Exhibit 3



|InterOil
    Corporation             | 
|------------------------------------ | 
|Management                          
|Discussion and Analysis             
|                                    
|For the year ended December 31, 2014
|March 17, 2015                      



TABLE
OF CONTENTS



|FORWARD-LOOKING STATEMENTS                                                            | 2 
|------------------------------------------------------------------------------------- | --
|ABBREVIATIONS AND EQUIVALENCIES                                                       | 3 
|CONVERSION                                                                            | 3 
|OIL AND GAS DISCLOSURES                                                               | 4 
|GLOSSARY OF TERMS                                                                     | 4 
|INTRODUCTION                                                                          | 7 
|BUSINESS STRATEGY                                                                     | 7 
|OPERATIONAL HIGHLIGHTS                                                                | 8 
|SELECTED FINANCIAL INFORMATION AND HIGHLIGHTS                                         | 12
|DISCOUNTINUED OPERATIONS                                                              | 19
|LIQUIDITY AND CAPITAL RESOURCES                                                       | 21
|RISK FACTORS                                                                          | 26
|CRITICAL ACCOUNTING ESTIMATES                                                         | 26
|NEW ACCOUNTING STANDARDS                                                              | 27
|NON-GAAP MEASURES AND RECONCILIATION                                                  | 28
|PUBLIC SECURITIES FILINGS                                                             | 28
|DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL
    REPORTING | 29



This MD&A (as defined herein) should
be read in conjunction with our audited annual consolidated financial statements and accompanying notes for the year ended December
31, 2014 and our 2014 AIF (as defined herein) for the year ended December 31, 2014. This MD&A was prepared by management and
provides a review of our performance for the year ended December 31, 2014, and of our financial condition and future prospects.



Our financial statements and the financial
information contained in this MD&A have been prepared in accordance with International Financial Reporting Standards (“IFRS”)
as issued by the International Accounting Standards Board applicable to the preparation of financial statements and are presented
in United States dollars (“USD” or “$”) unless otherwise specified.



In this MD&A, references to “we,”
“us,” “our,” “the Company,” and “InterOil” refer to InterOil Corporation or InterOil
Corporation and its subsidiaries as the context requires. Information is presented in this MD&A as at December 31, 2014 and
for the year ended December 31, 2014 unless otherwise specified. A listing of specific defined terms can be found in the “Glossary
of Terms” section of this MD&A.



Management Discussion and Analysis  INTEROIL CORPORATION  1







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. We have based these forward-looking statements
on our current expectations and projections about future events. 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 business strategies and plans; plans for and anticipated timing of our exploration and appraisal
(including drilling plans) and other business activities and results therefrom; anticipated timing of certain well testing and
resource certifications under the Total SSA; characteristics of our properties; construction and development of a proposed LNG
plant in Papua New Guinea; the timing and cost of such construction and development; commercialization and monetization of any
resources; whether sufficient resources will be established; the likelihood of successful exploration for gas and gas condensate
or other hydrocarbons; cash flows from operations; sources of capital and its sufficiency; operating costs; contingent liabilities;
environmental matters; and plans and objectives for future operations; and timing, maturity and amount of future capital and other
expenditures.



Many risks and uncertainties may affect
matters addressed in these forward-looking statements, including but not limited to:



| | · | the
                                         uncertainty associated with the availability, terms and deployment of capital;
| | - | ---------------------------------------------------------------------------------------------------------------------------

| | · | our
                                         ability to obtain and maintain necessary permits, concessions, licenses and approvals
                                         from relevant State authorities to develop our gas and condensate resources within reasonable
                                         periods and on reasonable terms or at all;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | inherent
                                         uncertainty of oil and gas exploration;
| | - | -----------------------------------------------------------------------------------------

| | · | we
                                         will be transitioning the operatorship of PRL 15 to Total in accordance with the provisions
                                         of the JVOA;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                         difficulties with recruitment and retention of qualified personnel;
| | - | ----------------------------------------------------------------------------------------------------------------

| | · | the
                                         political, legal and economic risks in Papua New Guinea;
| | - | -----------------------------------------------------------------------------------------------------

| | · | landowner
                                         claims and disruption;
| | - | -------------------------------------------------------------------------

| | · | compliance
                                         with and changes in Papua New Guinean laws and regulations, including environmental laws;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                         exploration and production businesses are competitive;
| | - | ---------------------------------------------------------------------------------------------------

| | · | the
                                         inherent limitations in all control systems, and misstatements due to errors that may
                                         occur and not be detected;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | exposure
                                         to certain uninsured risks stemming from our operations;
| | - | ----------------------------------------------------------------------------------------------------------

| | · | contractual
                                         defaults;
| | - | --------------------------------------------------------------

| | · | weather
                                         conditions and unforeseen operating hazards;
| | - | ---------------------------------------------------------------------------------------------

| | · | compliance
                                         with environmental and other government regulations could be costly and could negatively
                                         impact our business;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | general
                                         economic conditions, including further economic downturn, availability of credit, European
                                         sovereign debt-credit crisis, downgrading of United States Government debt and the decline
                                         in commodity prices;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | risk
                                         of legal action against us; and
| | - | -----------------------------------------------------------------------------

| | · | law
                                         enforcement difficulties.
| | - | ----------------------------------------------------------------------



Forward-looking statements and information
are based on our current beliefs as well as assumptions made by, and information currently available to us concerning anticipated
financial conditions and performance, business prospects, strategies, regulatory developments, the ability to attract joint venture
partners, future hydrocarbon commodity prices, the ability to secure adequate capital funding, the ability to obtain equipment
and qualified personnel in a timely manner to develop resources, the ability to obtain financing on acceptable terms, and the
ability to develop reserves and production through development and exploration activities.







Management Discussion and Analysis  INTEROIL CORPORATION  2







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 will eventuate.



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 assumptions 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 2014 AIF.



Further, forward-looking statements contained
in this MD&A are made as of the date hereof and, except as required by applicable law, we will not update publicly or revise
any of these forward-looking statements. The forward-looking statements contained in this MD&A are expressly qualified by
this cautionary statement.



ABBREVIATIONS AND EQUIVALENCIES



Abbreviations



|Crude
        Oil and Natural Gas Liquids |                                                                      | Natural
        Gas
|----------------------------------------- | -------------------------------------------------------------------- | -------------------
|bbl                                       | one barrel equalling 34.972
    Imperial gallons or 42 U.S. gallons  |                    
|bblspd                                    | barrels per day                                                      |                    
|boe(1)                                    | barrels of oil equivalent                                            |                    
|boepd                                     | barrels of oil equivalent per day                                    |                    
|bpsd                                      | barrels per stream day                                               |                    
|mboe                                      | thousand barrels of oil equivalent                                   |                    
|mbbl                                      | thousand barrels                                                     |                    
|MMbbls                                    | million barrels                                                      |                    
|MMboe                                     | million barrels of oil equivalent                                    |                    
|WTI                                       | West Texas Intermediate crude oil delivered
    at Cushing, Oklahoma |                    
|bscf                                      | billion
    standard cubic feet                                      |                    



Note:

| | (1) | All calculations converting natural
                                         gas to crude oil equivalent have been made using a ratio of six mcf of natural gas to
                                         one barrel of crude equivalent. Boe may be misleading, particularly if used in isolation.
                                         A boe conversion ratio of six mcf of natural gas to one barrel of crude oil equivalent
                                         is based on an energy equivalency conversion method primarily applicable at the burner
                                         tip and does not represent a value equivalency at the wellhead.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (2) | Tcfes may be misleading, particularly
                                         if used in isolation. A Tcfe conversion ratio of one barrel of oil to six thousand cubic
                                         feet of gas is based on an energy equivalency conversion method primarily applicable
                                         at the burner tip and does not represent a value equivalency at the wellhead.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



CONVERSION



This table outlines certain standard conversions
between Standard Imperial Units and the International System of Units (metric units).



Management Discussion and Analysis  INTEROIL CORPORATION  3







|To
        Convert From |  | To           |  | Multiply
        By
|----------------------- |  | ------------ |  | -------------------
|mcf                     |  | cubic meters |  | 28.317             
|cubic meters            |  | cubic feet   |  | 35.315             
|bbls                    |  | cubic meters |  | 0.159              
|cubic meters            |  | bbls         |  | 6.289              
|feet                    |  | meters       |  | 0.305              
|meters                  |  | feet         |  | 3.281              
|miles                   |  | kilometers   |  | 1.609              
|kilometers              |  | miles        |  | 0.621              
|acres                   |  | hectares     |  | 0.405              
|hectares                |  | acres        |  | 2.471              



OIL
AND GAS DISCLOSURES



We are required to comply with Canadian
Securities Administrators’ NI 51-101 (as defined herein), which prescribes disclosure of oil and gas reserves and resources.
GLJ Petroleum Consultants Ltd., an independent qualified reserve evaluator based in Calgary, Canada, has evaluated our resources
data as at December 31, 2014 in accordance with NI 51-101. This evaluation is summarized in our 2014 AIF available at www.sedar.com.
We do not have any production or reserves, including proved reserves, as defined under NI 51-101 or as per the guidelines set
by the SEC, as at December 31, 2014.



The SEC permits oil and gas companies,
in their filings with the SEC, to disclose only proved, possible and probable reserves that a company has demonstrated by actual
production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions.
We include in this MD&A information that the SEC’s guidelines generally prohibit U.S registrants from including in filings
with the SEC.



GLOSSARY
OF TERMS



“2014 AIF”means InterOil’s
Annual Information Form for the year ended December 31, 2014.



“ANZ”means Australia
and New Zealand Banking Group (PNG) Limited.



“BNP Paribas” means
BNP Paribas Capital (Singapore) Limited.



“Board” means the board
of directors of InterOil.



“BP” means BP (formerly
known as British Petroleum) or a subsidiary or affiliate of that company.



“BSP” means Bank of
South Pacific Limited.



“CBA”means Commonwealth
Bank of Australia.



“Condensate”means
a component of natural gas which is a liquid at surface conditions.



“CSP”means the proposed
condensate stripping facilities, including gathering and condensate pipeline, condensate storage and associated facilities which
were to have been developed by the CSP Joint Venture, a joint venture with Mitsui pursuant to the Joint Venture Operating Agreement
entered into for the proposed condensate stripping facilities with Mitsui, which terminated on February 28, 2013.



Management Discussion and Analysis  INTEROIL CORPORATION  4







“Consolidated Financial Statements”means the consolidated financial statements for the years ended December 31, 2014, 2013 and 2012.



“Convertible Notes”means
the 2.75% convertible senior notes of InterOil due November 15, 2015.



“Credit Suisse” means
Credit Suisse A.G.



"crude oil" means a mixture
consisting mainly of pentanes and heavier hydrocarbonsthat exists in the liquid phase in reservoirsand remains
liquid at atmospheric pressure and temperature. Crude oilmay contain small amounts of sulfur and other non-hydrocarbons
but does not include liquids obtained from the processing of natural gas.



