|InterOil Corporation
        Consolidated Financial Statements
        (Expressed in United States dollars)
        
        Years ended December 31, 2012, 2011 and 2010 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 











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



Table of contents



|Management's Report                             | 3 
|----------------------------------------------- | --
|                                                |   
|Auditor's Report to the Shareholders            | 4 
|                                                |   
|Consolidated Income Statements                  | 7 
|                                                |   
|Consolidated Statements of Comprehensive Income | 8 
|                                                |   
|Consolidated Balance Sheets                     | 9 
|                                                |   
|Consolidated Statements of Changes in Equity    | 10
|                                                |   
|Consolidated Statements of Cash Flows           | 11
|                                                |   
|Notes to the Consolidated Financial Statements  | 12



Consolidated Financial Statements   INTEROIL CORPORATION    2







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



MANAGEMENT’S REPORT



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



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



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



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



The 2012 consolidated financial statements
have been audited by PricewaterhouseCoopers, the independent auditors, in accordance with Canadian generally accepted auditing
standards and auditing standards issued by the Public Company Accounting Oversight Board, on behalf of the shareholders. PricewaterhouseCoopers
has full and free access to the Audit Committee.





|/s/ Phil E. Mulacek     |  | /s/ Collin F. Visaggio  | 
|----------------------- |  | ----------------------- | 
|Phil E. Mulacek         |  | Collin F. Visaggio      | 
|Chief Executive Officer |  | Chief Financial Officer | 







Consolidated Financial Statements   INTEROIL CORPORATION    3







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











February 27, 2013



Independent Auditor’s Report



To theShareholders of InterOil
Corporation



We have completed an integrated audit of InterOil Corporation
and its subsidiaries' 2012 and 2011 consolidated financial statements and their internal control over financial reporting as at
31 December 2012, and an audit of their 2010 consolidated financial statements. Our opinions, based on our audits, are presented
below.



Report on the consolidated financial statements

We have audited the accompanying consolidated financial statements
of InterOil Corporation and its subsidiaries,which
comprise the Consolidated Balance Sheets as at December 31, 2012, December 31, 2011 and December 31, 2010 and the Consolidated
Income Statements, Statements of Comprehensive Income, Statements of Changes in Equity and Statements of Cash Flows for the years
ended December 31, 2012, December 31, 2011 and December 31, 2010, and the related notes, which comprise a summary of significant
accounting policies and other explanatory information.



Management’s responsibility for the consolidated
financial statements

Management is responsible for the preparation and fair presentation
of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International
Accounting Standards Board and for such internal control as management determines is necessary to enable the preparation of consolidated
financial statements that are free from material misstatement, whether due to fraud or error.



Auditor’s responsibility

Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards
and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
Canadian generally accepted auditing standards also require that we comply with ethical requirements.



An audit involves performing procedures to obtain audit evidence,
on a test basis, about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on
the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the company’s
preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate
in the circumstances. An audit also includes evaluating the appropriateness of accounting principles and policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements.



| |                                                                                 
| | --------------------------------------------------------------------------------
| | PricewaterhouseCoopers,
    ABN 52 780 433 757                                  
| | Darling Park Tower 2, 201 Sussex Street,
    GPO BOX 2650, SYDNEY NSW1171       
| | T: 61 2 8266 0000, F: 61 2 8266 9999,
    www.pwc.com.au                        
| |                                                                                 
| | Liability limited by a scheme approved under Professional Standards Legislation.



Consolidated Financial Statements   INTEROIL CORPORATION    4







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









We believe that the audit evidence we
have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion on the consolidated financial
statements.



Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
InterOil Corporation and its subsidiaries as at December, 31 2012, December 31, 2011 and December 31, 2010 and their financial
performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards as
issued by the International Accounting Standards Board.



Report on internal control over financial reporting

We have also audited InterOil Corporation and its subsidiaries' internal control over financial reporting as at December 31,
2012, based on criteria established in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).



Management’s responsibility for internal control over
financial reporting

Management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included
in Management’s Report on Internal Control over Financial Reporting.



Auditor’s responsibility

Our responsibility is to express an opinion on the company’s
internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting
in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting
was maintained in all material respects.



An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control, based on the assessed risk, and performing such other
procedures as we consider necessary in the circumstances.



We believe that our audit provides a reasonable basis for our
audit opinion on the company’s internal control over financial reporting.



Definition of internal control over financial reporting

A company’s internal control over financial reporting
is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance
with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect
on the financial statements.



Consolidated Financial Statements   INTEROIL CORPORATION    5







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









Inherent limitations

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



Opinion

In our opinion, InterOil Corporation and its subsidiaries maintained, in all material respects, effective internal control
over financial reporting as at December 31, 2012, based on criteria established in Internal Control - Integrated Framework
issued by COSO.





/s/ PricewaterhouseCoopers



Chartered Accountants



PricewaterhouseCoopers

Sydney, Australia



Consolidated Financial Statements   INTEROIL CORPORATION    6







|InterOil Corporation
        Consolidated Income Statements
        (Expressed in United States dollars) | 
|-------------------------------------------------------------------------------------------------------- | 



|                                                              |  | Year ended   |               
|------------------------------------------------------------- |  | ------------ | --------------
|                                                              |  | December 31, |               
|                                                              |  | 2012         |               
|                                                              |  | $            |               
|                                                              |  |              |               
|Revenue                                                       |  |              |               
|Sales and operating revenues                                  |  |              | 1,308,051,816 
|Interest                                                      |  |              | 248,261       
|Other                                                         |  |              | 12,257,833    
|                                                              |  |              | 1,320,557,910 
|                                                              |  |              |               
|Changes in inventories of finished goods and work in progress |  |              | 23,799,540    
|Raw materials and consumables used                            |  |              | (1,242,987,054
|Administrative and general expenses                           |  |              | (40,825,612   
|Derivative (losses)/gains (note 9)                            |  |              | (4,229,190    
|Legal and professional fees                                   |  |              | (5,418,210    
|Exploration costs, excluding exploration impairment (note 14) |  |              | (13,901,558   
|Finance costs                                                 |  |              | (28,614,981   
|Depreciation and amortization                                 |  |              | (21,863,367   
|Gain on conveyance of oil and gas properties (note 14)        |  |              | 4,418,170     
|Loss on extinguishment of liability                           |  |              | -             
|Litigation settlement expense                                 |  |              | -             
|Loss on available-for-sale investment                         |  |              | -             
|Foreign exchange (losses)/gains                               |  |              | (43,148       
|                                                              |  |              | (1,329,665,410
|                                                              |  |              |               
|(Loss)/profit before income taxes                             |  |              | (9,107,500    
|                                                              |  |              |               
|Income taxes                                                  |  |              |               
|Current tax expense (note 16)                                 |  |              | (15,883,469   
|Deferred tax benefit/(expense) (note 16)                      |  |              | 26,594,678    
|                                                              |  |              | 10,711,209    
|                                                              |  |              |               
|Profit/(loss) for the period                                  |  |              | 1,603,709     
|                                                              |  |              |               
|Profit/(loss) is attributable to:                             |  |              |               
|Owners of InterOil Corporation                                |  |              | 1,603,709     
|Non-controlling interest                                      |  |              | -             
|                                                              |  |              | 1,603,709     
|                                                              |  |              |               
|Basic profit/(loss) per share                                 |  |              | 0.03          
|Diluted profit/(loss) per share                               |  |              | 0.03          
|Weighted average number of common shares outstanding          |  |              |               
|Basic (Expressed in number of common shares)                  |  |              | 48,352,822    
|Diluted (Expressed in number of common shares)                |  |              | 49,357,256    



See accompanying notes to the consolidated financial statements



Consolidated Financial Statements   INTEROIL CORPORATION    7







|InterOil Corporation
        Consolidated Statements of Comprehensive Income
        (Expressed in United States dollars) | 
|------------------------------------------------------------------------------------------------------------------------- | 



|                                                                     |  | Year ended   |           
|-------------------------------------------------------------------- |  | ------------ | ----------
|                                                                     |  | December 31, |           
|                                                                     |  | 2012         |           
|                                                                     |  | $            |           
|                                                                     |  |              |           
|Profit/(loss) for the period                                         |  |              | 1,603,709 
|                                                                     |  |              |           
|Other comprehensive income:                                          |  |              |           
|Exchange gain/loss on translation of foreign operations, net of tax  |  |              | (5,001,319
|Gain/(loss) on available-for-sale financial assets, net of tax       |  |              | 653,390   
|Other comprehensive (loss)/income for the period, net of tax         |  |              | (4,347,929
|Total comprehensive (loss)/income for the period                     |  |              | (2,744,220
|                                                                     |  |              |           
|Total comprehensive (loss)/income for the period is attributable to: |  |              |           
|Owners of InterOil Corporation                                       |  |              | (2,744,220
|Non-controlling interests                                            |  |              | -         
|                                                                     |  |              | (2,744,220



See accompanying notes to the consolidated financial statements



Consolidated Financial Statements   INTEROIL CORPORATION    8







|InterOil Corporation
        Consolidated Balance Sheets
        (Expressed in United States dollars) | 
|----------------------------------------------------------------------------------------------------- | 



|                                                              |  | As at        |              
|------------------------------------------------------------- |  | ------------ | -------------
|                                                              |  | December 31, |              
|                                                              |  | 2012         |              
|                                                              |  | $            |              
|                                                              |  |              |              
|Assets                                                        |  |              |              
|Current assets:                                               |  |              |              
|Cash and cash equivalents (note 6)                            |  |              | 49,860,044   
|Cash restricted (note 9)                                      |  |              | 37,340,631   
|Short term treasury bills - held-to-maturity (note 8)         |  |              | -            
|Trade and other receivables (note 10)                         |  |              | 146,948,227  
|Derivative financial instruments (note 9)                     |  |              | 233,922      
|Other current assets                                          |  |              | 832,936      
|Inventories (note 11)                                         |  |              | 194,871,339  
|Prepaid expenses                                              |  |              | 8,517,340    
|Total current assets                                          |  |              | 438,604,439  
|Non-current assets:                                           |  |              |              
|Cash restricted (note 9)                                      |  |              | 11,670,463   
|Goodwill (note 12)                                            |  |              | 6,626,317    
|Plant and equipment (note 13)                                 |  |              | 255,031,703  
|Oil and gas properties (note 14)                              |  |              | 515,055,288  
|Deferred tax assets (note 16)                                 |  |              | 63,526,458   
|Other non-current receivables (note 22)                       |  |              | 5,000,000    
|Available-for-sale investments (note 15)                      |  |              | 4,304,176    
|Total non-current assets                                      |  |              | 861,214,405  
|Total assets                                                  |  |              | 1,299,818,844
|Liabilities and shareholders' equity                          |  |              |              
|Current liabilities:                                          |  |              |              
|Trade and other payables (note 17)                            |  |              | 180,026,381  
|Income tax payable                                            |  |              | 11,977,681   
|Derivative financial instruments (note 9)                     |  |              | -            
|Working capital facilities (note 18)                          |  |              | 94,290,479   
|Unsecured loan and current portion of secured loans (note 19) |  |              | 31,383,115   
|Current portion of Indirect participation interest (note 20)  |  |              | 15,246,397   
|Total current liabilities                                     |  |              | 332,924,053  
|Non-current liabilities:                                      |  |              |              
|Secured loans (note 19)                                       |  |              | 89,446,137   
|2.75% convertible notes liability (note 26)                   |  |              | 59,046,581   
|Deferred gain on contributions to LNG project (note 21)       |  |              | -            
|Indirect participation interest (note 20)                     |  |              | 16,405,393   
|Other non-current liabilities (note 22)                       |  |              | 20,961,380   
|Asset retirement obligations (note 23)                        |  |              | 4,978,334    
|Deferred tax liabilities (note 16)                            |  |              | -            
|Total non-current liabilities                                 |  |              | 190,837,825  
|Total liabilities                                             |  |              | 523,761,878  
|Equity:                                                       |  |              |              
|Equity attributable to owners of InterOil Corporation:        |  |              |              
|Share capital (note 25)                                       |  |              | 928,659,756  
|Authorized - unlimited                                        |  |              |              
|Issued and outstanding - 48,607,398                           |  |              |              
|(Dec 31, 2011 - 48,121,071)                                   |  |              |              
|(Dec 31, 2010 - 47,800,552)                                   |  |              |              
|2.75% convertible notes (note 26)                             |  |              | 14,298,036   
|Contributed surplus (note 27)                                 |  |              | 21,876,853   
|Accumulated Other Comprehensive Income                        |  |              | 25,032,953   
|Conversion options (note 20)                                  |  |              | 12,150,880   
|Accumulated deficit                                           |  |              | (225,961,512 
|Total equity attributable to owners of InterOil Corporation   |  |              | 776,056,966  
|Non-controlling interest (note 24)                            |  |              | -            
|Total equity                                                  |  |              | 776,056,966  
|Total liabilities and equity                                  |  |              | 1,299,818,844



See accompanying notes to the consolidated financial statements



Consolidated Financial Statements   INTEROIL CORPORATION    9







|InterOil Corporation
        Consolidated Statements of Changes in Equity
        (Expressed in United States dollars) | 
|---------------------------------------------------------------------------------------------------------------------- | 



|                                                                                  |  | Year ended   |             
|--------------------------------------------------------------------------------- |  | ------------ | ------------
|                                                                                  |  | December 31, |             
|                                                                                  |  | 2012         |             
|Transactions with owners as owners:                                               |  | $            |             
|Share capital                                                                     |  |              |             
|At beginning of period                                                            |  |              | 905,981,614 
|Issue of capital stock (note 25)                                                  |  |              | 22,678,142  
|At end of period                                                                  |  |              | 928,659,756 
|2.75% convertible notes                                                           |  |              |             
|At beginning of period                                                            |  |              | 14,298,036  
|Issue of convertible notes (note 26)                                              |  |              | -           
|At end of period                                                                  |  |              | 14,298,036  
|Contributed surplus                                                               |  |              |             
|At beginning of period                                                            |  |              | 25,644,245  
|Fair value of options and restricted stock transferred to share capital (note 27) |  |              | (11,649,459 
|Stock compensation expense (note 27)                                              |  |              | 7,882,067   
|Loss on extinguishment of IPI conversion options (note 20)                        |  |              | -           
|Loss on buyback of non-controlling interest (note 24)                             |  |              | -           
|At end of period                                                                  |  |              | 21,876,853  
|Accumulated Other Comprehensive Income                                            |  |              |             
|Foreign currency translation reserve                                              |  |              |             
|At beginning of period                                                            |  |              | 29,788,447  
|Foreign currency translation movement for the period, net of tax                  |  |              | (5,001,319  
|Foreign currency translation reserve at end of period                             |  |              | 24,787,128  
|Gain/(loss) on available-for-sale financial assets                                |  |              |             
|At beginning of period                                                            |  |              | (407,565    
|Gain/(loss) on available-for-sale financial assets, net of tax                    |  |              | 653,390     
|Gain/(loss) on available-for-sale financial assets at end of period               |  |              | 245,825     
|Accumulated other comprehensive income at end of period                           |  |              | 25,032,953  
|Conversion options                                                                |  |              |             
|At beginning of period                                                            |  |              | 12,150,880  
|Movement for the period (note 20)                                                 |  |              | -           
|At end of period                                                                  |  |              | 12,150,880  
|Accumulated deficit                                                               |  |              |             
|At beginning of period                                                            |  |              | (227,565,221
|Net profit/(loss) for the period                                                  |  |              | 1,603,709   
|At end of period                                                                  |  |              | (225,961,512
|Total InterOil Corporation shareholders' equity at end of period                  |  |              | 776,056,966 
|                                                                                  |  |              |             
|Transactions with non-controlling interest                                        |  |              |             
|At beginning of period                                                            |  |              | -           
|Net profit for the period                                                         |  |              | -           
|Buyback of non-controlling interest (note 24)                                     |  |              | -           
|At end of period                                                                  |  |              | -           
|Total equity at end of period                                                     |  |              | 776,056,966 



