Person. As used herein, the term “control” means possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of partnership interests or voting securities, by contract or otherwise.

     “Agreement” means this Loan Agreement between the Borrower and OPIC.

2

     “Annual Budget” has the meaning set forth in Section 6.07(a).

     “Application” means the Borrower’s application to OPIC for the Loan, consisting of the Sponsor Disclosure Reports dated January 14, 2000, the Application dated June 16, 1999, as amended January 14, 2000 and the Commitment Letter.

     “Approved Financial Plan” has the meaning set forth in Section 1.03.

     “Authorizations” means consents, licenses, approvals and authorizations (including, without limitation, consents, licenses, approvals and authorizations of the Bank of Papua New Guinea) of relevant Governmental Authorities and declarations, filings and registrations (including, without limitation, declarations, filings and registrations with the Bank of Papua New Guinea) with relevant Governmental Authorities.

     “Authorized Officer” means, with respect to any Person, its Chairperson, Managing Director, President, Secretary or Treasurer, any Vice President, Assistant Secretary or Assistant Treasurer thereof, and any other officer designated in writing by such Person as having been authorized to execute and deliver this Agreement, the Notes, any of the other Financing Documents to which it is or will be a party, or any other notice or instrument contemplated hereunder.

     “Borrower” has the meaning set forth in the preamble hereto.

     “Business Day” means any day other than (i) a Saturday, Sunday or day on which commercial banks are authorized by law to close in the City of New York or Washington, D.C., United States of America and (ii) with respect to any payment, delivery, or communication to OPIC, a day on which OPIC is not open for business.

     “Capital Expenditures” means all expenditures by the Companies which should be capitalized in accordance with U.S. GAAP, including all expenditures with respect to fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which should be capitalized in accordance with applicable generally accepted accounting principles) except for capital expenditures paid out of Insurance Proceeds.

     “Cash Available for Debt Service” means, for any period, (i) Adjusted Net Income for such period plus (ii) to the extent deducted in determining Adjusted Net Income for such period, all interest expense of the Companies, determined on a consolidated basis, for such period plus (iii) the amount of any net increase (or minus the amount of any net decrease) in working capital for such

3

period plus (iv) any subordinated Affiliate fees to the extent deducted but not paid minus (v) the amount of Capital Expenditures for such period.

     “Charter Documents” means, in respect of any company, corporation, limited liability company, partnership, governmental agency or other enterprise, its constitution, founding act, charter, articles of incorporation and by-laws, memorandum and articles of association, statute, or similar instrument.

     “Closing Date” means any Business Day on which a Disbursement is made.

     “Collateral Account Agreement” means a collateral account agreement among the Borrower, OPIC and the Account Bank, satisfactory to OPIC in form and substance.

     “Commitment” means OPIC’s commitment to lend an amount not to exceed $85,000,000 less (i) the portion thereof which pursuant to Section 2.03 has been canceled or has been deemed canceled and (ii) any Loan amounts repaid or prepaid.

     “Commitment Fee” has the meaning set forth in Section 2.02.

     “Commitment Letter” means the letter agreement among the Borrower, IL, the Sponsors and OPIC, dated May 17, 2000, as extended pursuant to a letter agreement among the Borrower, IL, the Sponsors and OPIC dated March 14, 2001, in which OPIC and the Borrower have agreed to enter into this credit facility, subject to the conditions stated therein.

     “Commitment Period” means the period commencing on May 17, 2000 and ending on the earliest of (i) the first date on which the amount of the Loan equals the total amount of the Commitment, (ii) December 31, 2003, (iii) the date the first repayment is made on the Loan and (iv) the date of termination in whole of the Commitment.

     “Company” means each of the Borrower and IL, and “Companies” means both of them.

     “Compensation Payments” means amounts paid to the Companies under (i) all insurance policies contemplated in Section 6.05 and covering loss or damage to the Project and (ii) all equipment warranties (including those provided in, or given for the benefit of the Companies pursuant to, the Construction Contract) or other similar agreements.

     “Construction Contract” means one or more contracts which constitute a lump sum, fixed price, turnkey, date certain obligation for engineering, procurement and construction in respect of the Project that (i) provides that the

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Construction Contractor’s obligations thereunder are guaranteed by the EPC Guarantee, (ii) meets the requirements of the Project Agreement, and (iii) is satisfactory to OPIC in form and substance, including with regard to the matters set forth in Schedule Y hereto.

     “Construction Contractor” means one or more entities acceptable to OPIC, to be engaged by the Companies to undertake engineering, procurement and/or construction work in respect of the Project.

     “Contributed Amounts” has the meaning set forth in Section 5.06.

     “Contributed Equipment” means the equipment listed on Schedule X hereto.

     “Control” means possession, directly or indirectly, of the power to vote 10% or more of any class of voting securities of a Person or to direct or cause the direction of the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise.

     “Corrupt Practices Laws” means (i) the Foreign Corrupt Practices Act of 1977 (Pub.L. No. 95-213, ''101-104), as amended, and (ii) any other law, regulation, order, decree or directive having the force of law and relating to bribery, kick-backs, or similar business practices.

     “Current Assets” means assets treated as current assets under U.S. GAAP.

     “Current Liabilities” means all Indebtedness and liabilities due on demand or to become due within one year and other liabilities treated as current liabilities under U.S. GAAP.

     “Debt Service” for any period means the sum of (i) Interest Expense for such period and (ii) the aggregate principal amount of the Loan scheduled to be paid during such period (whether or not paid).

     “Debt Service Coverage Ratio” means, for any period, the ratio of (x) Cash Available for Debt Service to (y) Debt Service for such period.

     “Debt Service Reserve Account” means a Dollar-denominated account established by the Borrower pursuant to the terms of the Collateral Account Agreement.

     “Default” means an Event of Default or an event or condition that with the passage of time or the giving of notice, or both, could constitute an Event of Default.

     “Default Rate” has the meaning set forth in Section 2.04(b).

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     “Development Costs” means the Development Costs as represented in the Approved Financial Plan.

     “Disbursement” means each disbursement of the Loan.

     “Disbursement Request” means a request for disbursement of the Loan substantially in the form of Exhibit A.

     “Distribution Account” means a Dollar bank account which the Borrower may open in accordance with the Security Documents that is not subject to the Lien of the Security Documents and which holds only funds that the Borrower is entitled to use to make payments permitted under Sections 7.04 or 7.05.

     “Dollars” or “$” means United States dollars.

     “Downstream Loan Documents” means (i) each agreement, note or other documents or arrangements in respect of the loans or other advances from the Borrower to IL in connection with the financing of the Project and (ii) each guarantee and indemnity of IL in respect of the Borrower’s obligations hereunder (such agreements, notes, other documents, guarantees and indemnities to be secured by a first ranking fixed and floating charge over all of the assets and undertaking of IL and real property mortgages over the Site Leases).

     “Downstream Loans” means the loans or other advances to IL contemplated in the Downstream Loan Documents.

     “EMMP” shall have the meaning set forth in Schedule 6.12.

     “Enron Papua New Guinea” means Enron Papua New Guinea Limited, a company organized and existing under the laws of Papua New Guinea.

     “Environmental Consultant” means NSR Environmental Consultants Pty. Ltd.

     “Environmental Report” means an environmental report from the Environmental Consultant to be delivered to OPIC annually, in form and substance satisfactory to OPIC.

     “EPC Guarantee” means the owner guaranty contemplated in the Construction Contract provided by the Construction Contractor for the benefit of the Companies in form and substance satisfactory to OPIC and executed and delivered by the Construction Contractor and in effect as of a date that is on or prior to the first Disbursement Date.

     “Event of Default” has the meaning set forth in Section 8.01.

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     “Facility Fee” has the meaning set forth in Section 2.08.

     “Feedstock Supply Agreement” means an agreement between either or both of the Companies and any other parties for the purchase of crude oil for use by the Project (other than in connection with spot market purchases in the ordinary course of business), in form and substance satisfactory to OPIC.

     “Financial Statements” means the Companies’ quarterly or annual balance sheet and statements of income, retained earnings, and sources and application of funds for such fiscal period, together with all notes thereto and with comparable figures for the corresponding period of their previous Fiscal Year, each prepared on both a consolidated and consolidating basis, in Dollars and in accordance with U.S. GAAP.

     “Financing Documents” has the meaning set forth in Section 4.02.

     “Fiscal Year” means the accounting year of the Companies, commencing each year on January 1 and ending on December 31 or such other period agreed to among the Companies and OPIC.

     “Governmental Authority” means any government, governmental department, ministry, commission, board, bureau, agency, regulatory authority, instrumentality of any government (national, provincial or local), judicial, legislative or administrative body, domestic or foreign, federal, state, municipal or local, having jurisdiction over the matter or matters in question.

     “Hedging Arrangement” means (x) any interest rate or currency swap, future, option, cap, collar, ceiling, hedge, or other interest rate protection agreement or foreign exchange contract, or any other agreement or arrangement designed to protect against fluctuations in interest rates or currency values and (y) any crude oil price hedging agreements and other agreements, contracts, instruments or other arrangements or commitments, in each case entered into by either Company to fix or cap the cost to IL of crude oil (but which are settled financially and do not require either Company to physically deliver or receive crude oil).

     “IAS” means the accounting standards promulgated by the International Accounting Standards Committee as in effect from time to time.

     “IL” has the meaning set forth in the recitals to this Agreement.

     “Indebtedness” of any Person means, at any date, all or any liabilities, obligations and reserves, contingent or otherwise, which, in accordance with U.S. GAAP, would be reflected as a liability on a balance sheet, including, without limitation, (i) any obligation of such Person for borrowed money or arising out of any credit facility, (ii) any obligation of such Person evidenced by bonds,

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debentures, notes or other similar instruments, (iii) any obligation of such Person to pay the deferred purchase price of property or services, (iv) any obligation of such Person under conditional sales or other title retention agreements, (v) the net aggregate rentals under any lease by such Person as lessee that under U.S. GAAP would be capitalized on the books of the lessee or is the substantial equivalent of the financing of the property so leased, (vi) any obligation of such Person to purchase securities or other property which arises out of or in connection with the sale of the same or substantially similar securities or property, (vii) any obligation of such Person secured by any Lien upon property, (viii) any Indebtedness of others secured by a Lien on any asset of such Person, and (ix) any Indebtedness of others guaranteed, directly or indirectly, by such Person.

     “Indemnified Person” has the meaning set forth in Section 9.11.

     “Indemnity” has the meaning set forth in Section 9.11.

     “Independent Engineer” means Kellogg Brown & Root, Inc.

     “Insurance Consultant” means AON Risk Services, Inc.

     “Interest Expense” means, for any period, the sum of (without duplication) (a) interest expense of the Companies, determined on a consolidated basis, required to be paid during such period (whether or not so paid) (which, in the case of Indebtedness incurred with original issue discount, shall include the accreted value for such period), except for interest expense required to be paid during such period with respect to any Subordinated Obligations, plus (b) all other financing fees and withholding tax gross-ups with respect to interest expense and financing fees required to be paid by the Companies, determined on a consolidated basis, during such period (whether or not so paid), including Commitment Fees, Maintenance Fees and Additional Amounts but excluding any such amounts in respect of or constituting Subordinated Obligations.

     “Interest Period” means the period (i) from and including the day following the immediately preceding Payment Date or, if later, the Closing Date (ii) to and including the next succeeding Payment Date or, if earlier, the Loan Maturity Date.

     “InterOil” means InterOil Corporation, a corporation organized and existing under the laws of New Brunswick, Canada.

     “Italian Turbine Contract” means the Purchase Agreement dated May 12, 1999 between the Borrower and GM Service srl in respect of the Borrower’s purchase of turbines for $1,350,000.

     “Lien” means any lien, pledge, mortgage, security interest, deed of trust, charge, assignment, hypothecation, title retention or other encumbrance on or

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with respect to, or any preferential arrangement having the practical effect of constituting a security interest with respect to the payment of any obligation with, or from the proceeds of, any asset or revenue of any kind.

     “Litigation Payment” has the meaning set forth in Section 9.10.

     “Loan” means, on any date, the aggregate of the outstanding unpaid principal amounts of the Notes then outstanding.

     “Loan Documents” has the meaning set forth in Section 4.02.

     “Loan Maturity Date” means December 31, 2012 or such earlier date on which the entire outstanding principal balance of the Loan shall be due and payable in full (whether by way of acceleration, mandatory prepayment or otherwise).

     “Local Currency” or “LC” means the official currency of Papua New Guinea or the Cayman Islands, as applicable.

     “Loss” has the meaning set forth in Section 9.11.

     “Maintenance Fee” has the meaning set forth in Section 2.09.

     “Material Adverse Effect” means a material adverse effect on (i) the Project, (ii) the business, operations, prospects, condition (financial or otherwise), or property of the Companies, the Sponsors (for so long as any of them have any financial obligations under the Sponsor Support Agreement), or any other Person whose continuing viability, because of its guaranty or other undertaking, is essential to the Project, (iii) the ability of the Companies or any other party to perform in a timely manner its material obligations under any of the Financing Documents, (iv) the validity or enforceability of any material provision of any Financing Document, (v) the rights and remedies of OPIC, if any, under any of the Financing Documents, or (vi) the Liens provided to OPIC under the Security Documents.

     “Net Income” means, with respect to any Person for any fiscal period, the net income of such Person for such period after Taxes but before extraordinary items, determined in accordance with U.S. GAAP.

     “Note” means any promissory note issued by the Borrower pursuant to this Agreement substantially in the form of Exhibit E.

     “Note Interest Rate” has the meaning set forth in Section 2.04(a).

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     “O&M Agreement” means an operating and maintenance agreement in respect of the operation and maintenance of the Project satisfactory to OPIC in form and substance.

     “OHSP” shall have the meaning set forth in Schedule 6.12.

     “OPIC” means Overseas Private Investment Corporation, an agency of the United States of America.

     “OPIC Environmental Requirements” means the requirements set forth in the OPIC Environmental Handbook, April 1999.

     “OPIC Plaintiff” has the meaning set forth in Section 9.10.

     “OPIC Spread” means (x) prior to Project Completion, three percent (3.00%) per annum and (y) at and after Project Completion, three and one-half percent (3.50%) per annum.

     “Papua New Guinea” means the Independent State of Papua New Guinea.

     “Payment Date” means the thirtieth (30^th) day of each June and the thirty-first (31^st) day of each December, commencing December 31, 2000, until the Loan and all amounts due hereunder or under the Note are paid in full, unless such date is not a Business Day, in which case the Payment Date will be the next succeeding Business Day.

     “PC” means Petroleum Independent and Exploration Corporation, a corporation organized and existing under the laws of the State of Texas.

     “Person” means and includes (i) an individual, (ii) a legal entity, including a partnership, a joint venture, a corporation, a limited liability company or partnership, a trust, and an unincorporated organization, and (iii) a government or any department or agency thereof.

     “Phil Mulacek” and “Philippe Mulacek” mean Mr. Philippe Mulacek, who is the President and Chairman of PC as of the date hereof.

     “Physical Completion Certificate” has the meaning set forth in Section 2.05(b).

     “Physical Completion Conditions” has the meaning set forth in Schedule 2.05B.

     “Physical Completion Date” has the meaning set forth in Schedule 2.05B.

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     “PIE” means PIE Group, LLC, a limited liability company organized and existing under the laws of the State of Delaware.

     “Potential Event of Default” means an event or condition that, with the passage of time or the giving of notice, or both, could constitute an Event of Default.

     “Preliminary Financial Plan” has the meaning set forth in Section 1.03.

     “Prepayment Premium” has the meaning set forth in Section 2.06.

     “Product Sales Agreement” means (i) the Shell Contracts and (ii) any other agreement between either or both of the Companies and any other parties for the purchase and sale of refined product produced by the Project (other than in connection with spot market sales in the ordinary course of business), in form and substance satisfactory to OPIC.

     “Project” means the construction and operation of a 32,500 barrels per day hydroskimming crude oil refinery in Papua New Guinea, as described in the Application.

     “Project Agreement” means the Project Agreement dated May 29, 1997 among Papua New Guinea, InterOil Pty Limited and the Borrower, as amended by the Extension Deed dated July 1, 1999 among Papua New Guinea, IL and the Borrower, as amended from time to time.

     “Project Completion” has the meaning set forth in the Sponsor Support Agreement.

     “Project Contracts” has the meaning set forth in Section 7.10.

     “Project Documents” has the meaning set forth in Section 4.02.

     “Prudent Industry Practice” shall mean those practices, methods, equipment specifications and standards of safety and performance, as the same may change from time to time, as are commonly used by crude oil refineries of a type, size and projected useful life similar to the Project as good, safe and prudent engineering practices in connection with the design, construction, operation, maintenance, repair and use of crude oil refineries and other equipment, facilities and improvements of such crude oil refineries, with commensurate standards of safety, performance, dependability, efficiency and economy.

     “Rights of Way” means all easements, rights-of-way, restrictions, encroachments and other similar charges, rights or encumbrances that are necessary for the operation and maintenance of the Project, including all utilities and interconnection facilities.

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     “Security Agreement” means a security agreement among the Borrower. OPIC and any other parties thereto, satisfactory to OPIC in form and substance.

     “Security Documents” has the meaning set forth in Section 4.02.

     “Self-Monitoring Questionnaire” means the Annual Self-Monitoring Questionnaire attached hereto as Exhibit B, as the same may be revised and supplemented by OPIC from time to time.

     “Share Pledge Agreements” means the share pledge agreements among each of the Sponsors, the Companies and OPIC, in each case satisfactory to OPIC in form and substance.

     “Share Retention Agreements” means the share retention agreements among each of InterOil, PC, Phil Mulacek and OPIC, in each case satisfactory to OPIC in form and substance.

     “Shell Contracts”means (i) the Domestic Sale Agreement dated as of April 9, 2001 between IL and Shell Papua New Guinea Limited, (ii) the Export Marketing and Shipping Agreement dated as of March 23, 2001 between the Borrower and Shell International Eastern Trading Company Limited, (iii) the Agreement for the Sale and Purchase of Naphtha dated as of February 6, 2001 between the Borrower and Shell International Eastern Trading Company and (iv) the Shell Consent Deeds.

     “Shell Consent Deeds” means (i) the Shell Domestic Consent Deed and (ii) the Consent Deed to be entered into on or prior to the first Closing Date by the Borrower and Shell International Eastern Trading Company Limited, in each case substantially in the form of (and in any event the terms of which are no less favorable to OPIC than those contained in) the form of consent deed attached to that certain letter from the Companies to OPIC dated June 12, 2001.

     “Shell Domestic Consent Deed” means the Consent Deed to be entered into on or prior to the Transfer Date by IL, Shell Papua New Guinea Limited and Shell Oil Products (PNG) Limited.

     “Site” has the meaning set forth in Section 3.09.

     “Site Lease” means State Lease No. 04116/1499 in respect of land described as Portion 1499, Milinch Granville, Fourmil Moresby and State Lease 04116/1500 in respect of land described as Portion 1500, Milinch Granville, Fourmil Moresby, in each case as granted to IL pursuant to the Land Act (Chapter No. 185).

     “SPCC” has the meaning set forth in Schedule 6.12.

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     “Specified Policies” has the meaning set forth in the Sponsor Support Agreement.

     “SPI” means S.P. InterOil, LDC, an international business company organized and existing under the laws of the Bahamas.

     “Sponsor Support Agreement” means the Sponsor Support Agreement dated as of the date hereof among the Companies, the Sponsors and OPIC.

     “Sponsors” means PIE and SPI.

     “Subordinated Lender” means SPI.

     “Subordinated Loan” means the aggregate amount outstanding, if any, from time to time under the Subordinated Loan Agreement.

     “Subordinated Loan Agreement” means a loan agreement, if any, between the Companies and the Subordinated Lender, satisfactory to OPIC in form and substance, pursuant to which the Subordinated Lender shall have agreed to make a subordinated loan to the Companies in accordance with Section 5.06.

     “Subordination Agreement” means the Subordination Agreement dated as of a date prior to the first Disbursement, among the Sponsors, the Companies and OPIC, satisfactory to OPIC in form and substance.

     “Subordinated Obligations” shall have the meaning set forth in the Subordination Agreement.

     “Supplemental Financial Statements” means a report prepared in accordance with U.S. GAAP, following the guidelines set forth in Exhibit C, prepared by the Companies’ independent accountants contemporaneously with each of the Companies’ Financial Statements, translating the Companies’ Financial Statements into Dollars and adjusting such Financial Statements to compensate for fluctuations in the exchange rate between the Local Currency and the Dollar.

     “Tangible Net Worth” means, as of any date for the Companies, (i) the total stockholders’ equity (including capital stock, paid-in capital and retained earnings, after deducting treasury stock and reserves) that would appear on the Companies’ Financial Statements prepared on a consolidated basis as of that date, less (ii) the aggregate book value of all intangible assets shown on the Companies’ Financial Statements (prepared on a consolidated basis) as of that date (including, without limitation, goodwill, patents, trademarks, trade names, copyrights, franchises, and unrealized appreciation of assets).

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     “Tangible Net Worth Coverage Ratio” means, at any time, the ratio of the Companies’ Indebtedness, determined on a consolidated basis, to their Tangible Net Worth.

     “Taxes” has the meaning set forth in Section 2.11.

     “Transfer Date” has the meaning set forth in Clause 9.1 of Draft 12 of the Purchase and Sale Agreement, with draft date of April 6, 2001, between Shell Overseas Holdings Limited and InterOil.

     “Treasury Cost” means, with respect to a Note and the related Disbursement, a fixed rate of interest equal to the weighted average per annum discount rate (expressed as a bond equivalent yield on the basis of a year of 360 days and applied on a daily basis) for direct obligations of the United States of America having a maturity of five (5), seven (7), ten (10) or twenty (20) years, as applicable (the obligations with such applicable maturity being referred to as the “Treasury Securities”), set at the most recent auction of Treasury Securities conducted in the month immediately preceding such Disbursement, as published by the Board of Governors of the Federal Reserve System (in Statistical Release H.15 or any successor publication, or in the absence of such publication, by a press release). In the event that the results of any auction of Treasury Securities are not published as provided above, the results of the most recently reported auction of Treasury Securities conducted prior to such unreported auction shall continue to apply for purposes of determining the Treasury Cost until such time, if any, as the results of any subsequent auction of Treasury Securities shall again be so published. The applicable maturity for Treasury Securities shall be determined by selecting the maturity listed in this definition above that most closely approximates the maturity of such Disbursement (determined as provided in the following paragraph); provided that the applicable maturity of Treasury Securities shall be not less than the maturity in the relevant Disbursement Request.

     For purposes of determining the Treasury Cost with respect to any Disbursement, installments of the repayment of the Loan shall be allocated to Disbursements in direct order of maturity. Accordingly, for this purpose, the amount of each Disbursement shall be divided into installments of $4,500,000 (or, if applicable, fraction thereof) and shall be allocated to Payment Dates for which a full allocation of $4,500,000 has not previously been made, in direct chronological order. For purposes of determining the applicable maturity of Treasury Securities with respect to such Treasury Cost, the maturity in the relevant Disbursement shall be determined based on the term beginning on the date of such Disbursement and ending on the date of the latest installment which has been allocated to such Disbursement in accordance with this paragraph.

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     “Uniform Credit Analysis Cash Flow Statement” means cash flow as determined according to the Uniform Credit Analysis Cash Flow attached hereto as Exhibit D.

     “U.S. GAAP” means generally accepted accounting principles in the United States of America in effect from time to time, applied on a consistent basis both as to classification of items and amounts.

     “U.S. Person” means (i) an entity created under the laws of the United States, any state, or territory thereof, or the District of Columbia (an “Entity”), more than fifty percent (50%) of the beneficial ownership of which is held by citizens of the United States and (ii) a wholly owned subsidiary of an Entity that satisfies the criteria set out in clause (i) of this sentence. An Entity shall satisfy the beneficial ownership criteria set forth in the preceding sentence if:

     (a) it is a stock insurance company and more than fifty percent (50%) of the beneficial ownership of its stock is held by citizens of the United States;

     (b) it is a mutual insurance company and policyholders representing more than 50% of the aggregate coverage issued by such mutual insurance company are citizens of the United States;

     (c) it is an insurance company purchasing for a separate account, as described under Rule 144A(a)(1)(i)(A) of the Securities Act, and more than fifty percent (50%) of the beneficial ownership of such separate account is held by citizens of the United States;

     (d) it is a registered investment company described under Rule 144A(a)(1)(i)(B) or Rule 144A(a)(1)(iv) of the Securities Act and the beneficial owners of more than fifty percent (50%) of its interests are citizens of the United States;

     (e) (i) it is an entity described under Rule 144A(a)(1)(i)(D) or (E) of the Securities Act (a “plan”) and the beneficiaries of more than fifty percent (50%) of the interests in such plan are citizens of the United States or (ii) it is a trust whose participants are exclusively plans as described under Rule 144A(a)(1)(i)(F) of the Securities Act and more than fifty percent (50%) of (A) the assets of such trust are held for the benefit of plans satisfying the criteria set forth in the clause (E)(i) and (B) the participants in such trust satisfy the criteria set forth in clause (E)(i);

     (f) it is an organization described in '501(c)(3) of the Internal Revenue Code and more than fifty percent (50%) of the identified beneficiaries of such organization are citizens of the United States; provided, however, that, if such organization does not have identified beneficiaries, it will satisfy the criteria set forth in clause (A) above if more than fifty percent (50%) of the persons

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controlling the investment decisions of such organization are citizens of the United States;

     (g) it is a corporation, partnership, or business trust and more than fifty percent (50%) of the stock, partnership interests, or trust interests, respectively, of such entity are beneficially owned by citizens of the United States;

     (h) it is a registered investment adviser or registered dealer and more than fifty percent (50%) of the ownership interests in such entity are beneficially owned by citizens of the United States or, if it is purchasing for an account other than its own, more than fifty percent (50%) of the ownership interests in such other account are beneficially owned by citizens of the United States; or

     (i) it is a bank or savings and loan association, more than fifty percent (50%) of the ownership interests of which are beneficially owned by citizens of the United States.

     A corporation owned under the laws of the United States or its states and territories shall be deemed to be a “U.S. Person” if more than fifty percent (50%) of its issued and outstanding stock is owned by U.S. citizens either directly or beneficially. Where shares of stock of a corporation with widely dispersed public ownership are held in the names of trustees or nominees, including, without limitation, stock brokerage firms, with addresses in the United States, such shares shall be deemed to be owned by U.S. citizens unless any of such corporation, OPIC, the Companies or the Sponsors has knowledge to the contrary. The beneficial ownership of U.S. corporations shall be determined by tracing back through any foreign ownership of their shares to the ultimate beneficial owners.