"DPE"means the Department
of Petroleum and Energy, a Papua New Guinea Government department responsible for regulating oil and gas activities in Papua New
Guinea.



“EBITDA” represents
net income/(loss) plus total interest expense (excluding amortization of debt issuance costs), income tax expense, depreciation
and amortization expense. EBITDA is a non-GAAP measure used to analyze operating performance. See “Non-GAAP Measures
and Reconciliation”.



“FID”means final investment
decision.



“GAAP”means Canadian
generally accepted accounting principles.



“gas” means a mixture
of lighter hydrocarbons that exist either in the gaseous phase or in solution in crude oil in reservoirs but are gaseous at atmospheric
conditions. Gas may contain sulfur or other non-hydrocarbon compounds.



“GCA”means Gaffney
Cline & Associates who is a recognized certifier under the Total SSA.



“GLJ”means GLJ Petroleum
Consultants Limited, an independent qualified reserves evaluator.



“IFRS” means International
Financial Reporting Standards as issued by the International Accounting Standards Board.



“IPI holders” means
investors holding indirect participating working interests in certain exploration wells required to be drilled pursuant to the
indirect participating interest agreement between us and certain investors dated February 25, 2005, as amended.



“JVOA”means Joint
Venture Operating Agreement.



“LIBOR”means daily
reference rate based on the interest rates at which banks borrow unsecured funds from banks in the London, United Kingdom, wholesale
money market.



“LNG”means liquefied
natural gas. Natural gas may be converted to a liquid state by pressure and severe cooling for transportation purposes, and then
returned to a gaseous state to be used as fuel. LNG, which is predominantly artificially liquefied methane, is not to be confused
with NGLs, natural gas liquids, which are heavier fractions that occur naturally as liquids.



“LNG Project” means
the proposed development by us of liquefaction facilities in Papua New Guinea with potential partners, including Total and the
State.



“Macquarie”means Macquarie
Group Limited.



“MD&A”means this
Management’s Discussion and Analysis for the year ended December 31, 2014.



“Mitsui” refers to
Mitsui & Co., Ltd., a company organized under the laws of Japan and/or certain of its wholly-owned subsidiaries (as the context
requires).



Management Discussion and Analysis  INTEROIL CORPORATION  5







“MUFG” means Bank of
Tokyo-Mitsubishi UFJ, Ltd.



“natural gas”means 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.



“NI 51-101” means National
Instrument 51-101 - Standards of Disclosure for Oil and Gas Activitiesadopted by the Canadian Securities Administrators.



“Oil Search” means
Oil Search Limited, a company incorporated in Papua New Guinea; an oil and gas exploration and development company that has been
operating in Papua New Guinea since 1929.



“PacLNG” means Pacific
LNG Operations Ltd., a company incorporated under the laws of the Bahamas.



“PGK”means the Kina,
currency of Papua New Guinea.



“PNGDV”meansPNG
Drilling Ventures Limited,an entity with which we entered into an amended and restated indirect participation agreement
on May 1, 2006.



“PNGEI”means PNG Energy
Investors LLC, a former indirect participating investor.



"PNG LNG" means PNG LNG,
Inc., a joint venture company established in 2007 to hold the interests of certain joint venturers in the proposed venture to
construct the proposed liquefaction facilities referred to in the LNG Project Agreement.



“PPL”
means the Petroleum Prospecting License, an exploration tenement granted under the Oil & Gas Act 1997 (PNG).



“PRE” means Pacific
Rubiales Energy Corp., a company incorporated under the laws of British Columbia, Canada.



“PRL”means the Petroleum
Retention License, the tenement granted under the Oil & Gas Act 1997 (PNG) to allow the license holder to evaluate the commercial
and technical options for the potential development of an oil and/or gas discovery.



“Puma” means Puma Energy
Pacific Holdings Pte Ltd, a subsidiary of Trafigura, that focuses on midstream and downstream, oil businesses.



“Puma Transaction”
means the transaction by which Puma acquired all of the shares of certain of our subsidiaries that held our refinery and petroleum
products distribution businesses for approximately $524.6 million. The transaction was completed on June 30, 2014.



“SEC” means the United
States Securities and Exchange Commission.



“SocGen” means Societe
Generale Hong Kong branch.



“State” or “PNG”means the independent State of Papua New Guinea.



“Tcfe” means trillion
standard cubic feet equivalent.



“Total” means Total
S.A., a French multinational integrated oil and gas company and its subsidiaries.



“Total SSA” means the
share purchase agreement under which Total acquired, through the purchase of all of the shares of SPI (200) Limited, a wholly
owned subsidiary, a gross 40.1275% interest in PRL 15. This agreement replaced the Total SPA on March 26, 2014.



Management Discussion and Analysis  INTEROIL CORPORATION  6







“UBS” means UBS A.G.



“USD”means United
States dollars.



“Westpac” means Westpac
Bank PNG Limited.



INTRODUCTION



We are an independent oil and gas business
with a sole focus on Papua New Guinea. Our assets include licenses covering the Elk, Antelope, Triceratops, Raptor and Bobcat
fields in the Gulf Province of Papua New Guinea, and exploration licenses covering about 16,000 square kilometers (about 4 million
acres) in Papua New Guinea. We have our main offices in Singapore and Port Moresby. We are listed on the New York Stock Exchange
and the Port Moresby Stock Exchange. At December 31, 2014, we had 361 full-time employees.



Prior to the Puma Transaction, our operations
were organized into four major segments; further details of these segments can be found in the “Discontinued Operations”
section of this MD&A. Following the Puma Transaction, we are an upstream exploration and production business.



BUSINESS
STRATEGY



Our strategy is to unlock significant
value to shareholders by finding oil and gas safely and competitively; enable its development through the right partnerships,
funding and project development capability; and to repeat this process. Running an effective and efficient business is the core
component of this strategy. This business model is founded on exploration and drilling discipline and success, strong commercial
and project development acumen and being a “partner of choice”. The focus areas for our strategy are to:



| | - | Continue to develop as a prudent
                                         and responsible business operator;
| | - | ------------------------------------------------------------------------------------------------------------



| | - | Enable our discovered resources
                                         with strategic joint venture partners;
| | - | ---------------------------------------------------------------------------------------------------------------



| | - | Maximize the value of our exploration
                                         assets; and
| | - | ------------------------------------------------------------------------------------------



| | - | Position for long-term success.
| | - | -------------------------------



Further details of our business strategy
can be found under the heading “Business Strategy” in our 2014 AIF available at www.sedar.com.



Management Discussion and Analysis  INTEROIL CORPORATION  7







OPERATIONAL
HIGHLIGHTS



Summary of operational highlights



A summary of the key operational matters
and events for the year for continuing operations is as follows:



| | · | New
                                         license applications
| | - | -----------------------------------------------------------------

| | - | On October 16, 2013, we applied
                                         to the DPE for new licenses over the area covered by PPL 236, PPL 237 and PPL 238, which
                                         were due to expire on March 6, 2014 (PPL 238) and March 27, 2014 (PPLs 236 and 237).
                                         We proposed new work programs and commitments for each new license. On March 6, 2014,
                                         applications for the new licenses were approved with PPL 474 replacing PPL 236, PPL 475
                                         replacing PPL 237, and PPL 476 and PPL 477 replacing PPL 238.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Airborne
                                         Field Survey
| | - | --------------------------------------------------------------

| | - | During late 2014, final contract
                                         negotiations were completed with CGG for acquisition of high resolution airborne Falcon
                                         gravity gradiometry over all our licenses. Subsequent to year end, acquisition of these
                                         surveys commenced on January 17, 2015.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Seismic
| | - | -------

| | - | In 2014, we acquired seismic
                                         data across a number of leads during the Zebra seismic program targeting PPL 476 and
                                         across the Antelope field in PRL 15 during the Antelope South (formerly Antelope Deep)
                                         seismic appraisal program. We also commenced a geophysical survey (Magnetotellurics)
                                         over the Antelope field in PRL 15, Antelope South prospect in PRL 15 with survey extensions
                                         into PPL 476, and Mule Deer lead in PPL 475.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | The Murua seismic program in
                                         PPL474 commenced on November 4, 2014 with acquisition expected to be completed mid-March
                                         2015. In late 2014, we began planning and initial preparation for an appraisal seismic
                                         program over the Raptor discovery. The Raptor seismic program commenced January 22, 2015.
                                         Appraisal seismic acquisition over the Bobcat discovery will follow on from the Raptor
                                         program.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Exploration
                                         program and appraisal drilling
| | - | -----------------------------------------------------------------------------------

| | - | In 2013, the Board approved a
                                         major exploration and appraisal drilling and seismic work program and budget for 2014-15.
                                         The program provides for the following exploration wells: PPL 474 (Wahoo-1), PPL 475
                                         (Raptor-1), PPL 476 (Bobcat-1) and PRL 15 (Antelope South). Appraisal wells were also
                                         scheduled for PRL 15 (Antelope-4, Antelope-5 and Antelope-6) and PRL 39 (Triceratops-3).
                                         Following Board approval of the program, we spudded the Wahoo-1, Raptor-1 and Bobcat-1
                                         wells in March 2014, updates of the drilling are noted below.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | PPL
                                         474 - Wahoo drilling program
| | - | -------------------------------------------------------------------------

| | - | Wahoo-1 exploration well is about
                                         170 kilometers southeast of our Elk and Antelope gas fields. The well was spudded on
                                         March 10, 2014.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On July 14, 2014, we announced
                                         that we had suspended drilling the Wahoo-1 well in PPL 474 after intersecting gas and
                                         higher-than expected pressures. Significant concentrations of methane, ethane, propane
                                         and butane were recorded, believed to be entering the well bore from permeable zones
                                         above the predicted reservoir zone, which was yet to be penetrated. Before Wahoo can
                                         be considered a discovery, further drilling is required to confirm the presence of a
                                         reservoir below the current total depth of the well. The DPE approved this suspension
                                         to enable us to re-evaluate the drilling plan.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | We intend to resume operations
                                         following a detailed review of well engineering, equipment, options, and regulatory approval
                                         of our revised plans. We currently expect to recommence drilling in 2015.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis  INTEROIL CORPORATION  8







| | · | PPL
                                         475 – Raptor drilling program
| | - | --------------------------------------------------------------------------

| | - | Raptor-1 exploration well is
                                         about 12 kilometers west of our Elk and Antelope gas fields. The well was spudded on
                                         March 28, 2014.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On October 21, 2014, we announced
                                         that Raptor-1 well had intersected 200 meters of the Kapau Limestone target zone, with
                                         wireline logs indicating the presence of hydrocarbons. On November 6, 2014, we announced
                                         that gas and condensate has been recorded at surface and directed through the flare at
                                         the well site.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On November 14, 2014, we notified
                                         the DPE of a discovery at Raptor-1 well. Results from the testing program, including
                                         pressure measurements, support the presence of a hydrocarbon column in excess of the
                                         200 meter gross gas interval already encountered by the well. Logs indicate a highly
                                         fractured reservoir system and mud loss during drilling supports the likely connectivity
                                         of the fracture network.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | The well was drilled to final
                                         total depth of 4,032 meters. We will continue comprehensive planning of future Raptor
                                         appraisal work, which will include additional appraisal seismic, appraisal drilling and
                                         a comprehensive testing program.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | PPL
                                         476 – Bobcat drilling program
| | - | --------------------------------------------------------------------------