See accompanying notes to the consolidated financial statements



Consolidated Financial Statements   INTEROIL CORPORATION    10







|InterOil Corporation
        Consolidated Statements of Cash Flows
        (Expressed in United States dollars) | 
|--------------------------------------------------------------------------------------------------------------- | 



|                                                                                    |  | Year ended   |             
|----------------------------------------------------------------------------------- |  | ------------ | ------------
|                                                                                    |  | December 31, |             
|                                                                                    |  | 2012         |             
|                                                                                    |  | $            |             
|                                                                                    |  |              |             
|Cash flows generated from (used in):                                                |  |              |             
|                                                                                    |  |              |             
|Operating activities                                                                |  |              |             
|Net profit/(loss) for the period                                                    |  |              | 1,603,709   
|Adjustments for non-cash and non-operating transactions                             |  |              |             
|Depreciation and amortization                                                       |  |              | 21,863,367  
|Deferred tax                                                                        |  |              | (29,450,576 
|Gain on conveyance of exploration assets                                            |  |              | (4,418,170  
|Accretion of convertible notes liability                                            |  |              | 3,408,951   
|Amortization of deferred financing costs                                            |  |              | 598,698     
|Timing difference between derivatives recognized and settled                        |  |              | 350,061     
|Stock compensation expense, including restricted stock                              |  |              | 7,882,067   
|Inventory write down                                                                |  |              | 322,535     
|Accretion of asset retirement obligation liability                                  |  |              | 331,096     
|Loss on extinguishment of IPI Liability                                             |  |              | -           
|Non-cash litigation settlement expense                                              |  |              | -           
|Loss on Flex LNG investment                                                         |  |              | -           
|Gain on proportionate consolidation of LNG project                                  |  |              | -           
|Unrealized foreign exchange gain                                                    |  |              | (1,070,269  
|Change in operating working capital                                                 |  |              |             
|Increase in trade and other receivables                                             |  |              | (31,472,316 
|(Increase)/decrease in other current assets and prepaid expenses                    |  |              | (3,004,713  
|Increase in inventories                                                             |  |              | (28,886,641 
|Increase in trade and other payables                                                |  |              | 25,912,734  
|Net cash (used in)/generated from operating activities                              |  |              | (36,029,467 
|                                                                                    |  |              |             
|Investing activities                                                                |  |              |             
|Expenditure on oil and gas properties                                               |  |              | (184,165,722
|Proceeds from IPI cash calls                                                        |  |              | 3,497,542   
|Expenditure on plant and equipment                                                  |  |              | (36,661,897 
|Proceeds received on sale of exploration assets                                     |  |              | -           
|Proceeds from Pacific Rubiales Energy (conveyance accounted portion)                |  |              | 20,000,000  
|Maturity of/(investment in) short term treasury bills                               |  |              | 11,832,110  
|Acquisition of Flex LNG Ltd shares, including transaction costs                     |  |              | -           
|(Increase)/decrease in restricted cash held as security on borrowings               |  |              | (9,760,331  
|Change in non-operating working capital                                             |  |              |             
|Decrease/(increase) in trade and other receivables                                  |  |              | 5,000,000   
|Increase/(decrease) in trade and other payables                                     |  |              | 20,545,509  
|Net cash used in investing activities                                               |  |              | (169,712,789
|                                                                                    |  |              |             
|Financing activities                                                                |  |              |             
|Repayments of OPIC secured loan                                                     |  |              | (35,500,000 
|Proceeds from Mitsui for Condensate Stripping Plant                                 |  |              | 3,578,489   
|Proceeds from/(repayments of) Clarion Finanz secured loan, net of transaction costs |  |              | -           
|Proceeds from Westpac secured loan                                                  |  |              | 15,000,000  
|Repayments of Westpac secured loan                                                  |  |              | (2,143,000  
|Proceeds from PNG LNG cash call                                                     |  |              | -           
|Proceeds from Pacific Rubiales Energy for interest in PPL237                        |  |              | 20,000,000  
|Proceeds from Petromin for Elk and Antelope field development                       |  |              | -           
|Proceeds from/(repayments of) working capital facility                              |  |              | 77,809,976  
|Proceeds from ANZ, BSP & BNP syndicated loan (net of transaction costs)             |  |              | 95,924,091  
|Proceeds from issue of common shares, net of transaction costs                      |  |              | 11,028,683  
|Proceeds from issue of convertible notes, net of transaction costs                  |  |              | -           
|Net cash generated from/(used in) financing activities                              |  |              | 185,698,239 
|                                                                                    |  |              |             
|(Decrease)/increase in cash and cash equivalents                                    |  |              | (20,044,017 
|Cash and cash equivalents, beginning of period                                      |  |              | 68,846,441  
|Exchange gains on cash and cash equivalents                                         |  |              | 1,057,620   
|Cash and cash equivalents, end of period                                            |  |              | 49,860,044  
|Comprising of:                                                                      |  |              |             
|Cash on Deposit                                                                     |  |              | 49,225,717  
|Term Deposits                                                                       |  |              | 634,327     
|Total cash and cash equivalents, end of period                                      |  |              | 49,860,044  



See accompanying notes to the consolidated financial statements



Consolidated Financial Statements   INTEROIL CORPORATION    11







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



| | 1. | General information
| | -- | -------------------



InterOil Corporation (the "Company"
or "InterOil") is a publicly traded, integrated oil and gas company operating in Papua New Guinea (“PNG”).
The Company is incorporated and domiciled in Canada. The Company is a Yukon Territory corporation, continued under the Business
Corporations Act (Yukon Territory) on August 24, 2007. The address of its registered office is 300-204 Black Street, Whitehorse,
Yukon, Canada.



Management has organized the Company’s
operations into four major segments - Upstream, Midstream, Downstream and Corporate. Upstream includes exploration, appraisal and
development operations for crude oil and natural gas structures in PNG. Upstream currently includes the development of infrastructure
for the Elk and Antelope fields which includes wells, gas gathering pipelines, condensate stripping facilities and pipelines to
deliver natural gas to the Midstream Liquefaction segment and condensate to the Midstream Refining segment. This segment is also
conducting appraisal drilling of the Triceratops field and manages our construction business which services our development projects
underway in PNG. Midstream consists of both Midstream Refining and Midstream Liquefaction. Midstream Refining includes production
of refined petroleum products at Napa Napa in Port Moresby, PNG for the domestic market and for export, and Midstream Liquefaction
includes the work being undertaken to develop liquefaction and associated facilities in PNG for the export of liquefied natural
gas. Downstream segment markets and distributes refined products domestically in PNG on a wholesale and retail basis. Corporate
segment provides support to our other business segments by engaging in business development and improvement activities, providing
management, general and administrative services, undertakes financing and treasury activities, and is responsible for government
and investor relations. This segment also manages our shipping business which currently operates two vessels transporting petroleum
products for our Downstream segment and external customers, both within PNG and for export in the South Pacific region.



These consolidated financial statements
were approved by the Directors for issue on February 27, 2013. The Directors have the power to amend and reissue the financial
report.



| | 2. | Significant accounting policies
| | -- | -------------------------------



The principal accounting policies applied
in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied
to all the years presented, unless otherwise stated.



| | (a) | Basis of preparation
| | --- | --------------------



The consolidated financial statements of
the Company have been prepared in accordance with International Financial Reporting Standards (“IFRS”), as issued by
the IASB. The consolidated financial statements for the year ended December 31, 2012 have been prepared under the historical cost
convention, except for derivative financial instruments which are measured at fair value.



The preparation of financial statements
requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process
of applying the Company’s accounting policies. Estimates and judgments are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances.
The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom
equal the related actual results. The estimates and assumptions that have a significant risk of causing a material adjustment to
the carrying amounts of assets and liabilities within the next financial year are addressed below.



| | - | Net realizable value of inventory:Inventory is recorded at the lower of cost or
net realizable value. To determine the net realizable value of finished goods inventory, the IPP pricing from January 2013 is considered
(IPP is based on December MOPS product pricing) along with estimated Naphtha, LSWR and LPG pricing based on the expected date of
sale. The estimates are based on the most reliable evidence available at the time the estimates are made, of the amounts that are
expected to be realized. These estimates take into consideration fluctuations of price or cost directly relating to events occurring
after the end of the period to the extent that such events confirm conditions existing at the end of the reporting period.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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. Management
has assessed 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. Management valued the liability
component first and assigned the residual value to the equity component. Management 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 $70,000,000 total issue represents
127.5% of the liability portion.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Consolidated Financial Statements   INTEROIL CORPORATION    12















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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



| | - | Deferred gain on contributions to LNG project:The Company has a recognized deferred
gain on its contributions to the Joint Venture based on the share of other joint venture partners in the project. As InterOil’s
shareholding within the Joint Venture Company as at December 31, 2012 is 84.582%, the gain on contribution of non cash assets to
the project by InterOil relating to other joint venture partners’ shareholding (15.418% - amounting to $15,113,190) has been
recognized by InterOil in its balance sheet as a deferred gain. This deferred gain will increase/decrease as the other Joint Venture
partners decrease/increase their shareholding in the project.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



This amount has been recorded
as a reduction of deferred LNG project costs by $15,113,190 at December 31, 2012 which has reduced the LNG project costs to $4,385,857
at December 31, 2012. The deferred gain will be recognized in the consolidated income statement when the risks and rewards have
considered to be passed.



| | - | Asset retirement obligation:A liability is recognized for future legal or constructive
retirement obligations associated with the Company’s property, plant and equipment. The amount recognized is the net present
value of the estimated costs of future dismantlement, site restoration and abandonment of properties based upon current regulations
and economic circumstances at period end. As a result of an independent assessment of the potential asset retirement obligations
of the refinery, Management has recognized an asset retirement obligation at December 31, 2012 of $4,978,334. The inflation factor
used in the independent assessment of the retirement obligation is 2.6% and the fair value of the best estimate was derived based
on discounting the obligation to the current period end using a discount rate of 7.78%.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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. The Company currently does 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 the Company’s operating permits which may result in increased capital expenditures and operating costs.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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, expected price volatility of the underlying share, the expected yield and risk-free interest rate
for the term of the option. Upon exercise of options, the balance of the contributed surplus relating to those options is transferred
to share capital. The fair value of restricted stock on grant date is the market value of the stock. The Company uses 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Income taxes:The company uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the deferred tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the date of enactment. In considering the recoverability
of deferred tax assets and liabilities, the Company considers a number of factors, including the consistency of profits generated
from the refinery, likelihood of production from Upstream operations to utilize the carried forward exploration costs, etc. If
actual results differ from the estimates or if the Company adjusts the estimates in future periods, a reduction in the Company’s
deferred tax assets will result in a corresponding increase in deferred tax expenses.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Oil and gas properties:The Company uses the successful-efforts method to account
for its oil and gas exploration and development activities. Under this method, costs are accumulated on a field-by-field basis
with certain exploratory expenditures and exploratory dry holes being expensed as incurred. The Company continues to carry as an
asset the cost of drilling exploratory wells if the required capital expenditure is made and drilling of additional exploratory
wells is underway or firmly planned for the near future, or when exploration and evaluation activities have not yet reached a stage
to allow reasonable assessment regarding the existence of economical reserves. Capitalized costs for producing wells will be subject
to depletion using the units-of-production method. Geological and geophysical costs are expensed as incurred. If the Company’s
plans change or the Company adjusts the estimates in future periods, a reduction in the Company’s oil and gas properties
asset will result in a corresponding increase in the amount of our exploration expenses.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Consolidated Financial Statements   INTEROIL CORPORATION    13







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



| | - | Impairment of Long-Lived Assets:The Company is required to review the carrying value
of all property, plant and equipment, including the carrying value of oil and gas assets, and goodwill for potential impairment.
The Company tests long-lived assets for recoverability whenever events or changes in circumstances indicate that its carrying amount
may not be recoverable by the 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 the Company’s earnings. The Company’s impairment
evaluations are based on assumptions that are consistent with the Company’s business plans.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Rate regulation



InterOil is currently the sole refiner
of hydrocarbons in PNG. The Company’s 30 year project agreement with the Independent State of Papua New Guinea (“the
State”) expires in 2035. The State has undertaken to ensure that all domestic distributors purchase their refined petroleum
products from the Company’s refinery, or any other refinery which is constructed in PNG, at an Import Parity Price (”IPP”).
The IPP is monitored by the Papua New Guinea Independent Consumer and Competition Commission (”ICCC”). In general,
the IPP is the price that would be paid in PNG for a refined product being imported. For all price controlled products (diesel,
unleaded petrol, kerosene and aviation fuel) produced and sold locally in PNG, the IPP is calculated by adding the costs that would
typically be incurred to import such product to ‘Mean of Platts Singapore’ (“MOPS”) which is the benchmark
price for refined products in the region in which the Company operates.



InterOil is also a significant participant
in the retail and wholesale distribution business in PNG. The ICCC regulates the maximum prices that may be charged by the wholesale
and retail hydrocarbon distribution industry in PNG. The Downstream business may charge less than the maximum margin set by the
ICCC in order to maintain its competitiveness with other participants in the market. In November 2010, the ICCC released its review
report which will govern the pricing arrangements for petroleum products in PNG until the end of 2014, taking effect from November
1, 2010. The purpose of the review was to consider the extent to which the existing regulation of price setting arrangements at
both wholesale and retail levels should continue or be revised for the next five year period. The report recommended an increase
in margins for wholesale business and certain other activities, while the retail margin is to remain the same. It also recommended
some increases in monitoring industry activity in PNG mainly, relating to import of products by distributors and in relation to
aviation fuel pricing.



No rate regulated assets or liabilities
have been recognized.



| | (b) | Statement on liquidity, capital resources and capital requirements
| | --- | ------------------------------------------------------------------



These consolidated financial statements
have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the
normal course of business as they become due.



The net current assets as at December 31,
2012 amounted to $105.7 million compared to $226.6 million as at December 31, 2011 and $311.0 million as at December 31, 2010.
The Company has cash, cash equivalents and cash restricted of $98.9 million as at December 31, 2012 (December 2011 - $108.1 million,
December 2010 - $280.9 million), of which $49.0 million is restricted (December 2011 - $39.3 million, December 2010 - $47.3 million).