     The criteria set forth in (a) through (i) above are not intended to be exclusive and nothing herein will prevent an Entity that otherwise meets the criteria set forth in the first sentence of this definition from being a “U.S. Person” for purposes of this Agreement.

     “Worker Rights Requirements” has the meaning set forth in Section 7.10.

     “World Bank Guidelines” means (a) the World Bank 1998 Pollution and Abatement Handbook for (i) Petroleum Refining, (ii) General Environmental Guidelines and (iii) Monitoring Guidelines, (b) the International Finance Corporation General Health and Safety Guidelines and (c) the “Techniques for Assessing Industrial Hazards” included in the September 1985 World Bank Guidelines for Identifying, Analyzing, and Controlling Major Hazard Installation in Developing Countries with respect to environmental and safety issues associated with explosions, fire and other accidents.

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     Section 1.02 . Interpretation. In this Agreement, unless otherwise indicated or required by the context:

     (a) Reference to and the definition of any document (including this Agreement) shall be deemed a reference to such document as it may be amended, supplemented, revised, or modified from time to time;

     (b) All references to an “Article”, “Section”, “Schedule”, or “Exhibit” are to an Article or Section hereof or to a Schedule or an Exhibit attached hereto;

     (c) The table of contents and article and section headings and other captions are for the purpose of reference only and do not limit or affect the meaning of the terms and provisions hereof;

     (d) Defined terms in the singular include the plural and vice versa, and the masculine, feminine and neuter gender include all genders;

     (e) Accounting terms not defined in Section 1.01 have the meanings given to them under U.S. GAAP. Where this Agreement requires that Financial Statements and Supplemental Financial Statements be prepared in accordance with U.S. GAAP, such Financial Statements and Supplemental Financial Statements may instead be prepared in accordance with IAS and reconciled with U.S. GAAP to the extent such Financial Statements and Supplemental Financial Statements are usually prepared in accordance with IAS;

     (f) The words “hereof”, “herein” and “hereunder” and words of similar import refer to this Agreement as a whole and not to any particular provision of this Agreement. The words “include”, “includes”, and “including” mean include, includes and including “without limitation” and “without limitation by specification”;

     (g) Any reference to a time of day means the time of day in Washington, D.C.;

     (h) Terms capitalized for other than grammatical purposes which are defined in (i) the introductory paragraph hereof, (ii) the recitals hereof or (iii) the succeeding Sections hereof have the meanings ascribed to them therein; and

     (i) Phrases such as “satisfactory to OPIC”, “in such manner as OPIC may determine”, “to OPIC’s satisfaction”, “at OPIC’s election” and phrases of similar import authorize and permit OPIC to approve, disapprove, act or decline to act in its sole discretion.

     Section 1.03 . Financial Plan. A preliminary financial plan for the Project is set forth in Schedule 1.03 (the “Preliminary Financial Plan”). Prior to the first Disbursement of the Loan, a final financial plan for the Project (which shall

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reflect the executed version of the Construction Contract approved by OPIC) shall be agreed by OPIC and the Borrower (the “Approved Financial Plan”).

ARTICLE 2
Amount and Terms of the Loan

     Section 2.01 . Amount and Disbursement. (a) Commitment. Subject to the terms and conditions hereof, OPIC agrees to make, and the Borrower agrees to accept, a loan for the Project in the principal amount of not more than $85,000,000. Disbursements of the loan hereunder shall only be made from the date hereof through the end of the Commitment Period.

     (b) Disbursement; Term. Subject to the satisfaction of the conditions set forth in Articles 4 and 5, the Borrower may request a Disbursement of the Loan by delivering a Disbursement Request to OPIC not less than ten (10) Business Days prior to the Closing Date. Each Disbursement shall be evidenced by one or more (as OPIC may specify) Notes aggregating the principal amount of the Disbursement and dated the Closing Date. All Notes shall be issued for a term ending on or before the Loan Maturity Date and shall be consistent with the allocation of installments of repayment of the Loan used in determining the Treasury Cost for the corresponding Disbursement. The amount of the Loan shall not exceed the amount of the Commitment.

     (c) Number and Amount of Disbursements. The Loan hereunder shall be disbursed in not more than five (5) Disbursements. Each Disbursement shall be in an amount of not less than $5,000,000 and in multiples of $500,000 in excess thereof; provided that (i) the first Disbursement shall not exceed $31,000,000 (or such other amount as OPIC and the Borrower agree in the Approved Financing Plan) and (ii) after such first Disbursement, Disbursements and Contributed Amounts shall be made on a Dollar-for-Dollar basis until such time as all Contributed Amounts shall have been contributed in accordance with the Approved Financing Plan.

     Section 2.02 . Commitment Fee. Upon the execution and delivery of all of the Loan Documents and continuing through the Commitment Period, a commitment fee (the “Commitment Fee”) shall accrue on a daily basis at the rate of one-half of one percent (0.50%) per annum on the difference, calculated for each day during such period, between (i) the amount of the Commitment, and (ii) the aggregate amount of the Loan outstanding on such day. The Commitment Fee shall be payable in arrears to OPIC on each Payment Date and on the date of expiration of the Commitment Period.

     Section 2.03 . Cancellation of the Commitment. The Borrower may cancel all or any part of the Commitment at any time upon giving written notice to OPIC

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of the amount canceled. There shall be no cancellation fee. Any part of the Commitment not disbursed at the end of the Commitment Period shall be deemed to have been canceled.

     Section 2.04 . Interest. (a) Note Interest Rate. On each Payment Date, commencing with the first such date to occur at least six months after the date of the first Disbursement, the Borrower shall pay interest in arrears to the order of OPIC on the daily outstanding principal balance of each Note, less any amount of principal on which interest is payable at the Default Rate pursuant to Section 2.04(b), at a rate per annum equal to the sum of the following (the “Note Interest Rate”):

          (i) The Treasury Cost applicable to such Note; and

          (ii) The OPIC Spread.

     (b) Default Interest. If the Borrower fails to pay in full when due any amount of principal or interest on any Note, the Borrower shall, on demand, or, if no demand, on each Payment Date, pay interest in arrears to the order of OPIC on the amount of the defaulted payment, from the date of such payment default until the date on which such defaulted amount is paid in full, at a rate per annum (the “Default Rate”), in lieu of the Note Interest Rate and to the extent permitted by applicable law, equal to the sum of the following:

          (i) The Note Interest Rate; and

          (ii) Two percent (2.0%) per annum.

     Section 2.05 . Repayment of the Loan. (a) The Borrower shall repay the Loan in installments of $4,500,000 (or, if less, the outstanding principal balance of the Loan) payable on each Payment Date commencing on the earlier of (i) the first Payment Date to occur at least six (6) months after the Physical Completion Date and (ii) December 31, 2003.

     (b) The Borrower shall furnish OPIC with a certificate substantially in the form of Schedule 2.05B (the “Physical Completion Certificate”) certifying the Physical Completion Date promptly after the occurrence of the Physical Completion Conditions.

     Section 2.06 . Voluntary Prepayment. On any date following the last day of the Commitment Period, the Borrower may, upon thirty (30) Business Days’ prior notice to OPIC, prepay the Loan in whole or in part upon the payment to OPIC of a prepayment premium (the “Prepayment Premium”) of (i) three percent (3%) of the Loan amount prepaid during the year immediately following the last day of the Commitment Period, (ii) two percent (2%) of the Loan amount prepaid during the year immediately following the first anniversary of the last day

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of the Commitment Period, and (iii) one percent (1%) of the Loan amount prepaid during the year immediately following the second anniversary of the last day of the Commitment Period; no Prepayment Premium shall be payable following the third anniversary of the last day of the Commitment Period. The amount of any such voluntary prepayment shall be a minimum of $5,000,000 (or such lesser amount necessary to prepay the Loan in full) and shall be applied to the repayment schedule provided for in Section 2.05 in the inverse order of maturity.

     Section 2.07 . Mandatory Prepayment. The Borrower shall reduce the amount of the Loan:

     (a) by the amount by which (i) the aggregate amount of insurance proceeds received by the Companies for or in respect of their properties or assets on a consolidated basis during any Fiscal Year, which are not applied or committed within 180 days after the receipt thereof to the repair or replacement of such assets, exceeds (ii) $500,000; and

     (b) as and to the extent necessary so that in any Fiscal Year the sum of

     (i) the amount of cash distributions paid by the Companies to their shareholders in respect of any of their capital stock, including dividends and share redemptions referred to in Section 7.04, in such Fiscal Year and

     (ii) the amount of payments by the Companies to the Sponsors referred to in Section 7.06 in such Fiscal Year

     does not exceed the principal and interest on the Loan paid to OPIC in such Fiscal Year.

     The Loan prepayment resulting from this Section 2.07 shall have the same effect as if such prepayment occurred pursuant to Section 2.06, except that no Prepayment Premium shall be payable and the quantum of the Loan being prepaid need not be a minimum of $5,000,000.

     Section 2.08 . Facility Fee. The Borrower shall pay OPIC a facility fee (the “Facility Fee”) in the amount of one percent (1%) of the amount of the Commitment as of the date hereof or $850,000, of which $90,000 has previously been paid to OPIC. The outstanding balance of $760,000 shall be due and payable upon the execution and delivery of all of the Loan Documents by the Companies.

     Section 2.09. Maintenance Fee. The Borrower shall pay to OPIC an annual maintenance fee (the “Maintenance Fee”) in the amount of $100,000 on the first Payment Date on which a payment of principal of the Loan is scheduled

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and on each anniversary of such Payment Date, so long as any portion of the Loan remains outstanding.

     Section 2.10. Waiver and Amendment Fees. Waivers and amendments to this Agreement may be subject to additional fees at OPIC’s discretion.

     Section 2.11. Taxes. (a) All sums payable by the Borrower hereunder or under the Notes, whether of principal, interest, fees, expenses or otherwise, shall be paid in full, free of any deductions or withholdings for any and all present and future taxes, levies, imposts, stamps, duties, fees, assessments, deductions, withholdings, and other governmental charges, and all liabilities with respect thereto (collectively referred to as “Taxes”). In the event that the Borrower is prohibited by law from making payments hereunder or under the Notes free of such deductions or withholdings, then the Borrower shall pay such additional amount (an “Additional Amount”) as may be necessary in order that the actual amount received after such deduction or withholding shall equal the full amount stated to be payable hereunder or under the Notes.

     (b) The Borrower shall pay directly to all appropriate taxing authorities any and all present and future Taxes, and all liabilities with respect thereto imposed by law or by any taxing authority on or with regard to any aspect of the transactions contemplated by this Agreement or the execution and delivery of this Agreement or the Notes, except for any Taxes or other liabilities that the Borrower is contesting in good faith by appropriate proceedings, provided that the Borrower hereby indemnifies OPIC and holds OPIC harmless from and against any and all liabilities, fees or additional expense with respect to or resulting from any delay in paying, or omission to pay, Taxes. Within thirty (30) days after the payment by the Borrower of any Taxes, the Borrower shall furnish OPIC with the original or a certified copy of the receipt evidencing payment thereof, together with any other information OPIC may reasonably require to establish to its satisfaction that full and timely payment of such Taxes has been made.

     (c) OPIC shall notify the Borrower of any payment of Taxes required or requested of it and shall give due consideration to any advice or recommendation given in response thereto by the Borrower, and upon notice from OPIC that Taxes or any liability relating thereto (including penalties and interest) have been paid, the Borrower shall pay or reimburse OPIC therefor within thirty (30) days of such notice.

     (d) Without prejudice to the survival of any other agreement of the Borrower hereunder, the agreements and obligations of the Borrower contained in this Section 2.11 shall survive the payment in full of principal and interest hereunder and under the Notes.

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     Section 2.12. Miscellaneous. (a) Payment or Reimbursement of Expenses. The Borrower shall pay or reimburse OPIC, upon request, OPIC’s reasonable out-of-pocket costs and expenses incurred in connection with the negotiation, preparation, execution and delivery, and implementation of this Agreement, the Notes, and the other Financing Documents, including (i) the fees and expenses of outside legal counsel and business consultants (it being understood that OPIC shall consult with the Sponsors prior to engaging any such legal counsel or consultants but shall not require the Sponsors’ consent to engage any such persons) and (ii) the costs of communications, the preparation of any documents, the authentication, registration and recordation of any of the Financing Documents, the preparation of bound volumes of the Financing Documents for OPIC’s use, and the termination of the Liens created pursuant to the Security Documents. The Borrower shall also reimburse OPIC upon demand for all costs and expenses, including attorneys’ fees and expenses and the cost of travel incurred by OPIC in preserving in full force and effect or enforcing its rights hereunder or under any of the Financing Documents and all reasonable costs and expenses, including attorneys’ fees and expenses and the cost of travel incurred by OPIC in connection with the modification, amendment or waiver of any provision of any such document, including release of the Liens in favor of OPIC arising under the Security Documents.

     (b) Currency and Place of Payment. All payments required hereunder shall be made in Dollars in immediately available funds without any offset or deduction for Taxes or otherwise to OPIC at the following address:

     If sent by wire transfer (via a United States domestic bank):

U.S. Treasury Department
New York, New York
ABA No. 0210-3000-4 TREASNYC/CTR/BNF=AC71000001
OBI=OPIC Loan No. 889-2000-218-DI

     (c) Computation of Interest on Notes and Fees. Except as otherwise provided herein or in any Note, interest (including the OPIC Spread), default interest, the Commitment Fee and any other fees shall accrue on a daily basis and shall be computed on the basis of 360-day years composed of twelve (12) thirty (30)-day months.

     (d) Application of Payments to OPIC. Payments received by OPIC under this Agreement or with respect to any Note shall be applied to amounts due under this Agreement and under the Notes in such manner as OPIC may determine to be appropriate, notwithstanding any instruction to the contrary from the Borrower.

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ARTICLE 3
Representations And Warranties

     The Borrower represents, covenants, and warrants to OPIC that:

     Section 3.01. Existence And Power Of The Companies. The Borrower is a corporation duly organized, validly existing, and in good standing under the laws of the Cayman Islands. IL is a corporation duly organized, validly existing, and in good standing under the laws of Papua New Guinea. Each Company is duly authorized to do business in each jurisdiction in which its business makes such authorization necessary, has the requisite power to own and operate its properties, to carry on its business and the Project, to borrow money and create a charge on its properties and to execute, deliver, and perform this Agreement, the Notes, and each of the other Financing Documents to which it is or will be a party.

     Section 3.02. Authority Of The Companies. The execution, delivery, and performance by the Borrower of this Agreement and the Notes, and by each Company of each of the other Financing Documents to which it is or will be a party: (i) have been duly authorized by all necessary action, corporate or otherwise; (ii) will not violate any applicable regulation or ruling of any Governmental Authority; and (iii) will not breach, or result in the imposition of any Lien upon any of its assets (except as permitted by Section 7.01) under, any of its Charter Documents or any agreement or other requirement by which it or any of its properties may be bound or affected. The execution and delivery by the Borrower of this Agreement and the Notes, and by each Company of each of the other Financing Documents to which it is or will be a party will cause each such respective instrument to constitute a legal, valid, and binding obligation of such Company enforceable in accordance with its terms, except as the enforceability thereof may be limited by bankruptcy, insolvency, reorganization, or other similar laws affecting the enforcement of creditors’ rights generally or general principles of equity (regardless of whether such enforcement is considered in a proceeding in equity or at law). Except for consents referred to in Section 3.10, no consent of any other Person, including shareholders of either Company (except for the Shareholders of IL, which consent has been obtained and is in full force and effect) is required in connection with the execution, delivery, performance, validity, or enforceability of any of the Financing Documents. Subject to Section 7.01(d), the obligations of the Borrower hereunder and under the Notes will rank not less than pari passu with all of the Borrower’s other Indebtedness and obligations, and the Borrower shall cause the obligations of IL under the Downstream Loans to rank not less than pari passu with all of IL’s other Indebtedness and obligations.

     Section 3.03. Financial Condition. The Companies’ audited Financial Statements, dated December 31, 2000, which have been furnished to OPIC, are complete and correct and fairly present its financial condition and results of its operations for the period then ended. The Companies have no contingent

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obligation, liability for Taxes, material or long-term commitment, or outstanding Indebtedness of any kind except as disclosed in such Financial Statements. There has been no change in either Company’s financial condition or prospects from that set forth in such Financial Statements that could have a Material Adverse Effect, and since the date thereof no dividend or other distribution has been declared or paid to such Company’s shareholders.

     Section 3.04. Capitalization of the Companies. (a) Subject to modification pursuant to the last sentence of this clause (a), the authorized capital of the Borrower consists of the following classes of capital stock: 100 shares of non-participating voting ordinary shares, par value $1.00 per share, of which 100 shares are issued and outstanding and which are held by SPI; and 24,000,000 shares of participating non-voting ordinary shares, par value $0.01 per share, of which 13,984,482 shares are issued and outstanding and of which 13,087,040 are held by SPI and 897,542 are held by Enron Papua New Guinea. All such capital stock of the Borrower has been duly authorized and validly issued, and is fully paid and nonassessable. There are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, require the issuance of, or otherwise relate to any class of the capital stock of the Borrower. Subject to OPIC’s approval, the authorized and issued share capital of the Borrower may be increased as necessary in order to allow contributions of equity to the Project; the amount of any such increase shall be notified promptly to OPIC in writing.

     (b) Subject to modification pursuant to the last sentence of this clause (b), the issued share capital of IL consists of 2 ordinary shares, 10 class A ordinary shares, and 499,990 class B ordinary shares. All such issued share capital of IL has been duly authorized and validly issued, and is fully paid and nonassessable. There is no unissued share capital of IL. There are no outstanding subscriptions, options, warrants, calls, agreements, preemptive rights, acquisition rights, redemption rights or any other rights or claims of any character that restrict the transfer of, require the issuance of, or otherwise relate to any class of the issued share capital of IL. All the issued share capital of IL is owned beneficially and of record by the Borrower. Subject to OPIC’s approval, the issued share capital of IL may be increased as necessary in order to allow contributions of equity to the Project; the amount of any such increase shall be notified promptly to OPIC in writing.

     Section 3.05. Subsidiaries. Except for the interest of the Borrower in IL, neither Company owns or otherwise controls any voting stock of, or has any ownership interest in, any other Person, including any other corporation or partnership.

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     Section 3.06. Liens. Except as permitted in Section 7.01, the Security Documents are, or upon filing and registration will be, effective to create in favor of OPIC legal, valid, and enforceable first Liens on all of each Company’s assets intended to be covered thereby. Neither Company has outstanding, nor is it contractually bound to create, any Lien on or with respect to, any of its properties, rights or revenues, except as permitted in Section 7.01.

     Section 3.07. Taxes and Reports. All tax returns and reports of the Borrower required by law to be filed in the Cayman Islands and each governmental subdivision thereof and all tax returns and reports of IL required by law to be filed in Papua New Guinea and each governmental subdivision thereof have been duly filed for periods ending prior to the date of this Agreement, and all Taxes, assessments, fees and other governmental charges due or reasonably anticipated to become due in respect of each Company, or any assets, income, or franchises of such Company, that if not paid could have a Material Adverse Effect, have been duly paid or have been adequately provided for on the books of such Company.

     Section 3.08. Defaults. No Default has occurred and is continuing. Neither Company or any other party is in breach of any provision of any contract to which such Company is a party, which breach could have a Material Adverse Effect.

     Section 3.09. Litigation. No action, suit, other legal proceeding, arbitral proceeding, claim or investigation is pending by or before any domestic or foreign court, Governmental Authority or in any arbitral or other forum or is threatened, against either Company or any of its properties or rights that (i) relates to any of the transactions contemplated by this Agreement or any other Financing Document, or (ii) has, or if adversely determined could have, a Material Adverse Effect. No action (including any non-judicial or administrative action) is pending or threatened by any persons residing, whether permanently or temporarily, on or in the vicinity of the land which is the subject of the Site Lease (the “Site”) which may materially interrupt access to the Site or which may otherwise have a Material Adverse Effect.

     Section 3.10. Compliance with Law; Corrupt Practices. (a) Each Company is conducting its business in compliance with all applicable laws, regulations and Authorizations, non-compliance with which could have a Material Adverse Effect, and in compliance with its Charter Documents. Neither the making of any Financing Document to which either Company is a party nor (when all the Authorizations referred to in Section 4.04 have been obtained) the compliance with its terms will conflict with or result in a breach of any of the terms, conditions or provisions of, or constitute a default or require any consent under, any indenture mortgage, agreement or other instrument or arrangement to which such Company is a party or by which it is bound, or violate any of the

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terms or provisions of such Company’s Charter Documents or any Authorization, judgment, decree or order or any statute, rule or regulation applicable to such Company.

     To the best of such Company’s knowledge, after due inquiry:

          (i) the Authorizations specified in Schedule 4.04 are all the Authorizations (other than Authorizations that are of a routine nature and are obtained in the ordinary course of business) needed by such Company to conduct its business, carry out the Project and execute, and comply with its obligations under, this Agreement and each of the other Financing Documents to which it is a party;

          (ii) all Authorizations specified in Section (1) of Schedule 4.04 have been obtained and are in full force and effect; and

          (iii) such Company has applied (or is making arrangements to apply) for all Authorizations specified in Section (2) of Schedule 4.04, and has no reason to believe that it will not obtain those Authorization in a timely manner.

     (b) Without limiting the effect of clause (a), each Company and its officers, directors, employees, and agents have complied with all applicable Corrupt Practices Laws in obtaining any consents, licenses, approvals, authorizations, rights, and privileges in respect of the Project, and are otherwise conducting the Project and the business of the Company in compliance with applicable Corrupt Practices Laws. Each Company’s internal management and accounting practices and controls are adequate to ensure compliance with applicable Corrupt Practices Laws.

     Section 3.11. Easements, Property Interests, Utilities, Etc. Except as set forth in Schedule 3.11, all easements, leasehold and other property interests (including, without limitation, ownership and other rights with respect to the Contributed Equipment), and all utility and other services, means of transportation, facilities, other materials and other rights that can reasonably be expected to be necessary for the construction, completion and operation of the Project in accordance with applicable requirements of law and the Financing Documents (including, without limitation, gas, electrical, water and sewage services and facilities) have been procured or are commercially available to the Project, and, to the extent appropriate, arrangements have been made on commercially reasonable terms for such easements, interests, services, means of transportation, facilities, materials and rights. No material licenses, trademarks, patents or other similar agreements are necessary for the construction, ownership, operation and maintenance of the Project.

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     Section 3.12. Environmental Matters. Each Company has duly complied with, and its business, operations, assets, equipment, property, leaseholds, and other facilities are materially in compliance with, the provisions of all applicable environmental, health and safety laws, codes and ordinances, and all rules and regulations promulgated thereunder, with the OPIC requirements and with the World Bank Guidelines. Each Company (x) has been issued and will maintain all required permits, licenses, certificates and approvals relating to, and (y) has received no complaint, order, directive, claim, citation or notice by any Governmental Authority or any Person with respect to: (i) air emissions, (ii) discharges to surface water or ground water, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes, or (vi) other environmental, health or safety matters.

     Section 3.13. Project Cost and Project Completion. Each Company’s preliminary good faith estimate of the total cost of the Project (including provisions for contingencies) is the equivalent of $191,000,000 (at InterOil Book Value) based on the Preliminary Financial Plan, and such Company’s good faith estimate of the date on which it will achieve Project Completion is a date not later than December 31, 2004.

     Section 3.14. Disclosure. All documents, reports or other written information pertaining to the Project (including, without limitation, the Application, this Agreement, and the other Financing Documents) that have been furnished to OPIC were when furnished true and correct and did not at such time contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained herein or therein not materially misleading. There is no fact known to either Company, that has not been disclosed to OPIC in writing, the existence of which could have a Material Adverse Effect. No condition has arisen since the date of the Application that has or could have a Material Adverse Effect.

     Section 3.15. Suspension and Debarment. No event has occurred and no condition exists that is likely to result in the debarment or suspension of either Company from contracting with the U.S. Government or any agency or instrumentality thereof, and neither Company is now and has been subject to any such debarment or suspension.

     Section 3.16. Certain Contracts. Neither Company is party to any contract (x) relating to the design and construction of the Project other than (i) the Construction Contract and (ii) the Italian Turbine Contract or (y) for the lease of equipment or facilities for the Project, in either case exceeding a value of $500,000.

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     Section 3.17. Specified Policies. Each of the Specified Policies is in full force and effect and no event which constitutes or could, with the passage of time or the giving of notice, reasonably be expected to constitute a default thereunder has occurred and is continuing; provided that this representation and warranty is not required to be true prior to the first Closing Date.

ARTICLE 4
Conditions Precedent To First Disbursement

     Unless OPIC otherwise agrees in writing, the obligation of OPIC to make the first Disbursement of the Loan is subject to the prior fulfillment, to OPIC’s satisfaction, of the following conditions precedent and to their continued fulfillment on the date of the first Disbursement:

     Section 4.01. Corporate Authorization. (a) OPIC shall have received a certificate of an Authorized Officer of each Company, dated the Closing Date, satisfactory to OPIC in form and substance:

          (i) attaching a copy of each of the Charter Documents of such Company, as amended to date, certifying that the attached copies are true and complete and in full force and effect as of the Closing Date, together with evidence satisfactory to OPIC that such documents have been approved or registered, as applicable, by the competent governmental agencies and authorities in the Cayman Islands or Papua New Guinea, as applicable;

          (ii) attaching a copy of the resolutions of the Board of Directors of such Company, and of all documents evidencing any other necessary corporate action (each such resolution and document satisfactory to OPIC in form and substance), authorizing it to execute, deliver and perform this Agreement, the Notes, and each of the other Financing Documents to which it is or will be a party and to engage in the transactions herein contemplated, and certifying that the attached copies are true and complete and in full force and effect as of the Closing Date; and

          (iii) certifying the names, titles and specimen signatures of the Persons who are authorized to execute and deliver on behalf of such Company this Agreement, the Notes, each of the other Financing Documents to which it is or will be a party and all other notices or instruments contemplated hereunder.

     (b) OPIC shall have received a certificate of an Authorized Officer of each Sponsor, dated the Closing Date, satisfactory to OPIC in form and substance:

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          (i) attaching a copy of each of the Charter Documents of such Sponsor, as amended to date, certifying that the attached copies are true and complete and in full force and effect as of the Closing Date, together with evidence satisfactory to OPIC that such documents have been approved by the competent governmental agencies and authorities in the Bahamas or the State of Delaware, as applicable;

          (ii) attaching a copy of the resolutions of the Board of Directors (or other similar body, if applicable) of such Sponsor, and of all documents evidencing any other necessary corporate or limited liability company action, as applicable (each such resolution and document satisfactory to OPIC in form and substance), authorizing it to execute, deliver and perform each of the Financing Documents to which it is or will be a party and to engage in the transactions herein contemplated, and certifying that the attached copies are true and complete and in full force and effect as of the Closing Date; and

          (iii) certifying the names, titles and specimen signatures of the Persons who are authorized to execute and deliver on behalf of the Sponsor each of the Financing Documents to which it is or will be a party and all other notices or instruments contemplated hereunder.

