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DRILLING PARTICIPATION AGREEMENT
 BETWEEN
 INTEROIL CORPORATION
(InterOil)
 AND
 PNG DRILLING VENTURES LIMITED
(PNGDV)




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TABLE OF CONTENTS
 1. INTERPRETATION
    
    
    12. INDIRECT PARTICIPATION INTEREST
    
    
    53. BACKSTOP PAYMENT
    
    
    64. PHASE ONE EXPLORATION PROGRAM
    
    
    75. CONVERSION OPTION
    
    
    76. CASH CALLS
    
    
    87. PHASE TWO EXPLORATION PROGRAM AND PNGDV OPTION
    
    
    98. CARRY
    
    
    109. ASSIGNMENT
    
    
    1010. CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS
    
    
    1011. TERM AND TERMINATION
    
    
    1112. FORCE MAJEURE
    
    
    1113. LIABILITY
    
    
    1214. NOTICES
    
    
    1215. AMENDMENT
    
    
    1316. ENTIRE AGREEMENT
    
    
    1317. ACKNOWLEDGMENT AND LEGEND
    
    
    1318. COSTS
    
    
    1319. GOVERNING LAW
    
    
    1420. RELATIONSHIP OF PARTIES
    
    
    14




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21. COUNTERPARTS
    
    
    1422. TIME
    
    
    1423. SEVERABILITY
    
    
    14
 DISTRIBUTIONS SCHEDULE
 ANNEXURE I -

    EXPLORATION MAP AND PHASE ONE EXPLORATION PROGRAM PROSPECTS




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DRILLING PARTICIPATION AGREEMENT
 THIS AGREEMENT
 BETWEEN:
 InterOil Corporation, InterOil)
 AND:
 PNG Drilling Ventures Limited a Barbados company PNGDV)
 WHEREAS:
 A.
    
    InterOil, through its relevant Affiliate, intends to conduct exploration drilling programs
within the area covered by PPLs 236, 237 and 238 (the Licence Area) in Papua New Guinea and
to develop and produce Petroleum in any new PDL issued from and out of that area.
 B.
    
    InterOil is seeking investors to participate in funding these drilling programs in exchange
for a beneficial interest (the Indirect Participation Interest) in InterOils Participation
Interest
 C.
    
    PNGDV intends to acquire an Indirect Participation Interest under the terms of this
Agreement and to hold that Indirect Participation Interest as agent and trustee for
various investors.D.
    
    Whereas the parties acknowledge that partial escrow was deposit by July
1st 2003.
 NOW THIS AGREEMENT WITNESSES
 INTERPRETATION
 1.1
    
    Unless a contrary intention appears, in this Agreement (including its Recitals):-Affiliatemeans, when used with reference to a specified person, any person that directly
or indirectly controls or is controlled by or is under common control with the specified
person and, for the purposes of this definition, control shall mean the right to exercise
control and direction over the management and policies of the relevant specified person
whether directly or indirectly and whether through the ownership of voting securities or by
contract or otherwise, and any person, or combination of persons, acting jointly or in
concert or any combination of Affiliates holding more than 50% of the outstanding voting
securities of the specified person shall be deemed to exercise control of that specified
person;Backstop Payment has the meaning given to it in clause 3.1;barrelmeans that quantity of petroleum which will occupy a volume of 42 U.S. standard
gallons measured at 60 degrees Fahrenheit (which volume shall be deemed equivalent to
0.158987 cubic metres when measured at 15.55 degrees Celsius);




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Blockmeans a block constituted as provided by Section 17 of the Oil and Gas Act;Commercial Fieldmeans a Petroleum Field with at least five million barrels of recoverable
Petroleum;Commercial Interest Ratemeans the sum of (a) the Prime Rate as reported in the Wall Street
Journal on every Tuesday in the Money Rates section; and (b) 250 basis points (or 2.5%);"Completion has the meaning given to it in clause 4.4;Confidential Informationmeans:
 (a)
    
    information regarding the existence, terms or conditions of this Agreement;
and(b)
    