| | - | Bobcat-1 exploration well is
                                         about 30 kilometers northwest of our Elk and Antelope gas fields. The well was spudded
                                         on March 5, 2014.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On October 21, 2014, we announced
                                         that Bobcat-1 well had successfully drilled through the Orubadi seal section and into
                                         the Kapau Limestone. During the week commencing November 10, 2014, the well was drilled
                                         to a final total depth of 3,207 meters after intersecting an interval of about 320 meters
                                         of Kapau Limestone.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On December 11, 2014, we announced
                                         that the well was tested over an interval of about 320 meters of Kapau limestone, the
                                         upper section of the target reservoir, and flowed and flared hydrocarbons at surface.
                                         Seismic mapping, wireline logging and testing results indicate the well is close to the
                                         gas-water contact in the transition zone. We notified the DPE of a discovery at the Bobcat-1
                                         exploration well, with a total depth of 3,207 meters.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | The well was further deepened
                                         to 3,501 meters by year end as the first part of the appraisal program to appraise reservoir
                                         quality. Further seismic program is planned in 2015 over the discovery to further evaluate
                                         the commerciality.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | PRL
                                         15 – Antelope-4 and Antelope-5 drilling program
| | - | --------------------------------------------------------------------------------------------

| | - | On September 16, 2014, we spudded
                                         the Antelope-4 appraisal well. The Antelope-4 appraisal well intersected the top reservoir
                                         at 1,911 meters. During January 2015, a derrick structural member was noted as being
                                         slightly bowed outside tolerance. The repairs were carried out and drilling recommenced
                                         post-re-certification and approval from the DPE.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On December 23, 2014, we spudded
                                         the Antelope-5 appraisal well. On February 16, 2015, we announced the Antelope-5 appraisal
                                         well had intersected the top reservoir at 1,534 meters. The well reached a total depth
                                         of 2,453 meters on February 24, 2015. We are currently continuing with the reservoir
                                         evaluation program, we plan to conduct an extended well test at Antelope-5 with pressure
                                         gauges monitoring pressure drawdown in other appraisal wells.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Progress continues with engineering
                                         and technical studies being conducted by Total towards concept selection of the development
                                         option for the PRL15 gas fields.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | PRL15
                                         – Total SSA
| | - | ----------------------------------------------------------

| | - | As part of our strategy to monetize
                                         gas resources, we signed and completed on March 26, 2014 the Total SSA under which Total
                                         acquired, through the purchase of all shares of a wholly owned subsidiary, a gross participating
                                         interest of 40.1275% (net 31.0988%, after the State back-in right of 22.5%) in PRL 15,
                                         which contains the Elk and Antelope gas fields.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | We retained 35.4839% (net 27.5%,
                                         after the State back-in right of 22.5%) of the PRL. Under the transaction with Total,
                                         we received $401.3 million as a completion payment, and are entitled to receive payments
                                         of $73.3 million upon a FID for an Elk and Antelope LNG Project, and $65.5 million upon
                                         the first LNG cargo shipment from such LNG Project.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | - | In addition to these fixed amounts, Total is obliged to make variable
                         payments for resources in PRL 15 that are in excess of 3.5 Tcfe, based on certification by two independent
                         certifiers following the drilling of up to three appraisal wells in PRL 15. Payments for resources greater
                         than 5.4 Tcfe will be paid at certification.                                                                                                            
| | - | Total will carry 75% of costs relating to our participating interest
                         in a maximum of three appraisal wells (up to a maximum of $50.0 million per well on a 100% basis). Certification
                         of the Elk and Antelope resources under the Total SSA is expected in 2015.                                                                                                                                                                                                             



Management Discussion and Analysis  INTEROIL CORPORATION  9







| |  | 
| |  | 

| | - | In addition to payments for the
                                         Elk and Antelope resources in PRL 15, Total has also agreed to pay $65.4 million per
                                         Tcfe for volumes over one Tcfe of additional resources discovered in PRL 15 from one
                                         exploration well. Any payment would be made at first gas production from a proposed Elk
                                         and Antelope LNG Project. Total will also carry 75% of costs relating to our participating
                                         interests of this exploration well to a maximum of $60.0 million on a 100% basis. Costs
                                         in excess of this are to be borne by the parties in accordance with their participating
                                         interests.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On March 26, 2014, we also completed
                                         the acquisition from IPI holders of an additional 1.0536% in PRL 15 for $41.53 million,
                                         satisfied by the issuance of 688,654 common shares in the capital of the Company, plus
                                         additional variable resource payments if interim or final resource certification exceeds
                                         7.0 Tcfe under the Total SSA. This increased our gross interests in PRL 15 to 36.5375%
                                         (net 28.3166%, after the State back-in right of 22.5%).
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On February 27, 2014, Oil Search
                                         agreed to acquire shares in certain PacLNG entities that hold a 22.835% interest in PRL
                                         15 for a consideration of $900.0 million plus further contingent payments based on resource
                                         certification.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On March 27, 2014 we received
                                         notification from Oil Search Limited of a dispute under the JVOA relating to PRL 15.
                                         The dispute related to the Total SSA, and Oil Search’s claim to have pre-emptive
                                         rights over the transaction under the JVOA. The matter was referred to arbitration and
                                         was heard in late November 2014 by the ICC International Court of Arbitration (the “ICA’).
                                         The ICA dismissed all claims by the PacLNG companies, affiliates of Oil Search, and declared
                                         that Oil Search had no pre-emptive rights as per their claims.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Subsequent to the year ended
                                         December 31, 2014, on February 27, 2015, all participants in PRL 15 unanimously voted
                                         to appoint Total as operator. The appointment will take effect in accordance with an
                                         operator transition plan and the terms of the JVOA. The appointment is subject to all
                                         necessary PNG Government approvals.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | PRL
                                         39 – Triceratops-3 appraisal well
| | - | ------------------------------------------------------------------------------

| | - | We have contracted a drilling
                                         rig to be mobilized to Papua New Guinea in 2015. This rig will be utilized for drilling
                                         of the Triceratops-3 appraisal well during 2015.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Pacific
                                         Rubiales Energy farm-in
| | - | ------------------------------------------------------------------------

| | - | On March 13, 2013, we completed
                                         the farm-in transaction with PRE originally entered into in July 2012 related to PREs
                                         acquisition of a 10.0% net (12.9% gross) participating interest in PPL 237 (now PPL 475),
                                         including the Triceratops structure and exploration acreage located within that license.
                                         PRE funded the final payment of $55.0 million of the full $116.0 million contribution
                                         due under the farm-in agreement. PacLNG and its affiliates are participating on a 25%
                                         beneficial equity basis in the portion of the PRE farm-in relating to PRL 39 by selling
                                         PRE a 3.2258% participating interest before State participation (2.5% after State participation).
                                         Other indirect participating interest holders are also participating by selling PRE a
                                         0.6591% participating interest before State participation, 0.5108% after State participation.
                                         Neither PacLNG Group nor any of the IPI holders participated in the sale of the indirect
                                         interest in PPL 475.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On January 17, 2014, we agreed
                                         to amend the JVOA to cap PRE’s carry for each well at $25.0 million, with costs
                                         in excess of this to be borne by the parties according to their equity participation
                                         interests.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Sale
                                         of refinery and distribution assets
| | - | ---------------------------------------------------------------------------------

| | - | On June 30, 2014, we completed
                                         the Puma Transaction for gross proceeds of $525.6 million, and made a gain on the Puma
                                         Transaction of $49.5 million. The subsidiaries sold pursuant to the Puma Transaction
                                         were previously included within the Midstream Refining and Downstream segments respectively.
                                         In addition, the shipping business which was previously included within the Corporate
                                         segment has been transferred to Puma. Following the Puma Transaction, the results of
                                         these operations have been classified as ‘discontinued operations’ and we
                                         are no longer organized as separate segments for reporting purposes. The continuing operations
                                         are considered to be an Upstream Exploration and Production business.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis  INTEROIL CORPORATION  10







| | · | Financing
| | - | ---------

| | - | On June 17, 2014, we replaced
                                         our $250.0 million facility with a $300.0 million syndicated, senior secured capital
                                         expenditure facility through a consortium of banks led by Credit Suisse. CBA, ANZ, UBS,
                                         Macquarie, BSP, BNP and Westpac, each of which was a participating lender under the original
                                         facility, in addition to new banks, MUFG and SocGen, support the new facility. Subsequent
                                         to the year end, on March 17, 2015, we signed an amendment to further extend the maturity date on this facility
                                         to the end of 2016 with Credit Suisse, CBA, ANZ, UBS AG, Macquarie, BSP, Westpac, MUFG
                                         and SocGen participating in the extension.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Other
                                         matters
| | - | ------------------------------------------------------

| | - | On July 21, 2014, we announced
                                         the plan to buy up to $50.0 million of our common shares within the next twelve months.
                                         We appointed Macquarie as our broker to handle the share buy-back. We redeemed and terminated
                                         730,000 of our common shares during the year ended December 31, 2014 for a total purchase
                                         price of $41.8 million.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On August 10, 2014, we appointed
                                         Chris Finlayson, former BG Group Chief Executive Officer and former Shell executive,
                                         as our Chairman-designate. Mr. Finlayson has nearly 40 years’ global experience
                                         and has led exploration and production ventures with BG Group and Shell. He replaced
                                         Dr. Gaylen Byker as our Chairman on October 16, 2014, who formally retired from the Board
                                         on the same date.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On September 8, 2014, Laurie
                                         Brown was appointed as Senior Vice President, Exploration. Mr. Brown has more than 30
                                         years’ international industry experience, including with BP, and as a Shell Global
                                         Consultant. He oversees our exploration strategy, exploration portfolio management, geoscience,
                                         and field data acquisition programs, including seismic and other technologies. His focus
                                         will be on identifying new exploration opportunities in our exploration licenses as we
                                         seek to expand and maximize the value of our portfolio.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On January 1, 2015, Dr. Ellis
                                         Armstrong, former BP Group E&P - Chief Financial Officer, was appointed as a non-executive
                                         director. Dr. Armstrong has more than 30 years of international oil and gas experience
                                         covering strategy and operations, major integrations, acquisitions and disposals and
                                         government relations.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On January 1, 2015, Ms. Katherine
                                         Hirschfeld, former Australasia BP Executive Director, was appointed as a non-executive
                                         director. Ms. Hirschfeld has board experience and international oil and gas experience
                                         covering oil refining, logistics, exploration and production in Australia, New Zealand,
                                         the United Kingdom and Turkey.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | On March 13, 2015, Mr. Yap Chee
                                         Keong, the current Chairman and non-executive independent director of CityNet Infrastructure
                                         Management Pte Ltd, was appointed as a non-executive director.  Mr. Yap is also
                                         a director of several Singapore based companies and also serves as a board member of
                                         the Accounting and Corporate Regulatory Authority and as a member of the Public Accountants
                                         Oversight Committee. He replaced Mr. Samuel Delcamp as a director, who formally retired
                                         from the Board on March 12, 2015.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis  INTEROIL CORPORATION  11