     Section 4.02. Financing Documents. OPIC shall have received the following documents, each of which shall be satisfactory to OPIC in form and substance, each of which shall have been duly executed by the parties thereto and each of which shall be in full force and effect in accordance with its terms without default:

     (a) OPIC shall have received duly executed originals (or, at OPIC’s election, a true and complete copy) of each of the following agreements and documents (the “Loan Documents”):

          (i) this Agreement;

          (ii) any Notes issued in connection with the Disbursement;

          (iii) the Sponsor Support Agreement, together with all documents providing for collateral security or other credit support in connection therewith;

          (iv) the Collateral Account Agreement;

          (v) the Security Agreement;

          (vi) the Subordination Agreement (if any);

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          (vii) the Share Pledge and Retention Agreements;

          (viii) the Share Retention Agreements; and;

          (ix) the Downstream Loan Documents.

     (b) OPIC shall have received duly executed originals (or, at OPIC’s election, a true and complete copy) of the following agreements and documents (the “Security Documents”):

     Security for the Loan and the Downstream Loans shall be determined by OPIC, and documented to the satisfaction of OPIC, in consultation with OPIC’s local counsel and shall include, at OPIC’s discretion, a valid, first-ranking (except that Liens permitted under Section 7.01(d) may rank ahead of the Liens under the Security Documents), and perfected (or otherwise enforceable against all persons to the fullest extent possible in each relevant jurisdiction) lien or charge on, or security interest in, all of the Companies’ assets, whether now or hereafter acquired, tangible or intangible, including, without limitation, all accounts receivable, inventory, general intangibles, equipment, real and personal property, accounts, rights under relevant project agreements, and such other security as OPIC requires, and by a pledge of all of the Companies’ stock owned by SPI and the Borrower.

     Each Lien created pursuant to the Security Documents (i) to the extent it arises or attaches under the Uniform Commercial Code of any jurisdiction in the United States, shall be perfected and (ii) in all other cases, shall be enforceable against the relevant Company and any holder of a subsequently established Lien (including a judgment lien), holder of a fixed or floating charge, or transferee for or not for value, in bulk, by operation of law, for the benefit of creditors, or otherwise. Each of the Security Documents shall be in full force and effect and shall have been duly filed and registered or recorded in every jurisdiction in which such filing and registration or recording is necessary to make valid and effective the Liens intended to be created thereby, and the rights of OPIC thereunder, and OPIC shall have received evidence satisfactory to it that such filing and registration or recording has been made.

     (c) OPIC shall have received copies of the following agreements, each of which shall be satisfactory to OPIC in form and substance, shall have been duly executed by the parties thereto and shall have been certified by an Authorized Officer of each Company as being true and complete and in full force and effect in accordance with its terms without default (the “Project Documents”):

          (i) the Project Agreement;

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          (ii)any Subordinated Loan Agreement;

          (iii)the Construction Contract;

          (iv) the Product Sales Agreements;

          (v) any Feedstock Supply Agreement(s);

          (vi) the EPC Guarantee;

          (vii) the Site Lease;

          (viii) the Rights of Way;

          (ix) all contracts to provide services to the Project exceeding a value of $500,000; and

          (x) any other agreements material to the Project.

The Loan Documents, the Security Documents, and the Project Documents, together with any other agreements or instruments pursuant to which the Loan or any portion thereof is made to the Borrower, are collectively referred to herein as the “Financing Documents.”

     (d) OPIC shall have received satisfactory evidence, which evidence shall include certificates of Authorized Officers of the Companies, that all conditions to the obligations of the parties (other than OPIC) to the Financing Documents (other than the Shell Contracts) have been satisfied or waived in accordance with the terms of the Financing Documents.

     Section 4.03. Approved Financial Plan. (a) The Company and OPIC shall have agreed upon the Approved Financial Plan (which shall reflect the executed version of the Construction Contract approved by OPIC), (b) the Sponsors or other entities acceptable to OPIC have made to the Companies a fully paid-in equity contribution of at least $55,000,000 (exclusive of the amounts contemplated in Section 4.13) consisting of Contributed Equipment and Development Costs (in each case at OPIC’s valuation as set forth in the Approved Financial Plan) on terms satisfactory to OPIC and in accordance with the Approved Financial Plan, (c) the Companies, either directly or indirectly, have acquired complete marketable title rights to such Contributed Equipment, subject only to Liens permitted under Section 7.01 and (d) OPIC shall be satisfied that the Sponsors have available, either in the form of cash or cash equivalents or equity commitments from creditworthy entities on terms and conditions satisfactory to OPIC, sufficient resources to fund on a timely basis all requirements to provide equity capital to the Companies in accordance with the requirements of the Approved Financial Plan and the Construction Contract.

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     Section 4.04. Government Approvals. The Companies shall have obtained, and provided to OPIC copies of, all Authorizations listed in Sections (1) and (2) of Schedule 4.04, and such other Authorizations not listed in such Sections that may become necessary for:

          (i) the Loan;

          (ii) the obligations of IL under the Downstream Loan Documents;

          (iii) the businesses of the Companies as presently conducted and contemplated to be conducted;

          (iv) the Project and the implementation of the Approved Financial Plan;

          (v) the due execution, delivery, validity and enforceability of, and performance by, the Companies of their obligations under, this Agreement, the other Financing Documents and any other documents (in each case to the extent such Company is a party thereto) necessary to the implementation of any of those agreements or documents; and

          (vi) the remittance to OPIC or its assigns in Dollars of all monies payable with respect to the Financing Documents;

     and all such Authorizations are in full force and effect.

     Section 4.05. Land. OPIC shall have received evidence in form and substance satisfactory to it that the Companies, either directly or indirectly, have acquired complete marketable title or complete leasehold rights to the land necessary for the Project, subject only to Liens permitted under Section 7.01.

     Section 4.06. Insurance. (a) OPIC shall have received from the insurer evidence of required coverages in accordance with items (E) and (F) of Schedule 6.05.

     (b) The Insurance Consultant shall have provided OPIC with a report, in form and substance satisfactory to OPIC and on which OPIC is expressly permitted to rely, confirmed by the Insurance Consultant as of the date of the first Disbursement, indicating that such insurance is effective and provides coverage for the Project consistent with the customs and practices of limited recourse financing for international projects.

     Section 4.07. Approval of Construction Contract. OPIC shall have received a report, satisfactory to OPIC in form and substance, from the

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Independent Engineer that the technical, design and other specifications set forth in the Construction Contract satisfy the requirements of the Independent Engineer.

     Section 4.08. Due Diligence. OPIC shall have completed to its satisfaction its due diligence investigation of the Project and matters relating thereto and to the Loan Documents (including, without limitation, environmental issues raised by the Environmental Report or otherwise, the issues identified in Schedule 4.08 and issues relating to the Construction Contract and to approvals of the Bank of Papua New Guinea), and the results of such investigation shall be satisfactory to OPIC.

     Section 4.09. Appointment of Agent. OPIC shall have received evidence that: (i) the agent for service of process referred to in Section 8.03 has been duly appointed and holds such appointment without reservation until the Borrower is no longer obligated under this Agreement or any Note, together with evidence of the prepayment in full of the fees of such agent; (ii) the agent for service of process referred to in the Sponsor Support Agreement has been duly appointed and holds such appointment without reservation until the Borrower is no longer obligated under this Agreement or any Note, together with evidence of the prepayment in full of the fees of such agent; and (iii) the agent for service of process referred to in each other Financing Document pursuant to which the appointment of such agent is required has been duly appointed and holds such appointment without reservation until the Borrower is no longer obligated under this Agreement or any Note, together with evidence of the prepayment in full of the fees of such agent.

     Section 4.10. Legal Opinions. OPIC shall have received the following written opinions, dated the Closing Date, in respect of the first Disbursement, satisfactory to OPIC in form and substance:

          (i) of Allens Arthur Robinson, its special Papua New Guinea Counsel;

          (ii) of Epstein, Becker & Green, PC, New York legal counsel to the Companies and the Sponsors;

          (iii) of Gadens Lawyers, Papua New Guinea counsel to the Companies and the Sponsors;

          (iv) of Maples and Calder, Cayman Islands counsel to the Borrower; and

          (v) of Lobosky and Lobosky, Bahamas counsel to SPI.

     Section 4.11. Management Control. OPIC shall have received satisfactory evidence, which evidence shall include copies of the Charter

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Documents of the Sponsors and the Companies, that the Sponsors and Phil Mulacek have adequate contractual and legal rights (as determined by OPIC in its sole discretion) such that SPI will retain Control of the Companies, that Phil Mulacek will retain Control of PC, and that PC will remain the general manager of the Sponsors.

     Section 4.12. Other Documents. OPIC shall have received such other certificates, opinions, agreements and documents, each satisfactory to OPIC in form and substance, as it may reasonably request.

     Section 4.13. Debt Service Reserve Account. The Debt Service Reserve Account shall have been fully funded in the amount of $8,500,000 in cash or cash equivalents (e.g. letters of credit) from creditworthy entities on terms and conditions satisfactory to OPIC.

ARTICLE 5
Conditions Precedent to Each Disbursement

     Unless OPIC otherwise agrees in writing and save as otherwise provided herein, it shall be a condition precedent to the Borrower’s right to each Disbursement (including the first Disbursement), that each of the following conditions be satisfied on the date of any such Disbursement:

     Section 5.01. Representations and Defaults. The representations and warranties set forth in Article 3 shall be true and correct in all material respects in respect of the facts and circumstances then subsisting on the date of such Disbursement as if made on such date, and on such date no Default shall have occurred and be continuing.

     Section 5.02. Change in Circumstances. At the time of each Disbursement, no circumstance shall exist, and no change of law or regulation of any Governmental Authority shall have occurred, that could have a Material Adverse Effect.

     Section 5.03. Certification. Each Company shall have furnished OPIC with a certificate of an Authorized Officer of such Company, dated the date of such Disbursement, satisfactory to OPIC in form and substance (i) certifying the satisfaction of the conditions set forth in Sections 5.01 and 5.02, (ii) setting forth the Project costs to which any prior Disbursements have been applied and (iii) setting forth the Project costs to which the present Disbursement will be applied and certifying that the proceeds of this Disbursement are anticipated to be needed for these purposes prior to the next Disbursement, and that, to the extent such proceeds are not so applied or are not anticipated to be applied within the following 30 days, such proceeds will be held by a financial institution

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satisfactory to OPIC in an account that is pledged or charged to OPIC in a manner satisfactory to it (it being understood that each withdrawal from such account shall (a) absent a Default, be at the discretion of th Borrower without the need for any approval by OPIC or the financial institution at which the account is held, but, if a Default has occurred and is continuing, will require OPIC’s consent and (b) constitute a deemed representation by the Borrower that the amounts so withdrawn shall be applied to the Project costs set forth in such certificate).

     Section 5.04. Financial Information and Construction Progress. Not less than ten (10) Business Days before the Closing Date, OPIC shall have received: (i) any Financial Statements, reports, and other information that the Companies, pursuant to Section 6.07, would otherwise be required to furnish to OPIC on or before the Closing Date, and (ii) evidence, satisfactory to OPIC in form and substance, that sufficient progress has been made in the construction of the Project to proceed with such Disbursement.

     Section 5.05. Payment or Reimbursement of Expenses. All fees and other amounts due to OPIC with respect to the making of the Loan, and all other amounts payable or reimbursable by the Companies in connection with the making of the Loan, shall have been paid, including, but not limited to, (i) the Commitment Fee, (ii) the Facility Fee, (iii) the Maintenance Fee, (iv) any Taxes and Additional Amounts payable pursuant to Section 2.11, and (v) any amounts payable pursuant to Section 2.12(a), including the fees and expenses of OPIC legal counsel and business consultants and the costs of registration and recordation of any of the Financing Documents.

     Section 5.06. Sponsor Investment. OPIC shall have received satisfactory evidence, which evidence shall include certificates of the Companies’ independent accountants and certified copies of relevant stock certificates, that the Sponsors or other entities acceptable to OPIC have made to the Companies a fully paid-in cash equity contribution or a contribution of a combination of equity and subordinated debt, cash, assets (other than the Contributed Equipment and Development Costs paid under Section 4.03) and, to the extent approved by OPIC for this purpose, Project costs incurred as of the date hereof, in each case satisfactory to OPIC, on terms satisfactory to OPIC and in accordance with the Approved Financial Plan and Section 2.01(c) (together, the “Contributed Amounts”).

     Section 5.07. Fulfillment of Conditions to Subordinated Loan. The Subordinated Loan Agreement, if any, shall be in full force and effect without default, and the Subordinated Loan shall have been disbursed in full.

     Section 5.08. Specified Policies. OPIC shall have received evidence satisfactory to it that each of the Specified Polices is in full force and effect.

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     Section 5.09. Shell Contracts. (a) OPIC shall have received evidence satisfactory to it that each of the Shell Consent Deeds is in full force and effect; provided that no such evidence shall be required with respect to the Shell Domestic Consent Deed prior to the Transfer Date.

     (b) OPIC shall have received satisfactory evidence, which evidence shall include certificates of Authorized Officers of the Companies, that all conditions to the obligations of the parties (other than OPIC) to the Shell Contracts have been satisfied or waived in accordance with the terms of the Shell Contracts; provided that such conditions shall not be required to have been so satisfied or waived to the extent that they are not required to be satisfied on or prior to the date of the Disbursement in accordance with the terms of the relevant Shell Contracts.

     Section 5.10. Other Documents; Opinions. OPIC shall have received such other certificates, opinions, agreements and documents (including, without limitation, a legal opinion or opinions of counsel acceptable to OPIC), each satisfactory to OPIC in form and substance, as it may reasonably request, with respect to any matters incident to the Disbursement, which, due to changes in circumstance, are not adequately addressed by the certificates, opinions, agreements and documents that were delivered in connection with prior Disbursements.

ARTICLE 6
Affirmative Covenants

     Unless OPIC otherwise agrees in writing, so long as the Commitment shall remain outstanding and until all amounts due and to become due hereunder and under the Notes shall have been paid in full, the Borrower covenants and agrees as follows:

     Section 6.01. Project Completion. The Borrower shall, and shall cause IL to, construct and implement the Project promptly, shall apply the proceeds of the Loan and shall apply, or cause IL to apply, as applicable, the proceeds of the Subordinated Loan and of the loans contemplated in the definition of Downstream Loan Documents exclusively to the Project and shall use, and cause IL to use, its best efforts to cause Project Completion to be achieved on or prior to December 31, 2004. If the Borrower becomes unable to achieve the completion undertakings set out in the preceding sentence, or the Companies become unable to meet their other obligations in respect of such completion prior to Project Completion, the Borrower shall promptly so notify OPIC.

     Section 6.02. Company Operations. The Borrower shall duly and punctually perform its obligations under this Agreement, the Notes, and each of

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the other Financing Documents to which it is a party and shall cause IL to duly and punctually perform its obligations under each of the Financing Documents to which it is a party. The Borrower shall, and shall cause IL to, conduct its operations on the basis of customary commercial practice and arm’s-length arrangements, with due diligence and efficiency and under the supervision of qualified and experienced management. The Borrower shall, and shall cause IL to, repair, and/or replace and protect each of its assets in accordance with prudent industry practice so that its business can be conducted properly at all times.

     Section 6.03. Maintenance of Rights and Compliance with Laws. The Borrower shall, and shall cause IL to (i) whenever in its power to do so, acquire, maintain, and renew all rights, contracts, powers, privileges, leases, lands, sanctions, and franchises necessary for the conduct of its business and the performance of its obligations hereunder and under the other Financing Documents; (ii) conduct its business in compliance with all applicable laws and directives of Governmental Authorities having force of law, including applicable environmental standards and Corrupt Practices Laws; and (iii) duly pay before they become overdue all Taxes, assessments and other government charges levied or imposed in any jurisdiction upon its property, earnings or business that, if not paid, could have a Material Adverse Effect, except amounts being contested in good faith by appropriate proceedings diligently pursued for which adequate reserves shall have been established.

     Section 6.04. Government Approvals; Foreign Exchange Consents. (a) The Borrower shall, and shall cause IL to, obtain (in each case no later than the time specified therefor in Schedule 4.04), and maintain in full force and effect, all material Authorizations necessary for the performance by such Company of this Agreement, the Notes, and each of the other Financing Documents to which it is a party.

     (b) Following each Disbursement of the Loan, the Borrower shall promptly cause such disbursed portion of the Loan to be duly registered or recorded with all relevant Governmental Authorities and shall take all other steps necessary to secure the foreign exchange consents required for the payment of all amounts due hereunder and under the Notes. The Borrower shall furnish OPIC promptly with a copy of each such registration, recording and consent.

     Section 6.05. Maintenance of Insurance. (a) The Borrower shall, and shall cause IL to, keep all property useful and necessary in their business in good working order and condition (ordinary wear and tear excepted) in accordance with Prudent Industry Practice and keep their present and future properties and business insured as required by and in accordance with the terms and provisions described in Section (B) of Schedule 6.05.

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     (b) The Borrower shall, and shall cause IL to, cause the Construction Contractor to obtain and maintain the insurance described in Section (A)(1) of Schedule 6.05 as required by and in accordance with the terms and provisions of such Schedule and the operator under the O&M Agreement to obtain and maintain the insurance described in Section (A)(2) of Schedule 6.05 as required by and in accordance with the terms and provisions of such Schedule.

     (c) The Borrower shall, and shall cause IL to, comply with and observe all of their covenants and agreements set forth in Schedule 6.05, each of which is incorporated by reference in this Section 6.05 as if set forth in full herein.

     Section 6.06. Accounting and Financial Management. (a) The Borrower shall, and shall cause IL to (i) maintain adequate management information and cost control systems, (ii) maintain a system of accounting, (iii) prepare the Companies’ Financial Statements in accordance with U.S. GAAP (including a Uniform Credit Analysis Cash Flow Statement), (iv) engage KPMG or other independent internationally recognized accountants satisfactory to OPIC, (v) cause such independent accountants to prepare the Supplemental Financial Statements, (vi) notify OPIC of any change in such accountants and the reason therefor, and (vii) upon OPIC’s reasonable request to the Borrower, shall instruct such accountants to communicate directly with OPIC regarding the Companies’ accounts and operations. Without limiting the foregoing, the Borrower shall, and shall cause IL to, maintain the systems described in clauses (i) and (ii) and related management and accounting policies in a manner adequate to ensure compliance with applicable Corrupt Practices Laws.

     (b) The Borrower shall, and shall cause IL to, make arrangements satisfactory to OPIC for overseeing the financial operations of the Companies, including their cash management, accounting and financial reporting, and for overseeing the Companies’ relationship with their lenders and independent accountants; such arrangements may include, but shall not be limited to, employing a chief financial officer to oversee the financial operations of the Companies.

     Section 6.07. Financial Statements and Other Information. At its cost the Borrower shall, and shall cause IL to, furnish to OPIC each of the following documents:

     (a) Within forty-five (45) days after the end of each fiscal quarter (including the fourth (4th) fiscal quarter) of each Fiscal Year, the Companies’ unaudited Financial Statements and corresponding Supplemental Financial Statements, and a comparison between (i) such Financial Statements and the projections for such fiscal quarter furnished pursuant to Section 6.07(e) below, (ii) actual financial ratios and the financial ratio required by Section 6.11, showing all calculations and (iii) actual financial results and the forecasted financial results set

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forth in the projections furnished pursuant to Section 6.07(e) below, all prepared in accordance with U.S. GAAP and certified by the chief financial officer of each Company as fairly presenting the financial condition, results of operations, and cash flow of the Companies’ for the period then ended, together with such officers’ certificate that their review has not disclosed the existence of a Default or, if any Default then exists, specifying the nature and period of existence thereof and what action the Companies’ have taken or propose to take with respect thereto. If OPIC so requests, a financial officer of the Borrower, duly empowered to act on behalf of each Company, shall schedule a date within sixty (60) days prior to the close of the then-current Fiscal Year to present the relevant annual budget (the “Annual Budget”) to OPIC and to discuss such other matters relating to the Project as OPIC deems reasonable at OPIC’s offices in Washington, D.C.;

     (b) Within ninety (90) days after the end of each Fiscal Year, the Companies’ audited Financial Statements and corresponding Supplemental Financial Statements, all prepared in accordance with U.S. GAAP, together with a certificate by the independent accountants reporting thereon describing briefly the scope of their examination (which shall include a review of the relevant terms of this Agreement) and certifying whether their examination has disclosed the existence of a Default and if so, specifying the nature and period of existence thereof;

     (c) Until the Companies shall have achieved Project Completion, a report within forty-five (45) days after the end of each fiscal quarter prepared in accordance with U.S. GAAP and certified by an Authorized Officer setting forth in reasonable detail the progress of the Project, including (i) expenditures of funds, (ii) estimated future costs, (iii) unexpended funds available to such Company, (iv) the progress and percentage of completion of the major phases of Project construction and the total construction work of the Project, (v) the acquisition of fixtures and equipment, and (vi) any material variation order, amendment or waiver relating to the Construction Contract;

     (d) Within forty-five (45) days after the end of each Fiscal Year, a report certified by an Authorized Officer setting forth in reasonable detail all transactions between (x) such Company, (y) the other Companies or Affiliates of the other Companies and (z) the Sponsors or Affiliates of the Sponsors;

     (e) Not later than thirty (30) days prior to the beginning of each Fiscal Year, an annual operating forecast for the Companies’, including their projected quarterly Financial Statements for such Fiscal Year and corresponding Supplemental Financial Statements, together with a statement of the assumptions on which such forecast is based;

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     (f) Within ninety (90) days after the end of each Fiscal Year, the Self-Monitoring Questionnaire, certified by an Authorized Officer as true and complete; and

     (g) Copies of all other annual or interim audit reports submitted to such Company by its independent accountants and such other information and data with respect to its operations (including supporting information as to compliance with this Agreement) as OPIC may reasonably request from time to time upon at least two (2) Business Days’ notice.

     Section 6.08. Access to Records; Inspection; Meetings. The Borrower shall, and shall cause IL to, upon request of OPIC, give, or cause to be given, to any representatives of OPIC access during normal business hours to, and permit them to examine, copy and make extracts from, any and all records and documents in the possession or subject to the control of such Company relating to its operations and financial affairs, and to inspect any of its facilities or properties. If OPIC so requests, the Borrower shall, or, if applicable, shall cause such other Company to, give OPIC not less than ten (10) days’ notice of, and shall permit an Authorized Officer of OPIC to attend, each meeting of its shareholders and of its directors.

     Section 6.09. Notice of Default and Other Matters. The Borrower shall, and shall cause IL to, immediately notify OPIC of (i) the occurrence of each Event of Default and of each event or condition known to any of its officers that with the passage of time or the giving of notice, or both, could constitute an Event of Default, (ii) any actions, suits, other legal proceedings or arbitral proceedings against either Company that involve claims aggregating more than the equivalent of $250,000, and (iii) the occurrence of any other condition or event (including action by a Governmental Authority or any landowner) that could have a Material Adverse Effect.

     Section 6.10. Security Documents. The Borrower at its cost shall, and shall cause IL to, take all actions necessary to maintain each of the Security Documents in full force and effect and enforceable in accordance with its terms, including all (i) filings and recordations, (ii) payments of fees and other charges, (iii) issuance of supplemental documentation, including continuation statements, (iv) discharge of all claims or other Liens adversely affecting the rights of OPIC in the property subject to any Security Document (other than any Lien permitted under this Agreement or to which OPIC has otherwise consented), (v) publication or other delivery of notice to third parties, (vi) deposit of title documents, and (vii) taking all actions necessary to ensure that, except as otherwise provided in this Agreement, all after-acquired property of the Companies is subject to a valid and enforceable first-ranking Lien in favor of OPIC.

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     Section 6.11. Financial Ratios. The Borrower shall cause the Companies to, as of the last day of each fiscal quarter following the date of the first Disbursement, maintain a Tangible Net Worth Coverage Ratio equal to or less than 1.5 to 1. For purposes of this Section 6.11, the ratio and amounts referred to shall be calculated on the basis of information set forth in the Financial Statements or the Supplemental Financial Statements, as applicable.

     Section 6.12. Environmental Compliance. The Borrower shall, and shall cause IL to, comply with, and conduct its business, operations, assets, equipment, property, leaseholds, and other facilities in compliance with, the provisions of all applicable environmental, health and safety laws, codes and ordinances, and all rules and regulations promulgated thereunder. The Borrower shall, and shall cause IL to, maintain all required permits, licenses, certificates and approvals relating to: (i) air emissions, (ii) discharges to surface water or ground water, (iii) noise emissions, (iv) solid or liquid waste disposal, (v) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes, or (vi) other environmental, health or safety matters. In addition to and not in limitation of the foregoing, the Borrower shall, and shall cause IL to perform the actions specified in Schedule 6.12.

     Section 6.13. O&M Agreement. The Companies shall enter into the O&M Agreement on or prior to the date that is twelve (12) months after to the date of the first Disbursement.

     Section 6.14. Third-party Consents. The Borrower shall, and shall cause IL to, use its best efforts to cause third parties under Product Sales Agreements to enter into “consent to assignment” agreements with the relevant Company, OPIC and the Account Bank granting OPIC and the Account Bank “step-in” rights upon foreclosure, requiring that payments by such third party be made directly to an account under OPIC’s or the Account Bank’s control free of deduction or set-off, and containing other provisions typical in such agreements. For the avoidance of doubt, it is understood that the entry by the parties thereto into the each of the Shell Consent Deeds at the time specified therefor in the definition of such Shell Consent Deed will constitute satisfaction of this covenant with respect to the third parties under Product Sales Agreements that are also Shell Contracts.

ARTICLE 7
Third-party Consents

     Unless OPIC otherwise agrees in writing, so long as the Commitment shall remain outstanding and until all amounts due and to become due hereunder and under the Notes shall have been paid in full, the Borrower covenants and agrees as follows:

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     Section 7.01. Liens. The Borrower shall not, and shall cause IL not to, create, assume or otherwise permit to exist any Lien on any of their properties or assets, whether now owned or hereafter acquired, or in any proceeds or income therefrom, except for:

     (a) the Liens created under the Security Documents or pursuant to any of the other Financing Documents;

     (b) Liens for Taxes or other statutory Liens that are being contested or litigated in good faith;

     (c) any mechanic’s, worker’s or other like Liens arising by mandatory provision of law securing obligations incurred in the ordinary course of business that are not yet overdue or that are being contested or litigated in good faith; and

     (d) Liens on crude oil inventory, product, collection accounts and receivables that secure Indebtedness permitted by Section 7.02(d).