The Company’s primary use of capital
resources has been the exploration and development activities in the Upstream operations. The Company has no obligation to execute
exploration activities within a set timeframe and therefore has the ability to select the timing of these activities as long as
the minimum license commitments in relation to the Company’s Petroleum Prospecting Licenses (“PPL”) and Petroleum
Retention Licenses (“PRL”) are met. Refer note 30 for further information on these commitments. Accordingly, the Company’s
actual capital expenditure can be accelerated or decelerated at its discretion.



The Company has a short term total working
capital facility of $240.0 million for its Midstream – Refining operation that was renewable annually with BNP Paribas. In
October 2012, the working capital facility agreement with BNP Paribas was amended so that the facility was made evergreen and the
annual renewal requirement removed. This facility is secured by the charge over the assets it is drawn down against. As at December
31, 2012, $233.8 million of the combined facility has been utilized, and the remaining facility of $6.2 million remains available
for use.



Consolidated Financial Statements   INTEROIL CORPORATION    14







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



The Company has an approximate $66.6 million
(Papua New Guinea Kina (“PGK”) 140.0 million) revolving working capital facility for its Downstream operations in PNG
from Bank of South Pacific Limited (“BSP”) and Westpac Bank PNG Limited (“Westpac”). As at December 31,
2012, none of this combined facility has been utilized, and the entire facility remains available for use. The Westpac facility
was for an initial term of three years and was renewed in November 2011 through to November 2014. The facility was increased in
February 2012 by $4.8 million (PGK 10.0 million). In addition, a secured loan of $15.0 million was provided as part of this increased
facility which is repayable in equal installments over 3.5 years with an interest rate of LIBOR + 4.4% per annum. The BSP facility
is renewable annually and was renewed in October 2012 through to October 2013.



On October 16, 2012, the Company entered
into a five year amortizing $100.0 million secured term loan facility with BNP Paribas Singapore, Bank South Pacific Limited, and
Australia and New Zealand Banking Group (PNG) Limited. Borrowings under the facility have been used for repayment of all outstanding
amounts under the term loan granted by OPIC and will also be used for general corporate purposes. The loan is secured over the
fixed assets of the refinery and bears interest at LIBOR plus 6.5%.



The Company believes that it has sufficient
funds for the Midstream Refinery and Downstream operations; however, existing cash balances and ongoing cash generated from these
operations will not be sufficient to facilitate further necessary development of the Elk and Antelope fields, appraisal of Triceratops
field, condensate stripping and liquefaction facilities. Therefore the Company must extend or secure sufficient funding through
renewed or additional borrowings, equity raising and or asset sales to enable sufficient cash to be available to further its development
plans. Management expects that the Company will be able to secure the necessary financing through one, or a combination of, the
aforementioned alternatives. Accordingly, these consolidated financial statements have been prepared on a going concern basis in
the belief that the Company will realize its assets and settle its liabilities and commitments in the normal course of business
and for at least the amounts stated, for a period not less than one year from the date of signing the financial report.



| | (c) | New standards issued but not yet effective
| | --- | ------------------------------------------



The following new standards, new interpretations
and amendments to standards and interpretations have been issued but are not yet effective for the financial year beginning January
1, 2012 and have not been early adopted:



| | - | IFRS 9 ‘Financial Instruments’(effective from January 1, 2015):This addresses the classification and measurement of financial assets. The standard is not applicable until January 1,
2015 but is available for early adoption. The Company is yet to assess IFRS 9’s full impact, but do not expect any material
changes due to this standard. The Company has not yet decided to early adopt IFRS 9.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | IFRS 10 'Consolidated Financial Statements'(effective from January 1, 2013): This
builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included
within the consolidated financial statements. The standard provides additional guidance to assist in determining control where
this is difficult to assess. This new standard will have no impact on the entities that the Company currently consolidates as its
subsidiaries.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | IFRS 11 'Joint Arrangements'(effective from January 1, 2013): This provides
for a more realistic reflection of joint arrangements by focusing on the rights and obligations of the arrangement, rather than
its legal form. There are two types of joint arrangements: joint operations and joint ventures. Joint operations arise where a
joint operator has rights to the assets and obligations relating to the arrangement and hence accounts for its interest in assets,
liabilities, revenue and expenses. Joint ventures arise where the joint operator has rights to the net assets of the arrangement
and hence equity accounts for its interest. Proportional consolidation of joint ventures is no longer allowed. Under IFRS 11, the
LNG Project will be classified as a joint venture and the Company will therefore equity account for its interest in the LNG Project
as compared to the current treatment of proportional consolidation. The Company will reassess the impact of this standard taking
into consideration the final outcome of the ongoing sell down process in relation to the Elk and Antelope fields.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | IFRS 12 'Disclosure of Interests in Other Entities'(effective from January 1, 2013):
This is a new standard on disclosure requirements for all forms of interests in other entities, including joint arrangements, associates,
special purpose vehicles and other off balance sheet vehicles. As a result of this standard, the Company will have increased disclosure
around the LNG Project joint venture.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | IFRS 13 ‘Fair Value Measurement’(effective from January 1, 2013): This
aims to improve consistency and reduce complexity by providing a precise definition of fair value and a single source of fair value
measurement and disclosure requirements for use across IFRSs. As a result of this standard, there may be some additional disclosure
requirements that may impact on the Company’s financial statements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | IAS 27 ‘Separate Financial Statements’(effective from January 1, 2013):
This includes the provisions on separate financial statements that are left after the control provisions of IAS 27 have been included
in the new IFRS 10. This new standard will have no impact on the Company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Consolidated Financial Statements   INTEROIL CORPORATION    15







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



| | - | IAS 28 ‘Investments in Associates and Joint Ventures’(effective from
January 1, 2013): This now includes the requirements for joint ventures, as well as associates, to be equity accounted following
the issue of IFRS 11. As a result of the LNG Project being classified as a joint venture under IFRS 11, the Company will have to
equity account for its interest in the LNG Project in accordance with IAS 28. The Company will reassess the impact of this standard
taking into consideration the final outcome of the ongoing sell down process in relation to the Elk and Antelope fields.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (d) | Principles of consolidation
| | --- | ---------------------------



| | - | Business combinations:The Company applies the acquisition method to account for
business combinations. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred,
the liabilities incurred to the former owners of the acquiree and the equity interests issued by the group. The consideration transferred
includes the fair value of any asset or liability resulting from a contingent consideration arrangement. Identifiable assets acquired
and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the
acquisition date. The Company recognizes any non-controlling interest in the acquiree on an acquisition-by-acquisition basis, either
at fair value or at the non-controlling interest’s proportionate share of the recognized amounts of acquiree’s identifiable
net assets.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If the business combination
is achieved in stages, the acquisition date fair value of the acquirer’s previously held equity interest in the acquiree
is re-measured to fair value at the acquisition date through profit or loss. Any contingent consideration to be transferred by
the Company is recognized at fair value at the acquisition date. Subsequent changes to the fair value of the contingent consideration
that is deemed to be an asset or liability is recognized in accordance with IAS 39 either in profit or loss or as a change to other
comprehensive income. Contingent consideration that is classified as equity is not re-measured, and its subsequent settlement is
accounted for within equity.



The Company measures goodwill
at the acquisition date as the fair value of the consideration transferred including the recognized amount of any non-controlling
interests in the acquiree, less the fair value of the identifiable assets acquired and liabilities assumed, all measured as of
the acquisition date.



Transaction costs, other than
those associated with the issue of debt or equity securities, that the Company incurs in connection with a business combination
are expensed as incurred.



| | - | Subsidiaries:The consolidated financial statements of the Company incorporates the
assets, liabilities and results of InterOil Corporation and of all subsidiaries as at December 31, 2012, December 31, 2011 and
December 31, 2010, and for the periods then ended. Subsidiaries of InterOil Corporation as at December 31, 2012 included South
Pacific Refining Limited (100%), SPI Exploration and Production Corporation (100%), SPI Distribution Limited (100%), InterOil LNG
Holdings Inc. (100%), InterOil Australia Pty Ltd (100%), Direct Employment Services Company (100%), InterOil Singapore Pte Ltd
(100%), InterOil Finance Inc. (100%), InterOil Shipping Pte Ltd (100%), InterOil Corporate PNG Limited (100%) and their subsidiaries.
InterOil Corporation and its subsidiaries together are referred to in these consolidated financial statements as the Company or
the consolidated entity.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Subsidiaries are all those entities
over which the Company has the power to determine strategic operating, investing and financing policies without the cooperation
of others. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when
assessing whether the Company controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred
to the Company. They are de-consolidated from the date that control ceases.



Intercompany transactions, balances
and unrealized gains on transactions between companies are eliminated on consolidation. Non-controlling interests in the results
and equity of subsidiaries are shown separately in the consolidated income statements, statements of comprehensive income, balance
sheets and statement of changes in equity.



In April 2010, InterOil Shipping
Pte Ltd was incorporated in Singapore as a 100% subsidiary of InterOil Corporation to provide shipping services to domestic customers
within PNG and also to export customers from PNG.



In May 2010, SPI Holdings No.1
Limited was incorporated in PNG as a 100% subsidiary of SPI (208) Limited to hold an interest in PRL15. There have been no transactions
in this entity as of December 31, 2012.



In May 2010, SPI Holdings No.2
Limited was incorporated in PNG as a 100% subsidiary of SPI (208) Limited to hold an interest in PRL15. There have been no transactions
in this entity as of December 31, 2012.



Consolidated Financial Statements   INTEROIL CORPORATION    16







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



In May 2010, SPI CSP Holdings
Limited was incorporated in PNG as a 100% subsidiary of SPI Exploration & Production Corporation to hold InterOil’s interest
in the proposed condensate stripping facilities, including gathering condensate pipeline, condensate storage and associated facilities
being progressed in joint venture with Mitsui & Co. Ltd. (“CS Project”).



In June 2010, Champion No. 50
Limited was incorporated in PNG as a 100% subsidiary of Liquid Niugini Gas Limited. In January 2011, this company underwent a change
of name to LNG Train 1 Limited and then a further name change in February 2011 to LNGL Train 1 Limited. The purpose of LNGL Train
1 Limited was to be the owner and operator of a modular LNG plant to be acquired from Energy World Corporation. There have been
no transactions in this entity as of December 31, 2012.



In March 2011, InterOil Corporate
PNG Limited was incorporated in PNG as a 100% subsidiary of InterOil Corporation to employ all corporate staff in PNG and to capture
their associated costs. In addition, this entity has taken over the operation of the Napa Napa camp and all costs associated with
the operation of the camp are now captured in this entity. All costs incurred by this entity will be recharged to relevant InterOil
entities based on an equitable driver basis. This entity began transacting in October 2012.



In May 2011, SPI Holdings No.3
Limited was incorporated in PNG as a 100% subsidiary of SPI (220) Limited to hold an interest in Triceratops field. This company
underwent a change of name, and is currently registered as SPI Security Holdings Limited. There have been no transactions in this
entity as of December 31, 2012.



In March 2012, Champion No.
57 Limited was incorporated in PNG as a 100% subsidiary of SPI (220) Limited to hold an interest in the Triceratops field. This
company underwent a change of name, and is currently registered as InterOil Partners Limited. There have been no transactions in
this entity as of December 31, 2012.



| | - | Proportionate consolidation of Joint Venture interests:The Company’s interests
in PNG LNG Inc. is governed by a Shareholders’ Agreement signed on July 30, 2007 between the Joint Ventures’. Guidance
under IAS 31 – ‘Interest in Joint Ventures’ is followed and the entity has been proportionately consolidated
in InterOil’s consolidated financial statements. The consolidated results of InterOil’s proportionate shareholding
in the LNG Project has been disclosed separately within the segment notes under Midstream - Liquefaction, refer to note 5. The
Company is currently reviewing the revised guidance under IFRS 11 – ‘Joint Arrangements' which is effective from January
1, 2013. The Company will assess the impact of this revised standard taking into consideration the final outcome of the ongoing
sell down process in relation to the Elk and Antelope fields.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (e) | Segment reporting
| | --- | -----------------



An operating segment is a component of
an enterprise:

| | - | that engages in business activities from which it may earn revenues and incur expenses (including
revenues and expenses relating to transactions with other segments of the same enterprise),
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | whose operating results are regularly reviewed by the chief operating decision maker to make decisions
about resources to be allocated to the segment and assess its performance, and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | for which discrete financial information is available.
| | - | ------------------------------------------------------



Segment capital expenditure is the total
cost incurred during the period to acquire property, plant and equipment, and intangible assets other than goodwill. Refer to note
1 for the management’s organization of the Company by reporting segment.



| | (f) | Foreign currency
| | --- | ----------------



| | - | Functional and presentation currency:These consolidated financial statements are
presented in United States Dollars (“USD”) which is InterOil’s functional and presentation currency.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Foreign currency transactions:Transactions in foreign currencies are translated
to the respective functional currencies of Company entities at exchange rates at the dates of the transactions. Monetary assets
and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange
rate at that date. The foreign currency gain or loss on monetary items is the difference between amortized cost in the functional
currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortized cost
in foreign currency translated at the exchange rate at the end of the period.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Non-monetary assets and liabilities
denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate
at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical
cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation
are recognized in profit or loss.



Consolidated Financial Statements   INTEROIL CORPORATION    17







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



| | - | Foreign operations:For subsidiaries considered to be foreign operations, all assets
and liabilities denominated in foreign currency are translated to USD at exchange rates in effect at the balance sheet date and
all revenue and expense items are translated at the rates of exchange in effect at the time of the transactions. Foreign exchange
gains or losses are recognized and presented in other comprehensive income and in the foreign currency translation reserve in equity.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of
the foreign operation and translated at the closing rate.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (g) | Financial instruments
| | --- | ---------------------



(i) Non-derivative financial assets



The Company initially recognizes loans
and receivables and deposits on the date that they are originated. All other financial assets (including assets designated at fair
value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual
provisions of the instrument. The Company derecognizes a financial asset when the contractual rights to the cash flows from the
asset expire, or it transfers the rights to receive the contractual cash flows on the financial asset in a transaction in which
substantially all the risks and rewards of ownership of the financial asset are transferred. Any interest in transferred financial
assets that is created or retained by the Company is recognized as a separate asset or liability.