    all communications between the parties, all information concerning the Phase
One Exploration Program and Phase Two Exploration Program, and all other information
supplied to, or received by, any party from any other party in connection with this
Agreement, which is either marked confidential or by its nature is intended to be
for the knowledge of the recipient and/or any other person within clause 10.1.
 Cost of IPI has the meaning given to it in clause 2.2;Discoverymeans the discovery of Petroleum not previously known to have existed,
recoverable at the surface of any well bore in a significant amount measurable by
conventional petroleum industry testing methods and which may reasonably be considered to be
an indication of a potentially commercial accumulation of Petroleum. The verb Discover
means the act of making a Discovery;Discovery Fieldmeans a Petroleum Field Discovered as a result of the Phase One Exploration
Program or the Phase Two Exploration Program within PPL236, 237 or 238 or any PDL issued from
or granted out of the Participation Area;Distributionsis defined in the attached Distributions Schedule;Fieldmeans that volume of rock extending from the surface of the earth vertically down to
the base of the earths crust from a line enclosing the minimum surface area required to
include, with respect to a Petroleum Pool created by a geological structure or a
stratigraphic trap (whether or not compartmentalised by faulting), the maximum reasonably
interpreted area included above the petroleum-water fluid contact or contacts on a structural
map delineating the single structural closure of each known Zone.For the avoidance of doubt:
 (a)
    
    where the surface area of a Zone overlaps the surface area of another Zone they
comprise a single Field;(b)
    
    where two or more Zones include a common Petroleum Pool these structures comprise
a single Field; and(c)
    
    where two or more Zones are found adjacent to each other, with separate
interpreted structural or stratigraphic closures and which do not include a common
Petroleum Pool, such structures are separate Fields;




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Indirect Participation Interestor IPImeans the IPI Percentage share of the whole (100%)
of the undivided interest in the Participation Area, provided that such share shall only ever
burden InterOils Participation Interest in and Petroleum Share from the Participation
Area, whatever that may be from time to time, and InterOil shall not transfer or assign such
interest to any other party;Indirect Participation Interest Percentage or IPI Percentagemeans 13.5% multiplied by a
fraction the numerator of which is 8 and the denominator of which is the number of
exploratory wells drilled in the Phase One Exploration Program, and shall be adjusted on a
pro-rata basis for conversion(s), if any, to either InterOil common shares and/or debt or
adjusted in accordance with clause 2.4 or clause 7.4;InterOil Refinery means the oil refinery owned by InterOil or its Affiliate at Napa Napa
near Port Moresby in Papua New Guinea, including the related storage tanks and marine
terminal;Investor means a party to an indirect participation agreement with PNGDV pursuant to which
PNGDV has agreed to hold an Indirect Participation Interest as agent and trustee for the
Investor;JVOA means the Joint Venture Operating Agreement to be entered into by InterOil or its
nominated Affiliate, and any other working interest parties, in respect of the Licence;Licence means PPLs 236, 237 and 238 or any PDL that may be issued or granted out of PPLs
236, 237 and 238, and includes any extension, renewal or variation of that Licence;Non Consent Penaltymeans for any payment that PNGDV was obligated to make in accordance
with its IPI (excluding the Cost of IPI, the payment under clause 7.5 or debt financing under
clause 5.4), but did not make for any reason, PNGDV will not receive any Distributions for
its IPI from InterOil until InterOil has received from Distributions associated with PNGDVs
IPI , or from PNGDV, the sum of:
 (a)
    
    200% of the total amount InterOil paid on behalf of PNGDVs IPI; and(b)
    
    interest on the total amount of payment(s) PNGDV would have made accruing at the
Commercial Interest Rate, and
 thereafter, PNGDV will receive all Distributions in accordance with its IPI;Oil and Gas Act means the Oil and Gas Act, 1998 of Papua New Guinea as amended from
time to time, and the regulations thereto;Operatormeans InterOil or its wholly owned affiliate, designated and acting as
Operator under the terms of the JVOA;Participation Areameans the area within the Licence Area in which PNGDV is entitled to the
Indirect Participation Interest in accordance with this Agreement, including the full extent,
regardless of the number of wells required to exploit fully all commercially recoverable
Petroleum, of any and all Zones drilled pursuant to the Phase One Exploration Program and, if
applicable, the Phase Two Exploration Program, and includes the Phase One Participation Area
and, if applicable, the Phase Two Participation Area;Participation Interest means, with respect
to a party to the JVOA, that partys undivided interest, expressed as a percentage and determined in
accordance with the JVOA, in all rights,