     Section 7.02. Indebtedness. The Borrower shall not, and shall cause IL not to, incur, assume, guarantee, or permit to exist or otherwise become liable for Indebtedness except:

     (a) the Loan;

     (b) the Downstream Loans;

     (c) Indebtedness subordinated to the Loan pursuant to the terms of the Subordination Agreement;

     (d) Indebtedness on normal commercial terms consisting of trade credit from suppliers of goods including but not limited to crude oil, or from a working capital lender in connection with the financing of crude oil purchases by the Companies, or services incurred in the ordinary course of business and on terms requiring payment in full in not more than ninety (90) days; and

     (e) Indebtedness which, when incurred, will not cause the Companies to fail to meet the financial ratio set forth in Section 6.11.

     Section 7.03. No Alteration of Agreements. (a) The Borrower shall not, and shall cause IL not to, terminate, amend or grant any waiver of, or assign any of the respective duties or obligations under, any of its Charter Documents or any provision of any of the Financing Documents to which it is a party (other than amendments or waivers, either to correct manifest error or which are of a formal, minor, or technical nature and do not change materially any Person’s rights or obligations, provided that Borrower gives, or, if applicable, causes such Company to give, OPIC prompt notice of such amendment or waiver).

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     (b) The Borrower shall not, and shall cause IL not to, approve without OPIC’s consent any variation or change order under, or amend or grant any waiver of, any provision of, the Construction Contract, the effect of which, individually or in aggregate, could be to increase the cost of the Project above $250,000 or $2,000,000, respectively.

     Section 7.04. Dividends and Share Redemptions. The Borrower shall not, and shall cause IL not to, declare or pay any dividends or make any other distributions on any shares of any class of its capital stock (other than dividends payable solely in shares of its capital stock), or purchase, acquire, redeem or retire (directly or indirectly through any subsidiary of either Company) any of such shares until all amounts due or to become due hereunder or under the Notes shall have been paid in full; provided, however, that after the Borrower shall have repaid in full the first two (2) installments of the Loan in accordance with Section 2.05, the relevant Company may (subject to the mandatory prepayment provisions set forth in Section 2.07(b)) pay such dividends or redemptions, but only if, after giving effect to each such dividend or redemption: (i) no Default shall have occurred and be continuing; (ii) the Companies shall for the period of the four fiscal quarters immediately preceding such dividend or distribution and following the date of the first Disbursement (or prior to the completion of four full fiscal quarters following such date, for each period from such date to the last day of each full fiscal quarter following such date) have maintained a Debt Service Coverage Ratio equal to or greater than 1.35 to 1, (iii) the Companies shall as of the last day of each fiscal quarter in each such period have maintained a Tangible Net Worth Coverage Ratio equal to or less than 1.50 to 1 and (iv) all reserve accounts shall have been funded to the levels required under the Collateral Account Agreement; and provided further that nothing in this Section 7.04 shall be deemed to prevent payments by IL to the Borrower or OPIC, as applicable, in accordance with the Downstream Loan Documents or otherwise solely in order to allow the Borrower to make payments hereunder.

     Section 7.05. Conduct of Business with Sponsors. (a) The Borrower shall not, and shall cause IL not to, conduct any business with, or enter into any business transaction involving, the other Company, any Sponsor or an Affiliate of the other Company or any Sponsor, except on an arm’s length basis and subject to the reporting requirement set forth in Section 6.07(d).

     (b) Except for amounts permitted under Section 7.05, the Borrower shall not, and shall cause IL not to, pay, or incur or assume any obligation to pay, any amount to the Sponsors, including, without limitation, salaries, bonuses, commissions, management fees, consulting fees, technical assistance fees and debt service; provided, however, that the Companies may (subject to the mandatory prepayment provisions set forth in Section 2.07(b)) make such payments, but only if, after giving effect to each such payment: (i) no Default

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shall have occurred and be continuing; and (ii) the Companies shall be in compliance with the financial ratio set forth in Section 6.11.

     Section 7.06. Sale of Assets; Mergers. The Borrower shall not, and shall cause IL not to:

     (a) sell, assign, convey, lease or otherwise dispose of all or a substantial part of its assets or properties, whether now owned or hereafter acquired, except (i) for the replacement of a capital asset with an asset of equal or greater value, (ii) pursuant to the sale of refined product in the ordinary course of business or (iii) in connection with the disposal of physical assets constituting Contributed Equipment to the extent such assets are reasonably deemed unsuitable for refurbishment and re-use and are not required (in accordance with the terms of the Construction Contract) for the completion of the Project (and Schedule X shall be deemed amended to such extent);

     (b) dissolve, liquidate or otherwise cease to do business;

     (c) create any subsidiaries other than those referred to in Section 3.05 or as approved by OPIC in connection with purchases of crude oil from domestic producers under collateral security arrangements acceptable to OPIC;

     (d) acquire by purchase or otherwise any of the shares of capital stock or assets of another Person; or

     (e) merge or consolidate with any Person.

     Section 7.07. Lease Obligations. The Borrower shall not, and shall cause IL not to, enter into any agreement or arrangement to acquire by lease the use of any property or equipment of any kind, if the annual rental payable under such lease, when aggregated with the annual rentals payable under all other leases already entered into by such Company, would exceed $500,000 or its equivalent in any Fiscal Year.

     Section 7.08. Hedging Arrangements. The Borrower shall not, and shall cause IL not to, without OPIC’s consent, enter into any Hedging Arrangement, if as a result of such Hedging Arrangement such Company might incur or otherwise become liable for any Indebtedness, whether in respect of any cost of modifying the terms of such Hedging Arrangement or in respect of any cost of terminating such Hedging Arrangement.

     Section 7.09. Ordinary Conduct of Business. The Borrower shall not, and shall cause IL not to:

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     (a) engage in any business other than its present business activities, those related to the Project and other activities similar thereto or form or acquire any subsidiary;

     (b) materially change the nature or scope of the Project;

     (c) change its Charter Documents in a manner that would be inconsistent with the provisions of any of the Financing Documents;

     (d) change its name or take any other action that might adversely affect the Liens created by the Security Documents;

     (e) enter into any partnership, profit-sharing or royalty agreement or other similar arrangement whereby such Company’s income or profits are, or might be, shared with any other Person;

     (f) except for investments by the Borrower in IL, purchase any equity securities of, make or permit to exist any loans or advances to, invest or acquire any interest whatsoever in, or assume, guarantee, endorse or otherwise become directly or contingently liable for any obligation or Indebtedness of, any Person, other than the endorsement of negotiable instruments for collection in the ordinary course of business and the prudent investment of idle surplus funds in readily marketable Dollar-denominated or LC-denominated debt securities; provided that such investment of idle surplus funds in Local Currency may be made or continue to be held only to the extent that such Local Currency cannot, under the laws of Papua New Guinea, be converted to Dollars;

     (g) fail to maintain its corporate existence and its right to carry on its operations;

     (h) enter into any Product Sales Agreement or Feedstock Supply Agreement without OPIC’s consent; or

     (i) enter into any contract of a type specified in Section 3.16 without OPIC’s consent and determination that such contract is satisfactory to OPIC in form and substance.

     Section 7.10. Worker Rights. The Borrower shall not, and shall cause IL not to, take any action to prevent its employees from lawfully exercising their right of association and their right to organize and bargain collectively and shall observe applicable laws relating to a minimum age for employment of children, acceptable conditions of work with respect to minimum wages, hours of work and occupational health and safety, and not to use forced labor. In addition, the Borrower agrees, and shall cause IL to agree that (i) no person under the age of fourteen (14) years shall be employed by such Company and that no person under the age of sixteen (16) years shall be employed by such Company in the

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performance of any hazardous activity and (ii) every person employed by such Company shall have the right to remove himself or herself from dangerous work situations without jeopardizing his or her continued employment in connection with the Project. The Borrower shall, and shall cause each Company to, require each of its Project contractors performing engineering, procurement or construction services, or providing operating or maintenance services, for the Project, to comply with the foregoing undertakings (the “Worker Rights Requirements”) with respect to employees of such Project contractors, and to employees of their respective subcontractors, performing work under contracts between such Company and the Project contractor (“Project Contracts”) in Papua New Guinea. The Borrower shall, and shall cause IL to, use commercially reasonable efforts to monitor the compliance of contractors and subcontractors with the Worker Rights Requirements. In the event information concerning non-compliance or potential non-compliance with the Worker Rights Requirements with respect to employees of either Company or under any Project Contract comes to the attention of a responsible officer of either Company, the Borrower shall, or, if applicable, shall cause such Company to, give prompt notice thereof to OPIC and shall investigate the circumstances of such non-compliance or potential non-compliance. In the event of non-compliance, the Borrower shall, or, if applicable, shall cause the relevant Company to (i) cure such non-compliance or use its best efforts to cause the relevant Project contractor to cure, or to cause its subcontractor to cure, such non-compliance, in either case to the satisfaction of OPIC, and (ii) terminate such Project contractor’s Project Contract, or cause such Project contractor to terminate the relevant subcontract, unless such non-compliance is cured to the satisfaction of OPIC within ninety (90) days after such notice, or notice from OPIC to such Company, whichever first occurs. Notwithstanding the foregoing, none of the Companies or any of their Project contractors shall be responsible for non-compliance with the Worker Rights Requirements resulting from actions of a government.

ARTICLE 8
Defaults And Remedies

     Section 8.01. Events of Default. The occurrence and continuation of any of the following events or circumstances shall constitute an “Event of Default” hereunder:

     (a) The Borrower fails to pay when due any principal or interest payable pursuant to any Note or any other amount payable pursuant to this Agreement;

     (b) Either Company fails to pay when due any principal of or interest on any of its Indebtedness other than the Loan, and such failure continues beyond the grace period, if any, applicable thereto; or a default occurs under any agreement or instrument evidencing, or under which such Company has outstanding at the

46

time, any such Indebtedness and such default continues beyond the grace period, if any, applicable thereto, if the effect of such default is to accelerate, or to permit the acceleration of, the maturity of such Indebtedness;

     (c) Any representation or warranty made by or on behalf of either Company in this Agreement, or in any notice or other certificate, document, Financial Statement or other statement delivered pursuant hereto, proves to have been incorrect in any material respect when made;

     (d) The Borrower fails to comply with any covenant or provision set forth in Section 6.09 or Article 7 or the Sponsors fail to perform their obligations under the Sponsor Support Agreement;

     (e) The Borrower fails to comply with or perform any agreement or covenant contained herein other than those referred to in Sections 8.01(a), (b), (c) and (d) above, and such failure continues for thirty (30) days after the occurrence thereof;

     (f) Any authorization, consent or approval of any governmental agency or public authority necessary for the execution, delivery or performance of this Agreement, the Notes, or any of the other Financing Documents or for the validity or enforceability of any of the Borrower’s obligations under this Agreement, the Notes or any of the other Financing Documents, is not effected or given or is withdrawn or ceases to remain in full force and effect;

     (g) This Agreement, the Notes, or any of the other Financing Documents at any time for any reason ceases to be in full force and effect (other than as a result of a termination of such Financing Document in accordance with its stated term), or is declared by a court of competent jurisdiction to be void or is repudiated, or the validity or enforceability hereof or thereof is at any time contested by either Company or any other party thereto (other than OPIC), or is terminable in connection with the bankruptcy or insolvency of any party thereto (other than OPIC) (and the Borrower has been unable to cure such deficiency to OPIC’s satisfaction within sixty (60) days or such longer period as may have been agreed with OPIC) or, in the case of the Security Documents, ceases to give or provide the respective Liens, rights, titles, remedies, powers, or privileges intended to be created thereby;

     (h) Any Governmental Authority condemns, nationalizes, seizes or otherwise expropriates any substantial portion of the assets or the capital stock of either Company or takes any action that would prevent such Company from carrying on any material part of its business or operations;

     (i) Either Company or any other party fails to comply with or perform any of its material obligations or undertakings set forth in any Financing

47

Document (other than this Agreement and the Sponsor Support Agreement) and such failure continues for thirty (30) days after the occurrence thereof;

     (j) Either Company or, prior to Project Completion, any Sponsor (or any successor in interest thereto), (i) applies for, or consents to the appointment of, a receiver, trustee, custodian, intervener or liquidator of itself or of all or a substantial part of its assets, (ii) files a voluntary petition in bankruptcy, admits in writing that it is unable to pay its debts as they become due or generally fails to pay its debts as they become due, (iii) makes a general assignment for the benefit of creditors, (iv) files a petition or answer seeking reorganization or arrangement with creditors or to take advantage of any bankruptcy or insolvency laws, (v) files an answer admitting the material allegations of, or consents to, or defaults in answering, a petition filed against it in any bankruptcy, reorganization or insolvency proceeding where such action or failure to act will result in a determination of bankruptcy or insolvency against it;

     (k) Without its application, approval or consent, a proceeding is instituted in any court of competent jurisdiction or by or before any government or governmental agency of competent jurisdiction, seeking in respect of either Company or, prior to Project Completion, any Sponsor (or any successor in interest thereto): adjudication in bankruptcy, reorganization, dissolution, winding up, liquidation, a composition or arrangement with creditors, a readjustment of Indebtedness, the appointment of a trustee, receiver, liquidator or the like of it or of all or any substantial part of its property or assets, or other like relief in respect of it under any bankruptcy, reorganization or insolvency law; and, if such proceeding is being contested by it in good faith, the same continues undismissed for a period of 60 days;

     (l) Any final judgment or judgments for the payment of money in an aggregate amount in excess of $100,000 or its equivalent in another currency is rendered against either Company, and such judgment or judgments is not satisfied or discharged or stayed or bonded pending appeal for any period of 60 consecutive days;

     (m) Phil Mulacek (or, in the event of his death, disability or incapacity, another person acceptable to OPIC) ceases to retain Control of PC, or PC ceases to be the general manager of either Sponsor;

     (n) Any environmental claim shall have been asserted against either Company or any other party to the Financing Documents, and such claim could have a Material Adverse Effect;

     (o) Any event shall have occurred that, in the reasonable judgment of OPIC, could have a Material Adverse Effect;

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     (p) Any acts of war (whether declared or undeclared), revolution, insurrection, civil war, strife of a lesser degree, terrorism or sabotage occur that cause the destruction, disappearance or physical damage of a substantial portion of the assets of either Company or prevent such Company from carrying on any material part of its business or operations;

     (q) The occurrence and continuation of any event of default under any of the Downstream Loan Documents; or

     (r) Less than twenty-five percent (25%) of the issued share capital of InterOil shall be beneficially owned by U.S. Persons.

     Section 8.02. Remedies upon Event of Default. (a) Except as otherwise provided in Section 8.02(b), if any Event of Default has occurred and is continuing, OPIC may at any time do any one or more of the following: (i) suspend or terminate the Commitment, (ii) declare, by written demand for payment to the Borrower, any portion or all of the Loan to be due and payable, whereupon such portion of the Loan, together with interest accrued thereon and all other amounts due under this Agreement, the Notes, and the other Financing Documents, shall immediately mature and become due and payable, without any other presentment, demand, diligence, protest, notice of acceleration, or other notice of any kind, all of which the Borrower hereby expressly waives, or (iii) without notice of default or demand, proceed to protect and enforce its rights and remedies by appropriate proceedings, whether for damages or the specific performance of any provision of this Agreement, any Note, or any other Financing Document, or in aid of the exercise of any power granted in this Agreement, any Note, any other Financing Document, or by law, or may proceed to enforce the payment of any Note.

     (b) Upon the occurrence of an Event of Default referred to in Sections 8.01(j) or (k), (i) the Commitment shall automatically be terminated, and (ii) the Loan, together with interest accrued thereon and all other amounts due under this Agreement, the Notes, and the other Financing Documents, shall immediately mature and become due and payable, without any other presentment, demand, diligence, protest, notice of acceleration, or other notice of any kind, all of which the Borrower hereby expressly waives.

     Section 8.03. Jurisdiction and Consent to Suit. (a) Without prejudice to OPIC’s right to bring suit in any appropriate domestic or foreign jurisdiction, any proceeding to enforce this Agreement, any Note, or any other Financing Document to which the Borrower is a party (unless otherwise specified) may be brought by OPIC in any state or federal court of competent jurisdiction in the District of Columbia or the State of New York of the United States of America or in any other jurisdiction where the Borrower or any of its property may be found. The Borrower hereby irrevocably waives any present or future objection to any

49

such venue, and irrevocably consents and submits unconditionally to the non-exclusive jurisdiction for itself and in respect of any of its property of any such court. The Borrower further agrees that final judgment against it in any such action or proceeding arising out of or relating to this Agreement shall, to the fullest extent permitted by law, be conclusive and may be enforced in any other jurisdiction within or outside the United States of America by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and of the amount of its obligation.

     (b) Prior to the first Closing Date, the Borrower shall irrevocably designate and appoint agents satisfactory to OPIC for service of process in the District of Columbia and the State of New York as its authorized agent to receive, accept, and forward on its behalf service of process in any such proceeding, and shall provide OPIC with evidence of the prepayment in full of the fees of such agents. The Borrower agrees that service of process, writ, judgment, or other notice of legal process upon said agents shall be deemed and held in every respect to be effective personal service upon it. The Borrower shall maintain such appointment (or that of a successor satisfactory to OPIC) continuously in effect at all times while the Borrower is obligated under this Agreement or any Note. Nothing herein shall affect OPIC’s right to serve process in any other manner permitted by applicable law.

     Section 8.04. Judgment. This is an international loan transaction in which the specification of Dollars is of the essence, and such currency shall be the currency of account in all events. The payment obligation of the Borrower hereunder and under the Notes shall not be discharged by an amount paid in another currency, whether pursuant to a judgment or otherwise, to the extent that the amount so paid on prompt conversion to Dollars in the United States of America under normal banking procedures does not yield the amount of Dollars then due. In the event that any payment by the Borrower, whether pursuant to a judgment or otherwise, upon conversion and transfer, does not result in the payment of such amount of Dollars at the place such amount is due, OPIC shall be entitled to demand immediate payment of, and shall have a separate cause of action against the Borrower for, the additional amount necessary to yield the amount of Dollars then due. In the event OPIC, upon the conversion of such judgment into Dollars, shall receive (as a result of currency exchange rate fluctuations) an amount greater than that to which it was entitled, the Borrower shall be entitled to immediate reimbursement of the excess amount.

     Section 8.05. Immunity. The Borrower represents and warrants that it is subject to civil and commercial law with respect to its obligations under this Agreement, the Notes, and each of the other Financing Documents to which it is a party, that the making and performance of this Agreement, the Notes, and such other Financing Documents and the borrowings by the Borrower pursuant hereto constitute private and commercial acts rather than governmental or public acts

50

and that neither the Borrower nor any of its properties or revenues has any right of immunity from suit, court jurisdiction, attachment prior to judgment, attachment in aid of execution of a judgment, set-off, execution of a judgment or from any other legal process with respect to its obligations under this Agreement, the Notes, and such other Financing Documents. To the extent that the Borrower may hereafter be entitled, in any jurisdiction in which judicial proceedings may at any time be commenced with respect to this Agreement, any Note or any other Financing Document to which it is a party, to claim for itself or its revenues or assets any such immunity, and to the extent that in any such jurisdiction there may be attributed to the Borrower such an immunity (whether or not claimed), the Borrower hereby irrevocably agrees not to claim and hereby irrevocably waives such immunity. The foregoing waiver of immunity shall have effect under the United States Foreign Sovereign Immunities Act of 1976.

ARTICLE 9
Miscellaneous

     Section 9.01. Notices. Each notice, demand, report, or other communication relating to this Agreement shall be in writing, shall be hand-delivered or sent by mail (postage prepaid), telegram or facsimile transmission (with a copy by mail to follow, receipt of which copy shall not be required to effect notice), and shall be deemed duly given when sent to the following addresses, or to such other address or number as each party shall have last specified by notice to the other parties:

To the Borrower:

E.P. InterOil, Ltd.
25025 I 45N, Suite 420
The Woodlands, TX 77380

(Facsimile: 281-292-0888)

To OPIC:

Overseas Private Investment Corporation
1100 New York Avenue, N.W.
Washington, D.C. 20527
United States of America
(Attn: Vice President, Finance)

Re: InterOil Refining Project (Papua New Guinea)

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(Facsimile: 1-202-408-9866)

Either party may, by written notice to the other, change the address to which such communications should be sent to it.

     Section 9.02. English Language. All documents to be furnished or communications to be given or made under this Agreement, the Notes, and each of the other Financing Documents to which the Borrower is a party shall be in the English language or, if in another language, shall be accompanied by a translation into English certified by an Authorized Officer of the Borrower, which translation shall be the governing version between the Borrower and OPIC.

     Section 9.03. Governing Law. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA, WITHOUT REGARD TO ITS CONFLICT OF LAW RULES THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK.

     Section 9.04. Succession. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of the parties hereto, provided that the Borrower shall not, without the prior written consent of OPIC, assign or delegate all or any part of its interest herein or obligations hereunder.

     Section 9.05. Survival of Agreements. Each agreement, representation, warranty and covenant contained or referred to in this Agreement shall survive any investigation at any time made by OPIC and shall survive the Disbursement of the Loan, except for changes permitted hereby, and, save as otherwise provided in Sections 2.11 and 9.10, shall terminate only when all amounts due or to become due under this Agreement and the Notes are paid in full.

     Section 9.06. Integration; Amendments. This Agreement embodies the entire understanding of the parties hereto and supersedes all prior negotiations, understandings and agreements between them with respect to the subject matter hereof. The provisions of this Agreement may be waived, supplemented or amended only by an instrument in writing signed by Authorized Officers of the Borrower and OPIC.

     Section 9.07. Severability. If any provision of this Agreement is prohibited or held to be invalid, illegal or unenforceable in any jurisdiction, the parties hereto agree to the fullest extent permitted by law that (i) the validity, legality and enforceability of the other provisions in such jurisdiction shall not be affected or impaired thereby, and (ii) any such prohibition, invalidity, illegality or unenforceability shall not render such provision prohibited, invalid, illegal, or unenforceable in any other jurisdiction. If, and to the extent that, the obligations

52

of any party under Section 9.10 are unenforceable for any reason, such party agrees to make the maximum contribution to the payment and satisfaction thereof as is permissible under applicable law.

     Section 9.08. No Waiver. (a) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights, powers or remedies. No single or partial exercise of any such right shall preclude any other or further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing.

     (b) The rights, powers, and remedies provided for herein are cumulative and are not exclusive of any other rights, powers, or remedies provided by law. The assertion or employment of any right, power, or remedy hereunder, or otherwise, shall not prevent the concurrent assertion of any other appropriate right, power, or remedy.

     Section 9.09. Waiver of Jury Trial. THE BORROWER AND OPIC EACH HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE ARISING OUT OF, IN CONNECTION WITH, RELATED TO, OR INCIDENTAL TO THE RELATIONSHIP BETWEEN THEM ESTABLISHED BY THIS AGREEMENT, THE NOTES, ANY OTHER FINANCING DOCUMENT AND ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT ENTERED INTO IN CONNECTION WITH THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.

     Section 9.10. Waiver of Litigation Payments. In the event that any action or lawsuit is initiated by or on behalf of OPIC in Papua New Guinea or elsewhere against the Borrower or any other party to any Financing Document, the Borrower, to the fullest extent permissible under applicable law, irrevocably waives its right to, and agrees not to request, plead, or claim that OPIC and its successors, transfers, and assigns (any such Person, an “OPIC Plaintiff”) post, pay, or offer, any caution judicatum bond, litigation bond, or any other bond, fee, payment, or security measure provided for by any provision of law applicable to such action or lawsuit (any such bond, fee, payment, or measure, a “Litigation Payment”), and the Borrower further waives any objection that it may now or hereafter have to an OPIC Plaintiff’s claim that such OPIC Plaintiff should be exempt or immune from posting, paying, making or offering any such Litigation Payment.

     Section 9.11. Indemnity. The Borrower shall indemnify and hold harmless (collectively, the “Indemnity”) OPIC and each of OPIC’s directors, officers, employees, personal services contractors, and agents (but, as to each such agent, only and to the extent that OPIC asserts a claim hereunder) (each an “Indemnified Person”) in connection with any losses, claims, damages, liabilities,

53

penalties, or other expenses arising out of or relating to, this Agreement, the Commitment Letter, the Financing Documents, the provision of this Agreement and the Loan, the use or intended use of the Loan and the Project, and the use, management, and operation thereof, (including, the cost of defending against such claim) which an Indemnified Person may incur or to which an Indemnified Person may become subject (each a “Loss”). The Indemnity shall not apply to the extent that a court or arbitral tribunal with jurisdiction over the subject matter of the Loss and over OPIC and each other Indemnified Person who has a Loss in connection therewith and at which OPIC and such other Indemnified Person had an adequate opportunity to defend its interests determines that such Loss resulted from (i) the gross negligence or willful misconduct of the Indemnified Person or (ii) OPIC’s failure to perform any act required of it hereunder or under any agreement between OPIC and the Borrower relating to the Project or the financing or guaranty contemplated hereunder. The Indemnity (i) shall survive the disbursement and repayment of the Loan and the provision of any subsequent or additional indemnity by any Person unless explicitly terminated by OPIC in writing and (ii) is independent of and in addition to any other agreement of the Borrower or any other Company to pay any amount to OPIC. Any exclusion of an obligation to pay any amount under this paragraph shall not affect the requirement to pay such amount under any other section hereof or under any other agreement. The requirement in this Section that costs of defense be borne by the Borrower shall not vest in the Borrower the right or power to control the defense of any Indemnified Person. The Borrower shall not assert any claim against any Indemnified Person or any agent of OPIC for special, indirect, consequential, or punitive damages relating to this Indemnity, the Loan or the Project.

     Section 9.12. No Third Party Reliance; No Assignment. The Borrower may not assign this Agreement or any rights hereunder to any Person or entity. This Agreement is for the sole benefit of the Borrower and OPIC, and no other Person (other than the Indemnified Persons) shall be a direct or indirect beneficiary of, be entitled to rely hereon, or have any direct or indirect cause of action or claim in connection with this Agreement or any of the other Financing Documents.

     Section 9.13. Further Assurances. From time to time, the Borrower shall, and shall cause each IL to, execute and deliver to OPIC such additional documents as OPIC may require to carry out the purposes of this Agreement or the Financing Documents or to preserve and protect OPIC’s rights as contemplated herein or therein.

     Section 9.14. Counterparts. This Agreement may be executed in counterparts, each of which when so executed and delivered shall be deemed an original and all of which together shall constitute one and the same instrument.