Financial assets and liabilities are offset
and the net amount presented in the balance sheet when, and only when, the Company has a legal right to offset the amounts and
intends to either settle on a net basis or to realize the asset and settle the liability simultaneously. The Company classifies
non-derivative financial assets into the following categories: financial assets at fair value through profit or loss, loans or
receivables, held to maturity financial assets and available-for-sale financial assets.



| | - | Loans and receivables:Loans and receivables are financial assets with fixed or determinable
payments that are not quoted in an active market. Such assets are recognized initially at fair value plus any directly attributable
transaction costs. Subsequent to initial recognition loans and receivables are measured at amortized cost using the effective interest
method, less any impairment losses. Loans and receivables comprise of trade and other receivables.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Held-to-maturity: Held-to-maturity investments are non-derivative financial assets
with fixed or determinable payments and fixed maturities that the Company’s management has the positive intention and ability
to hold to maturity. Held-to-maturity financial assets are recognized initially at fair value plus any directly attributable transaction
costs. Subsequent to initial recognition, held-to-maturity financial assets are measured at amortized cost using the effective
interest method, less any impairment losses. If the Company were to sell other than an insignificant amount of held-to-maturity
financial assets, the whole category would be tainted and reclassified as available-for-sale. Held-to-maturity financial assets
are included in non-current assets, except for those with maturities less than 12 months from the end of the reporting period,
which are classified as current assets.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





| | - | Available-for-sale:Available-for-sale financial assets are non-derivative financial
assets that are designated as available for sale or are not classified in any of the other categories. The Company’s investments
in equity securities are classified as available-for-sale financial assets. Subsequent to initial recognition, they are measured
at fair value and changes therein, other than impairment losses, are recognized in other comprehensive income. When an investment
is derecognized, the gain or loss accumulated in equity is reclassified to profit or loss.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(ii) Non-derivative financial liabilities



The Company initially recognizes debt securities
issued and subordinated liabilities on the date that they originated. All other financial liabilities (including liabilities designated
at fair value through profit or loss) are recognized initially on the trade date at which the Company becomes a party to the contractual
provisions of the instrument. The Company derecognizes a financial liability when its contractual obligations are discharged or
cancelled or expire. Financial assets and liabilities are offset and the net amount presented in the balance sheet when, and only
when, the Company has a legal right to offset the amounts and intends to either settle on a net basis or to realize the asset and
settle the liability simultaneously.



The Company classifies non-derivative financial
liabilities into the other financial liabilities category. Financial liabilities not designated at fair value through profit or
loss are recognized initially at fair value plus any directly attributable transaction costs. Subsequent to initial recognition,
these financial liabilities are measured at amortized cost using the effective interest method. Other financial liabilities comprise
secured and unsecured loans, bank overdrafts, and trade and other payables. Trades and other payables represent liabilities for
goods and services provided to the Company prior to the end of financial period which are unpaid. These amounts are unsecured and
are usually paid within 30 days of recognition.



Consolidated Financial Statements   INTEROIL CORPORATION    18







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



(iii) Derivative financial instruments



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



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



Changes in the fair value of a derivative
that is highly effective and that is designated and qualifies as a cash-flow hedge are recorded as a component of Other Comprehensive
Income until earnings are affected by the variability in cash flows of the designated hedged item. For cash flow hedges that have
been terminated or cease to be effective, prospective gains or losses on the derivative are recognized in earnings. Any gain or
loss that has been included in accumulated other comprehensive income at the time the hedge is discontinued continues to be deferred
in accumulated other comprehensive income until the original hedged transaction is recognized in earnings. If the likelihood of
the original hedged transaction occurring is no longer probable, the entire gain or loss in accumulated other comprehensive income
related to this transaction is immediately reclassified to earnings.



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



(iv) Compound financial instruments



Compound financial instruments issued by
the Company comprise convertible notes that can be converted to share capital at the option of the holder, when the number of shares
to be issued does not vary with changes in their fair value. The liability component of a compound financial instrument is recognized
initially at fair value of a similar liability that does not have an equity conversion option. The equity component is recognized
initially at the difference between the fair value of the compound financial instrument as a whole and the fair value of the liability
component. Any directly attributable transaction costs are allocated to the liability and equity components in proportion to their
initial carrying amounts.



Subsequent to initial recognition, the
liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity
component of a compound financial instrument is not remeasured subsequent to initial recognition. Interest and losses and gains
relating to the financial liability are recognized in profit or loss. On conversion, the financial liability is reclassified to
equity and no gain or loss is recognized on conversion.



| | (h) | Cash and cash equivalents
| | --- | -------------------------



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



| | (i) | Cash restricted
| | --- | ---------------



Cash restricted consists of cash on deposit
which is restricted from being used in daily operations. Cash restricted is carried at cost and any accrued interest is classified
under other assets.



| | (j) | Inventory
| | --- | ---------



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



Consolidated Financial Statements   INTEROIL CORPORATION    19







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



| | - | Crude oil and refined petroleum products:Crude oil and refined petroleum products
are recorded on a first-in, first-out basis and the net realizable value test for crude oil and refined petroleum products are
performed separately. The cost of Midstream Refining petroleum products consist of raw material, labor, direct overheads and transportation
costs. The cost of Downstream petroleum products includes the cost of the product plus related freight, wharfage and insurance.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (k) | Deferred financing costs
| | --- | ------------------------



Deferred financing costs represent the
unamortized financing costs paid to secure borrowings. Amortization is provided on an effective yield basis over the term of the
related debt and is included in expenses for the period. Unamortized deferred financing costs are offset against the respective
liability accounts.



| | (l) | Plant and equipment
| | --- | -------------------



| | - | Refinery assets:The Company’s most significant item of plant and equipment
is the oil refinery in PNG which is included within Midstream Refining assets. The pre-operating stage of the refinery ceased on
January 1, 2005. Project costs, net of any recoveries, incurred during the pre-operating stage were capitalized as part of plant
and equipment. Development costs and the costs of acquiring or constructing support facilities and equipment are also capitalized.
Interest costs relating to the construction and pre-operating stage of the development project prior to commencement of commercial
operations were capitalized as part of the cost of such plant and equipment.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The refinery assets are recorded
at cost less accumulated depreciation and accumulated impairment losses, if any. Refinery related assets are depreciated on straight
line basis over their useful lives, at an average rate of 4% per annum. The refinery is built on land leased from the State. The
lease expires on July 26, 2097.



Repairs and maintenance costs,
other than major turnaround costs, are expensed as incurred. Major turnaround costs will be capitalized when incurred and amortized
over the estimated period of time to the next scheduled turnaround. No major turnaround costs have been incurred in the year ended
December 31, 2012 (December 2011 - $nil).



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



Land is not depreciated. Depreciation
on other assets is calculated using the straight-line method to allocate their cost or revalued amounts, net of their residual
values, over their estimated useful lives as follows:



|Leasehold land improvements | Shorter of 100 years or lease period
|--------------------------- | ------------------------------------
|Refinery                    | 4 – 25 years                        
|Buildings                   | 20 – 40 years                       
|Plant and equipment         | 3 – 15 years                        
|Motor vehicles              | 4 – 5 years                         



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



Leases in which a significant
portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Operating lease payments
are representative of the pattern of benefit derived from the leased asset and accordingly are included in expenses on a straight
line basis over the period of the lease.



| | - | Leased assets (accounting as lessor):Assets are leased out under an operating lease.
The asset is included in the balance sheet based on the nature of the asset. Lease income is recognized over the term of the lease
on a straight-line basis.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Consolidated Financial Statements   INTEROIL CORPORATION    20







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



| | - | Asset retirement obligations:A liability is recognized for future legal or constructive
retirement obligations associated with the Company’s property, plant and equipment. The amount recognized is the net present
value of the estimated costs of future dismantlement, site restoration and abandonment of properties based upon current regulations
and economic circumstances at period end.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As a result of an independent
assessment of the potential asset retirement obligations of the refinery, a liability was recognized for asset retirement obligation,
which amounted to a balance of $4,978,334 as at December 31, 2012.



In relation to Upstream operations,
the Company’s activities are still largely in the exploration and appraisal phase. The Midstream - Liquefaction segment is
currently at its early development stage with front-end engineering and design work being progressed. As there are no production
wells, there is minimal rectification required of the footprint created by the activities at this stage.



In relation to Downstream operations,
the current environmental law regime in Papua New Guinea does not impose remediation obligations on an operator specifically in
relation to remediation and/or rehabilitation requirements upon the closure of a site in PNG. However, the Company has a common
law duty not to cause damage to land. The Company is not aware of any material environmental contamination issues, hence no asset
retirement obligation has been recognized in relation to Downstream operations.



| | - | Environmental remediation:Remediation costs are accrued based on best 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.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Disposal of property, plant and equipment:At the time of disposal of plant and equipment,
the carrying values of the assets are written off along with accumulated depreciation and any resulting gain or loss is included
in the income statement. Gains and losses on disposals are determined by comparing proceeds with carrying amounts.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | IT Development and software:Costs incurred in development products or systems and
costs incurred in acquiring software and licenses that will contribute to future period financial benefits through revenue generation
and/or cost reduction are capitalized. Costs capitalized include external direct costs of materials and service, direct payroll
and payroll related costs of employees’ time spent on the project. Amortization is calculated on a straight line basis over
periods generally ranging from 3 to 5 years. IT development costs include only those costs directly attributable to the development
phase and are only recognized following completion of technical feasibility and where the Company has an intention and ability
to use the asset. These amounts are capitalized as part of property, plant and equipment in the Corporate segment.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (m) | Oil and gas properties
| | --- | ----------------------



The Company uses the successful-efforts
method to account for its oil and gas exploration and development activities. Under this method, costs are accumulated on a field-by-field
basis with certain exploratory expenditures and exploratory dry holes being expensed as incurred. The Company continues to carry
as an asset the cost of drilling exploratory wells if the required capital expenditure is made and drilling of additional exploratory
wells is underway or firmly planned for the near future or when exploration and evaluation activities have not yet reached a stage
to allow reasonable assessment regarding the existence of economic 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, except when they have been incurred to facilitate production techniques, to increase total recoverability and to determine
the desirability of drilling additional development wells within a proved area. Geological and geophysical costs capitalized would
be included as part of the cost of producing wells and be subject to depletion using the units-of-production method.



Conveyances of mineral interests in properties
may involve the transfer of all or a part of the rights and responsibilities of operating a property, or sufficient risks and benefits
of ownership to the transferee. Conveyance accounting is triggered by the Company on the sale of a property, where applying judgment
to the facts presented, it concludes that sufficient risks and benefits of ownership has passed to the transferee.



If a part of the interest in an unproved
property is sold, the amount received shall be treated as a recovery of cost. If the sales price exceeds the carrying amount of
a property, or exceeds the original cost of a property, gain shall be recognized in the amount of such excess.



Consolidated Financial Statements   INTEROIL CORPORATION    21







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



The sale of a part of a proved property,
or of an entire proved property, shall be accounted for as the sale of an asset, and a gain or loss shall be recognized. The unamortized
cost of the property or group of properties, a part of which was sold, shall be apportioned to the interest sold and the interest
retained on the basis of the fair values of those interests.



In the following types of conveyances,
gain shall not be recognized at the time of the conveyance:

| | - | A part of an interest owned is sold and substantial uncertainty exists about recovery of the costs
applicable to the retained interest.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| | - | A part of an interest owned is sold and the Company has a substantial obligation for future performance,
such as an obligation to drill a well or to operate the property without proportional reimbursement for that portion of the drilling
or operating costs applicable to the interest sold.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (n) | Impairment
| | --- | ----------



| | - | Non-derivative financial assets:A financial asset not carried at fair value through
profit or loss is assessed at each reporting date to determine whether there is any objective evidence that it is impaired. A financial
asset is considered to be impaired if objective evidence indicates that one or more events have had a negative effect on the estimated
future cash flows of that asset.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



An impairment loss in respect
of a financial asset measured at amortized cost is calculated as the difference between its carrying amount, and the present value
of the estimated future cash flows discounted at the original effective interest rate. An impairment loss in respect of an available-for-sale
financial asset is calculated by reference to its fair value.



Individually significant financial
assets are tested for impairment on an individual basis. The remaining financial assets are assessed collectively in groups that
share similar credit risk characteristics.



All impairment losses are recognized
in the consolidated income statement. An impairment loss, other than relating to available-for-sale equity instruments, is reversed
through profit and loss if the reversal can be related objectively to an event occurring after the impairment loss was recognized.
The reversal of an impairment loss relating to available-for-sale equity instruments is through other comprehensive income.



Trade receivables

The collectability of trade
receivables is assessed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying
amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence
that the company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial
difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganization, and default or delinquency
in payments are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference
between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective
interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial.



The amount of the impairment
loss is recognized in the income statement. When a trade receivable for which an impairment allowance had been recognized becomes
uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously
written off are credited against the income statement.



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



| | - | Non-financial assets:The carrying amounts of the Company’s non-financial assets,
other than inventories and deferred tax assets, are reviewed at each reporting date to determine whether there is any indication
of impairment. If any such indication exists then the asset’s recoverable amount is estimated. For goodwill, and intangible
assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each period
at the same time.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The recoverable amount of an
asset is the greater of its value in use or its fair value less costs to sell and is determined for an individual asset, unless
the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. In that situation,
the assets are tested as part of a cash-generating unit (“CGU”), which is the smallest identifiable group of assets,
liabilities and associated goodwill that generates cash inflows that are largely independent of the cash inflows from other assets
or groups of assets.



Consolidated Financial Statements   INTEROIL CORPORATION    22







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



Fair value is the amount of
the consideration that would be agreed upon in an arm's length transaction between knowledgeable, willing parties who are under
no compulsion to act. Value in use is determined as the net present value of the estimated future cash flows expected to arise
from the continued use of the asset in its present form and its eventual disposal, discounted at the risk free rate of interest
plus a risk premium. If an impairment loss is recognized, the adjusted carrying amount becomes the new cost basis.



An impairment loss is recognized
if the carrying amount of an asset or its CGU exceeds its recoverable amount. Impairment losses recognized in respect of CGUs are
allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then to reduce the carrying amounts of the
other assets in the CGU on a pro rata basis. Impairment losses are recognized in profit or loss.



Impairment losses recognized
in prior periods are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment
loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed
only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined,
net of depreciation or amortization, if no impairment loss had been recognized.



There has been no impairment
of assets or goodwill based on the assessments performed during the period.



| | (o) | Revenue recognition
| | --- | -------------------



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



| | - | Revenue from Midstream Refining operations:Revenue from sales of products is recognized
when products are shipped and the customer takes ownership and assumes risk of loss, collection of the relevant receivable is probable
and when the amount of revenue can be reliably measured. Sales between the operating segments of the Company have been eliminated
from sales and operating revenues and cost of sales.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Revenue from Downstream operations:Sales of goods are recognized when the Company
has delivered products to the customer, the customer takes ownership and assumes risk of loss, collection of the receivable is
probable, and when the amount of revenue can be reliably measured. It is not the Company’s policy to sell products with a
right of return.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Revenue from Upstream operations:Revenue from rig and constructions services are
recognized in the accounting period in with the services are rendered.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Interest revenue: Interest revenue is recognized as the interest accrues using the
effective interest rate.
| | - | -----------------------------------------------------------------------------------------------------------



| | (p) | Income tax
| | --- | ----------



Income tax comprises current and deferred
tax. Income tax is recognized in the income statement except to the extent that it relates to items recognized directly in other
comprehensive income or directly in equity, in which case the income tax is also recognized directly in other comprehensive income
or equity respectively.



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



Management periodically evaluates positions
taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation.



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



Consolidated Financial Statements   INTEROIL CORPORATION    23







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



| | 2. | Significant accounting policies (cont’d)
| | -- | ----------------------------------------



Deferred tax assets and liabilities are
offset when there is a legally enforceable right to offset current tax assets and liabilities and when the deferred tax balances
relate to the same taxation authority. Current tax assets and tax liabilities are offset where the entity has a legally enforceable
right to offset and intends either to settle on a net basis, or to realize the asset and settle the liability simultaneously.



