**MEMORANDUM OF UNDERSTANDING**     This Memorandum of Understanding (***“MOU”***) is made and entered into this 4th day of May 2006, byand 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”***), andMerrill 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”***andcollectively as the ***“Parties”***.     The Parties have reached an agreement in principle whereby Clarion and Merrill will provideadvantageous financing to IOC for its midstream and downstream petroleum operations in Papua NewGuinea (***“PNG”***) in consideration for IOC offering to Clarion and Merrill or their Affiliates and theother 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 backingor participation rights, in the following projects proposed to be developed by IOC in PNG: (i) anatural 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 theProject would comprise the whole value chain from sourcing natural gas and NGLs through toprocessing, liquefaction, and offtake and international sale and supply of all produced LNG. Inparticular the Project, which is subject to the negotiation of gas supply, transportation andproject agreements, currently contemplates: **•** National Gas Development Company, a company which will be owned by the Parties inproportion to their ownership interests in the Project will seek to build and develop anatural gas liquids facility (“NGL”) and an onshore liquid natural gas (“LNG”) facility inPapua New Guinea.  **•** Execution of agreements with the Government of PNG and PNG gas producers providing theProject 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 feedwet gas from the planned PNG gas pipeline project. The proposed NGL extraction facilityis currently projected to have a capacity of 1.1 billion scf/d, and a by-pass systempermitting 10% of the gas transported via the planned pipeline to pass through theextraction 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 mmscf/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 thefollowing 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 ***“FinalStudy”***) of developing a LNG facility and related infrastructure needed to develop the Projectin PNG.Signature Page to MOU
 

 
(B) Merrill and Clarion desire to participate in the Project and to assist IOC in the preparationof the Final Study.(C) Merrill has developed particular expertise in LNG projects, particularly in the areas oftransportation, financing and marketing, as well as having business relationships withreliable international LNG operators.(D) IOC wishes to create a practical plan for the Project as well as an initial pricing structureof LNG from the Project as promptly as possible. The Project plan and pricing structure willbe further developed and refined during the Final Study and during the negotiation of a finalcontract. Merrill has financial expertise in developing LNG projects as well as the keypricing structure of LNG and, therefore, is able to provide such information regarding LNGprojects and to provide advice based on its commercial background in dealing with existing LNGpricing formulas.(E) The Parties, or their Affiliates, have executed that certain Credit Agreement of even dateherewith, wherein Merrill and Clarion (or their Affiliates) have agreed to extend loans to IOCtotaling US$130,000,000 in the aggregate (***“Facility”***), with Merrill or its Affiliatescommitted to make US$70,000,000 available to IOC and Clarion or its Affiliates committed tomake the remaining US$60,000,000 available to IOC. The proceeds of the Facility will be usedfor the purposes described in the Facility and will not be used to finance any portion of theProject other than any amounts allocated to the Final Study. In addition to the base rate ofinterest payable to the lenders under the Facility, the Facility gives Merrill and Clarion theright to participate in the Project based on the amounts loaned to IOC pursuant to theFacility. Based on the amounts Merrill and Clarion will make available to IOC under theFacility, 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 makesa payment to IOC in the amount of US$10,000,000 in addition to the amounts agreed to beprovided by Clarion under the Facility, then IOC will transfer a 5% ownership interest inthe Project to Clarion so that thereafter IOC will have a 30% ownership interest in theProject 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 anoption 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 byIOC’s existing agreements, up to a 15% participation interest in IOC’s future exploration anddevelopment programs related to its Petroleum Prospecting Licenses in PNG, subject to pro ratadilution 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 toenter into an agreement with an EPC contractor for the Project. The funding details, whichwill include funding mechanisms for cost overruns that avoid dilution of equity participants,will be mutually agreed in the finalSignature Page to MOU
 

 
  project agreement (***“Definitive LNG/NGL ProjectAgreement”***) 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 beproduced pursuant to the Project, including the price estimates that can be secured by basinggas sales on securing gas contracts from the Atlantic basin. IOC is requesting a draft Scurve pricing structure and core contract outlines for LNG offtakes using historical contractpricing and terms as a base starting point from Merrill. The pricing material provided byMerrill will include the old base contract formats from any other LNG projects with thepricing curves which they may have, and secure current pricing from regional projectsincluding an estimated base pricing outline for current regional LNG estimates. Merrill willuse its reasonable commercial efforts to secure the highest net back price for gas sales fromthe proposed LNG facility through Merrill’s marketing Affiliates.(I) In connection with the Project, the Parties are proposing to enter into an agreement wherebyMerrill would commit to offtake a base volume of 1.75 million tones to 5 million tones perannum of LNG from the proposed LNG facility at market related prices for sale in Japan and/orthe US markets. Notwithstanding the above, each Party will have the right to offtakequantities of LNG in proportion to their equity ownership in the Project, subject to theminimum credit requirements for offtake agreements imposed upon the Project by any potentiallenders. Notwithstanding the foregoing, in the event any Party does not elect to enter intoan offtake agreement, the quantity of LNG that such Party would have the right to offtake willvest pro rata in the other Parties who have entered into off-take agreements. The actualofftake amount of each Party will be determined in the definitive agreements and is subject tothe size of the LNG facility.(J) Merrill and Clarion will use reasonable efforts to assist IOC in obtaining competitivefinancing needed to acquire producing gas properties in PNG that would be used to provide IOCwith current cash flow and gas reserves to support the Project. Potential parties from whomIOC may acquire gas producing properties in PNG include, but are not limited to, Exxon-Mobiland 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 FinalStudy and the Parties’ activities relating to the Project to the extent thatexchanging such information shall not violate any existing confidentiality agreementwhich 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 toassist IOC in connection with the Final Study and (ii) to independently conduct theirown studies of the feasibility of the Project and share suchresults with the other Parties. The Parties shall work together to review andevaluate the viability of the Project which shall be determined principally on theeconomic, strategic, technical and commercialSignature Page to MOU
 