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     IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed and delivered on its behalf by its Authorized Officer as of the date first above written.

E.P. INTEROIL, LTD.
By:	/s/ Phil E. Mulacek
Its:	Authorized Director
OVERSEAS PRIVATE INVESTMENT CORPORATION
By:	/s/ James C. Polan
Its:	Manager, Project Finance

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Schedule X

Contributed Equipment

DESCRIPTION OF REFINERY ASSETS

1.	Main Crude Processing Unit (Two Modules)
2.	Crude heaters
3.	Boiler
4.	Gasoline Stripper Column (C102)
5.	Diesel Furnace Oil Stripper (C104)
6.	Crude Column (C101)
7.	CATF Base Stripper Column (C103)
8.	Turbine Fuel Stripper
9.	Desalter
10.	LSR Separation Unit
11.	Boiler Feed Pumps
12.	Heat Exchangers and Asphalt Heaters
13.	Stabilizers (C105)
14.	Compressor
15.	Diesel Furnace
16.	Product Loading Manifolds
17.	Air Coolers
18.	Reboilers
19.	Clay Treater
20.	Main Furnaces
21.	All Plans, Drawings, and Records

Module and Furnaces

The main module contains all of the pumps, heat exchangers, fin-fan coolers and separator vessels.

Two crude heater furnaces have carbon steel tubes which may be operated at a maximum temperature of 900° F. The reboiler furnace also contains carbon steel tubes. Fuel gas produced in the Refinery is burned in the furnaces.

Five Major Columns

1. Atmospheric column: 120” diameter. Carbon steel with 40 sieve type trays

SX-1

2.	Heavy Straight Run Gasoline Stripper: 36” diameter, 34’ tangent to tangent, 8 sieve type trays
3.	Chevron Aircraft Turbine Fuel Base Stripper: 48” inside diameter, 29’ tangent to tangent, 8 sieve type trays
4.	Diesel Furnace Oil Stripper: 66” diameter at bottom head, 48” diameter top head, 31’ total tangent to tangent, 8 sieve type trays
5.	Gasoline Stabilizer Column: 54” bottom head, 30” top head, 74’ total tangent to tangent, 30 sieve type trays.

MAJOR EQUIPMENT ITEMS

C-101	Crude Column: 120” ID x 95’ — 6” T-T (113’ — 11” OAL), 56 psig design @ 655°F Steel — SA285C FBQ with 9’ of stainless cladding type T405 in flash zone between tray No. 5&6; weight: 147,000 lbs. Built 1962 by American Pipe and Construction Co., Portland, Oregon. SN12353, NB#6759, ASME Code stamped “U” & “W”, Partial x-rayed, partial stress relieved, corrosion allowances: 0.1, 1/8, 3/16”.
F-101A&B	Crude Charge Heaters (2): 30.4 MM BTU/hr. each, 22 tubes are steel A-161, 26 tubes are 5% Chrome steel, A-200 T5, Petrochem Isoflow SN-62F166-1A&1B, vertical cylindrical, -13’ OD x -30’ straight side w/convection section on top, 4-1/2 OD tubes x .275” wall.
V-101	Desalter: 12’ dia x 13’ t-t Horizontal, 240 psi @ 400°F, Petreco Cylectric Desalter w/(2) grids, upper & lower, (4) rectifiers, rating 100 KVA, 460v. Built by Mosher in 1962, stress relieved, weight: 48,800 lbs.
	NOTE: Manway open, looks good inside.
BOILER	Boiler, Packaged: 50,000#/hr., 275 psig approx. 10’-6” Wx11”-7” Hx27’-4” Lg. Fuel: Turbine Oil and/or Pitch-18,500 BTU/lb., 30.0 API. Built by Erie City Iron Works; Type: Keystone, Model SP#15-300 #, water tube package Keystone boiler tubes: 2”x.105”wall, SA 178A; steam outlet is 6”-300#; One burner: steam atomizing Model SAO-24; (4) Soot blowers, 100’ high stack on side. Forced draft fan driven by Terry steam turbine #600 BCH.

COLUMNS

C-101 Crude Column: 120”ID x 95’-6”T-T (113’-11” OAL), 56 psig

SX-2

	** See Major Equipment Listing for details**
C-102	Hv SR Gaso Stripper, 36” ID x 34’-2” t-t, design: 62 psig @ 650°F with 18 trays, SN 12354, 12,400 lbs., 46’-6” OAL
C-103	CATF Base Stripper, 48”ID x 29’-2” t-t, (40’-10” OAL), 62 psig @ 650°F with 8 trays, SN 12355, 12,000 lbs.
C-104	Diesel Furnace Oil Stripper, 60” ID Bottom & 48” ID Top x 31’ — 9” t-t (45’-3” OAL) 14,100 lbs., SN 12356, 8 trays in top section.
C-105	Stabilizer, 54”ID Bottom with 15 trays & 30” ID Top with 15 trays 74’ — 3” T-T (84’-11” OAL) 32,600 lbs., SN 12357, 187 psig @ 450°F.
C-106	Turbine Fuel Stripper, 30” ID x 14’-4” t-t (25’-7” OAL) with 4 Sieve Trays, 62 psig @ 650°F, SN 12375, 3600 lbs.
Note:	All columns are built by American Pipe & Construction Co., Portland, Oregon 1962. All are code stamped with NB Numbers, all rated 7.5 psi external also.

PUMPS

P-101&A	Crude Charge Pumps (2): 715 gpm @ 757’ United J4 x 15CTC (6’ end suction x 4” top discharge) SN 88044,5
	P-101A Driven by Terry Type Z-4 Turbine, 185HP, 220 psi inlet/50 psi exhaust
	P-101 Driven by 250 HP, 3550 RPM, TEFC motor.
P-102&A	Crude Booster Pumps (2): 770 gpm @ 547’, United J4x15 CTC, SN 88046,7 1962.
	P-102A Driven by Terry Turbine 130 HP, 3550 RPM, Type E, SN 32188, 220 psig inlet, 50 psig max. exhaust.
	P-101Driven by 150 HP, TEFC Motor.
P-103&A	Water Service (2): 35 gpm @ 560’, United C-1-1/2 x 13 STC, SN88048,9 with 40 HP motors, 1962.
P-104&A	Crude Col Reflux (2): 760 gpm @ 258’, United W-4 x 9 STC, SN 88050,1 1962.
P-104	Driven by Westinghouse 50 HP Motor, 3550 RPM, TEFC, 208-220/4400
P-104A	Driven by Terry Steam Turbine approx. 50 HP

SX-3

	P-105 Water Draw Spare: 35 gpm @ 725’, United C-1-1/4 x 13 STC, SN 88049, 4/9/62, with 60 HP motor, 3550 RPM, TEFC P-105A Stabilizer Feed: 132 gpm @ 725’, United N-1-1/4 x 13 STC, SN 88052, 4/9/62. With Terry Turbine approximately 60 HP.
P-106	Heavy SR Gasoline: 170 gpm @ 204’, United FX-2x9 TC, SN 88054, Steel Case, Cast Iron Impeller, 4” suction, 2” discharge with 10 HP motor, TEFC
P-107&A	CAT Stripper Bottoms (2): 193 gpm @ 232 United H-3x9 TC SN 88055, both driven by 15 HP motors, TEFC.
P-108&A	Diesel Furnace Stripper Bottoms (2): 495 gpm @ 410’, United M- 3x13 TC SN 88057
	P-108 Driven by 50 HP motor, TEFC
	P-108A Driven by Terry Type Z Turbine SN 32511, 55 HP, 3550 RPM, Max Inlet: 220 psig, Max Exhaust: 50 psig.
P-109	Crude Column Bottoms: 450 gpm @ 208’, United A-4x9 TC, SN 88059, 4/9/62, with 30 HP motor TEFC.
P-110&A	Stabilizer Reflux (2): 95 gpm @ 262’, United CX-2x9L STC, SN 88060, 4/9/62, both with 10 HP Westinghouse motors, TEFC.
P-114	No 4 Cut: 50 gpm @ 191’, United BX- 1-1/4 x 9L-TC, SN 88749. 6/27/62 with 7-1/2 HP motor, TEFC, 3550 RPM.
P-121	CATF Booster: 175 gpm @ 505’, United 1-1/2 TCB with 40 HP motor TEFC.
P-122	CATF Blend Transfer: 30 gpm @ 280’, United BX 1-1/2 x9 L-TC, with 10 HP Motor, TEFC.
P-204&A	Boiler Feed Water (2): 130 gpm @ 653’, United F-2x12 LTCM 2 Stg, SN 88599, 88600.
	P204 with 60 HP Westinghouse motor, TEFC
	P204A with 50 HP Terry Type Z steam turbine, SN 32542, 240 psig max inlet, 50 psig max exhaust.

EXCHANGERS

E-101 Crude Exchanger: 1782 sq. ft. Steel Shell: 150 psi @ 500°F Steel Tubes: 300 psi @ 650°F Type AES, built May 1962 by

SX-4

	Western Supply, Tulsa, OK. 28”OD x 20’ Long Tubes, (454) Tubes - 2/4”, 14 gage, 20’ long SA 214 Steel Stamped “U” & “W”.
E-101A	(Previously E9 @ Richmond)
	Crude Exchanger: approx. 1,200 ft. steel shell: 150 psi @ 550°F/Steel Tubes: 450 psi @ 350°F Type AES, built 12/3/57, Job #2045, SN 4335, HSB# 14325, NB#782, “U” & “W” stamped, SR, CH-FDC, Spot XR., 20”OD.
E-103	Resid/Crude: 2714 sq. ft., Steel Shell: 150 psi @ 650°F Type AES Western 1962, “U” stamped, 1 pass Shell/4 pass tubes, (692) Tubes 3/4”. 14 gage, 20’ Long SA 214. 19,800 lbs.
E-104	Brown Fin Tube (4) sections, 20.9 sq. ft. each Steel Shell: 275 psi @ 650°F/Steel Tubes: 500 psi @ 300°F NB#6886, “U” & “API” stamped, 1962.
E-105	Diesel Furnace Oil/Crude: 885 sq. ft., Steel 1 pass Shell: 150 psig @ 500°F Steel 2 pass tubes: 425 psig @ 650°F with (226) tubes 3/4” 14 gage 20’ SA 214 Type AES, Built May 1962 by Western, ASME “U” Stamped.
E-106	CATF/Crude: 885 sq. ft. same as E-105, E-105&6 stacked.
E-107&A	Resid/Crude (2) (stacked): 1550 sq. ft. each, Steel one pass shell 150 psi @ 650°F/Steel 2 pass tubes (396) 3/4” 11 gage 20’ SA214, 13,300 lbs. Type AES. 26” ODx20’ Built May 1962 by Western, “U” stamped.
	E-108 Air Cooler, ATM Column O.H. Condenser: 3557 sq. ft. bare, 58,262 sq. ft. extended, 57 psig @ 650°F, 26.5 MM BTU/HR, one pass, one cell, 3 coils, (2) 25 HP fans/cell, 22’-2” w x 30’ L x 12’H, YUBA 1YTF-430-212 (154) 1” x 12 gage steel tubes with aluminum fins
E-109	Air Cooler, ATM Column OH Condenser, 3,003 sq. ft. bare, 49,182 sq. ft. extended, 13.3 MM BTU/Hr., otherwise same as E-108.
E-110	Heavy SR gasoline Stripper Reboiler: 266 sq. ft. Vertical. Steel one pass shell: 160 psig @ 650°F/ steel one pass tubes: 64 psig @ 650°F with (178) tubes 3/4” OD 14 gage x 96”

SX-5

E-111	CATF Base Stripper Reboiler: 833 sq. ft. Vertical Steel one pass shell: 160 psig @ 650°F/steel one pass tubes: 64 psig @ 650°F AES, 29” x 8’, Western, 1962
E-112	Air Cooler, Hvy SR Prod Cooler, 877 sq. ft. bare, 14,376 sq. ft. extended 60 psig @ 375°F, 16’-7” w x 30’L x 12’H, with 1” 12 gage steel tubes, Alum fins one cell /2 fans per cell 20 HP each.
	YUBA 1YTF 330-212
E-113	Air Cooler, CATF Base Product Cooler. 970 sq. ft. bare, 15,890 sq. ft. extended 120 psig @ 650°F with 1” 12 gage steel tubes, Alum Fins, YUBA YTF 330-212
E-114	Air Cooler, Diesel Furnace Oil Prod Cooler, 785 sq. ft. bare, 12,863 sq. ft. extended 158 psig @ 473°F with (102) 1” 12 gage steel tubes with Alum Fins, YUBA 1YTF 230-210
E-115	Stabilizer Feed Bottoms: 314 sq. ft. AES, 12” x 20’. Western 1962. 3,300 lbs. Steel one pass shell: 270 psig @ 650°F.
E-116	Air Cooler, Stabilizer O.H. Condenser: 877 sq. ft. bare, 14,376 sq. ft. extended 185 psig @ 375°F. One section, 2 fans/cell YUBA YTF 230-210, 1” 12 gage steel tubes, alum fins.
E-117	Stabilizer Reboiler: 785 sq. ft. Vertical, 25” x 10’, Western, AES, 8,000 lbs., Steel one pass Shell: 275 psig @ 650°F/Steel one pass tubes: 190 psig @ 650°F.
E-118	Air Cooler. LT SR Product Cooler, 600 sq. ft. bare, 9,836 sq. ft. extended 178 psig @ 406°F, 1” 12 gage tubes, Alum fins, YUBA YTF 330-212.
E-119	Air Cooler, Turbine Fuel Cooler, 433 sq. ft. bare, 7106 sq. ft. extended 150 psig @ 650°F, 1 fan, 1 cell with 1” 12 gage steel tubes. Alum fins YUBA YGF-810-107
E-120	G-Fin, Glycol cooler, 140.6 sq. ft. Steel Shell: 500 psig @ 650°F/Steel Tubes: 500 psig @ 650°F Brown Type 117-000-720

VESSELS

V-102 Crude O.H. Reflux 84” ID x 20’ t-t, Horizontal, 61 psig @ 650°F, Steel, 14,000 lbs.

SX-6

V-103	Separator 72” ID x 20’ t-t, Horizontal, 60 psig @ 650°F Steel, 12,000 lbs.
V-104	Stabilizer Reflux 36” ID x 8’ t-t, Horizontal 200 psig @ 450°F, Steel 2,700 lbs.
V-115	Clay Treater 66” ID x 16’ t-t, Vertical 306 psig @ 450°F, Steel, 15,608 lbs.

COMPRESSOR

K-101 Crude Column Overhead Gas, Chicago Pneumatic 7x9 TB, SN 70639, 117 SCFM, P1 = 25.7 psig, P2 = 177.2 psig, 317 RPM max. with 25 HP motor, TEFC.

DELIVERY

F-102 Diesel Stripper Reboiler, Petrochem, vertical, cylindrical. 3.15 MM BTU/HR, 64 psi @ 609°F Inlet, (15) Tubes: 4.5” OD, .337” Wall, A-161 Steel.

MISCELLANEOUS ITEMS

One Lot B Structured Steel, Platforms, Ladders, Manual Valves and Piping Spools.

SX-7

DESCRIPTION OF RECONDITIONED GAS TURBINE GENERATORS

The two reconditioned gas turbine generator set include the following equipment:

Pfsparrow(1)

Two reconditioned Nuovo-Pignone PGT-5B Gas Turbines

Support Frames

Starting System including a Deutz Type F61-912 diesel engine and battery compartment.

Instrumentation

Lubrication Systems

Gas Fuel Systems

Liquid Fuel Systems

Acoustic Enclosures

Combustion Air Inlet Systems

Exhaust Systems with Silencers and Stacks

Mail Load Gears

Two 50 Hz Generators and Excitation Systems

Control Systems

Miscellaneous Items including a Compressor Washing Trolley, manuals, anchor bolts, interconnecting pipping, etc.

SX-8

DESCRIPTION OF REFORMER ASSETS:

3.0	HDS UNIT
3.1	Charge Pump, Heater & Reactor P & ID
	E-1251, 1252, 1253, 1254
	HDS FEED / EFFLUENT EXCHANGER (used surplus)
	P-1151 A, B
	HDS CHARGE PUMP
	3 x Flow Control Valves
	H-1451
	HDS CHARGE HEATER
	2 x Flow Control Valves
	1 x Pressure Control Valve
	R-1351
	HDS REACTOR (Refractory Lined)
	1 x Flow Control Valve
3.2	HDS Stripper and Side Stripper P & ID
	C-1353
	STRIPPER COLUMN (used surplus)
	1 x Flow Control Valve
	E-1264
	STRIPPER REBOILER (used surplus)
	1 x Temperature Control Valve
	C-1355
	SIDE STRIPPER COLUMN
	1 x Flow Control Valve
	E-1269
	SIDE STRIPPER REBOILER
	3.0 MM BTU / HR
	1 x Temperature Control Valve
3.3	HDS Reactor Effluent / Stripper Feed Exchange Systems P & ID

SX-9

	E-1255
	EFFLUENT CONDENSER
	E-1256, E-1257
	EFFLUENT TRIM COOLERS
	V-1352
	REACTOR SEPARATOR (Used Surplus)
	1 x Pressure Control Valve
	2 x Level Control Valve
	E-1258, E-1259
	STRIPPER FEED BOTTOMS EXCHANGERS
	1 x Flow Control Valve (to Naphtha Distillation)
	E-1272
	STRIPPER BOTTOMS COOLER (Existing)
	1 x Flow Control Valve
3.4	HDS Stripper Overhead and Side Stripper Exchange System P & ID
	E-1262
	STRIPPER OVERHEAD CONDENSER
	E-1263
	STRIPPER OVERHEAD TRIM CONDENSER
	V-1354
	STRIPPER ACCUMULATOR (Used Surplus)
	P-1153A & B
	STRIPPER REFLUX PUMPS
	P-1159
	SOUR DISTILLATE PRODUCT PUMP
	1 x Level Control Valve
	E-1266 A,B,C,D
	SIDE STREAM STRIPPER BOTTOMS COOLERS
	1 x Level Control Valve
	V-1316
	CHLORIDE INJECTION DRUM (Packaged Unit)
	P-1106
	CHLORIDE METERING PUMP

SX-10

V-1310

METHANOL STG. DRUM (Packaged Unit)

P-1105

METHANOL METERING PUMP

P-1101 A & B

CHARGE PUMPS

1 x Flow Control Valve

E-1204

SECONDARY FEED EFFLUENT EXCHANGER

E-1201, E-1202, E-1203

PRIMARY FEED EFFLUENT EXCHANGERS

H-1401

CHARGE HEATER

1 x Temperature Control Valve

1 x Pressure Control Valve

R-1301

REACTOR

50” I.D. x 13’ — 0” T/T

V-1501

BOILER STEAM DRUM

1 x Level Control Valve (Boiler Feed Water)

1 x Pressure Control Valve (Steam Export)

P-1109 A & B

BOILER FEED WATER PUMPS

H-1402

REHEATER

1 x Temperature Control Valve

1 x Pressure Control Valve

R-1302

REACTOR

H-1403

REHEATER

1 x Temperature Control Valve

1 x Pressure Control Valve

SX-11

R-1303

REACTOR

1 x Flow Control Valve

C-1305

STABILIZER COLUMN

P-1103 A & B

STABILIZER REFLUX PUMPS

1 x Flow Control Valve

E-1206

STABILIZER REBOILER (Existing)

1 x Temperature Control Valve

E-1212

STABILIZER OVERHEAD CONDENSER

V-1308

STABILIZER OVERHEAD ACCUMULATOR

1 x Level Control Valve

1 x Pressure Control Valve

V-1318

3 x Pressure Control Valves

E-1207, E-1208

REACTOR EFFLUENT CONDENSERS (Used Surplus)

V-1304

PRODUCT SEPARATOR DRUM (Used Surplus)

1 x Flow Control Valve

1 x Pressure Control Valve

1 x Level Control Valve

E-1210 & 1211

STABILIZER EXCHANGERS (Combined)

E-1216

STABILIZER BOTTOMS COOLER

Duty: 4.27 MM BTU / HR

1 x Level Control Valve

K-1901

HYDROGEN RECYCLE COMPRESSOR

1 x Shut Down Control Valve

SX-12

	E-1218
	JACKET WATER / LUBE OIL COOLER
	2 x 25 HP Motors
	P-1107 A & B
	JACKET WATER PUMPS
	V-1323
	JACKET WATER STORAGE DRUM
	K-1902
	HYDROGEN RECYCLE COMPRESSOR
	1 x shut down control valve
	K-1903
	HYDROGEN RECYCLE COMPRESSOR
	1 x Shut Down Control Valve / 1 x Pressure Control Valve
	P-1112
	START UP LUBE OIL PUMP
	E-1213
	LUBE OIL COOLER (K1903)
	V-1321
	STARTING AIR RECEIVER
	V-1306
	COMPRESSOR SUCTION KNOCK OUT DRUM
	C-1353
	STRIPPER COLUMN (Used Surplus)
	1 x Flow Control Valve
	E-1264
	STRIPPER REBOILER (Used Surplus)
	1 x Temperature Control Valve
	C-1355
	SIDE STRIPPER COLUMN
	1 x Flow Control Valve
	E-1269
	SIDE STRIPPER REBOILER
3.5	One Lot B Structured Steel, Platforms, Ladders, Manual Valves

SX-13

and Piping Spools

SX-14

Schedule Y

EPC Contract Requirements

     The requirements of this Schedule are set forth in a letter of the Companies to OPIC dated June 12, 2001.

Schedule 1.03

Preliminary Financial Plan

The total cost of the Project (being the assets of the Developer and Refiner on a consolidated basis) are estimated to be as follows:

	At InterOil		At OPIC
	Book Value		Vauation
	US$m		US$m
Contributed Equipment		41		26
Development Costs already incurred (to Mar 2001)		29		29
EPC (fixed price)		94		94
Owner’s Costs		14		14
Contingency & Reserve		6		6
Finance Costs (fees and IDC)		7		7
Total Project Cost		191		176
Plus funding of Debt Service Reserve Account		9		9
Total Funding Requirement		200		185

     The Developer and Refiner, on a consolidated basis, will be funded as follows:

	At InterOil		At OPIC
	Book Value		Vauation
	US$m		US$m
Contributed Equipment and Development Costs already funded		70		55
Senior Debt provided by OPIC		85		85
InterOil Funding (Equity and Subordinated Debt) / Guarantees required		36		36
Funding of Debt Service Reserve Account1		9		9
Total Funding		200		185

¹ To be fully funded in cash pursuant to Section 4.13 prior to the first Disbursement.

Schedule 2.05

Repayment Schedule

The Loan, if fully drawn, shall be repaid on the dates and in the amounts shown in the table, adjusted according to the note to the table.

	Repayment		Principal to
Date	Number		be Repaid(1)
31-Dec-03		1	$	4,500,000
30-Jun-04		2	$	4,500,000
31-Dec-04		3	$	4,500,000
30-Jun-05		4	$	4,500,000
31-Dec-05		5	$	4,500,000
30-Jun-06		6	$	4,500,000
31-Dec-06		7	$	4,500,000
30-Jun-07		8	$	4,500,000
31-Dec-07		9	$	4,500,000
30-Jun-08		10	$	4,500,000
31-Dec-08		11	$	4,500,000
30-Jun-09		12	$	4,500,000
31-Dec-09		13	$	4,500,000
30-Jun-10		14	$	4,500,000
31-Dec-10		15	$	4,500,000
30-Jun-11		16	$	4,500,000
31-Dec-11		17	$	4,500,000
30-Jun-12		18	$	4,500,000
30-Dec-12		19	$	4,000,000
TOTAL			$	85,000,000

Note:

The first Payment Date is assumed in the table to be 31 December 2003. If it is earlier, then all repayment dates will be brought forward by the same amount in time. For example, if the first Payment Date is 30 June 2003, then the last Payment Date shall be 30 June 2012.

Schedule 2.05B

[FORM OF PHYSICAL COMPLETION CERTIFICATE]

PHYSICAL COMPLETION CERTIFICATE

DATE:
TO:	Overseas Private Investment Corporation (“OPIC”)
	1100 New York Avenue, N.W.
	Washington, D.C. 20527
	Attn.: Vice President for Finance, and [Investment Officer]

     This Physical Completion Certificate is submitted to OPIC pursuant to Section 2.05(b) of the Loan Agreement, dated as of June 12, 2001 (the “Loan Agreement”), between E.P. INTEROIL, LTD., a corporation organized and existing under the laws of the Cayman Islands (the “Borrower”) and OVERSEAS PRIVATE INVESTMENT CORPORATION, an agency of the United States of America (“OPIC”).

     All capitalized terms used herein and not otherwise defined shall have their respective meanings set forth in the Loan Agreement.

     The undersigned hereby certifies that [he/she] is an Authorized Officer of the Borrower, and further certifies that as of ______ ___, 200___ (the “Physical Completion Date”) all buildings, equipment, facilities, and necessary infrastructure for the Project have in all material respects been procured, constructed, and installed in accordance with the Construction Contract, are operational and in good working condition and have satisfied all performance and reliability tests under the Construction Contract, and are capable of being used for their intended purpose (the “Physical Completion Conditions”).

     Evidence of the foregoing is attached hereto and made a part hereof as Schedule 1 [attach relevant supporting evidence][NOTE: Relevant supporting evidence may include an independent consultant’s report, accountants’ certificate, opinions of counsel, Authorized Officer’s Certificate from the Companies, audited Financial Statements, etc.].

     The undersigned further certifies that the documents and materials attached hereto as Schedules are true, correct, and complete originals or copies.

     The undersigned understands that Section 237(n) of the Foreign Assistance Act of 1961, as amended, provides for imprisonment, as well as fines, for knowingly submitting false statements or reports or willfully overvaluing any

land, property, or security for the purpose of influencing in any way the actions of OPIC with respect to an OPIC-financed project.

     IN WITNESS WHEREOF, the undersigned has hereunto set [his][her] hand on this ___day of ___, 200_.

[PRINTED NAME OF AUTHORIZED OFFICER]
[TITLE OF AUTHORIZED OFFICER]
E.P. INTEROIL, LTD.

Attachments

S2.05B-2

Schedule 3.11

Easements

     Confirmation of Rights of Way for the Napa Napa Road Corridor access road to the Project site.

Schedule4.04

Government Approvals

See Sections 3.10 and 4.04 of the Agreement:

Section (1) Authorizations already obtained

     1. Grant of exemption from import duty under section 9 (1) (d) of the Customs Tariff Act 1990 in Notice of Exemption published in the National Gazette No. G81 of 30 June 1999, for goods comprising an oil refinery and other associated and ancillary goods, materials, assets, plans, equipment, consumables and spare and replacement parts that are an integral part of the refinery and are necessary for the commencement of commercial operations and for two years after for the operation of the refinery.