Deferred tax assets are recognized for
deductible temporary differences and unused tax losses only if it is probable that future taxable amounts will be available to
utilize those temporary differences and losses. Deferred tax assets are reviewed at each reporting date and are reduced to the
extent that it is no longer probable that the related tax benefit will be realized.



The Refinery Project Agreement gave “pioneer”
status to InterOil Limited (”IOL”). This status gave IOL a tax holiday beginning upon the date of the commencement
of commercial production, January 1, 2005 and ended December 31, 2010.



In addition to income taxes, InterOil is
subject to Goods and Services Tax, Excise Duty and other taxes in PNG, Australia, Singapore and Canada. The consolidated financial
statements are prepared on a net of Goods and Services Tax basis.



| | (q) | Employee entitlements
| | --- | ---------------------



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



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



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



| | - | Share-based payments:Stock-based compensation benefits are provided to employees
and directors pursuant to the 2009 Stock Incentive Plan (with options still in existence having been granted under the now superseded
2006 Stock Incentive Plan). The Company currently issues stock options and restricted stock units as part of its stock-based compensation
plan. 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 and expected price volatility
of the underlying share, the expected yield and risk-free interest rate for the term of the option. Upon exercise of options, the
balance of the contributed surplus relating to those options is transferred to share capital. The fair value of restricted stock
units on grant date is the market value of the stock.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Company uses 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.



| | - | Profit-sharing and bonus plans:The Company recognizes a provision where contractually
obliged or where there is a past practice that has created a constructive obligation.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (r) | Earnings per share
| | --- | ------------------



| | - | Basic earnings per share:Basic common shares outstanding are the weighted average
number of common shares outstanding for each period. Basic earnings per share is calculated by dividing the profit or loss attributable
to shareholders of the Company by the weighted average number of common shares outstanding during the period.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Diluted earnings per share:Diluted earnings per share is determined by adjusting
the profit or loss attributable to shareholders and the weighted average number of common shares outstanding, for the effects of
all dilutive potential ordinary shares, which comprise convertible notes and share options granted to employees.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





Consolidated Financial Statements   INTEROIL CORPORATION    24











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



| | 3. | Revision to Consolidated Statement of Cash Flows
| | -- | ------------------------------------------------



Prior to IFRS becoming effective from the
transition date of January 1, 2010, the Company undertook a transition project to ensure that the accounting policies being maintained
by the Company were in compliance with IFRS. As part of the transition project, the Company reviewed IAS 7 “Statement of
Cash Flows” and, at that time did not note any differences between the then Canadian GAAP and IFRS in relation to this standard.



Under Canadian GAAP, the Company had adopted
the accounting policy of treating oil and gas properties expensed (exploration costs, excluding exploration impairment) as an investing
activity in the statement of cash flows as they represented the extent to which expenditures have been made for resources intended
to generate future income and cash flows. The Company continued to treat these expenses as an investing activity in its first and
subsequent sets of IFRS financial statements, which was not in line with the specific IFRIC clarification to IAS 7, effective January
1, 2010, that confirmed that only expenditures that result in a recognized asset in the balance sheet are eligible for classification
as investing activities. The following table shows the revisions made to the Consolidated Statement of Cash Flows for the years
ended December 31, 2011 and 2010 to reflect the correct classification of exploration costs. The revision has no impact on basic
or diluted earnings per share.



|                                                                                                            |  | Year ended   |              |   | Year ended   | 
|----------------------------------------------------------------------------------------------------------- |  | ------------ | ------------ | - | ------------ | 
|                                                                                                            |  | December 31, |              |   | December 31, | 
|                                                                                                            |  | 2011         |              |   | 2010         | 
|                                                                                                            |  | $ (revised)  |              |   | $ (revised)  | 
|Cash flows provided by /(used in):                                                                          |  |              |              |   |              | 
|                                                                                                            |  |              |              |   |              | 
|Operating activities (as per orignal filed financial statements)                                            |  |              | 62,669,700   |   |              | 
|                                                                                                            |  |              |              |   |              | 
|Revision:                                                                                                   |  |              |              |   |              | 
|Reclass exploration costs expensed from original classification as investing activity to operating activity |  |              | (18,435,150  | ) |              | 
|Operating activities - Revised                                                                              |  |              | 44,234,550   |   |              | 
|                                                                                                            |  |              |              |   |              | 
|Investing activities - (as per orignal filed financial statements)                                          |  |              | (204,239,862 | ) |              | 
|                                                                                                            |  |              |              |   |              | 
|Revision:                                                                                                   |  |              |              |   |              | 
|Reclass exploration costs expensed from original classification as investing activity to operating activity |  |              | 18,435,150   |   |              | 
|Investing activities - Revised                                                                              |  |              | (185,804,712 | ) |              | 
|                                                                                                            |  |              |              |   |              | 
|Net impact to the Consolidated Statement of Cash Flows                                                      |  |              | -            |   |              | 



In addition to the annual revisions shown
above, the interim Consolidated Statement of Cash Flows in the Company’s first and subsequent IFRS quarterly financial statements
have also been revised as follows:



Consolidated Financial Statements   INTEROIL CORPORATION    25











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





| | 3. | Revision to Consolidated Statement of Cash Flows (cont’d)
| | -- | ---------------------------------------------------------



|                                                                                                            |  | Quarter ended |             |   | Six months ended |  |             | Quarter ended | 
|----------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ---------------- |  | ----------- | ------------- | 
|                                                                                                            |  | June 30,      |             |   | June 30,         |  |             | June 30,      | 
|                                                                                                            |  | 2012          |             |   | 2011             |  |             | 2012          | 
|                                                                                                            |  | $ (revised)   |             |   | $ (revised)      |  |             | $ (revised)   | 
|Cash flows (used in)/provided by:                                                                           |  |               |             |   |                  |  |             |               | 
|                                                                                                            |  |               |             |   |                  |  |             |               | 
|Operating activities (as per orignal filed financial statements)                                            |  |               | (17,524,179 | ) |                  |  | (53,432,799 | )             | 
|                                                                                                            |  |               |             |   |                  |  |             |               | 
|Revision:                                                                                                   |  |               |             |   |                  |  |             |               | 
|Reclass exploration costs expensed from original classification as investing activity to operating activity |  |               | (5,240,283  | ) |                  |  | (2,733,116  | )             | 
|Operating activities - Revised                                                                              |  |               | (22,764,462 | ) |                  |  | (56,165,915 | )             | 
|                                                                                                            |  |               |             |   |                  |  |             |               | 
|Investing activities - (as per orignal filed financial statements)                                          |  |               | (53,109,699 | ) |                  |  | (46,451,424 | )             | 
|                                                                                                            |  |               |             |   |                  |  |             |               | 
|Revision:                                                                                                   |  |               |             |   |                  |  |             |               | 
|Reclass exploration costs expensed from original classification as investing activity to operating activity |  |               | 5,240,283   |   |                  |  | 2,733,116   |               | 
|Investing activities - Revised                                                                              |  |               | (47,869,416 | ) |                  |  | (43,718,308 | )             | 
|                                                                                                            |  |               |             |   |                  |  |             |               | 
|Net impact to the Consolidated Statement of Cash Flows                                                      |  |               | -           |   |                  |  | -           |               | 



|                                                                                                            |  | Quarter ended |             |   | Nine months ended | 
|----------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ----------------- | 
|                                                                                                            |  | September 30, |             |   | September 30,     | 
|                                                                                                            |  | 2012          |             |   | 2011              | 
|                                                                                                            |  | $ (revised)   |             |   | $ (revised)       | 
|Cash flows provided by /(used in):                                                                          |  |               |             |   |                   | 
|                                                                                                            |  |               |             |   |                   | 
|Operating activities (as per orignal filed financial statements)                                            |  |               | 29,601,177  |   |                   | 
|                                                                                                            |  |               |             |   |                   | 
|Revision:                                                                                                   |  |               |             |   |                   | 
|Reclass exploration costs expensed from original classification as investing activity to operating activity |  |               | (2,056,367  | ) |                   | 
|Operating activities - Revised                                                                              |  |               | 27,544,810  |   |                   | 
|                                                                                                            |  |               |             |   |                   | 
|Investing activities - (as per orignal filed financial statements)                                          |  |               | (43,312,041 | ) |                   | 
|                                                                                                            |  |               |             |   |                   | 
|Revision:                                                                                                   |  |               |             |   |                   | 
|Reclass exploration costs expensed from original classification as investing activity to operating activity |  |               | 2,056,367   |   |                   | 
|Investing activities - Revised                                                                              |  |               | (41,255,674 | ) |                   | 
|                                                                                                            |  |               |             |   |                   | 
|Net impact to the Consolidated Statement of Cash Flows                                                      |  |               | -           |   |                   | 





Consolidated Financial Statements   INTEROIL CORPORATION    26











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



| | 4. | Financial Risk Management
| | -- | -------------------------



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



Risk Management is carried out under policies
approved by the Board of Directors. The Finance Department identifies, evaluates and hedges financial risks in close cooperation
with the Company’s operating units. The product pricing risks are managed by the Supply and Trading Department under the
guidance of the Risk Management Committee. The Board provides written principles for overall risk management, as well as written
policies covering specific areas, such as use of derivative financial instruments. The Company’s overall risk management
program seeks to minimize potential adverse effects on the Company’s financial performance.



| | (a) | Market risk
| | --- | -----------



(i) Foreign exchange risk

Foreign exchange risk arises when future
commercial transactions and recognized assets and liabilities are denominated in a currency that is not the Company’s functional
currency. The Company operates internationally and is exposed to foreign exchange risk arising from currency exposures to the USD.
The consolidated financial statements are presented in USD which is the Company’s functional and reporting currency. Most
of the Company’s transactions are undertaken in USD, PGK, Australian Dollars (“AUD”) and Singapore Dollars (“SGD”).



The PGK exposures mainly relate to the
exchange rates achieved from the banks on transfer of PGK sale proceeds to USD to repay the Company’s crude cargo borrowings
under the working capital facility. The rates achieved fluctuate significantly based on other exporters/importers looking to convert
their USD into PGK, and is also impacted by seasonality based farm produce exports from PNG. The Company is unable to do any hedging
due to PGK illiquidity and small size of the market. The translation of PGK denominated balances in the Company’s operating
entities into USD at period ends can also result in material impact on the foreign exchange gains/losses on consolidation.



Changes in the PGK to USD exchange rate
can affect the Company’s Midstream Refining results as there is a timing difference between the foreign exchange rates utilized
when setting the monthly PGK IPP price and the foreign exchange rate used to convert the subsequent receipt of PGK proceeds to
USD to repay the Company’s crude cargo borrowings. The foreign exchange movement also impacts equity as translation gains/losses
of the Company’s Downstream operations from PGK to USD is included in other comprehensive income. The PGK strengthened against
the USD during the year ended December 31, 2012 (from 0.4665 to 0.4755) and also strengthened during the year ended December 31,
2011 (from 0.3785 to 0.4665).



The financial instruments denominated in
PGK and translated to USD as at December 31, 2012 are as follows:



|                          |  | December 31, |            |  | December 31, |  |            | December 31, | 
|------------------------- |  | ------------ | ---------- |  | ------------ |  | ---------- | ------------ | 
|                          |  | 2012         |            |  | 2011         |  |            | 2010         | 
|                          |  | $            |            |  | $            |  |            | $            | 
|Financial assets          |  |              |            |  |              |  |            |              | 
|Cash and cash equivalents |  |              | 32,465,738 |  |              |  | 42,669,762 |              | 
|Cash restricted           |  |              | 173,676    |  |              |  | 161,801    |              | 
|Short term treasury bills |  |              | -          |  |              |  | 11,832,110 |              | 
|Receivables               |  |              | 61,493,200 |  |              |  | 96,322,533 |              | 
|Other financial assets    |  |              | 3,083,721  |  |              |  | 3,289,791  |              | 
|                          |  |              |            |  |              |  |            |              | 
|Financial liabilities     |  |              |            |  |              |  |            |              | 
|Payables                  |  |              | 30,033,391 |  |              |  | 30,866,291 |              | 
|Working capital facility  |  |              | -          |  |              |  | 6,450,372  |              | 



The following table summarizes the sensitivity
of financial instruments held at balance sheet date to movement in the exchange rate of the USD to the PGK, with all other variables
held constant. Certain USD debt and other financial assets and liabilities are not held in the functional currency of the relevant
subsidiary. This results in an accounting exposure to exchange gains and losses as the financial assets and liabilities are translated
into the functional currency of the subsidiary that accounts for those assets and liabilities. These exchange gains and losses
are recorded in the consolidated income statement except to the extent that they can be taken to equity under the Company’s
accounting policy. If PGK appreciates/(depreciates) by 5% against the USD, it will result in a gain/(loss) as per the table below.





Consolidated Financial Statements   INTEROIL CORPORATION    27











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



| | 4. | Financial Risk Management (cont’d)
| | -- | ----------------------------------



|                                 |  | Year ended        |           |  | Year ended                                  |  |           | Year ended        | 
|-------------------------------- |  | ----------------- | --------- |  | ------------------------------------------- |  | --------- | ----------------- | 
|                                 |  | December 31, 2012 |           |  | December 31, 2011                           |  |           | December 31, 2010 | 
|                                 |  | Impact on profit  |           |  | Impact on equity
 – excluding profit impact |  |           | Impact on profit  | 
|                                 |  | $                 |           |  | $                                           |  |           | $                 | 
|                                 |  |                   |           |  |                                             |  |           |                   | 
|Post-tax gain/(loss)             |  |                   |           |  |                                             |  |           |                   | 
|Effect of 5% appreciation of PGK |  |                   | 2,079,351 |  |                                             |  | 1,279,796 |                   | 



The changes in AUD and SGD to USD exchange
rate can affect the Company’s Corporate results as the expenses of the Corporate offices in Australia and Singapore are incurred
in the respective local currencies. The AUD and SGD exposures are minimal currently as funds are transferred to AUD and SGD from
USD as required. No material balances are held in AUD or SGD. However, the Company is exposed to translation risks resulting from
AUD and SGD fluctuations as in country costs are being incurred in AUD and SGD and reporting for those costs being in USD. The
Company has entered into some AUD to USD foreign currency forward contracts to partially manage the foreign exchange risk in relation
to the expenses to be incurred in AUD.



(ii) Price risk



Product Price Risk:

The Midstream Refining operations of the
Company are largely exposed to price fluctuations during the period between the crude purchases and the refined products leaving
the refinery when sold to Downstream operations and other distributors. The Company actively tries to manage the price risk by
entering into derivative contracts to buy and sell crude and finished products.



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



The following table summarizes the sensitivity
of derivative financial instruments held at balance sheet date to $10.0 movement in benchmark pricing, with all other variables
held constant. If the pricing increases/(declines) by $10.0, it will result in a (loss)/gain as per the table below.



|                                                          |  | Year ended        |            |   | Year ended                                  |  |   | Year ended        | 
|--------------------------------------------------------- |  | ----------------- | ---------- | - | ------------------------------------------- |  | - | ----------------- | 
|                                                          |  | December 31, 2012 |            |   | December 31, 2011                           |  |   | December 31, 2010 | 
|                                                          |  | Impact on profit  |            |   | Impact on equity
 – excluding profit impact |  |   | Impact on profit  | 
|                                                          |  | $                 |            |   | $                                           |  |   | $                 | 
|                                                          |  |                   |            |   |                                             |  |   |                   | 
|Post-tax gain/(loss)                                      |  |                   |            |   |                                             |  |   |                   | 
|$10 increase in benchmark pricing of derivative contracts |  |                   | (1,970,000 | ) |                                             |  | - |                   | 



Securities Price Risk:

The Company is also exposed to equity securities
price risk. This arises from investments held by the Company and classified in the balance sheet as available-for-sale. The Company’s
equity investments are publicly traded and are quoted on the Oslo stock exchange Axess. Refer to note 15 for further details of
this investment.