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interests, benefits, obligations and liabilities
derived under and by virtue of the JVOA and the Licence;
 PDLmeans a Petroleum Development Licence granted under the Oil and Gas Act;Petroleum means:
 (a)
    
    any naturally occurring hydrocarbons, whether in a gaseous, liquid, or solid
state; or(b)
    
    any naturally occurring mixture of hydrocarbons, whether in a gaseous, liquid, or
solid state; or(c)
    
    any naturally occurring mixture of one or more hydrocarbons, whether in a
gaseous, liquid, or solid state and any other substance; or(d)
    
    any fraction, mixture or product derived from sub-paragraphs (a), (b) or (c) as a
result of production or processing; or(e)
    
    any Petroleum as defined in sub-paragraphs (a), (b), (c) or (d) which has been
returned to a natural reservoir,
 but does not include coal or any other substance which can only be recovered by mechanical
mining processes;Petroleum Poolmeans a naturally occurring discrete accumulation of Petroleum;Petroleum Sharemeans the Participation Interest share of Petroleum to which a party is
entitled pursuant to the JVOA;Phase One Areahas the meaning given to it in clause 4.2;Phase One Exploration Program means the exploration program to be conducted by InterOil for
Petroleum within the Licence Area comprising: (i) all necessary work relating to preparation
for drilling exploration wells, which will include geological and other studies; and (ii)
drill the well bore of up to 16 exploratory wells to the designated Target Depth of each such
well on up to 16 separate, distinct, non-overlapping Zones within the Licence Area marked as
separate drilling prospects on the Exploration Map attached as Annexure I. Each exploratory
well must drill into a separate drilling prospect on the Exploration Map attached as Annexure
I in the Phase One Exploration Program;Phase One Participation Areahas the meaning given to it in clause 4.2;Phase Two Exploration Program means the exploration program to be conducted by InterOil for
Petroleum within the Licence Area comprising: (i) all necessary work relating to preparation
for drilling exploration wells, which will include geological and other studies; and (ii)
drill the well bore of at least 8 exploratory wells to the designated Target Depth of each
such well on at least 8 separate, distinct, non-overlapping Zones within the Licence Area
that are separate, distinct, and non-overlapping from the Zones to be drilled during the
Phase One Exploration Program. Each exploratory well must drill into a separate drilling
prospect that has not been drilled by a previous exploratory well in either the Phase One
Exploration Program or the Phase Two Exploration Program;Phase Two Participation Areahas the meaning given to it in clause 7.3;PPLs 236, 237 and 238means Petroleum Prospecting Licences 236, 237 and 238 granted under
the Oil and Gas Act, or top file licences 236, 237 and 238;




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Statemeans the Independent State of Papua New Guinea;Subsequent Work Programhas the meaning given to it in clause 4.4;Target Depthmeans the lesser of (a) 2,000m; or (b) a depth sufficient to test the Pale
Sandstone. In no way shall this definition limit or constrain the Operator from drilling
deeper if it deems appropriate;Wilful Misconductmeans, in relation to any provision of this Agreement, such wanton or
reckless act or omission not justified by any special circumstances as amounts to a wilful
and utter disregard for the harmful and avoidable consequences thereof, but shall not include
any error of judgment, mistake, act or omission, whether negligent or not, made by the
Operator or any director, employee, agent or contractor of the Operator in the exercise, in
good faith of any function, authority or discretion conferred upon the Operator;Zonemeans a geological structure containing or thought to contain a common accumulation of
petroleum separately producible from any other common accumulation of Petroleum.
 1.2
    
    The parties agree that:
 (a)
    
    reference to the singular includes the plural and vice versa;(b)
    
    reference to a clause means a clause of this Agreement; and(c)
    
    reference to legislation or any document includes any amendments or
replacements to the legislation or document.
 INDIRECT PARTICIPATION INTEREST
 IPI).
 Cost of IPI 6 . 7 5
 th




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th
    BACKSTOP PAYMENT
 Backstop Payment
 th th