SELECTED
FINANCIAL INFORMATION AND HIGHLIGHTS



Consolidated Results for the
Year Ended December 31, 2014, 2013 and 2012



|Consolidated – Operating results                                                                    |  | Year ended  December
    31, |          
|--------------------------------------------------------------------------------------------------- |  | ---------------------------- | ---------
|($ thousands, except per share data)                                                                |  | 2014                         |          
|Interest revenue                                                                                    |  |                              | 1,991    
|Other                                                                                               |  |                              | 11,168   
|Total revenue                                                                                       |  |                              | 13,159   
|Adminstrative and general expenses                                                                  |  |                              | (39,245  
|Derivative (losses)/gains                                                                           |  |                              | -        
|Legal and professional fees                                                                         |  |                              | (14,091  
|Exploration costs, excluding exploration impairment                                                 |  |                              | (34,529  
|Finance costs, excluding interest expense                                                           |  |                              | (18,578  
|Gain on conveyance of exploration and evaluation assets                                             |  |                              | 340,540  
|Gain on available-for-sale investment                                                               |  |                              | -        
|Foreign exchange gains/ (losses)                                                                    |  |                              | 4,421    
|Share of net (losses)/gains of joint venture partnership 
accounted for using the equity
    method |  |                              | (17,558  
|EBITDA (1)                                                                                          |  |                              | 234,119  
|Depreciation and amortization                                                                       |  |                              | (3,628   
|Interest expense                                                                                    |  |                              | (11,409  
|Profit/(loss) for the period from continuing operations before income taxes                         |  |                              | 219,082  
|Income tax expense                                                                                  |  |                              | (1,119   
|Profit/(loss) for the period from continuing operations                                             |  |                              | 217,963  
|Profit for the period from discontinued operations, net of tax                                      |  |                              | 71,803   
|Profit/(loss) for the period                                                                        |  |                              | 289,766  
|Basic earnings/(loss) per share                                                                     |  |                              | 5.84     
|From continuing operations                                                                          |  |                              | 4.39     
|From discontinued operations                                                                        |  |                              | 1.45     
|Diluted earnings/(loss) per share                                                                   |  |                              | 5.82     
|From continuing operations                                                                          |  |                              | 4.38     
|From discontinued operations                                                                        |  |                              | 1.44     
|Total assets                                                                                        |  |                              | 1,340,130
|Total liabilities                                                                                   |  |                              | 311,477  
|Total long-term liabilities                                                                         |  |                              | 96,000   



Notes:



| | (1) | EBITDA is a non-GAAP measure and is
                                         reconciled to IFRS under the heading “Non-GAAP Measures and Reconciliation”.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis  INTEROIL CORPORATION  12







Analysis Comparing Financial Condition
as at December 31, 2014, 2013 and 2012



As at December 31, 2014, our debt-to-capital
ratio (being debt divided by [shareholders’ equity plus debt]) was 6%, compared to 26% as at December 31, 2013 and 19% as
at December 31, 2012, well below our targeted maximum gearing level of 50%. Gearing targets are based on several factors including
operating cash flows, future cash needs for development, capital market and economic conditions, and are assessed regularly. Our
current ratio (being current assets divided by current liabilities), which measures our ability to meet short-term obligations,
was 4.5 times as at December 31, 2014, compared to 1.0 times as at December 31, 2013 and 1.4 times as at December 31, 2012. The
current ratio satisfied our internal target of above 1.5 times as at December 31, 2014.



Variance in Total Assets:

As at December 31, 2014, our total assets
amounted to $1,340.1 million, compared with $1,305.8 million as at December 31, 2013 and $1,303.3 million as at December 31, 2012.
The increase of $34.3 million, or 3%, from December 31, 2013 was primarily due to:

| | - | $286.5 million increase in cash
                                         and cash equivalents and restricted cash, mainly due to the receipt of net proceeds from
                                         the Puma Transaction, receipt of the completion payment in relation to the Total SSA,
                                         offset by expenditure on appraisal and exploration of our licenses, repayment of secured
                                         term loan facilities, and the redemption of our shares during the year ended December
                                         31, 2014; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | $467.7 million increase in trade
                                         and other receivables, largely as a result of the recognition of the interim resource
                                         payment receivable in relation to the conveyance proceeds from Total SSA calculated using
                                         the best case scenario provided by GCA of 7.10 Tcfe for the Elk and Antelope fields.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



These increases have been partially
offset by:

| | - | $259.8 million decrease in exploration
                                         and evaluation assets, primarily resulting from the allocation of Total SSA conveyance
                                         proceeds against the respective PRL 15 capitalized costs on the balance sheet prior to
                                         recognizing any gain on conveyance during the year;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | $17.6 million decrease in investments
                                         accounted for using equity method, which is attributable to our share of losses incurred
                                         by the PNG LNG joint venture resulting from the impairment of joint venture assets, as
                                         we are now progressing the LNG Project development jointly with Total; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | The Puma Transaction resulted in
                                         the decrease in plant and equipment by $232.1 million, inventories by $158.1 million
                                         and deferred tax assets by $48.2 million.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Comparing December 31, 2013 to December
31, 2012, the increase of total assets of $2.5 million or 0.2% was primarily due to the capitalization of expenditure of our oil
and gas properties of $74.1 million associated mainly with appraisal of the Elk and Antelope fields and preparatory work for drilling
three exploration wells within our PPL 236, PPL 237 and PPL 238 licenses (since replaced with PPL 474, PPL 475, PPL476 and PPL
477); the $24.7 million increase in non-current receivables attributable to credits given to PacLNG and other indirect participating
interest holders for their participation in the sell down of interest as part of the Farm-in transaction with PRE; and the $17.6
million increase in equity accounted investment in Midstream Liquefaction joint venture due to adoption of ‘IFRS 11 Joint
Agreements’. These increases were offset by a $62.9 million decrease in our trade and other receivables due to change in
our discounting facility to a non-recourse basis, and receipt of $29.9 million from IPI partners in settlement of other receivables
outstanding at December 31, 2012; a $36.8 million decrease in crude and products inventory balances due to shipment timing; a
$15.3 million decrease in deferred tax assets mainly resulting from the impact of unfavorable foreign exchange movements affecting
temporary differences on translation of non-monetary assets of the refinery operation using year-end rates; and a $10.6 million
decrease in plant and equipment mainly due to depreciation charges incurred during the year.



Variance in Total Liabilities:

As at December 31, 2014, our total liabilities
amounted to $311.5 million, compared with $573.0 million at December 31, 2013 and $527.2 million at December 31, 2012. The decrease
of $261.5 million, or 46%, from December 31, 2013 was primarily due to:

| | - | A decrease of $200.5 million in
                                         secured and unsecured loans payable due to the full repayment in June 2014 of the BSP
                                         and Westpac combined secured loan facility, the ANZ, BSP and BNP syndicated loan facility
                                         and the full repayment in April 2014 of the Credit Suisse syndicated secured loan post
                                         receipt of Total SSA completion payment; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis  INTEROIL CORPORATION  13







| | - | The Puma Transaction also resulted
                                         in the decrease in working capital facilities by $36.4 million and income tax payable
                                         by $15.3 million.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Comparing December 31, 2013 to December
31, 2012, the increase of total liabilities of $45.7 million or 9% was primarily due to the net increase of $79.6 million in secured
loans payable primarily on drawdown of the Credit Suisse secured loan of $100.0 million, and the receipt of PRE’s $75.0
million initial staged cash payment. These increases were partially offset by the $57.9 million decrease in working capital facilities
mainly due to discounted receivables under the BNP working capital facility being made non-recourse and no longer included within
our liabilities; and the $44.3 million decrease in accounts payable and accrued liabilities, mainly related to timing of payments
on certain crude cargo purchases.



Analysis of Consolidated Financial
Results Comparing Year Ended December 31, 2014 and 2013



Our net loss for the quarter ended December
31, 2014 was $64.2 million, compared with a net loss of $24.8 million for the same quarter in 2013, an increase of $39.4 million,
which was primarily driven by a $17.6 million loss for our share of losses incurred by the PNG LNG joint venture resulting from
the impairment of joint venture assets, a $24.2 adjustment to the carrying value of Total S.A. receivable balance based on our
assessment of the revised expected cash flow timing of the Interim Resource Payment to the end of 2015 to accommodate the drilling
of the Antelope-6 appraisal well (which was initially optional), and an $8.9 million reduction in profit from discontinued operations
for the quarter ended December 31, 2014 compared to the same quarter of 2013.



Our net profit for the year ended December
31, 2014 was $289.8 million, compared with a net loss of $40.3 for the same period in 2013, an increase of profit by $330.1 million
which was primarily driven by the gain on conveyance of exploration and evaluation assets in relation to the Total SSA and the
Puma Transaction.



The table below analyzes key movements,
the net of which primarily explains the variance in results between the quarters and years ended December 31, 2014 and 2013:



|  | QuarterlyVariance($ millions) | YearlyVariance($ millions) |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|- | ----------------------------- | -------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                               |                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|  | ($39.4)                       | $330.1                     |  | Net profit/(loss) variance for the comparative periods primarily due to:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|  |                               |                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Ø | $0.0                          | $340.0                     |  | Gain on conveyance of exploration and evaluation assets in relation to the completion of the
    Total SSA on March 26, 2014 under which Total acquired, through the purchase of all shares of a wholly owned subsidiary, a
    gross participating interest of 40.1275% (net 31.0988%, after the State back-in right of 22.5%) in PRL 15, which contains
    the Elk and Antelope gas fields.                                                                                                                                                                                                  
|  |                               |                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Ø | ($8.9)                        | $53.2                      |  | Increase in profit from discontinued
        operations for year ended December 31, 2014 primarily derived from the $49.5 million gain from the Puma Transaction and
        the profits of the operating business during the first half of 2014 prior to the Puma Transaction.
        
        Net loss from discontinued operations
        for the quarter ended December 31, 2014 of $1.7 million (compared to operating profit of $7.2 million in the same quarter
        of prior year) was mainly due to certain corporate costs incurred by us in relation to discontinued operations.



Management Discussion and Analysis  INTEROIL CORPORATION  14







|Ø | ($7.6)  | ($20.1) |  | Increase in office and administration
        and other expenses for the quarter resulted from an increase in the support and management costs incurred as a result
        of increased drilling operations; in addition, $1.6 million of increase in share compensation expenses due to a new grant
        of restricted stock units and accelerated stock compensation expenses on options and restricted stock units owned by retired
        senior management or employees affected by our office restructure; and $0.8 million of restructuring costs relating to
        the closure of the corporate office in Cairns, Australia.
        