The following table summarizes the sensitivity
of these investments held at balance sheet date to 10% movement in benchmark pricing, with all other variables held constant. If
the pricing increases/(declines) by 10%, it will result in a (loss)/gain as per the table below.





Consolidated Financial Statements   INTEROIL CORPORATION    28











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



| | 4. | Financial Risk Management (cont’d)
| | -- | ----------------------------------



|                                                        |  | Year ended        |          |   | Year ended                                 |  |          | Year ended        | 
|------------------------------------------------------- |  | ----------------- | -------- | - | ------------------------------------------ |  | -------- | ----------------- | 
|                                                        |  | December 31, 2012 |          |   | December 31, 2011                          |  |          | December 31, 2010 | 
|                                                        |  | Impact on profit  |          |   | Impact on equity - excluding profit impact |  |          | Impact on profit  | 
|                                                        |  | $                 |          |   | $                                          |  |          | $                 | 
|                                                        |  |                   |          |   |                                            |  |          |                   | 
|Post-tax gain/(loss)                                    |  |                   |          |   |                                            |  |          |                   | 
|10% increase in benchmark pricing of equity investments |  |                   | -        |   |                                            |  | 430,418  |                   | 
|10% decrease in benchmark pricing of equity investments |  |                   | (226,441 | ) |                                            |  | (203,977 | )                 | 



(iii) Interest
rate risk

Interest rate risk is the risk that the
Company’s financial position will be adversely affected by movements in interest rates that will increase the cost of floating
rate debt or opportunity losses that may arise on fixed rate borrowings in a falling interest rate environment. As the Company
has no significant interest-bearing assets other than cash and cash equivalents, the Company’s income and operating cash
flows are substantially independent of changes in market interest rates.



The Company’s interest-rate risk
arises from cash and cash equivalent balances, borrowings and working capital financing facilities. Deposits/borrowings at variable
rates expose the Company to cash flow interest-rate risk. Deposits/borrowings at fixed rates expose the Company to fair value interest-rate
risk. The Company is actively seeking to manage its cash flow interest-rate risks by holding some cash, cash equivalents and borrowings
in fixed rate instruments and others in variable rate instruments.



The financial instruments exposed to cash
flow and fair value interest rate risk are as follows:



|                                       |  | December 31, 2012 |             |  | December 31, 2011 |  |            | December 31, 2010 |  |  | Cash flow/fair value
|-------------------------------------- |  | ----------------- | ----------- |  | ----------------- |  | ---------- | ----------------- |  |  | --------------------
|                                       |  | $                 |             |  | $                 |  |            | $                 |  |  | interest rate risk  
|Financial assets                       |  |                   |             |  |                   |  |            |                   |  |  |                     
|Cash and cash equivalents              |  |                   | 259,584     |  |                   |  | 37,891,187 |                   |  |  | 1,205,304           
|Cash and cash equivalents              |  |                   | 49,600,460  |  |                   |  | 30,955,254 |                   |  |  | 232,371,517         
|Cash restricted                        |  |                   | 381,096     |  |                   |  | 365,281    |                   |  |  | 309,926             
|Cash restricted                        |  |                   | 48,629,998  |  |                   |  | 38,885,482 |                   |  |  | 46,968,143          
|Short term treasury bills              |  |                   | -           |  |                   |  | 11,832,110 |                   |  |  | -                   
|Financial liabilities                  |  |                   |             |  |                   |  |            |                   |  |  |                     
|OPIC secured loan                      |  |                   | -           |  |                   |  | 35,500,000 |                   |  |  | 44,500,000          
|ANZ, BSP & BNP syndicated secured loan |  |                   | 100,000,000 |  |                   |  | -          |                   |  |  | -                   
|Westpac secured loan                   |  |                   | 12,857,000  |  |                   |  | -          |                   |  |  | -                   
|Mitsui unsecured loan                  |  |                   | 11,912,297  |  |                   |  | 10,393,023 |                   |  |  | 5,456,757           
|BNP working capital facility           |  |                   | 94,290,479  |  |                   |  | 10,030,131 |                   |  |  | 50,023,559          
|Westpac working capital facility       |  |                   | -           |  |                   |  | 6,450,372  |                   |  |  | 1,230,767           
|2.75% convertible notes                |  |                   | 70,000,000  |  |                   |  | 70,000,000 |                   |  |  | 70,000,000          



The following table summarizes the sensitivity
of the cash flow interest-rate risk of financial instruments held at balance date, following a movement to LIBOR, with all other
variables held constant. Increase in LIBOR rates will result in a higher expense for the Company.





Consolidated Financial Statements   INTEROIL CORPORATION    29











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



| | 4. | Financial Risk Management (cont’d)
| | -- | ----------------------------------



|                     |  | Year ended        |         |  | Year ended                                  |  |   | Year ended        | 
|-------------------- |  | ----------------- | ------- |  | ------------------------------------------- |  | - | ----------------- | 
|                     |  | December 31, 2012 |         |  | December 31, 2011                           |  |   | December 31, 2010 | 
|                     |  | Impact on profit  |         |  | Impact on equity - excluding  profit impact |  |   | Impact on profit  | 
|                     |  | $                 |         |  | $                                           |  |   | $                 | 
|                     |  |                   |         |  |                                             |  |   |                   | 
|Post-tax loss/(gain) |  |                   |         |  |                                             |  |   |                   | 
|LIBOR Increase by 1% |  |                   | 821,268 |  |                                             |  | - |                   | 



(iv) Product risk

The composition of the crude feedstock
will vary the refinery output of products. The 2012 year to date output achieved includes gasoline and distillates fuels (which
includes diesel and jet fuels) 57% (Dec 2011 – 58%, Dec 2010 – 58%), and naphtha and low sulphur waxy residue 38% (Dec
2011 – 37%, Dec 2010 – 42%). The product yields obtained will vary based on the type of crude feedstock used.



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



(b)    	Liquidity risk



Liquidity risk is the risk that InterOil
will not meet its financial obligations as they fall due. Prudent liquidity risk management therefore implies that, under both
normal and stressed conditions, the Company maintains:



| | · | sufficient cash and marketable securities;
| | - | ------------------------------------------

| | · | access to, or availability of, funding
through an adequate amount of committed credit facilities; and
| | - | -----------------------------------------------------------------------------------------------------

| | · | the ability to close-out any open market
positions.
| | - | ---------------------------------------------------



The Company manages liquidity risk by continuously
monitoring forecast and actual cash flows; matching maturity profiles of financial assets and liabilities; and by maintaining flexibility
in funding including ensuring that surplus funds are generally only invested in instruments that are tradable in highly liquid
markets or that can be relinquished with minimal risk of loss.



(i) Financing arrangements

The Company had the following established
undrawn borrowing facilities at the reporting date:



|                                                   |  |                |             |  | Undrawn Amount    | 
|-------------------------------------------------- |  | -------------- | ----------- |  | ----------------- | 
|                                                   |  | Total Facility |             |  | December 31, 2012 | 
|                                                   |  | $              |             |  | $                 | 
|Facility                                           |  |                |             |  |                   | 
|ANZ, BSP & BNP syndicated secured loan             |  |                | 100,000,000 |  |                   | 
|Westpac secured loan                               |  |                | 12,857,000  |  |                   | 
|Mitsui unsecured loan                              |  |                | 11,912,297  |  |                   | 
|2.75% convertible notes                            |  |                | 70,000,000  |  |                   | 
|BNP Paribas working capital facility 1*            |  |                | 190,000,000 |  |                   | 
|BNP Paribas working capital facility 2*            |  |                | 50,000,000  |  |                   | 
|Westpac working capital facility (PGK denominated) |  |                | 42,795,000  |  |                   | 
|BSP working capital facility (PGK denominated)     |  |                | 23,775,000  |  |                   | 
|                                                   |  |                | 501,339,297 |  |                   | 



*Includes temporary reallocation approval
of $10,000,000 limit from Facility 2 to Facility 1.



(ii) Maturities of financial liabilities

The tables below analyses the Company’s
financial liabilities, net and gross settled derivative financial instruments into relevant maturity groupings based on the remaining
period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted
cash flows.





Consolidated Financial Statements   INTEROIL CORPORATION    30











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



| | 4. | Financial Risk Management (cont’d)
| | -- | ----------------------------------



|                                          |  | Less than 1  year |             |  | Between 1 and 5  years |  |             | More than 5 years |  |  | Total  contractual  cash flow | 
|----------------------------------------- |  | ----------------- | ----------- |  | ---------------------- |  | ----------- | ----------------- |  |  | ----------------------------- | 
|Non-derivatives                           |  |                   |             |  |                        |  |             |                   |  |  |                               | 
|Trade and other payables (note 17)        |  |                   | 180,026,381 |  |                        |  | -           |                   |  |  | -                             | 
|Working capital facility (note 18)        |  |                   | 94,290,479  |  |                        |  | -           |                   |  |  | -                             | 
|Secured and unsecured loans (note 19)     |  |                   | 39,545,000  |  |                        |  | 120,234,000 |                   |  |  | -                             | 
|2.75% convertible notes (note 26)         |  |                   | 1,925,000   |  |                        |  | 73,690,000  |                   |  |  | -                             | 
|Other financial liabilities (note 22)     |  |                   | -           |  |                        |  | 20,961,380  |                   |  |  | -                             | 
|Total non-derivatives                     |  |                   | 315,786,860 |  |                        |  | 214,885,380 |                   |  |  | -                             | 
|                                          |  |                   |             |  |                        |  |             |                   |  |  |                               | 
|Derivatives                               |  |                   |             |  |                        |  |             |                   |  |  |                               | 
|Derivative financial instruments (note 9) |  |                   | -           |  |                        |  | -           |                   |  |  | -                             | 
|Total derivatives                         |  |                   | -           |  |                        |  | -           |                   |  |  | -                             | 
|                                          |  |                   | 315,786,860 |  |                        |  | 214,885,380 |                   |  |  | -                             | 



The ageing of trade and other payables
are as follows:



|                         |  |       |             |  | Payable ageing between | 
|------------------------ |  | ----- | ----------- |  | ---------------------- | 
|                         |  | Total |             |  | <30 days               | 
|Trade and other payables |  | $     |             |  | $                      | 
|December 31, 2012        |  |       | 180,026,381 |  |                        | 
|December 31, 2011        |  |       | 159,882,177 |  |                        | 
|December 31, 2010        |  |       | 75,132,880  |  |                        | 



| | (c) | Credit risk
| | --- | -----------



Credit risk is the risk that a contracting
entity will not complete its obligation under a financial instrument that will result in a financial loss to the Company. The carrying
amount of financial assets represents the maximum credit exposure.





The Company’s credit risk is limited
to the carrying value of its financial assets. A significant amount of the Company’s export sales are made to three customers
which represented $302,824,737 (Dec 2011 - $260,468,514, Dec 2010 - $211,864,290) or 23% (Dec 2011 – 24%, Dec 2010 –
26%) of total sales in the year ended December 31, 2012. The Company’s domestic sales for the year ended December 31, 2012
were not dependent on a single customer or geographic region within PNG. The export sales to three customers is not considered
a key risk as there is a ready market for InterOil export products and the prices are quoted on active markets. The receivables
from these customers are current as at December 31, 2012.



The Company actively manages credit risk
by routinely monitoring the credit ratings of the Company’s export customers and by monitoring the ageing of trade receivables
of the Company’s domestic customers. The credit terms provided to customers are revised if any changes are noted to customer
ratings or payment cycles.



Credit risk on cash, cash equivalents and
short term treasury bills held directly by the Company are minimized as all cash amounts, certificates of deposit and treasury
bills are held with banks which have acceptable credit ratings.



The maximum exposure to credit risk at
the reporting date was as follows:





Consolidated Financial Statements   INTEROIL CORPORATION    31











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



| | 4. | Financial Risk Management (cont’d)
| | -- | ----------------------------------



|                               |  | December 31, |             |  | December 31, |  |             | December 31, | 
|------------------------------ |  | ------------ | ----------- |  | ------------ |  | ----------- | ------------ | 
|                               |  | 2012         |             |  | 2011         |  |             | 2010         | 
|                               |  | $            |             |  | $            |  |             | $            | 
|Current                        |  |              |             |  |              |  |             |              | 
|Cash and cash equivalents      |  |              | 49,860,044  |  |              |  | 68,846,441  |              | 
|Cash restricted                |  |              | 37,340,631  |  |              |  | 32,982,001  |              | 
|Short term treasury bills      |  |              | -           |  |              |  | 11,832,110  |              | 
|Trade and other receivables    |  |              | 146,948,227 |  |              |  | 135,273,600 |              | 
|Commodity derivative contracts |  |              | 233,922     |  |              |  | 595,440     |              | 
|Non-current                    |  |              |             |  |              |  |             |              | 
|Cash restricted                |  |              | 11,670,463  |  |              |  | 6,268,762   |              | 
|Other non-current receivables  |  |              | 5,000,000   |  |              |  | -           |              | 



The ageing of trade receivables at the
reporting date was as follows (the ageing days relates to balances past due):



|                      |  |       |             |  | Receivable ageing | 
|--------------------- |  | ----- | ----------- |  | ----------------- | 
|                      |  | Total |             |  | Current           | 
|Net trade receivables |  | $     |             |  | $                 | 
|December 31, 2012     |  |       | 112,321,273 |  |                   | 
|December 31, 2011     |  |       | 112,239,803 |  |                   | 
|December 31, 2010     |  |       | 45,428,435  |  |                   | 



The impairment of trade receivables at
the reporting date was as follows:



|                        |  |       |             |  |         |  |            | Overdue        |  |  | Overdue    | 
|----------------------- |  | ----- | ----------- |  | ------- |  | ---------- | -------------- |  |  | ---------- | 
|                        |  | Total |             |  | Current |  |            | (not impaired) |  |  | (impaired) | 
|Gross trade receivables |  | $     |             |  | $       |  |            | $              |  |  | $          | 
|December 31, 2012       |  |       | 112,561,674 |  |         |  | 61,300,713 |                |  |  | 51,020,560 | 
|December 31, 2011       |  |       | 113,761,948 |  |         |  | 51,026,961 |                |  |  | 61,212,842 | 
|December 31, 2010       |  |       | 47,934,378  |  |         |  | 20,344,957 |                |  |  | 25,083,478 | 



Impairment is assessed by the Company on
an individual customer basis, based on customer ratings and payment cycles of the customers. An impairment provision is taken for
all receivables where objective evidence of impairment exists. The movement in impairment is also influenced by the translation
rates used to convert these amounts from local currency to USD.