 
   feasibility of the Project.  1-3   The Parties shall promptly negotiate a Definitive LNG/NGL Project Agreementthat will provide the definitive contractual terms and conditions under which theParties will undertake the formation of a new, special purpose joint venture projectcompany (***“ProjectCo”***) in order to pursue the Project, and which contains therespective rights and obligations of the ProjectCo shareholders in connection withsuch matters as capital funding, equity issuances, corporate governance, sharetransfers, development budgeting, and other matters to be mutually agreed.  1-4   During the currency of this MOU, IOC shall not be free to undertakeindependent discussions with other potential participant(s) in the Project (other thanSumitomo) and may not provide information to such third parties (other than Sumitomo)regarding Clarion’s and Merrill’s potential involvement without the prior writtenconsent of Clarion and Merrill, such consent not to be unreasonably withheld. NeitherClarion nor Merrill shall enter into discussions or negotiations, or executeagreements with any other party regarding equity or debt participation in theconstruction or operation of a NGL extraction facility, LNG facility, or otherfacility similar to the proposed Project in PNG, without the prior written consent ofIOC, such consent not to be unreasonably withheld.  1-5   Unless otherwise agreed to in writing by the Parties, each Party shall bearits own costs and expenses incurred in connection with or as a result of thetransactions contemplated by this MOU.**2.** **Cooperation.** 2-1   Unless the Parties agree otherwise, the Parties will use reasonable effortsto hold monthly meetings in Cairns, or Houston, or such other location as is agreed tobetween the Parties. The purpose of such meetings will be to (i) develop a commonview with respect to the implementation of the Project, and (ii) exchange data,information and views of the Parties about particular technical and commercialsubjects, such as the implementation plan for the Project, the development plan forany gas fields associated with the Project, engineering studies, potentialparticipants in the Project, potential operators for the liquefaction plantcontemplated by the Project, the preparation of an information memorandum relating tothe Project, and LNG shipping issues.  2-2   The Parties agree to exchange information regarding the Project, the FinalStudy and the Parties’ activities relating to the Project to the extent thatexchanging such information shall not violate any existing confidentiality agreementwhich 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 andexecute a Definitive LNG/NGL Project Agreement as to the scope of the Project andtheir respective participations, and that of relevant third parties, if any.  2-4   The Parties will endeavour to work in good faith to obtain all necessarySignature Page to MOU
 

 
   information needed in connection with the evaluation of and development of theProject, including without limitation, information related to: (i) the base reservesnecessary to start the project and the reserves needed to expand the Project over thedevelopment 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 anygaps in the available information may be filled and at whose risk and cost. TheParties will explore the optimum means from a commercial, legal and tax perspective ofowning the Project assets, whether via a jointly owned corporation or unincorporatedjoint venture relationship. The anticipated equity participants in the Project, andtheir interests, are set forth in Recital E. If either Clarion or Merrill elect notto acquire an interest in the Project, other parties to be mutually agreed uponbetween IOC and the remaining Party that has elected to acquire an interest in theProject following the finalization of participation terms between IOC and theremaining 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 anyconflicting provision of the Confidentiality Agreement entered into between IOC and anAffiliate of Merrill dated in or about January 2006 (***“Confidentiality Agreement”***), allinformation exchanged and/or developed under this MOU shall be regarded asconfidential between the Parties and shall not be disclosed to any third party or usedfor any other purpose other than as contemplated by this MOU without the prior writtenconsent of the other Parties. The confidentiality obligations of the Parties shall beeffective for the period of this MOU and for 2 years thereafter. If the Partiesextend their co-operation under this MOU, the confidentiality obligations of theParties under this MOU and the Confidentiality Agreement shall be automatically extendduring the term of any extension of this MOU. In particular, no information providedto IOC or Clarion by Merrill regarding LNG pricing or other information whether or notcontemplated by Recitals (D), (H), and (I) shall be disclosed by IOC or Clarion to anythird party without the written consent of Merrill, unless the disclosure of suchinformation is required by applicable securities laws or regulations, the rules of anystock exchange on which a Party is listed, or is properly in the public domain. Inregards to public disclosure, Merrill recognizes that IOC is a public-traded companyand Merrill will assist IOC in preparing, and consents to the release by IOC of, apress release of mutually agreed content, which may be a joint disclosure withMerrill, or other legally-required disclosure that discloses the basic terms of anyagreement entered into between the Parties.  3-2   It is recognized that information of a confidential nature may be disclosedby the Parties in the course of discussions held hereunder. In consideration of anyParty (the ***“Owner”***) making available to the any other Party (the ***“Recipient”***)information which is not publicly known concerning the Owner and its Affiliates (asdefined below) and its andSignature Page to MOU
 