        Increase in office and administration
        and other expenses for the year resulted from an increase in the support and management costs incurred as a result of
        increased drilling operations; in addition, $12.0 million of restructuring costs relating to the closure of the corporate
        office in Cairns, Australia; a $3.7 million increase in share compensation expenses due to a new grant of restricted stock
        units and accelerated stock compensation expenses on options owned by retired senior management, our office restructure
        or employees affected by Puma Transaction; and offset by a $2.0 million decrease in redundancy payroll costs as a result
        of the retirement of senior executives paid during the year ended December 31, 2013.
|- | ------- | ------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |         |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Ø | $1.8    | ($15.7) |  | Increase in exploration costs was mainly attributable to the expensing of seismic activities
    over Bobcat, Zebra-Razorback leads, and Antelope South prospects during the periods. The decrease for the quarter ended December
    31, 2014 is due to the expensing of $6.8 million in relation to the buy-back of PNGEI’s right to participate up to a
    4.25% interest in exploration wells numbered 9 to 24 for 100,000 InterOil common shares in the prior year quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  |         |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Ø | $3.2    | ($16.9) |  | Increase in finance costs for the year was primarily a result of the facility fees incurred
    for the Credit Suisse facility that was obtained in the fourth quarter of 2013 and refinanced in June 2014.  The decrease
    for the quarter ended December 31, 2014 is due to the non-utilization of the Credit Suisse facility during the quarter as
    compared to $100.0 million drawn under the facility in the prior year quarter.  As at December 31, 2014, there were
    no drawdowns made on the refinanced Credit Suisse facility.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|  |         |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Ø | ($15.2) | $1.9    |  | Increase in interest income for the year was attributable to the interest accretion income
    on the receivables recognized in relation to interim resource payments expected under the Total SSA calculated using the best
    case scenario provided by GCA of 7.10 Tcfe for the Elk and Antelope fields. During the quarter ended December 31, 2014, this
    accretion was partly reduced by the adjustment of carrying value of Total S.A. receivable balance based on our assessment
    of the revised expected cash flow timing of the Interim Resource Payment to the end of 2015 to accommodate the drilling of
    the Antelope-6 appraisal well (which was initially optional).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



Management Discussion and Analysis  INTEROIL CORPORATION  15







|Ø | $1.3    | $8.5    |  | Increase in other revenues for the quarter predominantly resulted from recharges
    to Puma on certain transition services provided post divestment.  Increase in other revenues for the year resulted
    from higher recoveries and increased utilization relating to exploration services (offset by an increase in the costs incurred
    by these services as a result of increased operations).  Following the divestment of the operating businesses in
    the Puma Transaction on June 30, 2014, we have ceased to operate a shared services model that resulted in the recognition
    of other revenue from the internal support of the exploration and development activities.  These costs have been
    allocated to those activities as a recovery of cost, rather than as other revenue.  We are also moving to more outsourced
    services model with third party rigs and services rather than internally servicing the exploration and development operations.
|- | ------- | ------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |         |         |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|Ø | ($17.5) | ($19.8) |  | Increase in loss of joint venture partnership accounted for using equity method was attributable
    to our share of losses incurred by the PNG LNG joint venture resulting from the impairment of joint venture assets, as we
    are now progressing the LNG Project development jointly with Total.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             



Comparing the year ended December 31,
2013 to the year ended December 31, 2012, the increase in net loss of $42.0 million was primarily driven by a $15.5 million reduction
in profits generated by our discontinued operations, a $6.0 million increase in legal and professional fees primarily due to expensing
of costs associated with financing and listing options that were considered during the year, a $7.7 million decrease in other
revenues resulting from lower activities and related recoveries from the drilling and construction activities during the year,
a $4.9 million increase in exploration costs mainly attributable to the expensing of $6.8 million in relation to the buy-back
of PNG Energy investors’ right to participate up to a 4.25% interest in exploration wells numbered 9 to 24 for 100,000 InterOil
shares and a $6.9 million increase in finance costs and interest expense due to financing fees and interest incurred on the Credit
Suisse-led facility.



Analysis of Consolidated Cash
Flows Comparing Quarters and Years Ended December 31, 2014, 2013 and 2012



As at December 31, 2014, we had cash,
cash equivalents, and restricted cash of $401.7 million (December 31, 2013 - $115.2 million and December 31, 2012 - $98.7 million),
of which $8.3 million (December 31, 2013 - $53.2 million and December 31, 2012 - $49.0 million) was restricted. Of the total restricted
cash at December 31, 2014, $8.0 million was restricted as a debt reserve under the Credit Suisse syndicated secured loan and the
balance was made up of a cash deposit on office premises and term deposits on our PPLs.



Cash flows from discontinued operations
have been combined with the cash flows from continuing operations in the consolidated statements of cash flows for the quarters
and years ended December 31, 2014, 2013 and 2012.



|($ thousands)                                |  | Year ended December 31 |         
|-------------------------------------------- |  | ---------------------- | --------
|                                             |  | 2014                   |         
|Net cash (outflows)/inflows from:            |  |                        |         
|Operations                                   |  |                        | (81,206 
|Investing                                    |  |                        | 640,136 
|Financing                                    |  |                        | (227,492
|Net cash movement                            |  |                        | 331,438 
|Opening cash                                 |  |                        | 61,967  
|Exchange losses on cash and cash equivalents |  |                        | -       
|Closing cash                                 |  |                        | 393,405 



Management Discussion and Analysis  INTEROIL CORPORATION  16







Cash flows (used in)/generated from
operating activities



Cash outflows from operating activities
for the quarter ended December 31, 2014 were $20.3 million compared with an inflow of $61.1 million for the quarter ended December
31, 2013, a net increase in cash outflows of $81.4 million. Cash outflows from operating activities for the year ended December
31, 2014 were $81.2 million compared with an inflow of $70.6 million for the year ended December 31, 2013, a net increase in cash
outflows of $151.8 million.

This table outlines key variances in the
cash (outflows)/inflows from operating activities between the quarters and years ended December 31, 2014 and 2013:



|  | Quarterlyvariance($ millions) | Yearlyvariance($ millions) |                                                                                                                                                                                                                                                                                                                                                                                                     
|- | ----------------------------- | -------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                                     
|  | ($81.4)                       | ($151.8)                   | Variance for the comparative periods primarily due to:                                                                                                                                                                                                                                                                                                                                              
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                                     
|Ø | ($28.8)                       | ($55.8)                    | Increase in cash used in operations prior to changes in operating working capital for the
    quarter was mainly due to the increase in net profit from operations adjusted for the increased accretion income on receivable,
    gain on sale of refining and downstream businesses in the Puma Transaction and gain on conveyance of PRL15 pursuant to the
    Total SSA.                         
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                               |                            | Increase in cash used in operations prior to changes in operating working capital for the
    year was mainly due to the increase in net loss from operations adjusted for the accretion income on receivable from Total.                                                                                                                                                                           
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                                     
|Ø | ($52.6)                       | ($96.0)                    | Decrease in cash employed by operations relating to changes in operating working capital for
    the quarter was due to a $53.7 million decrease in accounts payable and accrued liabilities, a $20.8 million increase in inventories
    a $3.7 million increase in other current assets and prepaid expenses; and partially offset by a $25.6 million decrease in
    trade and other receivables.
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                                     
|  |                               |                            | Increase in cash employed by operations relating to changes in operating working capital for
    the year was due to a $44.3 million increase in trade and other receivables, a $29.8 million decrease in trade and other payables
    and a $22.3 million increase in inventories; and partially offset by a $0.3 million decrease in other current assets and prepaid
    expenses.               



Cash flows generated from/(used in)
investing activities



Cash outflows from investing activities
for the quarter ended December 31, 2014 were $28.7 million compared with an outflow of $44.4 million for the quarter ended December
31, 2013. Cash inflows from investing activities for the year ended December 31, 2014 were $640.1 million compared with an outflow
of $133.4 million for the year ended December 31, 2013.



Management Discussion and Analysis  INTEROIL CORPORATION  17







This table outlines key variances in cash
inflows/(outflows) from investing activities between the quarters and years months ended December 31, 2014 and 2013:



|  | Quarterlyvariance($ millions) | Yearlyvariance($ millions) |                                                                                                                                                                                                                                                                                                                                                                                    
|- | ----------------------------- | -------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                    
|  | $15.7                         | $773.5                     | Variance for the comparative periods primarily due to:                                                                                                                                                                                                                                                                                                                             
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                    
|Ø | $0.0                          | $428.0                     | Receipt of $524.6 million gross proceeds from the Puma Transaction less $39.4 million of cash
    and cash equivalents held by those businesses, $52.9 million of secured loan repayments undertaken as part of the Puma Transaction,
    and $4.3 million of transaction costs.                                                                                                   
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                    
|Ø | $0.0                          | $401.3                     | Receipt of a $401.3 million completion payment from Total in accordance with the Total SSA
    during quarter ended March 31, 2014.                                                                                                                                                                                                                                                
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                    
|Ø | $14.3                         | $49.1                      | The reduction in restricted cash requirements was mainly due to the transfer of restricted
    cash balances (and the associated working capital facilities) in relation to the BNP Paribas led working capital facilities
    as part of the Puma Transaction.                                                                                                                    
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                    
|Ø | ($132.6)                      | ($329.1)                   | Increase in cash outflows on exploration and development expenditures was mainly due to the
    increased drilling activities (5 wells being drilled in the year ended December 31, 2014 as opposed to minimal drilling in
    prior periods), transaction costs associated with the completion of the Total SSA and premium paid for indirect participating
    interests buyback.
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                    
|Ø | $67.5                         | $99.7                      | Higher cash calls and related inflows from joint venture partners relating to the receipt
    of funds from PRE for historical Triceratops-2 well costs, the receipt of funds from Oil Search in relation to the Tagula
    seismic program, and the receipt of cash calls from Total and Oil Search on PRL 15 appraisal programs.                                                 
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                                                                    
|Ø | $60.6                         | $118.1                     | Movement in non-operating working capital for the periods was primarily related to trade payables
    and accruals in our exploration and development operations.                                                                                                                                                                                                                  



Cash flows (used in)/generated from
financing activities



Cash flow movement from financing activities
for the quarter ended December 31, 2014 amounted to $Nil, compared with an inflow of $4.8 million for the quarter ended December
31, 2013. Cash outflows from financing activities for the year ended December 31, 2014 amounted to $227.5 million, compared with
an inflow of $75.1 million for the year ended December 31, 2013.