Other receivables as at December 31, 2012
of $34,626,954 (Dec 2011 - $23,033,797, Dec 2010 - $2,619,061) were not impaired.



The movement in impaired trade receivables
for the year ended December 31, 2012 was as follows:



|                                              |  |                    |            |   | Year ended         |  |            |                    | 
|--------------------------------------------- |  | ------------------ | ---------- | - | ------------------ |  | ---------- | ------------------ | 
|                                              |  | December 31,  2012 |            |   | December 31, 
2011 |  |            | December 31,  2010 | 
|                                              |  | $                  |            |   | $                  |  |            | $                  | 
|                                              |  |                    |            |   |                    |  |            |                    | 
|Trade receivables - Impairment provisions     |  |                    |            |   |                    |  |            |                    | 
|Opening balance                               |  |                    | 1,522,145  |   |                    |  | 2,505,943  |                    | 
|Foreign exchange impact on opening balance    |  |                    | 29,366     |   |                    |  | 582,623    |                    | 
|Amounts written off during the period         |  |                    | (1,277,913 | ) |                    |  | (1,078,455 | )                  | 
|Movement in provisions, net of reversals made |  |                    | (33,197    | ) |                    |  | (487,966   | )                  | 
|Closing balance                               |  |                    | 240,401    |   |                    |  | 1,522,145  |                    | 



| | (d) | Geographic risk
| | --- | ---------------



The operations of InterOil are concentrated
in PNG.





Consolidated Financial Statements   INTEROIL CORPORATION    32











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



| | 4. | Financial Risk Management (cont’d)
| | -- | ----------------------------------



| | (e) | Financing facilities
| | --- | --------------------



As at December 31, 2012, the Company had
drawn down against the following financing facilities:



| | - | BNP working capital facility (refer note 18)
| | - | --------------------------------------------

| | - | Westpac secured loan facility (refer note 19)
| | - | ---------------------------------------------

| | - | ANZ, BSP and BNP syndicated secured loan facility (refer note 19)
| | - | -----------------------------------------------------------------

| | - | Mitsui unsecured loan facility (refer note 19)
| | - | ----------------------------------------------

| | - | 2.75% convertible notes (refer note 26)
| | - | ---------------------------------------



Repayment obligations in respect of the
amount of the facilities utilized are as follows:



|                                                     |  | December 31, |             |  | December 31, |  |             | December 31, | 
|---------------------------------------------------- |  | ------------ | ----------- |  | ------------ |  | ----------- | ------------ | 
|                                                     |  | 2012         |             |  | 2011         |  |             | 2010         | 
|                                                     |  | $            |             |  | $            |  |             | $            | 
|Due:                                                 |  |              |             |  |              |  |             |              | 
|No later than one year                               |  |              | 126,488,776 |  |              |  | 35,873,526  |              | 
|Later than one year but not later than two years     |  |              | 20,286,000  |  |              |  | 9,000,000   |              | 
|Later than two years but not later than three years  |  |              | 94,286,000  |  |              |  | 9,000,000   |              | 
|Later than three years but not later than four years |  |              | 24,000,000  |  |              |  | 78,500,000  |              | 
|Later than four years but not later than five years  |  |              | 24,000,000  |  |              |  | -           |              | 
|Later than five years                                |  |              | -           |  |              |  | -           |              | 
|                                                     |  |              | 289,060,776 |  |              |  | 132,373,526 |              | 



| | (f) | Effective interest rates and maturity profile
| | --- | ---------------------------------------------





|                             |  | Floating |             |  | Fixed interest maturing between |  |         |     |  |  |     |  |  | Effective |           
|---------------------------- |  | -------- | ----------- |  | ------------------------------- |  | ------- | --- |  |  | --- |  |  | --------- | ----------
|                             |  | interest |             |  | 1 year                          |  |         | 1-2 |  |  | 2-3 |  |  | 3-4       |           
|                             |  | rate     |             |  | or less                         |  |         |     |  |  |     |  |  |           |           
|December 31, 2012            |  | $        |             |  | $                               |  |         | $   |  |  | $   |  |  | $         |           
|                             |  |          |             |  |                                 |  |         |     |  |  |     |  |  |           |           
|Financial assets             |  |          |             |  |                                 |  |         |     |  |  |     |  |  |           |           
|Cash and cash equivalents    |  |          | 49,600,460  |  |                                 |  | 259,584 |     |  |  | -   |  |  |           | -         
|Cash restricted              |  |          | 48,629,998  |  |                                 |  | 381,096 |     |  |  | -   |  |  |           | -         
|Receivables                  |  |          | -           |  |                                 |  | -       |     |  |  | -   |  |  |           | -         
|Investments                  |  |          | -           |  |                                 |  | -       |     |  |  | -   |  |  |           | -         
|Other financial assets       |  |          | -           |  |                                 |  | -       |     |  |  | -   |  |  |           | -         
|                             |  |          | 98,230,458  |  |                                 |  | 640,680 |     |  |  | -   |  |  |           | -         
|Financial liabilities        |  |          |             |  |                                 |  |         |     |  |  |     |  |  |           |           
|Payables                     |  |          | -           |  |                                 |  | -       |     |  |  | -   |  |  |           | -         
|Interest bearing liabilities |  |          | 219,059,776 |  |                                 |  | -       |     |  |  | -   |  |  |           | -         
|Convertible notes liability  |  |          | -           |  |                                 |  | -       |     |  |  | -   |  |  |           | 70,000,000
|Other financial liabilities  |  |          | -           |  |                                 |  | -       |     |  |  | -   |  |  |           | -         
|                             |  |          | 219,059,776 |  |                                 |  | -       |     |  |  | -   |  |  |           | 70,000,000





Consolidated Financial Statements   INTEROIL CORPORATION    33













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



| | 4. | Financial Risk Management (cont’d)
| | -- | ----------------------------------



|                             |  | Floating |            |  | Fixed interest maturing between |  |            |     |  |  |           |  |  | Effective |          
|---------------------------- |  | -------- | ---------- |  | ------------------------------- |  | ---------- | --- |  |  | --------- |  |  | --------- | ---------
|                             |  | interest |            |  | 1 year                          |  |            | 1-2 |  |  | 2-3       |  |  | 3-4       |          
|                             |  | rate     |            |  | or less                         |  |            |     |  |  |           |  |  |           |          
|December 31, 2011            |  | $        |            |  | $                               |  |            | $   |  |  | $         |  |  | $         |          
|                             |  |          |            |  |                                 |  |            |     |  |  |           |  |  |           |          
|Financial assets             |  |          |            |  |                                 |  |            |     |  |  |           |  |  |           |          
|Cash and cash equivalents    |  |          | 30,955,254 |  |                                 |  | 37,891,187 |     |  |  | -         |  |  |           | -        
|Cash restricted              |  |          | 38,885,482 |  |                                 |  | 365,281    |     |  |  | -         |  |  |           | -        
|Short term treasury bills    |  |          | -          |  |                                 |  | 11,832,110 |     |  |  | -         |  |  |           | -        
|Receivables                  |  |          | -          |  |                                 |  | -          |     |  |  | -         |  |  |           | -        
|Investments                  |  |          | -          |  |                                 |  | -          |     |  |  | -         |  |  |           | -        
|Other financial assets       |  |          | -          |  |                                 |  | -          |     |  |  | -         |  |  |           | -        
|                             |  |          | 69,840,736 |  |                                 |  | 50,088,578 |     |  |  | -         |  |  |           | -        
|Financial liabilities        |  |          |            |  |                                 |  |            |     |  |  |           |  |  |           |          
|Payables                     |  |          | -          |  |                                 |  | -          |     |  |  | -         |  |  |           | -        
|Interest bearing liabilities |  |          | 26,873,526 |  |                                 |  | 9,000,000  |     |  |  | 9,000,000 |  |  |           | 9,000,000
|Convertible notes liability  |  |          | -          |  |                                 |  | -          |     |  |  | -         |  |  |           | -        
|Other financial liabilities  |  |          | -          |  |                                 |  | -          |     |  |  | -         |  |  |           | -        
|                             |  |          | 26,873,526 |  |                                 |  | 9,000,000  |     |  |  | 9,000,000 |  |  |           | 9,000,000



|                             |  | Floating |             |  | Fixed interest maturing between |  |           |     |  |  |           |  |  | Effective |          
|---------------------------- |  | -------- | ----------- |  | ------------------------------- |  | --------- | --- |  |  | --------- |  |  | --------- | ---------
|                             |  | interest |             |  | 1 year                          |  |           | 1-2 |  |  | 2-3       |  |  | 3-4       |          
|                             |  | rate     |             |  | or less                         |  |           |     |  |  |           |  |  |           |          
|December 31, 2010            |  | $        |             |  | $                               |  |           | $   |  |  | $         |  |  | $         |          
|                             |  |          |             |  |                                 |  |           |     |  |  |           |  |  |           |          
|Financial assets             |  |          |             |  |                                 |  |           |     |  |  |           |  |  |           |          
|Cash and cash equivalents    |  |          | 232,371,517 |  |                                 |  | 1,205,304 |     |  |  | -         |  |  |           | -        
|Cash restricted              |  |          | 46,968,143  |  |                                 |  | 309,926   |     |  |  | -         |  |  |           | -        
|Receivables                  |  |          | -           |  |                                 |  | -         |     |  |  | -         |  |  |           | -        
|Other financial assets       |  |          | -           |  |                                 |  | -         |     |  |  | -         |  |  |           | -        
|                             |  |          | 279,339,660 |  |                                 |  | 1,515,230 |     |  |  | -         |  |  |           | -        
|Financial liabilities        |  |          |             |  |                                 |  |           |     |  |  |           |  |  |           |          
|Payables                     |  |          | -           |  |                                 |  | -         |     |  |  | -         |  |  |           | -        
|Interest bearing liabilities |  |          | 56,711,083  |  |                                 |  | 9,000,000 |     |  |  | 9,000,000 |  |  |           | 9,000,000
|Convertible notes liability  |  |          | -           |  |                                 |  | -         |     |  |  | -         |  |  |           | -        
|Other financial liabilities  |  |          | -           |  |                                 |  | -         |     |  |  | -         |  |  |           | -        
|                             |  |          | 56,711,083  |  |                                 |  | 9,000,000 |     |  |  | 9,000,000 |  |  |           | 9,000,000



Consolidated Financial Statements   INTEROIL CORPORATION    34











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



| | 4. | Financial Risk Management (cont’d)
| | -- | ----------------------------------



| | (g) | Fair values
| | --- | -----------



|                                                          |  | December 31, 2012 |             |  | December 31, 2011 |  |             | December 31, 2010 |  |  | Fair value  |  | 
|--------------------------------------------------------- |  | ----------------- | ----------- |  | ----------------- |  | ----------- | ----------------- |  |  | ----------- |  | 
|                                                          |  | Carrying amount   |             |  | Fair value        |  |             | Carrying amount   |  |  | Fair value  |  | 
|                                                          |  | $                 |             |  | $                 |  |             | $                 |  |  | $           |  | 
|Financial instruments                                     |  |                   |             |  |                   |  |             |                   |  |  |             |  | 
|Financial assets                                          |  |                   |             |  |                   |  |             |                   |  |  |             |  | 
|Loans and receivables                                     |  |                   |             |  |                   |  |             |                   |  |  |             |  | 
|Cash and cash equivalents (note 6)                        |  |                   | 49,860,044  |  |                   |  | 49,860,044  |                   |  |  | 68,846,441  |  | 
|Cash restricted (note 9)                                  |  |                   | 49,011,094  |  |                   |  | 49,011,094  |                   |  |  | 39,250,763  |  | 
|Short term treasury bills (note 8)                        |  |                   | -           |  |                   |  | -           |                   |  |  | 11,832,110  |  | 
|Receivables (note 10)                                     |  |                   | 146,948,227 |  |                   |  | 146,948,227 |                   |  |  | 135,273,600 |  | 
|Other non-current receivable (note 22)                    |  |                   | 5,000,000   |  |                   |  | 5,000,000   |                   |  |  | -           |  | 
|Available-for-sale                                        |  |                   |             |  |                   |  |             |                   |  |  |             |  | 
|Investments (note 15)                                     |  |                   | 4,304,176   |  |                   |  | 4,304,176   |                   |  |  | 3,650,786   |  | 
|Held for trading                                          |  |                   |             |  |                   |  |             |                   |  |  |             |  | 
|Derivative contracts (note 9)                             |  |                   | 233,922     |  |                   |  | 233,922     |                   |  |  | 583,983     |  | 
|Financial liabilities                                     |  |                   |             |  |                   |  |             |                   |  |  |             |  | 
|Current liabilities:                                      |  |                   |             |  |                   |  |             |                   |  |  |             |  | 
|Accounts payable and accrued liabilities (note 17)        |  |                   | 180,026,381 |  |                   |  | 180,026,381 |                   |  |  | 159,882,177 |  | 
|Working capital facility (note 18)                        |  |                   | 94,290,479  |  |                   |  | 94,290,479  |                   |  |  | 16,480,503  |  | 
|Current portion of secured and unsecured loans  (note 19) |  |                   | 31,383,115  |  |                   |  | 31,383,115  |                   |  |  | 19,393,023  |  | 
|Non-current liabilities                                   |  |                   |             |  |                   |  |             |                   |  |  |             |  | 
|Secured loans (note 19)                                   |  |                   | 89,446,137  |  |                   |  | 89,446,137  |                   |  |  | 26,037,166  |  | 
|2.75% Convertible notes liability (note 26)               |  |                   | 59,046,581  |  |                   |  | 59,046,581  |                   |  |  | 55,637,630  |  | 
|Other non-current liability (note 22)                     |  |                   | 20,961,380  |  |                   |  | 20,961,380  |                   |  |  | -           |  | 



* Where fair value of financial assets
or liabilities is approximated by its carrying value, designation under the fair value hierarchy is not required.



The net fair value of cash and cash equivalents
and non-interest bearing financial assets and financial liabilities of the Company approximates their carrying amounts.



The carrying values (less impairment provision
if provided) of trade receivables and payables are assumed to approximate their fair values due to their short-term nature. The
carrying value of financial liabilities approximates their fair values which, for disclosure purposes, are estimated by discounting
the future contractual cash flows at the current market interest rate that is available to the Company for similar financial instruments.







Commodity derivative contracts’ and
available-for-sale investments are the only items from the above table that are measured at fair value on a recurring basis. All
the remaining financial assets and financial liabilities are measured at a fair value on a non-recurring basis and are maintained
at historical amortized cost.



The fair value of financial assets and
financial liabilities must be estimated for recognition and measurement or for disclosure purposes. The Company has classified
the fair value measurements using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.
The fair value hierarchy shall have the following levels:



Level 1- quoted prices
(unadjusted) in active markets for identical assets or liabilities

Level 2- inputs other
than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly
(i.e., derived from prices); and

Level 3- inputs for the
asset or liability that are not based on observable market data (unobservable inputs).



(i) Investments classified as being available-for-sale
are fair valued by using quoted prices on Oslo stock exchange Axess.

(ii) Derivative contracts classified as
being at fair value through profit and loss are fair valued by comparing the contracted rate to the current market rate for a contract
with the same remaining period to maturity. The fair value of the Company’s derivative contracts are based on price indications
provided to us by an external brokerage who enter into derivative transactions with counter parties on the Company’s behalf.