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PHASE ONE EXPLORATION PROGRAM
  Phase One Area Phase One Participation Area
  Completion Subsequent
Work Program
 th
  CONVERSION OPTION
  (a)
    
    promptly after such election, InterOil shall give to PNGDV and, if notified
in advance by PNGDV, to one more Investors, written notice of its Completion decision,
together with technical, geological and other logging data and a proposal for such
Completion, including cost estimates, that can reasonably be supplied which is
relevant to PNGDV making its decision in paragraph (b);(b)
    
    within 48 hours of receiving any notice from InterOil pursuant to paragraph
(a), PNGDV must:
 (i)
    
    in respect of $5,300,000 of the Cost of IPI, give written
notice to InterOil:
 (A)
    
    that PNGDV intends to participate in
operations in the Phase One Participation Area by paying its
corresponding IPI share of the costs of the aforementioned Completion
and all other costs incurred or to be incurred by InterOil in relation
to the Phase One Participation Area under the JVOA; or




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(B)
    
    that PNGDV intends to convert the
corresponding IPI (valued at the full paid in Cost of IPI) for 298,600
fully paid common shares of InterOil; and
 (ii)
    
    in respect of $1,485,000 of the Cost of IPI, give written
notice to InterOil:
 (A)
    
    that PNGDV intends to participate in
operations in the Phase One Participation Area by paying its
corresponding IPI share of the costs of the aforementioned Completion
and all other costs incurred or to be incurred by InterOil in relation
to the Phase One Participation Area under the JVOA; or
 (B)
    
    that PNGDV intends to convert the
corresponding IPI (valued at the full paid in Cost of IPI) for
(A)US$565,000 of interest free debt of InterOil, such debt due and
payable in a first instalment of US$159,200 on or about December 15,
2005, and a second instalment of US$405,800 on or about December 15,
2006, and (B) 64,540 fully paid common shares to be issued on December
15, 2006; and
 (iii)
    
    in respect of $5,400,000 of the Cost of IPI, give written
notice to InterOil:
 (A)
    
    that PNGDV intends to participate in
operations in the Phase One Participation Area by paying its
corresponding IPI share of the costs of the aforementioned Completion
and all other costs incurred or to be incurred by InterOil in relation
to the Phase One Participation Area under the JVOA; or(B)
    
    that PNGDV intends to convert the
corresponding IPI (valued at the full paid in Cost of IPI) for:
 a)
    
    360,720 fully
paid common shares of InterOil; or
 b)
    
    270,000 fully
paid common shares of InterOil to be issued on
December 15, 2006 and US$1,404,000 of interest free
debt of InterOil, such debt due by InterOil to
Investor and payable in two equal instalments on or
about December 15, 2005 and December 15, 2006,
respectively,
  (c)
    
    PNGDV may in its sole discretion designate one or more Investors to whom the
cash or shares contemplated in clause 5.1(b) above shall be paid or issued
 CASH CALLS




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(a)
    
    InterOil must submit an AFE (as defined in the JVOA) for that cost to PNGDV
for its consideration. PNGDV must within 15 days after receipt of that AFE, and in
accordance with the terms of the JVOA, either:
 (i)
    
    give written notice to InterOil that PNGDV intends to pay its
IPI share of the costs and make such payment within 30 days of notice given
under this clause 6.1(a)(i); or(ii)
    
    give written notice to InterOil that PNGDV intends not to pay
its IPI share of the costs and incur a Non-Consent Penalty.
 (b)
    
    In the event that PNGDV does not pay, within the period referred to in clause
6.1(a)(i), for any reason except clause 6.2, all or a part of its IPI share of the
aforementioned costs, PNGDV will incur a Non-Consent Penalty for the amount PNGDV
would have paid for its IPI share of such costs.
  mutatis mutandis
 PHASE TWO EXPLORATION PROGRAM AND PNGDV OPTION
   (a)
    
    30 days after completion of the Phase One Exploration Program; and(b)
    
    30 days after the Discovery of a Commercial Petroleum Field from the Phase One
Exploration Program.
 Phase Two Area Phase Two Participation Area