This table outlines key variances in cash
(outflows)/inflows from financing activities between quarters and years ended December 31, 2014 and 2013:



|  | Quarterlyvariance($ millions) | Yearlyvariance($ millions) |                                                                                                                                                                                                                                                                                                                                         
|- | ----------------------------- | -------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                         
|  | $0.0                          | ($302.6)                   | Variance for the comparative periods primarily due to:                                                                                                                                                                                                                                                                                  
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                         
|Ø | $0.0                          | $34.4                      | Termination settlement to Mitsui for the CSP funding provided by Mitsui and related interests
    during year ended December 31, 2013.                                                                                                                                                                                                  
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                         
|Ø | $0.0                          | $12.9                      | Full repayment of the secured loan from Westpac during year ended December 31, 2013.                                                                                                                                                                                                                                                    
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                         
|Ø | $0.0                          | ($47.5)                    | Net repayment of the BSP and Westpac combined secured loan facility during year ended December
    31, 2014.                                                                                                                                                                                                                            
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                         
|Ø | $0.0                          | ($193.0)                   | Drawdown of $50.0 million from the Credit Suisse syndicated secured loan facility during the
    quarter ended March 31, 2014 (as opposed to the $93.0 million drawdown of the Credit Suisse secured facility - net of transaction
    costs in year 2013) and the full loan repayment of $150.0 million in June 2014.                  
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                         
|Ø | $0.0                          | ($73.6)                    | Receipt of a $76.0 million staged cash payment from PRE for the sale of a 10.0% net (12.9%
    gross) participating interest in PPL 237 (now PPL 475) during the quarter ended March 31, 2013 and a $2.4 million commission
    was subsequently paid to PacLNG for facilitating the transaction during the quarter ended June 30, 2013.
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                         
|Ø | $0.0                          | $78.8                      | Movement in utilization of the BNP working capital facility in our discontinued operations
    from Puma Transaction.                                                                                                                                                                                                                   
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                         
|Ø | $0.0                          | ($68.0)                    | Full repayment of the ANZ, BSP and BNP syndicated loan was made in June 2014.                                                                                                                                                                                                                                                           
|  |                               |                            |                                                                                                                                                                                                                                                                                                                                         
|Ø | $0.0                          | ($41.8)                    | During the quarter ended September 30, 2014, we redeemed 730,000 common shares with a total
    purchase price of $41.8 million.                                                                                                                                                                                                        



Management Discussion and Analysis  INTEROIL CORPORATION  18







Summary of Consolidated Quarterly Financial
Results for Past Eight Quarters



This table contains consolidated results
for the eight quarters ended December 31, 2014 on a consolidated basis.









|Quarters ended                       |  | 2014           |         |   | 2013   | 
|------------------------------------ |  | -------------- | ------- | - | ------ | 
|($ thousands except per share 
data) |  | Dec-31
    (2) |         |   | Sep-30 | 
|Total revenues                       |  |                | (13,182 | ) |        | 
|EBITDA (1)                           |  |                | (60,443 | ) |        | 
|Net (loss)/profit                    |  |                | (64,205 | ) |        | 
|From continuing operations           |  |                | (62,474 | ) |        | 
|From discontinued operations         |  |                | (1,731  | ) |        | 
|Basic (loss)/earnings per share      |  |                | (1.30   | ) |        | 
|From continuing operations           |  |                | (1.26   | ) |        | 
|From discontinued operations         |  |                | (0.04   | ) |        | 
|Diluted (loss)/earnings per share    |  |                | (1.30   | ) |        | 
|From continuing operations           |  |                | (1.26   | ) |        | 
|From discontinued operations         |  |                | (0.04   | ) |        | 





| | (1) | EBITDA is a non-GAAP measure and is
                                         reconciled to IFRS under the heading “Non-GAAP Measures and Reconciliation”.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Total revenues for the quarter ended
                                         December 31, 2014 include an out-of-period adjustment of $7.6 million relating to interest
                                         accretion income recognized in prior quarters of 2014.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



DISCOUNTINUED
OPERATIONS



On June 30, 2014, we completed the Puma
Transaction for gross proceeds of $525.6 million, and made a gain of $49.5 million. The subsidiaries sold pursuant to the Puma
Transaction were previously included within the Midstream Refining and Downstream segments respectively. In addition, the shipping
business which was previously included within the Corporate segment has been transferred to Puma. Following the Puma Transaction,
the results of these operations have been classified as ‘discontinued operations’ and we are no longer organized as
separate segments for reporting purposes. All balance sheet items under refinery and distribution businesses were derecognized
from the consolidated balance sheet as of June 30, 2014.



Prior to the Puma Transaction, our operations
were organized into four major segments:



|Segments   |  | Operations                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Upstream   |  | Exploration and Development –
        Explore, appraise and develop hydrocarbon structures in Papua New Guinea.
        Proposed activities include commercializing,
        monetizing and developing oil and gas structures through production facilities, including a liquefied natural gas plant.                                                                                                                                          
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Midstream  |  | Refining – Produce refined petroleum products at Napa Napa in Port Moresby, Papua New
    Guinea, for domestic and export markets.                                                                                                                                                                                                                                                                                                             
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Downstream |  | Wholesale and Retail Distribution– Wholesale and retail marketing and distribution
    of refined petroleum products in Papua New Guinea.                                                                                                                                                                                                                                                                                                      
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                
|Corporate  |  | Corporate – Support business segments through
        business development and improvement activities, general services, administration, human resources, executive management,
        financing and treasury, government affairs and investor relations.
        This segment also managed our
        shipping business, which operated two vessels that transport petroleum products within Papua New Guinea and the South
        Pacific.



Management Discussion and Analysis  INTEROIL CORPORATION  19







We made a gain on the Puma Transaction
of $49.5 million during the quarter ended June 30, 2014. The gain has been calculated as follows:



|($ thousands)                        |  | June 30, 2014 |         
|------------------------------------ |  | ------------- | --------
|                                     |  |               |         
|Consideration                        |  |               |         
|Cash                                 |  |               | 525,590 
|Less settlement of intercompany debt |  |               | (52,877 
|Less amount refundable to Puma       |  |               | (1,038  
|Less transaction costs               |  |               | (4,258  
|Total consideration                  |  |               | 467,417 
|Assets and liabilities disposed of   |  |               |         
|Cash and cash equivalents            |  |               | 39,432  
|Trade and other receivables          |  |               | 150,375 
|Other current assets                 |  |               | 94      
|Inventories                          |  |               | 143,542 
|Prepaid expenses                     |  |               | 3,547   
|Plant and equipment                  |  |               | 230,682 
|Deferred tax assets                  |  |               | 46,354  
|Trade and other payables             |  |               | (110,338
|Income tax payable                   |  |               | (21,190 
|Derivative financial instruments     |  |               | (2,243  
|Working capital facilities           |  |               | (57,234 
|Asset retirement obligations         |  |               | (5,140  
|Net assets disposed of               |  |               | 417,881 
|Net gain on sale of subsidiaries     |  |               | 49,536  



Summary of Debt Facilities Repaid
or Transferred to Puma (as of June 30, 2014)



Below is a table listing the debt facilities
that were either repaid in full or transferred to Puma in connection with the Puma Transaction on June 30, 2014.



Management Discussion and Analysis  INTEROIL CORPORATION  20







|Organization                                      |  | Segment              |  | Facility |             |  | Original Maturity 
dates
|------------------------------------------------- |  | -------------------- |  | -------- | ----------- |  | ------------------------
|ANZ, BSP and BNP syndicated secured loan facility |  | Midstream - Refining |  | $        | 100,000,000 |  |                         
|BNP working capital facility                      |  | Midstream - Refining |  | $        | 270,000,000 |  |                         
|BNP non-recourse discounting facility             |  | Midstream - Refining |  | $        | 80,000,000  |  |                         
|Westpac PGK working capital facility              |  | Downstream           |  | $        | 18,540,000  |  |                         
|BSP PGK working capital facility                  |  | Downstream           |  | $        | 18,540,000  |  |                         
|BSP and Westpac combined secured facility         |  | Downstream           |  | $        | 24,780,077  |  |                         



Further
details in relation to discontinued operations can be found under the heading “Discontinued Operations” in our 2014
AIF available at www.sedar.com.



LIQUIDITY
AND CAPITAL RESOURCES



Summary of Debt Facilities



This table summarizes the debt facilities
available to us and the balances outstanding as at December 31, 2014.



|Organization                                                          |  | Facility |             |  | Balance  outstanding
     December 31,  2014 |   |            | Weighted 
average 
interest
     rate |  |  | Maturity
date
|--------------------------------------------------------------------- |  | -------- | ----------- |  | -------------------------------------------- | - | ---------- | ------------------------------------- |  |  | -------------
|Credit Suisse syndicated, senior secured capital expenditure facility |  | $        | 300,000,000 |  |                                              |   | $Nil       |                                       |  |  | Nil%         
|Convertible Notes                                                     |  | $        | 70,000,000  |  |                                              | $ | 69,998,000 |                                       |  |  | 7.91%        



| | (1) | Effective rate after
                                         bifurcating the equity and debt components of the $70.0 million principal amount of 2.75%
                                         convertible senior notes due 2015.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Credit Suisse Syndicated Secured
Loan



In November 2013, we secured a $250.0
million secured syndicated capital expenditure facility for an approved seismic data acquisition and drilling program. The facility
was provided by a group of banks led by Credit Suisse and included CBA, ANZ, UBS, Macquarie, BSP, BNP Paribas and Westpac. Post
completion of the Total SSA on March 26, 2014, this facility was fully repaid in April 2014.



On June 17, 2014, we replaced our $250.0
million loan with Credit Suisse with a $300.0 million syndicated, senior secured capital expenditure facility through a consortium
of banks led by Credit Suisse. CBA, ANZ, UBS, Macquarie, BSP, BNP and Westpac, each of which was a participating lender under
the original facility, in addition to new banks, MUFG and SocGen, support the new facility. The new facility has an annual interest
rate of LIBOR plus 5% and matures at the end of 2015. No drawdowns have been made under the new facility as at December 31, 2014.



Subsequent to the year end, on
March 17, 2015, we signed an amendment to further extend the maturity date on this facility to the end of 2016 with Credit
Suisse, CBA, ANZ, UBS AG, Macquarie, BSP, Westpac, MUFG and SocGen participating in the extension.



Management Discussion and Analysis  INTEROIL CORPORATION  21







Unsecured 2.75% Convertible
Notes



On November 10, 2010, we completed the
issuance of $70.0 million of Convertible Notes. The Convertible Notes rank junior to any secured indebtedness and to all existing
and future liabilities of us and our subsidiaries, including the Credit Suisse syndicated secured loan facility, trade payables
and lease obligations.



We pay interest on the Convertible Notes
semi-annually on May 15 and November 15. The Convertible Notes are convertible into cash or our common shares, based on an initial
conversion rate of 10.4575 common shares per $1,000 principal amount, which represents an initial conversion price of approximately
$95.625 per common share. The initial conversion price is subject to standard anti-dilution provisions designed to maintain the
value of the conversion option in the event we take certain actions with respect to our common shares, such as stock splits, reverse
stock splits, stock dividends and cash dividends, that affect all of the holders of our common shares equally and that could have
a dilutive effect on the value of the conversion rights of the holders of the Convertible Notes or that confer a benefit on our
current shareholders not otherwise available to the Convertible Notes. On conversion, holders will receive cash, common shares
or a combination thereof, at our option. The Convertible Notes are redeemable at our option if our share price has been at least
125% ($119.53 per share) of the conversion price for at least 15 trading days during any 20 consecutive trading day period. On
a fundamental change, which would include a change of control, holders may require us to repurchase their Convertible Notes for
cash at a purchase price equal to the principal amount of the notes to be repurchased, plus accrued and unpaid interest.