     2. Approval of the Company’s Training and Localisation Plan under the Employment of Non-Citizens Act (Ch. No 374).

     3. Approval of the Company’s Environmental Plan under the Environment Planning Act 1978 (PNG).

     4. Grant by NCD Water & Sewerage Limited, trading as Eda Ranu, under the National Capital District Water and Sewerage Act 1996, for the Company to:

• Use water sourced and derived from the Company’s boreholes on the Site Lease until such time as Eda Ranu is able to supply adequately from the mains;

• Construct and operate a sewerage system to a design approved by Eda Ranu for the project and refinery operations within the Site Lease.

     5. Registration of the Project Agreement and the Extension Deed against the PPFL 1, under Section 100 of the Oil and Gas Act 1998.

     6. Rezoning of the land the subject of the Site Leases to a zone which will permit the construction and operation of the Project and the grant of planning permission by the National Capital District Physical Planning Board under section 79 of the Physical Planning Act 1989 to conduct the Project on that land.

     7. Grant of Petroleum Processing Facility License No.1 (“PPFL 1”) under Section 189 and Part III Division 10 of the Oil and Gas Act 1998 to InterOil Limited.

Section (2) Authorizations to be obtained prior to first Disbursement

     8. Grant of permits under the Water Resources Act (Ch. No. 205) (PNG).

     (a) Water Investigation Permit granted by the Director of the Department of Water Resources.

     (b) Grant of Water Use Permits for:

     (i) the abstraction of bore water;

     (ii) the abstraction of sea water; and

     (iii) the discharge of treated sewage effluent, process area wash water and desalinated brine into the sea.

     9. Approval by the Bank of Papua New Guinea of the InterOil Limited’s final financing plan under clause 10 of the Project Agreement and the Central Banking (Foreign Exchange and Gold) Regulation.

     10. Approval by the Bank of Papua New Guinea pursuant to the Central Banking (Foreign Exchange and Gold) Regulation to allow InterOil Limited to enter into and perform its obligations pursuant to:

     (a) The Downstream Loan Documents;

     (b) The Equity Subscription Agreement;

     (c) The Asset Sale Agreement;

     (d) The Security Documents;

     (e) The Sponsor Support Agreement; and

     (f) The Share Pledge Agreement in respect of the Borrower’s pledge of its interest in IL.

     11. Approval by the Harbours Board under the Harbours Board Act for the Company to construct and operate the proposed marine jetty.

     12. Receipt of certification under section 28 of the Investment Promotion Act in respect of InterOil Limited and re-certification under that Act in relation to changes in shareholding in the Borrower and InterOil Limited.

S-4.05-2

     13. Confirmation of rights of way for access roads to the Project site by the compulsory acquisition by the State of the required land from the traditional landowners under the Land Act 1996.

     14. Grant of authorization from the Electricity Commission under section 31 of the Electricity Commission Act (Chapter No.78) to generate and supply electricity to the Project, or confirmation from the Commission that no such authorization is necessary.

S-4.05-3

Schedule 4.08

DUE DILIGENCE

1. State Leases

Confirm whether appropriate zoning and planning permission in respect of the state leases have been obtained.

2. Landowner Issues

Examine threat to access to Site.

3. Corporate Issues

• IL Constitution B Registration; confirm consistency with other IPA records re share structure; inappropriate provisions.

• IL filings B confirm annual returns lodged in accordance with the Act.

4. EPI Ownership of Former Chevron Assets

Legal opinion as to EPI’s ownership free from encumbrances of (a) the Chevron Crude & Light Ends Unit together with certain utility systems previously located at Nikiski on the Kenai peninsula in Alaska and (b) the Chevron El Paso Catalytic Reformer and its associated Hydro-desulfurizer (HDS) previously located at Cyril, Oklahoma.

Schedule 6.05

MAINTENANCE OF INSURANCE

(A) Insurance by the Contractor and the Operator.

(1)	Insurance By The Contractor: The Companies shall cause the Contractor to maintain in full force and effect at all times on and after the first Closing Date and continuing throughout the terms of the Agreement, insurance policies with limits and coverage provisions sufficient to satisfy the requirements set forth in each of the Project Documents.
(2)	Insurance By The Operator: The Companies shall cause the operator under the O&M Agreement to maintain in full force and effect at all times on and after the O&M Agreement is executed and then throughout the term of the Agreement, insurance policies with limits and coverage provisions sufficient to satisfy the requirements set forth in each of the Project Documents.

(B) Insurance by the Companies: The Companies shall procure at their own expense and maintain in full force and effect at all times on and after the first Closing Date (unless otherwise specified below) and continuing throughout the term of this Agreement (unless otherwise specified below) insurance policies with responsible insurance companies authorized to do business in Papua New Guinea (if required by law or regulation) with (i) a Best Insurance Reports rating of “A-” or better and a financial size category of “IX” or higher, (ii) or a Standard & Poors financial strength rating of “BBB+” or higher, (iii) or other companies acceptable to OPIC, with limits and coverage provisions sufficient to satisfy the requirements set forth in each of the Project Documents, but in no event less than the limits and coverage provisions set forth below (provided that the requirements with respect to the Specified Policies shall be those requirements set forth in the Sponsor Support Agreement).

(1)	Workers’ Compensation Insurance: Workers’ compensation insurance as required by applicable laws. A maximum deductible or self-insured retention of $25,000 per occurrence shall be allowed.
(2)	Employer’s Liability Insurance: Employer’s liability insurance for the Companies’ liability arising out of injury to or death of

employees of the Companies in the amount of $1,000,000 per accident. A maximum deductible or self-insured retention of $25,000 per occurrence shall be allowed.

(3)	General Liability Insurance: Liability insurance on an occurrence basis against occurrences anywhere in the world and claims filed in anywhere in the world for the Companies’ liability arising out of claims for personal injury (including bodily injury and death) and property damage. Such insurance shall provide coverage for products-completed operations (which coverage shall remain in effect for a period of at least three years following the final completion date contemplated in the Construction Contract), blanket contractual, broad form property damage, personal injury insurance, independent contractors and sudden and accidental pollution liability with a $1,000,000 minimum limit per occurrence for combined bodily injury and property damage provided that policy aggregates, if any, shall apply separately to claims occurring with respect to the Project. A maximum deductible or self-insured retention of $100,000 per occurrence shall be allowed.
(4)	Automobile Liability Insurance: Automobile liability insurance for the Companies’s liability arising out of claims for bodily injury and property damage covering all owned (if any), leased, non-owned and hired vehicles used in the performance of the Companies’ obligations under the Construction Contract with a $1,000,000 minimum limit per accident for combined bodily injury and property damage and containing appropriate no-fault insurance provisions wherever applicable. A maximum deductible or self-insured retention of $25,000 per occurrence shall be allowed.
(5)	Marine Liability: Marine liability insurance for the Companies’ liability arising out of claims for bodily injury or property damage arising out of any vessel or barge owned, rented or chartered by the Companies with a minimum $25,000,000 limit per occurrence provided that policy aggregates, if any, shall apply separately to claims occurring with respect to the Project.
(6)	Marine Terminal Operator’s Liability: On or before the substantial completion date contemplated in the Construction Contract, Marine Terminal Operator’s Liability for the Companies’ liability arising out of claims for bodily injury or property damage including physical damage to vessels, property of others or cargo during docking/undocking, loading/unloading or while in the custody of the Companies with a minimum limit of $25,000,000

S-6.05-2

per occurrence. A maximum deductible or self-insured retention of $250,000 per occurrence shall be allowed.

(7)	Environmental Impairment Liability: Environmental Impairment Liability insurance for the Companies’ liability arising out of the release of pollutants that cause environmental damage or bodily injury or property damage to third parties and first party clean-up expenses with a minimum limit of $50,000,000. A maximum deductible or self-insured retention of $1,000,000 per claim shall be allowed.
	Solely with respect to the Environmental Impairment Liability insurance outlined in this section, the Companies shall not be required to obtain such insurance earlier than the sixtieth (60th) day prior to the date crude oil is first introduced into the Project.
(8)	Excess Liability Insurance: Excess liability insurance on an occurrence basis covering claims (on at least a following form basis) in excess of the underlying insurance described in the foregoing subsections (2), (3), (4), (5) and (6), with a $25,000,000 minimum limit per occurrence until the sixtieth (60th) day prior to the date crude oil is first introduced into the Project and a $50,000,000 minimum limit per occurrence thereafter, provided that aggregate limits of liability, if any, shall apply separately to claims occurring with respect to the Project.
	The amounts of insurance required in the foregoing subsections (2), (3), (4), (5), (6) and this subsection (8) may be satisfied by Companies purchasing coverage in the amounts specified or by any combination of primary and excess insurance, so long as the total amount of insurance meets the requirements specified above.
(9)	Aircraft Liability Insurance: If the performance of the Construction Contract requires the use of any aircraft that is owned, leased or chartered by the Companies, aircraft liability insurance insuring the Companies with a $25,000,000 minimum limit per occurrence for property damage and bodily injury, including passengers and crew provided that policy aggregates, if any, shall apply separately to claims occurring with respect to the Project.
(10)	Construction All Risks: Property damage insurance on an “all risk” basis insuring the Companies, the Construction Contractor, sub-contractors, the operator under the O&M Agreement and OPIC, as their interests may appear, including coverage for the perils of earth movement (including but not limited to earthquake, landslide,

S-6.05-3

subsidence and volcanic eruption), flood, boiler, turbine and machinery accidents, strike, riot, civil commotion, sabotage and “terrorism”. For purposes of this clause “terrorism” shall be defined as any act of any person acting on behalf of or in connection with any organization with activities directed towards the overthrowing or influencing of any government de jure or de facto by force or violence.

(a)

Property Covered: The Construction All Risks insurance shall provide coverage for (i) the buildings, structures, boilers, machinery, equipment, facilities, fixtures, supplies, fuel and other properties constituting a part of the Project, (ii) free issue items used in connection with the Project, (iii) the inventory of spare parts to be included in the Project, (iv) property of others in the care, custody or control of the Companies, (v) all preliminary works, temporary works and interconnection works, (vi) foundations and other property below the surface of the ground, (vii) electronic equipment and media, (viii) any item of construction equipment whose loss or damage could result in delay in completion of the Project, (ix) steam and electrical transmission lines and equipment to the extent the Companies have an insurable interest and (x) all the Contributed Equipment and all assets included in Contributed Amounts.

(b)

Additional Coverages: The Construction All Risks policy shall insure (i) the cost of preventive measures to reduce or prevent a loss (sue & labor) in an amount not less than $5,000,000, (ii) operational and performance testing for a period not less than sixty (60) days, (iii) inland transit with sub-limits sufficient to insure the largest single shipment to or from the Site from anywhere within New Guinea, (iv) attorney’s fees, engineering and other consulting costs, and permit fees directly incurred in order to repair or replace damaged insured property in a minimum amount of $5,000,000, (v) expediting expenses (defined as extraordinary expenses incurred after an insured loss to make temporary repairs and expedite the permanent repair of the damaged property in excess of the delayed startup coverage even if such expenses do not reduce the delayed startup loss) in an amount not less than $5,000,000, (vi) off-site storage with sub-limits sufficient to insure the full replacement value of any property or equipment not stored on the Site, (vii) the removal of debris with a sub-limit not less than limit not less

S-6.05-4

than $5,000,000, and (viii) pollution clean up and removal for a sub-limit not less than $250,000.

(c)	Special Clauses: The Construction All Risks policy shall include (i) a seventy-two (72) hour flood/storm/earthquake clause, (ii) an unintentional errors and omissions clause, (iii) a 50/50 clause, (iv) a requirement that the insurer pay losses within 30 days after receipt of an acceptable proof or loss or partial proof of loss, (v) an other insurance clause making this insurance primary over any other insurance, (vi) currency clause giving the insured the option of obtaining loss payments in either Dollars or the equivalent amount of Papua New Guinea LC’s, and (vii) a clause stating that the policy shall not be subject to cancellation by the insurer except for non-payment of premium.
(d)	Prohibited Exclusions: The Construction All Risks policy shall not contain any (i) coinsurance provisions, (ii) exclusion for loss or damage resulting from freezing, mechanical breakdown, (iii) exclusion for loss or damage covered under any guarantee or warranty arising out of an insured peril, or (iv) exclusion for resultant damage caused by ordinary wear and tear, gradual deterioration, normal subsidence, settling, cracking, expansion or contraction, faulty workmanship, design or materials.
(e)	Sum Insured: The Construction All Risks policy shall (i) be on a completed value form, with no periodic reporting requirements, (ii) insure 100% of the completed insurable value of the Project, (iii) value losses at replacement cost, without deduction for physical depreciation or obsolescence including custom duties, taxes and fees and (iv) insure earth movement and flood coverage.
(f)	Deductible: The Construction All Risks insurance shall have no deductible greater than $250,000 per occurrence for operational testing coverage and $100,000 per occurrence for all other coverage.
(g)	Policy Expiration: The Construction All Risks insurance shall remain in effect until replaced by operational physical damage insurance as specified in Section (B)(13) below.

(11) Delayed Startup Insurance: Delayed startup coverage insuring the Companies and OPIC, as their interests may appear, covering the

S-6.05-5

	Companies’ fixed costs and debt service as a result of loss or damage insured by Section (B)(10) above resulting in a delay in completion of the Project beyond its anticipated date of completion in an amount not less than eighteen (18) months projected continuing expenses plus debt service of the Borrower.
	Such insurance shall (a) have a deductible of not greater than 30 days aggregate for all occurrences during the construction period, (b) have an indemnity period not less than eighteen (18) months, (c) include an interim payments clause allowing for the monthly payment of a claim pending final determination of the full claim amount, (d) cover loss sustained when access to the Site is prevented due to an insured peril at premises in the vicinity of the Site, (e) cover loss sustained due to the action of a public authority preventing access to the Site due to imminent or actual loss or destruction arising from an insured peril at premises in the vicinity of the Site, (f) insure loss caused by damage to finished equipment or machinery while awaiting shipment at a supplier’s premises (including all the Contributed Equipment and all assets included in Contributed Amounts), (g) insure loss resulting from caused by damage or mechanical breakdown to construction plant and equipment at the Site not already insured by Section (B)(9) above, (h) not contain any form of a coinsurance provision or include a waiver of such provision and (i) cover loss sustained due to the accidental interruption or failure of supplies of electricity, gas, sewers, water or telecommunication up to the terminal point of the utility supplier with the Site.
	Coverage shall remain in effect until replaced by business interruption insurance as specified in Section (B)(14) below.
(12)	Marine Cargo Insurance: cargo insurance insuring the Companies and OPIC, as their interests may appear, on a “warehouse to warehouse” basis including land, air and marine transit insuring “all risks” of loss or damage on a replacement cost basis plus freight and insurance from the time the goods are in the process of being loaded for transit until they are finally delivered to the Site including during shipment deviation, delay, forced discharge, re-shipment and transshipment. Such insurance shall include coverage for war, strikes, theft, pilferage, non-delivery, charges of general average sacrifice or contribution, salvage expenses, temporary storage in route, consolidation, repackaging, refused and returned shipments, contain a replacement by air extension clause, 50/50 clause, unintentional, difference in conditions for C.I.F. shipments, errors and omissions clause, import duty clause, non-

S-6.05-6

	vitiation clause, an English law and practices plus adjustment and settlement clause, OPIC loss payable clause satisfactory to the Insurance Consultant, debris removal, contain no exclusion for inadequate packing or survey warranties and insure for the replacement value of the largest single shipment plus freight and insurance, subject to a minimum limit of $15,000,000 per conveyance.
(13)	Marine Cargo Delayed Startup Insurance: Delayed startup insurance insuring the Companies and OPIC, as their interest may appear, for the Companies’ fixed costs, including debt service, as a result of (i) loss or damage insured by Section (B)(12) above, (ii) cover loss sustained when ingress to or egress from the Site is prevented, and (iii) loss, breakdown or damage to the hull, machinery or equipment of the vessel or aircraft on which the insured property is being transported, resulting in a delay in completion of the Project beyond their anticipated date of completion in an amount not less than eighteen (18) months projected continuing expenses plus debt service of the Borrower. Such insurance shall have a deductible of not greater than thirty (30) days per occurrence or thirty (30) days aggregate for all occurrences during the construction of the Project.
(14)	Operational Property Damage Insurance: On or prior to the Substantial Completion Date or the expiration of the Construction All Risks insurance, whichever comes first, property damage insurance on an “all risk” basis insuring the Companies and OPIC, as their interests may appear, including coverage against damage or loss caused by earth movement (including but not limited to earthquake, landslide, subsidence and volcanic eruption), flood, boiler and machinery accidents, strike, riot, civil commotion sabotage and “terrorism”. For purposes of this clause “terrorism” shall be defined as any act of any person acting on behalf of or in connection with any organization with activities directed towards the overthrowing or influencing of any government de jure or de acto by force or violence.

(a) Property Insured: The property damage insurance shall provide coverage for (i) the buildings, structures, boilers, machinery, turbines, equipment, facilities, fixtures, supplies, fuel and other properties constituting a part of the Project, (ii) steam and electrical transmission lines along with related equipment for which the Companies have an insurable interest, (iii) the cost of recreating plans, drawings or any other documents or computer system records, (iv) electronic

S-6.05-7

	equipment and (v) foundations and other property below the surface of the ground.
(b)	Additional Coverages: The property damage insurance shall insure (i) transit and off-site repair including ocean marine and air transit, if applicable, with sub-limits sufficient to insure the full replacement value of the property or equipment prior to its being moved to or from the Site and while located away from the Site, (ii) attorney’s fees, engineering and other consulting costs, and permit fees directly incurred in order to repair or replace damaged insured property in a minimum amount of $5,000,000, (iii) the cost of preventive measures to reduce or prevent a loss (sue & labor) in an amount not less than $5,000,000, (iv) increased cost of construction and loss to undamaged property as the result of enforcement of building laws or ordinances with sub-limits not less than 10% of the “Full Insurable Value”, (v) debris removal with sub-limits not less than $5,000,000 or 25% of the loss, whichever is greater and (vi) expediting expenses (defined as extraordinary expenses incurred after an insured loss to make temporary repairs and expedite the permanent repair of the damaged property in excess of the business interruption even if such expense does not reduce the business interruption loss) in an amount not less than $5,000,000.
(c)	Special Clauses: The property damage policy shall include a (i) seventy-two (72) hour clause for flood, windstorm and earthquakes, (ii) unintentional errors and omissions clause, (iii) requirement that the insurer pay losses within thirty (30) days after receipt of an acceptable proof of loss or partial proof of loss, (iv) other insurance clause making this insurance primary over any other insurance and (v) currency clause giving the insured the option of obtaining loss payment in either Dollars or the equivalent amount of Local Currency.
(d)	Sum Insured: Losses shall be valued at their repair or replacement cost, without deductible for physical depreciation or obsolescence, including custom duties, taxes and fees. The property damage policy shall insure the Project in an amount not less than the “Full Insurable Value”. For purposes of this Section, “Full Insurable Value” shall mean the full replacement value of the Project, including any improvements, equipment, spare parts, fuel and supplies,

S-6.05-8

	without deduction for physical depreciation and/or obsolescence.
(e)	Deductibles: The property damage insurance may have deductibles of not greater than $100,000 per occurrence, except for the turbine/generator units which shall not have a deductible greater than $250,000 per occurrence.
(f)	Prohibited Exclusions: The property damage policy shall not contain any (i) coinsurance provision, (ii) exclusion for loss or damage resulting from freezing, mechanical breakdown, (iii) exclusion for loss or damage covered under any guarantee or warranty arising out of an insured peril or (iv) exclusion for resultant damage caused by ordinary wear and tear, gradual deterioration, normal subsidence, settling cracking, expansion or contraction, faulty workmanship, design or materials.

(15)	Business Interruption Insurance: On or prior to the substantial completion date contemplated in the Construction Contract or the expiration of the delayed startup insurance, whichever comes first, business interruption insurance insuring the Companies and OPIC, as their interests may appear, covering 100% of the Companies’s continuing normal operating expenses including payroll and debt service for a period of 12 months, arising from loss required to be insured by Section (B)(14)(a) above.
	Such insurance shall (a) have a deductible no greater than thirty (30) days average daily value of production per occurrence, (b) include for a period of twelve (12) months that portion of fixed expenses and debt service not earned arising from an insured loss, (c) cover loss sustained when access to the Site is prevented due to an insured peril at premises in the vicinity of the Site, (d) cover loss sustained due to the action of a public authority preventing access to the Site due to imminent or actual loss or destruction arising from an insured peril at premises in the vicinity of the Site, (e) cover loss sustained due to damage by an insured peril to contributing or recipient properties, (f) have an indemnity period of not less than twelve (12) months, and (g) include a clause allowing interim payments on account pending finalization of the claim payment. Such insurance shall not contain any coinsurance clause or include a waiver of such clause.
(16)	Specified Policies: As set forth in the Sponsor Support Agreement with respect to the Specified Policies

S-6.05-9

(17) Endorsements: All policies of liability insurance required to be maintained by the Companies shall be endorsed as follows:

(a)	To name the Companies and OPIC and their respective officers and employees (and such other Persons as may be required by the Project Documents) as additional insureds;
(b)	To provide a severability of interests and cross liability clause;
(c)	That the insurance shall be primary and not excess to or contributing with any insurance or self-insurance maintained by the Companies or OPIC.

(18)

Evidence of Insurance: The Companies shall, prior to the first Disbursement date and upon request from time to time, to deliver to OPIC such suitable evidence of insurance as may be reasonably requested by OPIC.

(19)

Waiver of Subrogation: The Companies hereby waive any and every claim for recovery from OPIC for any and all loss or damage covered by any of the insurance policies to be maintained under this Agreement to the extent that such loss or damage is recovered under any such policy. Inasmuch as the foregoing waiver will preclude the assignment of any such claim to the extent of such recovery, by subrogation (or otherwise), to an insurance company (or other person), the Companies shall give written notice of the terms of such waiver to each insurance company which has issued, or which may issue in the future, any such policy of insurance (if such notice is required by the insurance policy) and shall cause each such insurance policy to be properly endorsed by the issuer thereof to, or to otherwise contain one or more provisions that, prevent the invalidation of the insurance coverage provided thereby by reason of such waiver.

(C) Amendment of Requirements:

(1) Amendment by OPIC: OPIC may at any time, acting reasonably, amend the requirements and approved insurance companies of this Schedule 6.05 due to (i) new information not known by OPIC on the first Disbursement date and which poses a material risk to the Project or (ii) changed circumstances after the first Disbursement date which in the reasonable judgment of OPIC renders such coverage materially inadequate.

S-6.05-10

(2)	Amendment Due To Commercial Unfeasibility: In the event any insurance (including the limits or deductibles thereof) hereby required to be maintained shall not be reasonably available and commercially feasible in the commercial insurance market, OPIC shall not unreasonably withhold its agreement to waive such requirement to the extent the maintenance thereof is not so available; provided, however, that (i) the Companies shall first request any such waiver in writing, which request shall be accompanied by a written report prepared by the Insurance Consultant, certifying that such insurance is “not reasonably available and commercially feasible” (and, in any case where the required amount is not so available, certifying as to the maximum amount which is so available) and explaining in detail the basis for such conclusions; (ii) at any time after the granting of any such waiver, but not more often than once a year, OPIC may request, and the Companies shall furnish to OPIC within fifteen (15) days after such request, supplemental reports reasonably acceptable to OPIC from the Insurance Consultant updating their prior report and reaffirming such conclusion; and (iii) any such waiver shall be effective only so long as such insurance shall not be reasonable available and commercially feasible in the commercial insurance market, it being understood that the failure of the Companies to timely furnish any such supplemental report shall be conclusive evidence that such waiver is no longer effective because such condition no longer exists, but that such failure is not the only way to establish such non-existence. The failure at any time to satisfy the condition to any waiver of an insurance requirement set forth in the proviso to the preceding sentence shall not impair or be construed as a relinquishment of the Companies’ ability to obtain a waiver of an insurance requirement pursuant to the preceding sentence at any other time upon satisfaction of such conditions. For the purposes of this sub-section insurance will be considered “not reasonably available and commercially feasible” if it is obtainable only at excessive costs which are not justified in terms of the risk to be insured and is generally not being carried by or applicable to projects or operations similar to the Project because of such excessive costs.
(D)	Conditions:
(1)	Loss Notification: The Companies shall promptly notify OPIC of any single loss or event likely to give rise to a claim against an insurer for an amount in excess of $500,000 covered by any insurance maintained pursuant to Sections (B)(9), (10), (11), (12), (13) and (14).

S-6.05-11

(2)	Payment of Loss Proceeds: All policies of insurance required to be maintained pursuant to Sections (B)(9), (10), (11), (12), (13) and (14), shall provide that the proceeds of such policies shall be payable solely to OPIC and applied as specified in the Financing Documents.
(3)	Loss Adjustment and Settlement: A loss under any insurance required to be carried under Sections (B)(10), (11), (12), (13), (14) and (15) shall be adjusted with the insurance companies, including the filing in a timely manner of appropriate proceedings, by the Companies, subject to the approval of OPIC if such loss is in excess of $500,000. In addition, the Companies may in their reasonable judgment consent to the settlement of any loss provided that in the event that the amount of the loss exceeds $500,000 the terms of such settlement is concurred with by OPIC.
(4)	Policy Cancellation and Change: All policies of insurance required to be maintained pursuant to this Schedule 6.05 shall be endorsed so that if at any time should they be canceled, or coverage be reduced (by any party including the insured) which affects the interests of OPIC, such cancellation or reduction shall not be effective as to OPIC for sixty (60) days, except for non-payment of premium which shall be for ten (10) days, after receipt by OPIC of written notice from such insurer of such cancellation or reduction.
(5)	Miscellaneous Policy Provisions: All policies of insurance required to be maintained pursuant to Sections (B)(9), (10), (11), (12), (13) and (14) shall (i) not include any annual or term aggregate limits of liability or clause requiring the payment of additional premium to reinstate the limits after loss except as regards the insurance applicable to the perils of flood, earth movement, sabotage and terrorism, (ii) shall include OPIC as additional insured as its interest may appear and (iii) include a clause requiring the insurer to make final payment on any claim within thirty (30) days after the submission of proof of loss and its acceptance by the insurer.
(6)	Separation of Interests: All policies (other than in respect to liability or workers compensation insurance) shall insure the interests of OPIC regardless of any breach or violation by the Companies or any other Party of warranties, declarations or conditions contained in such policies, any action or inaction of the Companies or others, or any foreclosure relating to the Project or any change in ownership of all or any portion of the Project.