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Phase Two Notice
  CARRY
 mutatis mutandis
 ASSIGNMENT
    (a)
    
    prevent InterOil from freely mortgaging or encumbering its Petroleum Share of
production and transferring or assigning to such mortgagee or lender the rights to the
proceeds of sale of any Petroleum sold hereunder on behalf of InterOil as security for
such debt. The provisions of this clause 9 shall not apply to the granting of any
such security interest; or(b)
    
    prevent PNGDV from freely mortgaging or encumbering its IPI and assigning to
such mortgagee or lender the rights to the proceeds from PNGDVs IPI as defined in
this Agreement as security for such debt.
 CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS




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(a)
    
    to any Affiliate or bona fide intended assignee of such party upon obtaining
a similar undertaking of confidentiality from such Affiliate or assignee in favour of
the other party and such third parties as the other party may reasonably request;(b)
    
    to any outside consultants, upon obtaining a similar undertaking of
confidentiality from such consultants in favour of the other party and such third
parties as the other party may reasonably request;(c)
    
    to any bank or financial institution from whom such party is seeking or
obtaining finance, upon obtaining a similar undertaking of confidentiality from such
bank or institution;(d)
    
    to the extent required by the Oil and Gas Act, the Licence, any other
applicable laws or regulations or the Securities and Exchange Commission of Australia
or any comparable government entity having jurisdiction over a party to this Agreement
or the regulations of any recognised stock exchange on which are
listed for quotation shares in the capital of such party or any Affiliate of such party;(e)
    
    in a prospectus registered by the Australian Securities Commission or any
comparable government entity, or any delegate thereof, where such disclosure is
required by law;(f)
    
    to the extent that the same has become generally available to the public; or(g)
    
    to the extent acquired independently from a third party whom the disclosing
party believed on reasonable grounds was under no obligation of confidentiality
relating thereto.
 TERM AND TERMINATION
  FORCE MAJEURE




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Force Majeure
  LIABILITY
  NOTICES




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Party
    
    AddressInterOil Corporation (or its nominated Affiliate)INTEROIL
    
    25025 I-45 NorthSuite 410The Woodlands TX 77380USAAttention: Phil MulacekPNG Drilling Ventures LimitedPNGDV
    
    25025 I-45 NorthSuite 410The Woodlands TX 77380USAAttention: Dale Dossey
  AMENDMENT
   ENTIRE AGREEMENT
  ACKNOWLEDGMENT AND LEGEND
  UNLESS PERMITTED UNDER SECURITIES LEGISLATION, THE HOLDER OF THE SECURITIES OFFERED HEREBY
SHALL NOT TRADE THE SECURITIES BEFORE NOVEMBER 28, 2003
 COSTS




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GOVERNING LAW
  RELATIONSHIP OF PARTIES
  COUNTERPARTS
  TIME
  SEVERABILITY
  IN WITNESS WHEREOF
 Signed for and on behalf of INTEROIL CORPORATION
    
    Signed for and on behalf of
PNGDV DRILLING VENTURES LIMITEDBy:
    
    By:/s/ Dale Dossey  Trustee/s/
Phil E. Mularek
    
    Name/TitleName/Title




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DISTRIBUTIONS SCHEDULE
 IPI
 +
    
    Any and all proceeds associated with the Participation Area, including (if applicable)
any and all funds borrowed using as security the rights to the Participation Area, but not
used for expenditures related to the Participation Area-
    
    Operators Direct Charges, calculated in accordance with the Accounting
Procedures in the JVOA, and including InterOils actual direct costs to transport and
sell Petroleum, including repayment of any and all borrowings (principal interest, and
fees etc.) secured by the rights to the Participation Area-
    
    Operators Indirect Charges, calculated in accordance with the Accounting
Procedures in the JVOA-
    
    US$0.45 per barrel infrastructure fee for Petroleum produced and transported to
the InterOil Refinery-
    
    State royalties and other State imposts and levies (if any)=
    
    Sub-total before State income taxx
    
    PNGDVs IPI%=
    
    PNGDVs Sub-total-
    
    Non-Consent Penalty outstanding, (if any)-
    
    PNGDV's IPI% share of abandonment security funding under the JVOA (if any)=
    
    Distribution to PNGDV




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ANNEXURE I: EXPLORATION MAP AND PHASE ONE EXPLORATION
PROGRAM PROSPECTS




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