Only $2,000 of the Convertible Notes has
been converted into cash since issuance.



Other Sources of Capital



Our share of expenditures on exploration
wells, appraisal wells and extended well programs is funded by capital raising activities, debt, cash calls from joint venture
partners and asset sales.



Cash calls are made on Total, Oil Search
and PNGDV for their share and carry (where applicable) of expenditure on appraisal wells and extended well programs under agreements
we have with them. Cash calls will also be made on PRE for exploration activities in PPL 475 (formerly PPL 237) and appraisal
activities in the Triceratops field.



Capital Expenditure



Net expenditure on exploration and
evaluation assets



Net capital expenditures on our exploration
and evaluation assets in Papua New Guinea for the quarter ended December 31, 2014 were $83.6 million, compared with $31.2 million
during the same period of 2013. Total net expenditures for the year ended December 31, 2014 were $355.7 million compared to $74.1
million during the same period in 2013.



This analysis outlines key net expenditures
in the quarter and year ended December 31. 2014:



|  | Quarterly movement
        ($ millions) | Yearly movement
        ($ millions) |                                                                                         
|- | --------------------------------------- | ------------------------------------ | ----------------------------------------------------------------------------------------
|  |                                         |                                      |                                                                                         
|  | $245.0                                  | $584.8                               | Opening balance of exploration and evaluation assets                                    
|  | $80.0                                   | $352.1                               | Net capital expenditure consisting of following:                                        
|  |                                         |                                      |                                                                                         
|Ø | $26.3                                   | $90.0                                | Costs for site preparation, pre-spud work and drilling and testing of the Raptor-1 well.
|  |                                         |                                      |                                                                                         
|Ø | $3.0                                    | $36.5                                | Costs for site preparation, pre-spud work and drilling of the Wahoo-1 well.             
|  |                                         |                                      |                                                                                         
|Ø | $34.7                                   | $88.4                                | Costs for site preparation, pre-spud work and drilling and testing of the Bobcat-1 well.



Management Discussion and Analysis  INTEROIL CORPORATION  22







|Ø | ($2.1) | $44.8    | Costs incurred for financial advisor fees and transaction costs for the monetization
    of the Elk and Antelope fields.                                                                                                                                                      
|- | ------ | -------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |        |          |                                                                                                                                                                                                                                                                               
|Ø | $0.0   | $41.5    | Premium paid on buyback of 1.0536% indirect participation interest in PRL 15.                                                                                                                                                                                                 
|Ø | ($1.9) | $4.9     | Seismic over the Antelope field in PRL 15.                                                                                                                                                                                                                                    
|  |        |          |                                                                                                                                                                                                                                                                               
|Ø | $4.1   | $4.6     | Costs for site preparation, pre-spud work for Triceratops-3 well.                                                                                                                                                                                                             
|  |        |          |                                                                                                                                                                                                                                                                               
|Ø | $8.5   | $10.6    | Costs for site preparation, pre-spud work and drilling of the Antelope-4 well.                                                                                                                                                                                                
|  |        |          |                                                                                                                                                                                                                                                                               
|Ø | $1.9   | $3.4     | Costs for site preparation, pre-spud work and drilling of the Antelope-5 well.                                                                                                                                                                                                
|  |        |          |                                                                                                                                                                                                                                                                               
|Ø | ($1.3) | $12.2    | Expenditure/(usage) of drilling inventory.                                                                                                                                                                                                                                    
|  |        |          |                                                                                                                                                                                                                                                                               
|Ø | $4.8   | $5.0     | Expenditure relating to concept select studies led by Total for PRL 15.                                                                                                                                                                                                       
|  |        |          |                                                                                                                                                                                                                                                                               
|Ø | $2.0   | $10.2    | Other expenditure, including equipment purchases and a portion of Antelope-4 and Antelope-5
    well costs that have been carried by Total but included in our net share of costs as the carry has been offset against the
    Interim Resource Payment receivable from Total.
|  |        |          |                                                                                                                                                                                                                                                                               
|  | $0.0   | ($611.9) | Allocation of costs against Total SSA proceeds                                                                                                                                                                                                                                
|  |        |          |                                                                                                                                                                                                                                                                               
|  | $325.0 | $325.0   | Closing balance of exploration and evaluation assets                                                                                                                                                                                                                          



Gross expenditure on exploration
and evaluation assets



Gross capital expenditures on our exploration
and evaluation assets in Papua New Guinea for the quarter ended December 31, 2014 was $157.7 million. Total gross expenditures
for the year ended December 31, 2014 were $500.7 million.



This analysis outlines key gross expenditures
in the quarter and year ended December 31, 2014:



|  | Quarterly movement
        ($ millions) | Yearly movement
        ($ millions) |                                                                                                                         
|- | --------------------------------------- | ------------------------------------ | ------------------------------------------------------------------------------------------------------------------------
|  |                                         |                                      |                                                                                                                         
|  | $156.2                                  | $497.1                               | Gross capital expenditure consisting of following:                                                                      
|Ø | $32.5                                   | $121.1                               | Costs for site preparation, pre-spud work and drilling
    and testing of the Raptor-1 well.                            
|  |                                         |                                      |                                                                                                                         
|Ø | $2.9                                    | $38.6                                | Costs for site preparation, pre-spud work and drilling
    of the Wahoo-1 well.                                         
|  |                                         |                                      |                                                                                                                         
|Ø | $38.1                                   | $96.9                                | Costs for site preparation, pre-spud work and drilling
    and testing of the Bobcat-1 well.                            
|  |                                         |                                      |                                                                                                                         
|Ø | $7.3                                    | $7.7                                 | Costs for site preparation and pre-spud work for
    Triceratops-3 well.                                                
|  |                                         |                                      |                                                                                                                         
|Ø | $0.0                                    | $44.7                                | Costs incurred for financial advisor fees and transaction
    costs for the monetization of the Elk and Antelope fields.
|  |                                         |                                      |                                                                                                                         
|Ø | $0.0                                    | $41.5                                | Premium paid on buyback of 1.0536% indirect participation
    interest in PRL 15.                                       
|  |                                         |                                      |                                                                                                                         
|Ø | ($2.3)                                  | $13.5                                | Seismic over the Antelope field in PRL 15.                                                                              
|  |                                         |                                      |                                                                                                                         
|Ø | $45.1                                   | $66.6                                | Costs for site preparation, pre-spud work and drilling
    of the Antelope-4 well.                                      
|  |                                         |                                      |                                                                                                                         
|Ø | $21.1                                   | $31.0                                | Costs for site preparation, pre-spud work and drilling
    of the Antelope-5 well.                                      
|  |                                         |                                      |                                                                                                                         
|Ø | ($1.3)                                  | $12.2                                | Expenditure/(usage) of drilling inventory.                                                                              
|  |                                         |                                      |                                                                                                                         
|Ø | $13.5                                   | $13.5                                | Expenditure relating to concept select studies
    led by Total for PRL 15.                                             
|  |                                         |                                      |                                                                                                                         
|Ø | ($0.7)                                  | $9.8                                 | Other expenditure, including equipment and asset
    purchases.                                                         



Management Discussion and Analysis  INTEROIL CORPORATION  23







Capital expenditure on plant and
equipment



A total of $3.6 million was incurred on
corporate related capital expenditure for the year ended December 31, 2014, including $2.1 million for renovation costs of our
new Singapore office and $1.3 million for the acquisition of corporate apartments, office renovations and motor vehicles in Papua
New Guinea.



Capital Requirements



Existing cash balances will be sufficient
to settle debt obligations and facilitate further necessary development of the Elk and Antelope fields, appraisal of Triceratops
field and exploration activities planned to meet our license commitment requirements. However, oil and gas exploration and development
and liquefaction are capital intensive and our business plans involve raising capital, which depends on market conditions when
we raise such capital. Additionally, our joint venture share of the costs of construction of an LNG plant and other infrastructure
associated with the proposed LNG plant may amount to hundreds of millions of dollars and thus exceed our existing cash balances.
No assurance can be given that we will be successful in obtaining new capital on terms that are acceptable to us, particularly
with market volatility.



Noted below are our contractual obligations
and commitments over the next five years which are required at a minimum to maintain our licenses in good standing.



Contractual Obligations and Commitments



This table contains information on payments
to meet our contracted exploration and debt obligations for each of the next five years and beyond. It should be read in conjunction
with our Consolidated Financial Statements and notes thereto.





|                                             |  | Payments Due by Period |        
|-------------------------------------------- |  | ---------------------- | -------
|Contractual obligations  ($ thousands)       |  | Total                  |        
|Petroleum prospecting and retention licenses |  |                        | 428,290
|Convertible Notes obligations                |  |                        | 71,763 
|Total                                        |  |                        | 500,053





The amount pertaining to the petroleum
prospecting and retention licenses represents the amount we have committed on these licenses as at December 31, 2014. On March
6, 2014, our applications for new petroleum prospecting licenses were approved with PPL 474 replacing PPL 236, PPL 475 replacing
PPL 237, and PPL 476 and PPL 477 replacing PPL 238 and included new license commitments. The new commitments require us to spend
an additional $369.7 million over the remainder of their six year term.



Further, the terms of grant of PRL 39
requires us to spend a further $58.6 million on the license area by the end of 2018.



Off Balance Sheet Arrangements



Neither during the year ended, nor as
at December 31, 2014, did we have any off balance sheet arrangements or any relationships with unconsolidated entities or financial
partnerships.



Management Discussion and Analysis  INTEROIL CORPORATION  24







Transactions with Related Parties



During the year ended December 31, 2014,
former Chief Financial Officer, Collin Visaggio, former Chief Operating Officer, William Jasper, and former Vice President of
Investor Relations, Wayne Andrews retired.  Compensation paid or payable to these officers upon their retirement was $1.5
million, $0.65 million and $0.2 million respectively.



Share Capital



Our authorized share capital consists
of an unlimited number of common shares and unlimited number of preferred shares, of which 1,035,554 Series A preferred shares
are authorized (none of which are outstanding). As of December 31, 2014, we had 49,414,801 common shares issued and outstanding
(50,656,333 common shares on a fully diluted basis) and no preferred shares issued and outstanding. The potential dilutive instruments
outstanding as at December 31, 2014 included employee stock options and restricted stock in respect of 509,528 common shares and
732,004 common shares relating to the $70.0 million principal amount Convertible Notes.



As of March 13, 2015, we had 49,491,166
common shares issued and outstanding (50,739,629 common shares on a fully diluted basis) and no preferred shares issued and outstanding.
The potential dilutive instruments outstanding as at March 13, 2015 included employee stock options and restricted stock in respect
of 516,459 common shares and 732,004 common shares relating to the $70.0 million principal amount Convertible Notes.



During the year, we redeemed and terminated
730,000 common shares for a total purchase price of $41.8 million.