S-6.05-12

(7)	Acceptable Policy Terms and Conditions: All policies of insurance required to be maintained pursuant to this Schedule 6.05 shall contain terms and conditions reasonably acceptable to OPIC after consultation with the Insurance Consultant.
(8)	Waiver of Subrogation: All policies of insurance to be maintained by the provisions of this Schedule 6.05 shall provide for waivers of subrogation in favor of OPIC and their respective officers and employees (and such other Persons as may be required by the Project Documents).

(E)	Evidence of Insurance: On the first Disbursement date or such other date as required by this Schedule 6.05 and on an annual basis at least 10 days prior to each policy anniversary, the Companies shall furnish OPIC with (1) certificates of insurance or binders, in a form acceptable to OPIC, evidencing all of the insurance required by the provisions of this Schedule 6.05 and (2) a schedule of the insurance policies held by or for the benefit of the Companies and required to be in force by the provisions of this Schedule 6.05. Such certificates of insurance/binders shall be executed by each insurer or by an authorized representative of each insurer where it is not practical for such insurer to execute the certificate itself. Such certificates of insurance/binders shall identify underwriters, the type of insurance, the insurance limits and the policy term and shall specifically list the special provisions enumerated for such insurance required by this Schedule 6.05. Upon request, the Companies will promptly furnish OPIC with copies of all insurance policies, binders and cover notes or other evidence of such insurance relating to the insurance required to be maintained by the Companies. The schedule of insurance shall include the name of the insurance company, policy number, type of insurance, major limits of liability and expiration date of the insurance policies.
(F)	Reports: Concurrently with the furnishing of the certification referred to in Section (E) above, the Companies shall furnish OPIC with a report of an independent broker, signed by an officer of the broker, stating that in the opinion of such broker, the insurance then carried or to be renewed is in accordance with the terms of this Schedule 6.05 and attaching an updated copy of the schedule of insurance required by Section (E) above. In addition the Companies will advise OPIC in writing promptly of any default in the payment of any premium and of any other act or omission on the part of the Companies which may invalidate or render unenforceable, in whole or in part, any insurance being maintained by the Companies pursuant to this Schedule 6.05.
(G)	Failure to Maintain Insurance: In the event the Companies fail, or fail to cause the Contractor or the operator under the O&M Agreement, to take

S-6.05-13

	out or maintain the full insurance coverage required by this Schedule 6.05, OPIC, upon thirty (30) days’ prior notice (unless the aforementioned insurance would lapse within such period, in which event notice should be given as soon as reasonably possible) to the Companies of any such failure, may (but shall not be obligated to) take out the required policies of insurance and pay the premiums on the same. All amounts so advanced thereof by OPIC shall become an additional obligation of the Companies to OPIC, and the Companies shall forthwith pay such amounts to OPIC, together with interest thereon at the Past-Due Rate from the date so advanced.
(H)	No Duty of OPIC to Verify or Review: No provision of this Schedule 6.05 or any provision of any Financing Document shall impose on OPIC any duty or obligation to verify the existence or adequacy of the insurance coverage maintained by the Companies, nor shall OPIC be responsible for any representations or warranties made by or on behalf of the Companies to any insurance company or underwriter. Any failure on the part of OPIC to pursue or obtain the evidence of insurance required by this Agreement from the Companies and/or failure of the OPIC to point out any non-compliance of such evidence of insurance shall not constitute a waiver of any of the insurance requirements in this Agreement.
(I)	Maintenance of Insurance: The Companies shall at all times maintain the insurance coverage required under the terms of the Project Documents.
(J)	Loss Proceeds:

(1) All insurance policies required hereby covering loss or damage to the Project shall provide that all Compensation Payments be applied as described below. Upon the occurrence of any event with respect to which Compensation Payments are payable, in respect of a single event, (x) in an amount not in excess of $500,000, the Companies shall be permitted to apply such Compensation Payments to the prompt payment or reimbursement of the costs of repair or replacement of properties or assets constituting part of the Project subject to the terms of subsection (2) of this Section (J) or (y) in an amount in excess of $500,000, the Companies shall be permitted to apply such Compensation Payments to the prompt payment or reimbursement of the costs of repair or replacement of properties or assets constituting part of the Project subject to the terms of subsection (2) of this Section (J) if, and only if, the Companies shall have furnished to OPIC and OPIC shall be satisfied with, and shall have consented to, the following:

S-6.05-14

(a)	contracts for such repair or replacement demonstrating the Company’s ability to effect such repair or replacement (i) at a cost no greater than such Compensation Payments (or, if such cost is greater, accompanied by an explanation of the source of funds for such excess amounts satisfactory to OPIC) and (ii) on a schedule reasonably acceptable to OPIC;
(b)	cash-flow projections and other assurances satisfactory to OPIC demonstrating the Companies’ ability to meet their obligations under the Financing Documents during the period from such loss until and following completion of such repair or replacement;
(c)	evidence that all required approvals of all Governmental Authorities to be obtained by the Companies or any contractor in connection with the necessary repairs and replacements have been obtained or are readily obtainable without material delay or expense; and
(d)	evidence that all Financing Documents and such required approvals shall remain in full force and effect during such period and thereafter to OPIC’s satisfaction and that the Companies and the Project are in compliance in all material respects with all applicable laws (except for any non-compliance caused by the casualty or other event that gave rise to the payment of such Compensation Payments that (i) will not prevent or materially delay the repairs or replacements proposed to be made, (ii) will not result in any material liability or obligation being imposed on the Companies, (iii) will not prevent the resumption of construction or normal operations of the Project in accordance with the Project Documents and substantially in accordance with the base case projections for the Project upon the completion of the repairs or replacements proposed to be made and (iv) will be cured upon completion of the repairs or replacements proposed to be made);

(2) Upon completion of any repair or replacement of properties or assets constituting part of the Project, and upon filing with OPIC of (a) a certificate of an Authorized Officer, certifying the completion f the repair or replacement of properties or assets constituting part of the Project and the amount, if any, required in the Companies’ opinion to be retained in an account approved by OPIC and pledged to OPIC to OPIC’s satisfaction for the payment of any remaining costs of repair or replacement not then due and payable

S-6.05-15

	or the liability for payment of which is being contested or disputed by the Companies and (b) a certificate from the Independent Engineer stating that, based upon reasonable investigation and review, all of the information material to the repair or replacement of properties or assets constituting part of the Project set forth in such Authorized Officer’s certificate is true and complete in all material respects, the Compensation Payments, if any, in excess of that amount to be retained by OPIC as specified in such Authorized Officer’s certificate, shall be transferred to an account approved by OPIC and pledged to OPIC to OPIC’s satisfaction.
(3)	If any Compensation Payments are not permitted to be applied in accordance with subsections (1) or (2) of this Section (J), or if so permitted are not so applied in accordance with subsections (1) or (2) of this Section (J) within sixty (60) days following receipt of such Compensation Payments, then, if the aggregate amount of such Compensation Payments not so otherwise applied exceeds $500,000, the Borrower shall be obligated, to the extent required hereunder, to prepay the principal amount of the Loan, in an amount that equals in the aggregate of such Compensation Payments not so otherwise applied (or approved to be so applied); provided, however, that if the aggregate amount of such Compensation Payments not so otherwise applied shall not exceed $500,000 following such sixty (60) day period, then such amounts shall be transferred to an account approved by OPIC and pledged to OPIC to OPIC’s satisfaction;
(4)	Notwithstanding subsections (1), (2) and (3) above, if an Event of Default shall have occurred and be continuing, OPIC shall apply all Compensation Payments as a prepayment of the Loan in accordance with Section 2.06 and any other permitted payee of such Compensation Payments shall apply all such amounts as a prepayment of the Loan pursuant to Section 2.07.

S-6.05-16

Schedule 6.12

ENVIRONMENTAL COMPLIANCE

     In addition to and not in limitation of Section 6.12, the Borrower shall, and shall cause IL to:

(a)	cause the Project to be operated in compliance with the World Bank Guidelines, the OPIC Environmental Requirements and applicable law;
(b)	at least ninety (90) days prior to Mechanical Completion (as defined in the Construction Contract, “Mechanical Completion”) submit to OPIC an acceptable Occupational Health and Safety Plan (the “OHSP”) consistent with international best practices, including, but not limited to, safety measures, training, fire safety, and public health safety.
(c)	at least ninety (90) days prior to Mechanical Completion, submit to OPIC an acceptable Site location plan showing the exact location of the Site relative to its surroundings as well as the extent of earth moving necessary for the Project. This plan shall be drawn to a legible scale and certified by a surveyor acceptable to OPIC;
(d)	at least ninety (90) days prior to the Mechanical Completion, submit to OPIC an acceptable Project layout showing the locations of all key apparatus including, but not limited to, tanks, sumps, jetties, wharf, ponds and major piping. The layout shall be drawn to a legible scale and certified by a surveyor acceptable to OPIC;
(e)	at least ninety (90) days prior to Mechanical Completion, submit to OPIC an acceptable waste disposal plan outlining the final disposal of all solid waste generated on the Site during construction and daily operations;
(f)	at least ninety (90) days prior to the Mechanical Completion, submit to OPIC an acceptable air emission data for the Project and power generators that shall include, but not be limited to, dimensions, flowrates, velocities, sulfur dioxide, and nitrogen dioxide emissions;
(g)	at least ninety (90) days prior to Mechanical Completion, submit to OPIC an acceptable wharf and jetty design and location. This plan shall show, without limitation, the location and design of the wharf(s) and jetties, any and all impacts to the environment (both

	land and sea), and any dredging that was necessary for the selected locations;
(h)	at least ninety (90) days prior to Mechanical Completion, submit to OPIC an acceptable hazardous waste disposal plan outlining the final disposal of all oily and hazardous waste generated on the Site. This plan shall include, but not be limited to, any proposed bioremediation techniques, disposal of slop material and waste holding area;
(i)	at least ninety (90) days prior to Mechanical Completion, submit to OPIC an acceptable Spill Prevention Control and Countermeasure plan (the “SPCC”) consistent with international best practices. The SPCC shall provide details on, without limitation, secondary containment measures at the fuel storage sites (and any testing done on the constructed tanks to ensure their integrity), actions planned to prevent human exposure (including the proposed tiered response plan), safety from fires, the contamination of surface water and groundwater in the event of spills, tank ruptures, or other such incidents, information on truck and oil tanker loading and offloading, bunding material and dimensions, method and material of construction of oil/water separators, tank sizes and material of construction and the amount and type of sorbent material stored on the Site;
(j)	at least ninety (90) days prior to Mechanical Completion, submit to OPIC an acceptable Environmental Management and Monitoring Plan (the “EMMP”) consistent with international best practices and including, but not limited to, applicable regulatory standards and guidelines, organizational responsibilities and management, socio-economic impacts and Site background information;
(k)	prior to the Project’s third year of operation, submit to OPIC an acceptable independent assessment of the current status of the Project’s compliance with applicable environmental requirements. This audit shall be performed by an independent engineer acceptable to OPIC who has the knowledge to evaluate the roject’s environmental compliance policies, practices and controls;
(l)	on each anniversary of the date of the Loan Agreement, submit to OPIC an acceptable annual self-monitoring report. Each such report shall include, without limitation, regular testing results for any emissions standard, effluent standards, noise, reports of material non-compliance with relevant environmental guidelines

S-6.12-2

	and requirements and remedial actions required to meet relevant environmental guidelines and requirements; and
(m)	within twenty-four (24) hours of its occurrence, submit to OPIC an acceptable written notice of any accident impacting the environment or resulting in the loss of life.

S-6.12-3

Exhibit A

Form of Disbursement Request

[E.P. INTEROIL, LTD. LETTERHEAD]

[Date]

Overseas Private Investment Corporation
1100 New York Avenue, N.W.
Washington, D.C. 20527
United States of America

Attention: Vice President for Finance
with a copy to Treasurer

Disbursement Request

Dear Sir or Madam:

Reference is made to the Loan Agreement between E.P. InterOil, Ltd. (the “Company”) and Overseas Private Investment Corporation (“OPIC”) dated as of June 12, 2001 (the “Loan Agreement”). Except as otherwise provided, capitalized terms used herein shall have the meanings set forth in the Loan Agreement.

Pursuant to Section 2.01(b) of the Loan Agreement, notice is hereby given that the undersigned requests Disbursement of the Loan as follows:

Amount of Disbursement:	$[                    ]
Closing Date:	Not less than ten (10) Business Days from the date OPIC receives this Disbursement Request.
Repayment Schedule for this Disbursement:

	Repayment		Principal to
Date	Number		be Repaid
[                    ]		1	$	[                    ]

Please indicate your agreement with this repayment schedule by returning to us by fax an executed version of the attached schedule.

The proceeds of the Disbursement are needed for purposes of the Project to meet the following expenses (which will be described in greater detail and documented in the Officer Certificate to be delivered pursuant to Section 5.03):

1. [                    ]

2. [                    ]

$ [                    ] of the proceeds of this Disbursement will be held in [specify account]. It is anticipated that these funds will be needed for the following purposes at the following times:

[                                        ]

As of the Closing Date, each of the conditions set forth in [Articles 4 and 5] [Article 5] will be satisfied.

Very truly yours,

E.P. INTEROIL, LTD.

By:

Its:

A-2

Schedule to Exhibit A

OVERSEAS PRIVATE INVESTMENT CORPORATION

[To be filled in by the Borrower]

[Date]

E.P. InterOil, Ltd.
Suite 2, Orchid Plaza
79 Abbott Street
Cairns QLD 4870
Australia

Attention: President

By facsimile to: 61-7-4031-4565

Repayment Schedule in Respect of Disbursement No. [1][2][3][4][5]

Dear Sir or Madam:

Reference is made to your Disbursement Request dated [                    ] with respect to the Loan Agreement between E.P. InterOil, Ltd. (the “Company”) and Overseas Private Investment Corporation (“OPIC”) dated as of June 12, 2001 (the “Loan Agreement”). Except as otherwise provided, capitalized terms used herein shall have the meanings set forth in the Loan Agreement.

This is to notify you that OPIC hereby agrees with you that the Disbursement being made to you on the date hereof shall be repaid on the dates and in the amounts shown in the table below:

	Repayment		Principal to
Date	Number		be Repaid
[                    ]		1	$[                    ]

Please note that all repayments of this Disbursement must be made on a Payment Date, and that the aggregate amount scheduled to be paid on any Payment Date with respect to this and all prior Disbursements cannot exceed $4,500,000 (or $4,000,000 if such Payment Date corresponds to installment 19 on Schedule 2.05,).

A-3

Please note also that OPIC agrees that the Promissory Note dated [            ] is varied to the extent that the Loan installments payable under that Note shall henceforth be payable as set forth in this letter.

Please indicate your agreement to the foregoing by signing in the space provided below.

Very truly yours,

OVERSEAS PRIVATE INVESTMENT CORPORATION

By:

Its:

Accepted and agreed:

E.P. INTEROIL, LTD.

By:

Its:

A-4

Exhibit C

Guidelines for Preparation of
Supplemental Financial Statements

(NOTE: Capitalized terms used in this Exhibit, and not defined herein,
are used as defined in the Loan Agreement; Section references
are to the Loan Agreement, unless otherwise stated.)

     The Companies independent accountants (the “Independent Accountants”), in addition to preparing the Financial Statements of the Companies, will also prepare the Supplemental Financial Statements required pursuant to Section 6.06.

     The Financial Statements of the Companies will be prepared in the currencies allowed under Section 1.02(e) of the Loan Agreement. The Supplemental Financial Statements will be prepared in Dollars, recognizing foreign currency translations in accordance with Appendix B of FASB 52.

     The Supplemental Financial Statements will be prepared on a quarterly as well as on an annual basis. The Supplemental Financial Statements will include a balance sheet and a statement of income. The Supplemental Financial Statements, while following Appendix B of FASB 52, will exclude the issue of deferred taxes. The Independent Accountants will not express any opinion on the Supplemental Financial Statements.

     Under Appendix B of FASB 52 the Independent Accountants are required to use historical exchange rates between the functional currency (Dollars) and the other currency (LC’s) for non-monetary balance sheet accounts and the current exchange rate for monetary accounts. Based upon Appendix B of FASB 52, the following guidelines will be applied in the preparation of the Supplemental Financial Statements:

Income Statement:	Income and expenses denominated in Dollars will be reported at their Dollar book value. Income and expenses denominated in LC’s will be reported at the average exchange rate for the period.
Fixed Assets:	Fixed assets will be recorded at $[                    ] (based on the Construction Contract) plus interest, finance and other costs capitalized during construction. Depreciation will be calculated in Dollars and accumulated depreciation will be reported in Dollars.

Inventories:	Inventories purchased in Dollars will be reported at their Dollar book value. Inventories purchased in LC’s will be translated at the exchange rate on the transaction date.
Receivables:	Receivables in Dollars will be reported at the Dollar book value. Receivables in LC’s will be translated at the exchange rate at the end of the period.
Cash and Bank Balances:	Balances denominated in Dollars will be reported at their Dollar book value. Balances in LC’s will be translated at the exchange rate at the end of the period.
Accounts Payable:	Accounts payable in Dollars will be reported at their Dollar book value. Accounts payable in LC’s will be translated at the exchange rate at the end of the period.
Loans:	The portion payable within twelve (12) months will be classified as the current portion of long term debt in the balance sheet. The balance will be classified as long term debt in the balance sheet. Loans payable in Dollars will be reported at their Dollar book value. Loans payable in LC’s will be translated at the exchange rate at the end of the period.
Equity:	Common stock shares denominated in LC’s will be translated at the exchange rate on the transaction date of LC’s [                    ] to the Dollar.
Retained Earnings:	Retained earnings for each year will be reported in Dollars at the average exchange rate for the period. These Dollar sums will remain fixed at that amount in the balance sheets in subsequent years.

C-2

Exhibit D

UNIFORM CREDIT CASH FLOW

For purposes of calculating cash flow, the following format should be followed (specific line items may vary):

Sales/Revenue
- -(G&A expenses)
- -(Taxes)
+/-(changes in working capital)
-(Non-discretionary Capital Expenditure)
Cash After Operations (Cash Available for Debt Service)

-(Current portion long-term debt)
- -(Management fees)
+/-(Changes in fixed assets)
+/-(Changes in investments)
Financing Surplus/Requirements

+/-Changes in common stock, retained earnings, minority interest)
Cash After Financing

+Any additional cash
Ending Cash and Equivalents

Exhibit E

[FORM OF] PROMISSORY NOTE

$[                                        ] Dated:                     , ___

     FOR VALUE RECEIVED, the undersigned, E.P. INTEROIL, LTD., a Cayman Islands corporation (the “Borrower”), HEREBY PROMISES TO PAY to the order of OVERSEAS PRIVATE INVESTMENT CORPORATION, an agency of the United States of America (“OPIC”), the principal sum of [amount of Disbursement in words] ($[amount of Disbursement in figures]) or, if less, the principal amount of the Disbursement (as defined below) evidenced by this Promissory Note that is outstanding at any time, in installments on the dates specified in the repayment schedule set forth in Schedule 1 attached hereto (each a “Payment Date”), and ending no later than the Loan Maturity Date (as defined in the Loan Agreement (as defined below), the “Loan Maturity Date”); provided, however, that the last such installment shall be in the amount necessary to repay in full the unpaid principal amount hereof; together with interest on the principal amount hereof from time to time outstanding from the date hereof until such principal amount is paid in full, payable in arrears as specified in the Loan Agreement at a fixed rate per annum equal at all times to the Treasury Cost plus (x) prior to Project Completion, three percent (3.00%) per annum and (y) at and after Project Completion, three and one-half percent (3.50%) per annum (the “Note Interest Rate”) and, with respect to interest on any overdue amount due to OPIC under any Financing Document, payable on demand, at the Default Rate from the date that such amount was due to the date of payment thereof in full. Both principal and interest on the Disbursement are payable to OPIC in Dollars and otherwise as set forth in Section 2.12 of the Loan Agreement (as defined below).

     This Promissory Note is a Note referred to in, is issued under, and is subject to and entitled to the benefits of, the Loan Agreement dated as of June 12, 2001 between the Borrower and OPIC (the “Loan Agreement”; the terms defined therein and not otherwise defined herein being used herein as therein defined). The Loan Agreement, among other things, (i) provides for the making of disbursements (each, a “Disbursement”) by OPIC to the Borrower from time to time, the indebtedness of the Borrower resulting from each such Disbursement being evidenced by a Note, and (ii) contains provisions for acceleration of the maturity hereof upon the happening of certain stated events and also for voluntary and mandatory prepayments on account of principal hereof prior to the maturity hereof upon the terms and conditions therein specified. No reference herein to the Loan Agreement and no provision of this Promissory Note or the Loan Agreement shall alter or impair the obligation of the Borrower to pay the principal

of, interest on, and all other amounts due pursuant to this Promissory Note as provided herein.

     THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA, WITHOUT REGARD TO ITS CONFLICT OF LAW RULES THAT WOULD REQUIRE THE APPLICATION OF THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK

E.P. INTEROIL, LTD.

By:

Title:

E-2

Exhibit E Schedule 1

REPAYMENT SCHEDULE

The Disbursement evidenced by this Promissory Note shall be repaid on the dates and in the amounts shown in the table below [to be adjusted according to each Disbursement].

	Repayment		Principal to
Date	Number		be Repaid
[                    ]		1	$	[                    ]
[                    ]		2	$	[                    ]
[                    ]		3	$	[                    ]
TOTAL			$	[                     ]

E-3

LIMITED WAVER AND AMENDMENT NO. 13 TO
LOAN AGREEMENT

     LIMITED WAIVER AND AMENDMENT NO. 13, dated as of February 15, 2005 (the “Amendment”), to the Loan Agreement dated as of June 12, 2001, as amended (the “Loan Agreement”), between EP InterOil, Ltd. (the “Borrower”) and Overseas Private Investment Corporation (“OPIC”).

WITNESSETH

     WHEREAS, the parties to this Amendment desire to waive certain requirements of, and make certain amendments to, the Loan Agreement;

     NOW, THEREFORE, the parties to this Amendment agree as follows:

     Section 1. Defined Terms; References. Unless otherwise specifically defined in this Amendment, each term used in this Amendment which is defined in the Loan Agreement has the meaning assigned to such term in the Loan Agreement. Each reference to “hereof,” “hereunder,” “herein,” “hereby” and other similar references, and each reference to “this Agreement” and other similar references contained in the Loan Agreement shall, after this Amendment becomes effective, refer to the Loan Agreement as amended by this Amendment.

     Section 2. Waivers.

     (a) OPIC hereby waives the conditions contained in Section 6.11 of the Loan Agreement.

     (b) The waiver contained in Section 2(a) hereof shall expire and cease to be in effect at midnight on March 31, 2006 (Washington, DC time).

     (c) OPIC hereby waives the requirement of Section 6.15 that the amounts on deposit in the Debt Service Reserve Account are at least equal to the Debt Service Reserve Requirement.

     (d) The waiver contained in Section 2(c) of this Amendment shall expire and cease to be in effect at on March 31, 2006 (Washington, DC time). The Borrower shall use commercially reasonable efforts to ensure drafts of all documentation for which OPIC’s consent is required will be delivered to OPIC not later than March 7, 2006.

Section 3. Amendments to Loan Agreement. (a) Section 6.11 of the Loan Agreement is hereby amended by deleting the paragraph in its entirety and replacing the paragraph with the following:

     “SECTION 6.11. Financial Ratios. The Borrower shall cause the Companies to, as of the last day of each fiscal quarter following the date of the first

Disbursement, maintain Tangible Net Worth Coverage equal to or less than 1.9 to 1. For the purposes of this Section 6.11, the ratio and amounts referred to shall be calculated on the basis of information set forth in the Financial Statements or the Supplemental Financial Statements, as applicable.”

     (b) This Amendment shall expire and cease to be in effect at midnight on March 31, 2006 (Washington, DC time).

     (c) Section 6.15 of the Loan Agreement is hereby amended by deleting the paragraph in its entirety and replacing the paragraph with the following:

“SECTION 6.15. Debt Service Reserve Account. The Borrower shall establish and maintain the Debt Service Reserve Account in accordance with the Collateral Account Agreement and shall ensure that, at all times beginning on March 31, 2006, the amounts on deposit in the Debt Service Reserve Account is at least equal to the Debt Service Reserve Requirement as defined and provided for under the Collateral Account Agreement, unless prior consent in writing is received from OPIC under the Collateral Account Agreement to make withdrawals from the Debt Service Reserve Account in reduction of the amounts on deposit below the Debt Service Reserve Requirement.”

     Section 4. Conditions Precedent to Effectiveness. This Amendment shall become effective when counterparts to this Amendment have been executed and delivered by the Borrower and OPIC. Notwithstanding the foregoing, the parties acknowledge, confirm and agree that the Loan Agreement is in full force and effect and as at the date hereof have not been rescinded or terminated and that no party is in breach of the terms of the Loan Agreement.

     Section 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

     Section 6. No Waiver; No Course of Dealing.

     (a) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights, powers or remedies. No single or partial exercise of any such right shall preclude any other further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing.

     (b) Except as expressly provided by this Amendment, the agreements contained herein shall not limit or otherwise adversely affect OPIC’s rights under the Finance Documents. OPIC specifically reserves the right to insist on strict compliance with the terms of the Finance Documents, and by executing and delivering this Amendment, the Company expressly acknowledges such reservation of rights. Any future amendment or waiver of any provision of the Finance Documents to which OPIC is a party or has consented, shall be effective only if set forth in a writing separate and distinct from this Amendment and executed by an authorized officer of OPIC. The terms

of this Amendment will not, either alone or taken with other amendments or waivers of provisions of the Finance Documents, be deemed to create or be evidence of a course of conduct.

     Section 7. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

[Signature Page Follows.]

     IN WITHNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.

EP INTEROIL, LTD.

By: /s/ [ILLEGIBLE]

Name: [ILLEGIBLE]

Title: [ILLEGIBLE]

OVERSEAS PRIVATE INVESTMENT
CORPORATION

By: /s/ Steven A. Smith

Name: Steven A. Smith

Title: Senior Investment Officer

LIMITED WAIVER AND AMENDMENT NO. 18 TO
LOAN AGREEMENT

     LIMITED WAIVER AND AMENDMENT NO. 18, dated as of June 30, 2006 (the “Amendment”), to (i) the Loan Agreement dated as of June 12, 2001, as amended (the “Loan Agreement”), between EP InterOil, Ltd. (the “Borrower”) and Overseas Private Investment Corporation (“OPIC”).