 
   their respective businesses, future projects, and financial and other affairs, inwhatever form supplied to the Recipient, whether orally or in writing,(collectively, ***“Confidential Information”***), the Recipient agrees and undertakes asfollows:  (i) Confidential Information will only be used by it for itsparticipation in bona fide discussions hereunder and for its assessment of anyopportunities identified and for any associated negotiations; and  (ii) Confidential Information will only be disclosed to such ofthe Recipient’s, or its Affiliates’, directors, officers, employees,professional advisers, counsel and lenders or other providers of funds (a) whoare directly concerned with the matters referred to herein or in anyassociated negotiations, and (b) whose knowledge of such information isessential for such involvement, and (c) who agree to comply with theprovisions of this MOU in respect of Confidential Information. The Recipientundertakes 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 thirdparties, other than through breach by the Recipient of any obligation arising fromthis MOU, or (ii) which was lawfully in the Recipient’s possession prior to suchdisclosure (as evidenced by its or its advisers’ written records) and which was notacquired directly or indirectly from it or an Affiliate, or (iii) which is lawfullyreceived or obtained by the Recipient from a third party which has acquired itlawfully and is not bound by an obligation of confidentiality to the Owner or anAffiliate, or (iv) which the Recipient is obliged to disclose by law or by a regulatoror other body or competent authority with jurisdiction over the Recipient concerned orthe rules of a stock exchange upon which its, or an Affiliate’s, shares are listed ortraded, in which case it shall, so far as practicable, consult with the Owner and takeaccount of its reasonable requirements before making such disclosure.  3-4   No public announcement, communication or circular concerning any of thematters referred to in this MOU shall be made or dispatched at any time by any Partywithout the prior written consent of the other Parties (such consent not to beunreasonably withheld or delayed), save where such Party is required to make anyannouncement by law or by a regulator or other body of competent authority withjurisdiction 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 aspracticable, consult with the other Parties and take account of its reasonablerequirements before making or dispatching such announcement, communication orcircular.**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, withoutlimitation, loss of profit or loss of business opportunity) that may arise in connection withor result from this MOU.**5.** **Assignment.**Without the prior consent of the other Parties, no Party may assignSignature Page to MOU
 

 
  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 orindirectly, 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 orindirectly 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 datehereof. Notwithstanding the above, the Parties may agree in writing to extend or shorten theterm 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 through11, which are legally binding on the Parties with effect from the date hereof, this MOU is notlegally binding. Any legal obligations with respect to the transactions contemplatedhereunder shall be subject to the negotiation and execution following respective boardapprovals of mutually acceptable definitive agreements relating to the Project.**9.** **Business Principles**. In relation to the Project, the Parties shall comply with the USForeign Corrupt Practices Act and any sanctions imposed by law or executive order in respectof doing business with governments, corporations or nationals of any territory. Mindful ofthe principles of the US Foreign Corrupt Practices Act, no Party shall, and shall procure thatits Affiliates and their respective employees shall not, make or cause to be made, inconnection with the Project or the transaction referred to herein, any payments, loans orgifts 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 knowsor has reason to suspect that any part of such payment, loan or gift will be directlyor indirectly given or paid by such other person, or will reimburse such other personfor payments, gifts or loans previously made, to any such governmental official orpolitical 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 UnitedStates of America or any other relevant jurisdiction.**10.** **Authority.**Nothing in this MOU shall be construed to give any Party the authority or rightto enter into any obligation on behalf of the other Parties unless specifically authorized bythe other Parties in advance in writing.**11.** **Governing law and Arbitration.**This MOU shall be governed by andSignature Page to MOU
 

 
  construed in accordance with the laws of England. Subject to Section 7, all disputesarising in connection with this Memorandum of Understanding shall be finally settled byarbitration under the Arbitration Act 1996 by one arbitrator, appointed by agreement or ifnot so agreed, in accordance with the said Act. The language to be used in the arbitralproceedings shall be English.     IN WITNESS WHEREOF, the Parties have caused this MOU to be executed by their respectiverepresentatives 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       Signature Page to MOU