INDUSTRY
TRENDS AND KEY EVENTS



Financing Arrangements



We continue to monitor liquidity risk
by setting and monitoring acceptable gearing. Our aim is to maintain our debt-to-capital ratio, or gearing levels, (debt divided
by (shareholders’ equity plus debt)) at 50% or less. This was achieved throughout 2013 and 2014. Gearing was 6% in December
2014, 26% in December 2013 and 19% in December 2012.



We had cash, cash equivalents and cash
restricted of $401.7 million as at December 31, 2014, of which $8.3 million was restricted. For details of other financial arrangements,
see “Liquidity and Capital Resources – Summary of Debt Facilities”.



On June 17, 2014, we replaced our $250.0
million loan with Credit Suisse with a $300.0 million syndicated, senior secured capital expenditure facility through a consortium
of banks led by Credit Suisse. CBA, ANZ, UBS, Macquarie, BSP, BNP and Westpac, each of which was a participating lender under
the original facility, in addition to new banks, MUFG and SocGen, support the new facility. The new facility has an annual interest
rate of LIBOR plus 5% and matures at the end of 2015. No drawdowns have been made under the new facility as at December 31, 2014.



Crude Prices



Crude prices declined in 2014, with the
price of Brent crude oil starting the year at $110 per Barrel and closing the year at $62 per Barrel. With the completion of the
Puma Transaction, we are not materially impacted by the fluctuations and declines in crude prices, however, our operating costs
have been reduced as a result of the lower cost of fuel used in our exploration and appraisal operations. We also expect that
as a result of the decline in oil prices, we may see our costs related to hiring oilfield service providers decline.



Management Discussion and Analysis  INTEROIL CORPORATION  25







Exchange Rates



The PGK interbank reference rate has weakened
considerably against the USD in the year ended December 31, 2014 (from 0.4130 to 0.3855). Changes in the AUD and SGD to USD exchange
rates can affect our corporate results as expenses of the corporate offices in Australia and Singapore are incurred in the respective
local currencies. PGK, AUD and SGD exposures are minimal currently as funds are transferred to PGK, AUD and SGD from USD as required.
No material balances are held in PGK, AUD or SGD. However, we are exposed to translation risks resulting from PGK, AUD and SGD
fluctuations as in country costs are being incurred in PGK, AUD and SGD and reporting for those costs are in USD.



RISK
FACTORS



Our business operations and financial
position are subject to risks. A summary of the key risks that may affect matters addressed in this document have been included
under “Forward Looking Statements” above. Detailed risk factors can be found under “Risk Factors”
in our 2014 AIF available at www.sedar.com.



CRITICAL
ACCOUNTING ESTIMATES



The preparation of financial statements
in accordance with IFRS 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 effect of changes in estimates
on future periods have not been disclosed in the Consolidated Financial Statements as estimating it is impracticable. 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.



For a discussion of those accounting policies,
please refer to Note 2 of the notes to our audited annual Consolidated Financial Statements for the year ended December 31, 2014,
available at www.sedar.com, which summarizes our significant accounting policies.



Convertible notes



The Convertible Notes are assessed based
on the substance of the contractual arrangement in determining whether it exhibits the fundamental characteristic of a financial
liability or equity. We have determined that the note instrument mainly exhibits characteristics that are liability in nature,
however, the embedded conversion feature is equity in nature and needs to be bifurcated and disclosed separately within equity.
We valued the liability component first and assigned the residual value to the equity component. We fair valued the liability
component by deducting the premium paid by holders specifically for the conversion feature. The conversion price of $95.625 per
share includes a premium of 27.5% to the issue price of the concurrent common shares offering of $75 per share. Therefore, the
$70.0 million total issue represents 127.5% of the liability portion.



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 as current legislation does not require it. Future legislative action and regulatory initiatives could
result in changes to our operating permits which may result in increased capital expenditures and operating costs.



Management Discussion and Analysis  INTEROIL CORPORATION  26







Share-based payments



The fair value of stock options at grant
date is 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, the expected price volatility of the underlying share, and the expected yield
and risk-free interest rate for the term of the option. On exercise of options, the balance of the contributed surplus relating
to those options is transferred to share capital. The fair value of restricted stock on grant date is the market value of the
stock. We use the fair value based method to account for employee stock based compensation benefits. 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. We
have not used a forfeiture rate as the assumption is for a 100% vesting of the granted options, however, if the options are forfeited
prior to vesting, then any amounts expensed in relation to those forfeited shares are reversed.



Exploration and Evaluation
Assets



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 expenditure 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 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 exploration expenses.



The
conveyance accounting for the Total SSA has been accounted for in the year ended December 31, 2014. This recognized the interim
resource certification payments expected in addition to the completion payment that was received from Total during the year. The
interim resource certifications were estimated based on a certification provided by GCA, which certified a best case scenario
of 7.1 Tcfe in the Elk and Antelope fields. GCA is a recognized certifier under the Total SSA. The interim resource certification
under the Total SSA will vary post the completion of up to three appraisal wells that will be drilled within Elk and Antelope
fields prior to the certification.



Impairment of Long-Lived Assets



We are required to review the carrying
value of all property, plant and equipment, including the carrying value of exploration and evaluation assets, and goodwill for
potential impairment. We test long-lived assets for recoverability when events or changes in circumstances indicate that its carrying
amount may not be recoverable by future discounted cash flows. 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.



NEW
ACCOUNTING STANDARDS



New accounting standards not yet
applicable as at December 31, 2014



These
new standards have been issued but are not yet effective for the financial year beginning January 1, 2014 and have not been early
adopted:



| | - | IFRS
                                         9 ‘Financial Instruments’(effective from January 1, 2018):This addresses the classification and measurement of financial assets. The standard
                                         is not applicable until January 1, 2018 but is available for early adoption. We have
                                         yet to assess IFRS 9’s full impact, but we do not expect any material changes due
                                         to this standard. We have not yet decided whether to early adopt IFRS 9.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis  INTEROIL CORPORATION  27







| | - | IFRS
                                         14 ‘Regulatory deferral accounts’(effective from January 1, 2016):
                                         This standard permits first-time adopters to continue to recognize amounts related to
                                         rate regulation in accordance with their previous GAAP requirements when they adopt IFRS.
                                         However, the effect of rate regulation must be presented separately from other items.
                                         This standard will have no impact on InterOil.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | IFRS
                                         15 ‘Revenue from contracts with customers’(effective from January
                                         1, 2017):The new standard is based on the principle that revenue is recognized
                                         when control of a good or service transfers to a customer, so the notion of control replaces
                                         the existing notion of risks and rewards. We are currently evaluating the impact of adopting
                                         this standard.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



NON-GAAP
MEASURES AND RECONCILIATION



Non-GAAP measures, including EBITDA, included
in this MD&A are not defined nor have a standardized meaning prescribed by IFRS or our previous GAAP. Accordingly, they may
not be comparable to similar measures provided by other issuers.



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 us to analyze operating performance. EBITDA does not have a standardized meaning prescribed by GAAP
(i.e. IFRS) 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 IFRS. Further, EBITDA is not a measure of cash flow under IFRS and should not be considered
as such.



This table reconciles net (loss)/profit
from continuing operations, a GAAP measure, to EBITDA from continuing operations, a non-GAAP measure for each of the last eight
quarters.





|                                                                   |  | 2014   |         |   | 2013   | 
|------------------------------------------------------------------ |  | ------ | ------- | - | ------ | 
|Quarters
    ended($ thousands)                                    |  | Dec-31 |         |   | Sep-30 | 
|Earnings before interest, taxes,
    depreciation and amortization |  |        | (60,443 | ) |        | 
|Interest expense                                                   |  |        | (1,464  | ) |        | 
|Income taxes                                                       |  |        | (211    | ) |        | 
|Depreciation and amortisation                                      |  |        | (356    | ) |        | 
|From continuing operations                                         |  |        | (62,474 | ) |        | 
|From discontinued operations                                       |  |        | (1,731  | ) |        | 
|Net (loss)/profit                                                  |  |        | (64,205 | ) |        | 





PUBLIC
SECURITIES FILINGS



You may access additional information
about us, including our 2014 AIF, in documents filed with the Canadian Securities Administrators at www.sedar.com, and
in documents, including our Form 40-F, filed with the U.S. SEC at www.sec.gov. Additional information is also available on our
website www.interoil.com.



Management Discussion and Analysis  INTEROIL CORPORATION  28







DISCLOSURE
CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING



Disclosure Controls and Procedures



Our Chief Executive Officer and Chief
Financial Officer have designed, or caused to be designed under their supervision, disclosure controls and procedures to provide
reasonable assurance that: (i) material information relating to us is made known to our Chief Executive Officer and Chief Financial
Officer by others, particularly during the period in which the annual and interim filings are being prepared; and (ii) information
required to be disclosed by us in our annual filings, interim filings or other reports filed or submitted by us under securities
legislation is recorded, processed, summarized and reported within the time specified in securities legislation. Such officers
have evaluated, or caused to be evaluated under their supervision, the effectiveness of our disclosure controls and procedures
at our financial year-end and have concluded that our disclosure controls and procedures are effective at December 31, 2014 for
the foregoing purposes.



While our Chief Executive Officer and
Chief Financial Officer believe that our disclosure controls and procedures provide reasonable assurance that they are effective,
they do not expect that the disclosure controls and procedures will necessarily prevent all errors and fraud. A control system,
no matter how well conceived or operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met.



Internal Controls over Financial
Reporting



Our Chief Executive Officer and Chief
Financial Officer have designed, or caused to be designed under their supervision, internal controls over financial reporting
to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements
for external purposes in accordance with IFRS. Such officers have evaluated, or caused to be evaluated under their supervision,
the effectiveness of our internal controls over financial reporting at our financial year-end and concluded that our internal
control over financial reporting is effective, at December 31, 2014, for the foregoing purpose.



Material Changes in Internal Control
over Financial Reporting



Effective July 1, 2014, as a result of
Puma Transaction and Cairns Office Closure, we ceased operating approximately 45% of key controls. Consequently, we have relocated
all functions in finance and information management from our office in Cairns, Australia, to our offices in Singapore and Papua
New Guinea. We also migrated our Information Management Data Centre to a third party location in Sydney, Australia hosted through
an Infrastructure as a Service Solution with Telstra. The changes resulted in changes to personnel, associated with operating
key controls or modification of processes associated with key controls. These changes have been evaluated against our key account
balances, and based on these evaluation, we believe that we have designed adequate and appropriate internal control over financial
reporting to ensure that the financial statements are materially accurate for the fiscal year 2014.



Other than the changes resulting from
the Puma Transaction and Office Relocation, there have been no changes in internal control over financial reporting during the
fiscal year 2014 that have materially affected, or are reasonably likely to materially affect our internal control over financial
reporting.



A control system, including our disclosure
and internal controls and procedures, can provide only reasonable, but not absolute, assurance that the objectives of the control
system will be met, no matter how well it is conceived, and it should not be expected that the disclosure and internal controls
and procedures will prevent all errors or fraud.



Management Discussion and Analysis  INTEROIL CORPORATION  29