WITNESSETH

     WHEREAS, the parties to this Amendment desire to waive certain requirements of, and make certain amendments to, the Loan Agreement;

     NOW, THEREFORE, the parties to this Amendment agree as follows:

     Section 1. Defined Terms; References. Unless otherwise specifically defined in this Amendment, each term used in this Amendment which is defined in the Loan Agreement has the meaning assigned to such term in the Loan Agreement, Each reference to “hereof,” “hereunder,” “herein,” “hereby” and other similar references, and each reference to “this Agreement” and other similar references contained in the Loan Agreement shall, after this Amendment becomes effective, refer to the Loan Agreement as amended by this Amendment.

     Section 2. Waiver.

     (a) OPIC hereby waives the conditions contained in Section 6.11 of the Loan Agreement.

     (b) The waiver contained in Section 2(a) of this Amendment shall expire and cease to be in effect at on September 30, 2006 (Washington, DC time).

     Section 3. Amendment to Loan Agreement.(a) Section 6.11 of the Loan Agreement is hereby amended by deleting the paragraph in its entirety and replacing the paragraph with the following:

“SECTION 6.11 Financial Ratios. The Borrower shall cause the Companies to, as of the last day of each fiscal quarter following the date of the first Disbursement, maintain a Tangible Net Worth Coverage equal in or less than 1.9 to 1.0. For the purposes of this Section 6.11, the ratio and amounts referred to shall be calculated on the basis of information set forth in the Financial Statements or the Supplemental Financial Statements, as applicable.”

     (b) This Amendment shall expire and cease to be in effect at midnight on September 30, 2006 (Washington, DC time).

     Section 4. Conditions Precedent to Effectiveness. This Amendment shall become effective as of June 30, 2006 upon the execution and delivery of counterparts to this Amendment by the Borrower and OPIC. Notwithstanding the foregoing, the parties acknowledge, confirm and agree that the Loan Agreement is in full force and effect and as at the date hereof has not been rescinded or terminated and that no party is in breach of the terms of the Loan Agreement.

     Section 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

     Section 6. No Waiver; No Course of Dealing.

     (a) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights, powers or remedies. No single or partial exercise of any such right shall preclude any other further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing.

     (b) Except as expressly provided by this Amendment, the agreements contained herein shall not limit or otherwise adversely affect OPIC’s rights under the Finance Documents. OPIC specifically reserves the right to insist on strict compliance with the terms of the Finance Documents, and by executing and delivering this Amendment, the Company expressly acknowledges such reservation of rights. Any future amendment or waiver of any provision of the Finance Documents to which OPIC is a party or has consented, shall be effective only if set forth in a writing separate and distinct from this Amendment and executed by an authorized officer of OPIC. The terms of this Amendment will not, either alone or taken with other amendments or waivers of provisions of the Finance Documents, be deemed to create or be evidence of a course of conduct.

     Section 7. Counterparts: This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

[Signature Page Follows.]

2

     IN WITHNESS WHEREOF, the parties here to have caused this Amendment to be duly executed as of the date first written above.

EP INTEROIL, LTD.

By: /s/ [ILLEGIBLE]

Name: [ILLEGIBLE]

Title: [ILLEGIBLE]

OVERSEAS PRIVATE INVESTMENT CORPORATION

By:  

Name:  

Title:  

A-1

LIMITED WAIVER AND AMENDMENT NO. 15 TO
LOAN AGREEMENT
AND
AMENDMENT NO 5 TO
COLLATERAL ACCOUNT AGREEMENT

     LIMITED WAIVER AND AMENDMENT NO. 15, dated as of March 31, 2006 (the “Amendment”), to (i) the Loan Agreement dated as of June 12, 2001, as amended (the “Loan Agreement”), between EP InterOil, Ltd. (the “Borrower”) and Overseas Private Investment Corporation (“OPIC”), and (ii) the Collateral Account Agreement dated as of March 25, 2002, as amended (the “Collateral Account Agreement”), between the Borrower and OPIC.

WITNESSETH

     WHEREAS, the parties to this Amendment desire to waive certain requirements of, and make certain amendments to, the Loan Agreement;

     NOW, THEREFORE, the parties to this Amendment agree as follows:

     Section 1. Defined Terms; References. Unless otherwise specifically defined in this Amendment, each term used in this Amendment which is defined in the Loan Agreement or the Collateral Agreement has the meaning assigned to such term in the Loan Agreement or the Collateral Agreement. Each reference to “hereof,” “hereunder,” “herein,” “hereby” and other similar references, and each reference to “this Agreement” and other similar references contained in the Loan Agreement or the Collateral Account Agreement shall, after this Amendment becomes effective, refer to the Loan Agreement or the Collateral Account Agreement as amended by this Amendment.

     Section 2. Waiver.

     (a) OPIC hereby waives the requirement of Section 6.15 that the amounts on deposit in the Debt Service Reserve Account is at least equal to the Debt Service Reserve Requirement and consents to the Borrower making withdrawals from the Debt Service Reserve Account in reduction of the amounts on deposit below the Debt Service Reserve Requirement for the purpose of making the interest and principal payments due pursuant to Sections 2.04(a) and 2.05(a) on June 30, 2006.

     (b) The waiver contained in Section 2(a) of this Amendment shall expire and cease to be in effect at on October 31, 2006 (Washington, DC time).

     Section 3. Amendment to Loan Agreement.

     (a) Section 6.15 of the Loan Agreement is hereby amended by deleting the paragraph in its entirety and replacing the paragraph with the following:

“SECTION 6.15. Debt Service Reserve Account. The Borrower shall establish and maintain the Debt Service Reserve Account in accordance with the Collateral Account Agreement and shall ensure that, (i) between April 16, 2006 and June 29, 2006, and (ii) at all times beginning on October 31, 2006, the amount on deposit in the Debt Service Reserve Account is at least equal to the Debt Service Reserve Requirement as defined and provided for under the Collateral Account Agreement, unless prior consent in writing is received from OPIC under the Collateral Account Agreement to make withdrawals from the Debt Service Reserve Account in reduction of the amounts on deposit below the Debt Service Reserve Requirement.”

     (b) Article 6 of the Loan Agreement is hereby amended by adding the following clause 6.16:

“SECTION 6.16. Refinery Optimization. On or prior to August 31, 2006, not less than $10 million will be transferred to Borrower by InterOil Corporation or one of its subsidiaries, in the form of an equity contribution, for the purpose of funding the Borrower’s ongoing refinery optimization efforts. Amounts of approximately $2.1 million that have already been transferred to the Borrower will count towards the Borrower’s rights to receive these funds from InterOil Corporation or one of its subsidiaries.

     Section 4. Amendment to Collateral Account Agreement.

     Section 2.04(a) of the Collateral Account Agreement is hereby amended by adding the following sentence to the end of clause (ii):

“Notwithstanding the foregoing, the Company may request that the Account Bank withdraw from the Debt Service Reserve Account all payments requested in the Senior Project Payment Requisition for all amounts due on the June 30, 2006 Semi-Annual Date regardless of whether or not the funds needed to pay such Senior Project Payment Requisition are available in the Operational Account.”

     Section 5. Conditions Precedent to Effectiveness. This Amendment shall become effective as of March 31, 2006 upon the execution and delivery of counterparts to this Amendment by the Borrower and OPIC. Notwithstanding the foregoing, the parties acknowledge, confirm and agree that the Loan Agreement and the Collateral Agreement are in full force and effect and as at the date hereof have not been rescinded or terminated and that no party is in breach of the terms of the Loan Agreement or Collateral Agreement.

     Section 6. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

2

     Section 7. No Waiver; No Course of Dealing.

     (a) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights, powers or remedies. No single or partial exercise of any such right shall preclude any other further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing.

     (b) Except as expressly provided by this Amendment, the agreements contained herein shall not limit or otherwise adversely affect OPIC’s rights under the Finance Documents. OPIC specifically reserves the right to insist on strict compliance with the terms of the Finance Documents, and by executing and delivering this Amendment, the Company expressly acknowledges such reservation of rights. Any future amendment or waiver of any provision of the Finance Documents to which OPIC is a party or has consented, shall be effective only if set forth in a writing separate and distinct from this Amendment and executed by an authorized officer of OPIC. The terms of this Amendment will not, either alone or taken with other amendments or waivers of provisions of the Finance Documents, be deemed to create or be evidence of a course of conduct.

     Section 8. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

[Signature Page Follows.]

3

     IN WITHNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.

EP INTEROIL, LTD.

By: /s/ [ILLEGIBLE]

Name: [ILLEGIBLE]

Title: [ILLEGIBLE]

OVERSEAS PRIVATE INVESTMENT CORPORATION

By: /s/ Steven A. Smith

Name: Steven A. Smith

Title: Senior Investment officer

A-4

LIMITED WAIVER AND AMENDMENT NO. 16 TO
LOAN AGREEMENT

     LIMITED WAIVER AND AMENDMENT NO. 16, dated as of April 14,2006 (the “Amendment”), to the Loan Agreement dated as of June 12, 2001, as amended (the “Loan Agreement”), between EP InterOil, Ltd. (the “Borrower”) and Overseas Private Investment Corporation (“OPIC”).

WITNESSETH

     WHEREAS, the parties to this Amendment desire to waive certain requirements of, and make certain amendments to, the Loan Agreement;

     NOW, THEREFORE, the parties to this Amendment agree as follows:

     Section 1. Defined Terms; References. Unless otherwise specifically defined in this Amendment, each term used in this Amendment which is defined in the Loan Agreement has the meaning assigned to such term in the Loan Agreement. Each reference to “hereof,” “hereunder,” “herein,” “hereby” and other similar references, and each reference to “this Agreement” and other similar references contained in the Loan Agreement shall, after this Amendment becomes effective, refer to the Loan Agreement as amended by this Amendment.

     Section 2. Waiver.

     (a) OPIC hereby waives the requirement of Section 6.15 that the amounts on deposit in the Debt Service Reserve Account is at least equal to the Debt Service Reserve Requirement and consents to the Borrower making withdrawals from the Debt Service Reserve Account in reduction of the amounts on deposit below the Debt Service Reserve Requirement for the purpose of making the interest and principal payments due pursuant to Sections 2.04(a) and 2.05(a) on June 30, 2006.

     (b) The waiver contained in Section 2(a) of this Amendment shall expire and cease to be in effect at on October 31, 2006 (Washington, DC time).

     Section 3. Amendment to Loan Agreement.

     (a) Section 6.15 of the Loan Agreement is hereby amended by deleting the paragraph in its entirety and replacing the paragraph with the following:

“SECTION 6.15. Debt Service Reserve Account. The Borrower shall establish and maintain the Debt Service Reserve Account in accordance with the Collateral Account Agreement and shall ensure that, (i) between May 5, 2006 and June 29, 2006, and (ii) at all times beginning on October 31, 2006, the amount on deposit in the Debt Service Reserve Account is at least equal to the Debt Service Reserve Requirement as defined and provided for under the Collateral Account

Agreement, unless prior consent in writing is received from OPIC under the Collateral Account Agreement to make withdrawals from the Debt Service Reserve Account in reduction of the amounts on deposit below the Debt Service Reserve Requirement.”

     Section 4. Conditions Precedent to Effectiveness. This Amendment shall become effective as of April 14, 2006 upon the execution and delivery of counterparts to this Amendment by the Borrower and OPIC. Notwithstanding the foregoing, the parties acknowledge, confirm and agree that the Loan Agreement is in full force and effect and as at the date hereof has not been rescinded or terminated and that no party is in breach of the terms of the Loan Agreement.

     Section 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

     Section 6. No Waiver; No Course of Dealing.

     (a) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights, powers or remedies. No single or partial exercise of any such right shall preclude any other further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing.

     (b) Except as expressly provided by this Amendment, the agreements contained herein shall not limit or otherwise adversely affect OPIC’s rights under the Finance Documents. OPIC specifically reserves the right to insist on strict compliance with the terms of the Finance Documents, and by executing and delivering this Amendment, the Company expressly acknowledges such reservation of rights. Any future amendment or waiver of any provision of the Finance Documents to which OPIC is a party or has consented, shall be effective only if set forth in a writing separate and distinct from this Amendment and executed by an authorized officer of OPIC. The terms of this Amendment will not, either alone or taken with other amendments or waivers of provisions of the Finance Documents, be deemed to create or be evidence of a course of conduct.

     Section 7. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

[Signature Page Follows.]

2

     IN WITHNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.

EP INTEROIL, LTD.
By:	/s/ Christian Vinson
Name: Christian Vinson
Title: Director
OVERSEAS PRIVATE INVESTMENT CORPORATION
By:	/s/ Steven A. Smith
Name: Steven A. Smith
Title: Senior Investment officer

3

LIMITED WAIVER AND AMENDMENT NO. 17 TO
LOAN AGREEMENT

     LIMITED WAIVER AND AMENDMENT NO. 17, dated as of May 8, 2006 (the “Amendment”), to the Loan Agreement dated as of June 12, 2001, as amended (the “Loan Agreement”) between EP InterOil, Ltd. (the “Borrower”) and Overseas Private Investment Corporation (“OPIC”).

WITNESSETH

     WHEREAS, the parties to this Amendment desire to waive certain requirements of, and make certain amendments to, the Loan Agreement;

     NOW, THEREFORE, the parties to this Amendment agree as follows:

     Section 1. Defined Terms; References. Unless otherwise specifically defined in this Amendment, each term used in this Amendment which is defined in the Loan Agreement has the meaning assigned to such term in the Loan Agreement. Each reference to “hereof,” “hereunder,” “herein,” “hereby” and other similar references, and each reference to “this Agreement” and other similar references contained in the Loan Agreement shall, after this Amendment becomes effective, refer to the Loan Agreement as amended by this Amendment.

     Section 2. Waiver.

     (a) OPIC hereby waives the requirement of Section 6.1 5 that the amounts on deposit in the Debt Service Reserve Account is at least equal to the Debt Service Reserve Requirement and consents to the Borrower making withdrawals from the Debt Service Reserve Account in reduction of the amounts on deposit below the Debt Service Reserve Requirement for the purpose of making the interest and principal payments due pursuant to Sections 2.04(a) and 2.05(a) on June 30, 2006.

     (b) The waiver contained in Section 2(a) of this Amendment shall expire and cease to be in effect at on October 31, 2006 (Washington, DC time).

     Section 3. Amendment to Loan Agreement.

     (a) Section 6.15 of the Loan Agreement is hereby amended by deleting the paragraph in its entirety and replacing the paragraph with the following:

“SECTION 6.15. Debt Service Reserve Account. The Borrower shall establish and maintain the Debt Service Reserve Account in accordance with the Collateral Account Agreement and shall ensure that, (i) between May 10, 2006 and June 29, 2006, and (ii) at all times beginning on October 31, 2006, the amount on deposit in the Debt Service Reserve Account is at least equal to the Debt Service Reserve Requirement as defined and provided for under the Collateral Account

Agreement, unless prior consent in writing is received from OPIC under the Collateral Account Agreement to make withdrawals from the Debt Service Reserve Account in reduction of the amounts on deposit below the Debt Service Reserve Requirement.”

     Section 4. Conditions Precedent to Effectiveness. This Amendment shall become effective as of May 5, 2006 upon the execution and delivery of counterparts to this Amendment by the Borrower and OPIC. Notwithstanding the foregoing, the parties acknowledge, confirm and agree that the Loan Agreement is in full force and effect and as at the date hereof has not been rescinded or terminated and that no party is in breach of the terms of the Loan Agreement.

     Section 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of Mew York.

     Section 6. No Waiver: No Course of Dealing.

     (a) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights, powers or remedies. No single or partial exercise of any such right shall preclude any other further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing.

     (b) Except as expressly provided by this Amendment, the agreements contained herein shall not limit or otherwise adversely affect OPIC’s rights under the Finance Documents. OPIC specifically reserves the right to insist on strict compliance with the terms of the Finance Documents, and by executing and delivering this Amendment, the Company expressly acknowledges such reservation of rights. Any future amendment or waiver of any provision of the Finance Documents to which OPIC is a party or has consented, shall he effective only if set forth in a writing separate and distinct from this Amendment and executed by an authorized officer of OPIC. The terms of this Amendment will not, either alone or taken with other amendments or waivers of provisions of the Finance Documents, be deemed to create or be evidence of a course of conduct.

     Section 7. Counterpart. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

[Signature Page Follows.]

2

     IN WITHNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.

EP INTEROIL, LTD.
By:	/s/ [ILLEGIBLE]
Name: [ILLEGIBLE]
Title: [ILLEGIBLE]
OVERSEAS PRIVATE INVESTMENT CORPORATION
By:	/s/ Steven A. Smith
Name: Steven A. Smith
Title: Senior Investment officer

3

LIMITED WAIVER AND AMENDMENT NO. 14 TO
LOAN AGREEMENT
AND
SPONSOR SUPPORT AGREEMENT NO.1

     LIMITED WAIVER AND AMENDMENT NO. 14, dated as of March 27, 2006 (the “Amendment”), to the Loan Agreement dated as of June 12, 2001, as amended (the “Loan Agreement”), between EP InterOil, Ltd. (the “Borrower”) and Overseas Private Investment Corporation (“OPIC”) and the Sponsor Support Agreement dated as of June 12, 2001 (“Sponsor Support Agreement”) between Borrower, InterOil Limited (“IL”), S.P. InterOil, LDC (“SPI”), P.I.E. Group, LLC (“PIE”) and OPIC.

WITNESSETH

     WHEREAS, the parties to this Amendment desire to waive certain requirements of, and make certain amendments to, the Loan Agreement and the Sponsor Support Agreement;

     NOW, THEREFORE, the parties to this Amendment agree as follows:

     Section 1. Defined Terms; References. Unless otherwise specifically defined in this Amendment, each term used in this Amendment which is defined in the Loan Agreement or the Sponsor Support Agreement has the meaning assigned to such term in the Loan Agreement or the Sponsor Support Agreement. Each reference to “hereof,” “hereunder,” “herein,” “hereby” and other similar references, and each reference to “this Agreement” and other similar references contained in the Loan Agreement or the Sponsor Support Agreement shall, after this Amendment becomes effective, refer to the Loan Agreement or the Sponsor Support Agreement as amended by this Amendment.

     Section 2. Waiver.

     (a) OPIC hereby waives the requirement of Section 6.05 and Schedule 6.05 of the Loan Agreement and Section 3 of the Sponsor Support Agreement that requires the Specified Policies to be in full force and effect.

     (b) The waiver contained in Section 2(a) of this Amendment shall expire and cease to be in effect at on March 31, 2007 (Washington, DC time).

     Section 3. Amendment to Loan Agreement. Section 3(a)(iii) of the Sponsor Support Agreement is hereby amended by adding the following parenthetical to the end of sub-clause (iii):

     “(provided; however, that the Specified Policies are not required to be in full force and effect during the period from March 27, 2006 to March 31, 2007)”

     Section 4. Conditions Precedent to Effectiveness. This Amendment shall become effective as of March 27, 2006 upon the execution and delivery of counterparts to this Amendment by the Borrower, IL, SPI, PIE and OPIC. On or prior to March 27, 2006, the Borrower covenants to deposit US$400,000 into the Debt Service Reserve Account in partial repayment of the amounts required to be deposited into such account on or before March 31, 2006 as contemplated by Amendment No. 13 to the Loan Agreement. Notwithstanding the foregoing, the parties acknowledge, confirm and agree that the Loan Agreement and the Sponsor Support Agreement are in full force and effect and as at the date hereof have not been rescinded or terminated and that no party is in breach of the terms of the Loan Agreement or Sponsor Support Agreement.

     Section 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

     Section 6. No Waiver; No Course of Dealing.

     (a) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights, powers or remedies. No single or partial exercise of any such right shall preclude any other further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing.

     (b) Except as expressly provided by this Amendment, the agreements contained herein shall not limit or otherwise adversely affect OPIC’s rights under the Finance Documents. OPIC specifically reserves the right to insist on strict compliance with the terms of the Finance Documents, and by executing and delivering this Amendment, the Company expressly acknowledges such reservation of rights. Any future amendment or waiver of any provision of the Finance Documents to which OPIC is a party or has consented, shall be effective only if set forth in a writing separate and distinct from this Amendment and executed by an authorized officer of OPIC. The terms of this Amendment will not, either alone or taken with other amendments or waivers of provisions of the Finance Documents, be deemed to create or be evidence of a course of conduct.

     Section 7. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

[Signature Page Follows.]

2

     IN WITHNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.

EP INTEROIL, LTD.

By: /s/ [ILLEGIBLE]

Name: [ILLEGIBLE]
Title:   [ILLEGIBLE]

OVERSEAS PRIVATE INVESTMENT
CORPORATION

By: /s/ Steven A. Smith

Name: Steven A. Smith

Title: Senior Investment Officer

INTEROIL LIMITED

By: /s/ [ILLEGIBLE]

Name: [ILLEGIBLE]

Title: [ILLEGIBLE]

S.P. INTEROIL, LDC

By: /s/ [ILLEGIBLE]

Name: [ILLEGIBLE]

Title: [ILLEGIBLE]

P.I.E. GROUP, LLC

By: /s/ [ILLEGIBLE]

Name: [ILLEGIBLE]

Title: [ILLEGIBLE]

A - 1

LIMITED WAIVER AND AMENDMENT NO. 18 TO
LOAN AGREEMENT

     LIMITED WAIVER AND AMENDMENT NO. 18, dated as of June 30, 2006 (the “Amendment”), to (i) the Loan Agreement dated as of June 12, 2001, as amended (the “Loan Agreement”), between EP InterOil, Ltd. (the “Borrower”) and Overseas Private Investment Corporation (“OPIC”).

WITNESSETH

     WHEREAS, the parties to this Amendment desire to waive certain requirements of, and make certain amendments to, the Loan Agreement;

     NOW, THEREFORE, the parties to this Amendment agree as follows:

     Section 1. Defined Terms; References. Unless otherwise specifically defined in this Amendment, each term used in this Amendment which is defined in the Loan Agreement has the meaning assigned to such term in the Loan Agreement. Each reference to “hereof,” “hereunder,” “herein,” “hereby” and other similar references, and each reference to “this Agreement” and other similar references contained in the Loan Agreement shall, after this Amendment becomes effective, refer to the Loan Agreement as amended by this Amendment.

     Section 2. Waiver.

     (a) OPIC hereby waives the conditions contained in Section 6.11 of the Loan Agreement.

     (b) The waiver contained in Section 2(a) of this Amendment shall expire and cease to be in effect at on September 30, 2006 (Washington, DC time).

     Section 3. Amendment to Loan Agreement. (a) Section 6.11 of the Loan Agreement is hereby amended by deleting the paragraph in its entirety and replacing the paragraph with the following:

“SECTION 6.11. Financial Ratios. The Borrower shall cause the Companies to, as of the last day of each fiscal quarter following the date of the first Disbursement, maintain a Tangible Net Worth Coverage equal to or less than 1.9 to 1.0. For the purposes of this Section 6.11, the ratio and amounts referred to shall be calculated on the basis of information set forth in the Financial Statements or the Supplemental Financial Statements, as applicable.”

     (b) This Amendment shall expire and cease to be in effect at midnight on September 30, 2006 (Washington, DC time).

     Section 4. Conditions Precedent to Effectiveness. This Amendment shall become effective as of June 30, 2006 upon the execution and delivery of counterparts to this Amendment by the Borrower and OPIC. Notwithstanding the foregoing, the parties acknowledge, confirm and agree that the Loan Agreement is in full force and effect and as at the date hereof has not been rescinded or terminated and that no party is in breach of the terms of the Loan Agreement.

     Section 5. Governing Law. This Amendment shall be governed by and construed in accordance with the laws of the State of New York.

     Section 6. No Waiver; No Course of Dealing.

     (a) No failure or delay by OPIC in exercising any right, power or remedy shall operate as a waiver thereof or otherwise impair any of its rights, powers or remedies. No single or partial exercise of any such right shall preclude any other further exercise thereof or the exercise of any other legal right. No waiver of any such right shall be effective unless given in writing.

     (b) Except as expressly provided by this Amendment, the agreements contained herein shall not limit or otherwise adversely affect OPIC’s rights under the Finance Documents. OPIC specifically reserves the right to insist on strict compliance with the terms of the Finance Documents, and by executing and delivering this Amendment, the Company expressly acknowledges such reservation of rights. Any future amendment or waiver of any provision of the Finance Documents to which OPIC is a party or has consented, shall be effective only if set forth in a writing separate and distinct from this Amendment and executed by an authorized officer of OPIC. The terms of this Amendment will not, either alone or taken with other amendments or waivers of provisions of the Finance Documents, be deemed to create or be evidence of a course of conduct.

     Section 7. Counterparts. This Amendment may be signed in any number of counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument.

[Signature Page Follows.]

2

     IN WITHNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.

EP INTEROIL, LTD.

By:  

Name:

Title:

OVERSEAS PRIVATE INVESTMENT
CORPORATION

By: /s/ Steven A. Smith

Name: Steven A. Smith

Title: Senior Investment Officer

A-1

EX-99.9

Exhibit 9

Certifications

I, Phil E. Mulacek, certify that:

1.	I have reviewed this annual report on Form 40-F of InterOil Corporation (the “issuer");
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors:

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

Date: March 30, 2007	/s/ Phil E. Mulacek
	Phil E. Mulacek
	Chief Executive Officer

8

EX-99.10

Exhibit 10

Certifications

I, Collin F. Visaggio, certify that:

1.	I have reviewed this annual report on Form 40-F of InterOil Corporation (the “issuer");
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c)	Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by this annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

5. The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors:

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

Date: March 30, 2007	/s/ Collin F. Visaggio
	Collin F. Visaggio
	Chief Financial Officer

9

EX-99.11

Exhibit 11

Certification Required by Rule 13a-14(b) or Rule 15d-14(b)
of the Securities Exchange Act of 1934 and
Section 1350 of Chapter 63 of Title 18 of the United States Code

In connection with the report of InterOil Corporation (the “Company") on Form 40-F for the fiscal year ending December 31, 2006 as filed with the Securities and Exchange Commission on the date hereof (the “Report"), I, Phil E. Mulacek, Chief Executive Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

Date: March 30, 2007

/s/ Phil E. Mulacek  

Phil E. Mulacek 

Chief Executive Officer 

10

EX-99.12

Exhibit 12

Certification Required by Rule 13a-14(b) or Rule 15d-14(b)
of the Securities Exchange Act of 1934 and
Section 1350 of Chapter 63 of Title 18 of the United States Code

In connection with the report of InterOil Corporation (the “Company") on Form 40-F for the fiscal year ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report"), I, Collin F. Visaggio, Chief Financial Officer of the Company, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

2. The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods presented in the Report.

Date: March 30, 2007

/s/ Collin F. Visaggio  

Collin F. Visaggio 

Chief Financial Officer 

11