Consolidated Financial Statements   INTEROIL CORPORATION    35











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





| | 4. | Financial Risk Management (cont’d)
| | -- | ----------------------------------



(iii) The fair value of the secured loan
is based on discounted cash flow analysis using a current market interest rate applicable for the loan arrangement, being the current
interest rate on a U.S. treasury note with the same approximate maturity profile plus the OPIC spread (3%).



| | (h) | Capital management
| | --- | ------------------



The finance department of the Company is
responsible for capital management. This involves the use of operating and development economic forecasting models which facilitates
analysis of the Company’s financial position including cash flow forecasts to determine the future capital management strategy.
Capital management is undertaken to ensure a secure, cost-effective and flexible supply of funds is available to meet the Company’s
expenditure requirements and safeguard its abilities to continue as a going concern.



The Company is actively managing the gearing
levels and raising equity/debt as required for optimizing shareholder returns. The Company is managing its gearing levels by maintaining
the debt-to-capital ratio (debt/(shareholders’ equity + debt)) at 50% or less. The gearing levels were 19% in December 2012
(12% in December 2011). The optimum gearing levels for the Company are overseen by the Board of Directors based on recommendations
by Management. Recommendations are based on operating cash flows, future cash needs for development, capital market conditions,
economic conditions, and will be reassessed as situations change.



During the quarter ended March 31, 2012,
the Company obtained a secured loan of $15.0 million from Westpac which is repayable in equal installments over 3.5 years with
an interest rate of LIBOR plus 4.4% per annum. The loan agreement stipulates semi-annual principal payments of $2.1 million, with
the final repayment to be made in August 2015. The loan is secured by a fixed and floating charge over the assets of Downstream
operations. The balance outstanding under the loan as at December 31, 2012 was $12.9 million.



On April 18, 2012, the Company signed a
binding HOA with PRE for PRE to be able to earn a 10.0% net (12.9% gross) participating interest in the PPL237 Petroleum Prospecting
License onshore Papua New Guinea, including the Triceratops structure located within that license. The transaction contemplates
staged initial cash payments totaling $116.0 million, an additional carry of 25% of the costs of an agreed exploration work program,
and a final resource payment. On July 27, 2012, the Company executed a farm in agreement with PRE relating to the Triceratops structure
and the participating interest in the PPL 237 license materially in line with the HOA signed on April 18, 2012. Completion of the
farm-in transaction remains subject to satisfaction of additional conditions within 18 months, including execution of PRE JVOA,
and PNG Government approval. PRE's gross participating interest will be subject to the Government of Papua New Guinea's back-in
rights provided for in relevant PNG legislation. Additionally, PRE has the option to terminate the Farm-In Agreement at various
stages of the work program and to be reimbursed up to $96.0 million of the $116.0 million initial cash payment (which does not
include carried costs) out of future upstream production proceeds.



On October 16, 2012, the Company entered
into a five year amortizing $100 million syndicated secured term loan facility, repayable in six monthly installments, with BNP
Paribas Singapore, Bank South Pacific Limited, and Australia and New Zealand Banking Group (PNG) Limited. Borrowings under the
facility have been used for repayment of all outstanding amounts under the term loan granted by OPIC and will also be used for
general corporate purposes. The loan is secured over the fixed assets of the refinery. The balance outstanding under the loan facility
as at December 31, 2012 was $100.0 million. The interest rate on the loan is equal to LIBOR plus 6.5%.



Investment bankers led by Morgan Stanley
& Company LLC, Macquarie Capital (USA) Inc. and UBS AG continued working on the bid process to seek a strategic partner to
acquire an interest in the Elk and Antelope fields, the LNG Project and well exploration licenses. The Company believes that it
has sufficient funds for the Midstream Refinery and Downstream operations; however, existing cash balances and ongoing cash generated
from these operations will not be sufficient to facilitate further necessary development of the Elk and Antelope fields, appraisal
of Triceratops field, condensate stripping and liquefaction facilities. Therefore the Company must extend or secure sufficient
funding through renewed or additional borrowings, equity raising and or asset sales to enable sufficient cash to be available to
further its development plans. Management expects that the Company will be able to secure the necessary financing through one,
or a combination of, the aforementioned alternatives.



| | 5. | Segmented financial information
| | -- | -------------------------------



As stated in note 1, management has identified
four major reporting segments - Upstream, Midstream, Downstream and Corporate. Midstream consists of both Midstream Refining and
Midstream Liquefaction. The Corporate segment includes assets and liabilities that do not specifically relate to the other reporting
segments. Results in this segment primarily include management expenses. Consolidation adjustments relating to total assets relates
to the elimination of intercompany loans and investments in subsidiaries.





Consolidated Financial Statements   INTEROIL CORPORATION    36













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



| | 5. | Segmented financial information (cont’d)
| | -- | ----------------------------------------



Notes to and forming part of the segment
information



Segment information is prepared in conformity
with the accounting policies of the entity. Segment revenues, expenses and total assets are those that are directly attributable
to a segment and the relevant portion that can be allocated to the segment on a reasonable basis. Upstream, Midstream and Downstream
include costs allocated from the Corporate activities based on a fee for services provided. The eliminations relate to sales and
operating revenues between segments recorded at transfer prices based on current market prices and to unrealized intersegment profits
in inventories. The majority of the Company’s operations are located in Papua New Guinea, with the exception of the Corporate
segment which also has operations in the United States, Australia and Singapore.



Included in the Company’s revenues
from external customers for the year ended December 31, 2012 is revenue from exports to foreign countries of $356,204,430 (Dec
2011 - $273,827,525, Dec 2010 – $227,932,775). The Midstream – Refining segment derives their revenue from the sale
of refined petroleum product to the domestic market in PNG and for export. The Downstream segment derives their revenue from the
sale of refined petroleum product to the domestic market in PNG on a wholesale and retail basis. The Corporate segment derives
their revenue from the shipping business which currently operates two vessels transporting petroleum products for our Downstream
segment and external customers, both within PNG and for export in the South Pacific region. Included in the revenues from external
customers in the Midstream – Refining segment for the year ended December 31, 2012 is revenue from a single customer of $174,798,099
(Dec 2011 - $194,402,840, Dec 2010 - $171,001,663) or 13% (Dec 2011 – 18%, Dec 2010 – 21%) of total revenues from external
customers.



|Year ended December 31, 2012                        |  | Upstream |             |   | Midstream -
    Refining |  |               | Midstream -
    Liquefaction |  |  | Downstream |   |  | Corporate |             |   | Consolidation
    adjustments |  |             | Total | 
|--------------------------------------------------- |  | -------- | ----------- | - | ------------------------ |  | ------------- | ---------------------------- |  |  | ---------- | - |  | --------- | ----------- | - | ----------------------------- |  | ----------- | ----- | 
|Revenues from external customers                    |  |          | -           |   |                          |  | 445,119,936   |                              |  |  | -          |   |  |           | 862,735,831 |   |                               |  | 196,049     |       | 
|Intersegment revenues                               |  |          | -           |   |                          |  | 669,607,545   |                              |  |  | -          |   |  |           | 221,835     |   |                               |  | 64,555,214  |       | 
|Interest revenue                                    |  |          | 6,193       |   |                          |  | 182,754       |                              |  |  | 379        |   |  |           | 3,116       |   |                               |  | 49,175,894  |       | 
|Other revenue                                       |  |          | 10,357,067  |   |                          |  | 1,821         |                              |  |  | -          |   |  |           | 1,894,877   |   |                               |  | 4,068       |       | 
|Total segment revenue                               |  |          | 10,363,260  |   |                          |  | 1,114,912,056 |                              |  |  | 379        |   |  |           | 864,855,659 |   |                               |  | 113,931,225 |       | 
|                                                    |  |          |             |   |                          |  |               |                              |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Cost of sales and operating expenses                |  |          | -           |   |                          |  | 1,071,852,263 |                              |  |  | -          |   |  |           | 800,216,798 |   |                               |  | 18,905,095  |       | 
|Administrative, professional and general expenses   |  |          | 11,970,486  |   |                          |  | 28,927,797    |                              |  |  | 525,032    |   |  |           | 18,815,879  |   |                               |  | 52,383,035  |       | 
|Derivative loss/(gain)                              |  |          | -           |   |                          |  | 4,240,647     |                              |  |  | -          |   |  |           | -           |   |                               |  | (11,457     | )     | 
|Foreign exchange loss/(gain)                        |  |          | 929,559     |   |                          |  | 7,823,620     |                              |  |  | 2,776      |   |  |           | (8,226,893  | ) |                               |  | (485,914    | )     | 
|Gain on conveyance of exploration assets            |  |          | (4,418,170  | ) |                          |  | -             |                              |  |  | -          |   |  |           | -           |   |                               |  | -           |       | 
|Exploration costs, excluding exploration impairment |  |          | 13,901,558  |   |                          |  | -             |                              |  |  | -          |   |  |           | -           |   |                               |  | -           |       | 
|Depreciation and amortisation                       |  |          | 1,675,393   |   |                          |  | 12,858,739    |                              |  |  | 8,139      |   |  |           | 5,081,522   |   |                               |  | 2,369,542   |       | 
|Interest expense                                    |  |          | 43,097,018  |   |                          |  | 17,825,206    |                              |  |  | 2,307,688  |   |  |           | 2,870,525   |   |                               |  | 6,185,494   |       | 
|Total segment expenses                              |  |          | 67,155,844  |   |                          |  | 1,143,528,272 |                              |  |  | 2,843,635  |   |  |           | 818,757,831 |   |                               |  | 79,345,795  |       | 
|Segment (loss)/profit before
    income taxes       |  |          | (56,792,584 | ) |                          |  | (28,616,216   | )                            |  |  | (2,843,256 | ) |  |           | 46,097,828  |   |                               |  | 34,585,430  |       | 
|Income tax benefit/(expense)                        |  |          | -           |   |                          |  | 25,722,118    |                              |  |  | -          |   |  |           | (13,512,763 | ) |                               |  | (1,498,146  | )     | 
|Segment net (loss)/profit                           |  |          | (56,792,584 | ) |                          |  | (2,894,098    | )                            |  |  | (2,843,256 | ) |  |           | 32,585,065  |   |                               |  | 33,087,284  |       | 
|                                                    |  |          |             |   |                          |  |               |                              |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Segment assets                                      |  |          | 558,584,325 |   |                          |  | 472,849,777   |                              |  |  | 12,361,979 |   |  |           | 185,572,059 |   |                               |  | 40,184,112  |       | 
|Unallocated:                                        |  |          |             |   |                          |  |               |                              |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Deferred tax                                        |  |          |             |   |                          |  |               |                              |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Total assets per the balance
    sheet              |  |          |             |   |                          |  |               |                              |  |  |            |   |  |           |             |   |                               |  |             |       | 
|                                                    |  |          |             |   |                          |  |               |                              |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Segment liabilities                                 |  |          | 121,844,295 |   |                          |  | 270,925,739   |                              |  |  | 1,712,897  |   |  |           | 75,727,861  |   |                               |  | 85,233,657  |       | 
|                                                    |  |          |             |   |                          |  |               |                              |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Capital expenditure (net
    of cash calls)         |  |          | 147,816,665 |   |                          |  | 4,470,672     |                              |  |  | 10,158,410 |   |  |           | 12,716,790  |   |                               |  | 10,652,864  |       | 



Consolidated Financial Statements   INTEROIL CORPORATION    37







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



| | 5. | Segmented financial information (cont’d)
| | -- | ----------------------------------------



|Year ended December 31, 2011                        |  | Upstream |             |   | Midstream -
    Refining |  |             | Midstream -
    Liquefaction |  |  | Downstream  |   |  | Corporate |             |   | Consolidation
    adjustments |  |            | Total | 
|--------------------------------------------------- |  | -------- | ----------- | - | ------------------------ |  | ----------- | ---------------------------- |  |  | ----------- | - |  | --------- | ----------- | - | ----------------------------- |  | ---------- | ----- | 
|Revenues from external customers                    |  |          | -           |   |                          |  | 362,605,718 |                              |  |  | -           |   |  |           | 743,662,499 |   |                               |  | 265,636    |       | 
|Intersegment revenues                               |  |          | -           |   |                          |  | 585,513,409 |                              |  |  | -           |   |  |           | 196,988     |   |                               |  | 53,362,401 |       | 
|Interest revenue                                    |  |          | 15,146      |   |                          |  | 830,795     |                              |  |  | 2           |   |  |           | 7,968       |   |                               |  | 38,511,774 |       | 
|Other revenue                                       |  |          | 9,826,126   |   |                          |  | -           |                              |  |  | -           |   |  |           | 1,255,434   |   |                               |  | (23,470    | )     | 
|Total segment revenue                               |  |          | 9,841,272   |   |                          |  | 948,949,922 |                              |  |  | 2           |   |  |           | 745,122,889 |   |                               |  | 92,116,341 |       | 
|                                                    |  |          |             |   |                          |  |             |                              |  |  |             |   |  |           |             |   |                               |  |            |       | 
|Cost of sales and operating expenses                |  |          | -           |   |                          |  | 897,824,569 |                              |  |  | -           |   |  |           | 704,213,086 |   |                               |  | 11,420,968 |       | 
|Administrative, professional and general expenses   |  |          | 5,122,087   |   |                          |  | 18,939,165  |                              |  |  | 14,121,189  |   |  |           | 15,780,247  |   |                               |  | 47,371,224 |       | 
|Derivative (gain)/loss                              |  |          | -           |   |                          |  | (2,017,778  | )                            |  |  | -           |   |  |           | -           |   |                               |  | 11,457     |       | 
|Foreign exchange loss/(gain)                        |  |          | 2,152,675   |   |                          |  | (26,458,424 | )                            |  |  | 13,127      |   |  |           | 229,042     |   |                               |  | (955,081   | )     | 
|Loss on Flex LNG investment                         |  |          | -           |   |                          |  | -           |                              |  |  | -           |   |  |           | -           |   |                               |  | 3,420,406  |       | 
|Exploration costs, excluding exploration impairment |  |          | 18,435,150  |   |                          |  | -           |                              |  |  | -           |   |  |           | -           |   |                               |  | -          |       | 
|Depreciation and amortisation                       |  |          | 3,254,672   |   |                          |  | 11,253,854  |                              |  |  | 25,632      |   |  |           | 4,026,422   |   |                               |  | 1,706,037  |       | 
|Interest expense                                    |  |          | 30,012,655  |   |                          |  | 9,664,482   |                              |  |  | 1,307,901   |   |  |           | 4,346,081   |   |                               |  | 6,011,916  |       | 
|Total segment expenses                              |  |          | 58,977,239  |   |                          |  | 909,205,868 |                              |  |  | 15,467,849  |   |  |           | 728,594,878 |   |                               |  | 68,986,927 |       | 
|Segment (loss)/profit before
    income taxes       |  |          | (49,135,967 | ) |                          |  | 39,744,054  |                              |  |  | (15,467,847 | ) |  |           | 16,528,011  |   |                               |  | 23,129,414 |       | 
|Income tax benefit/(expense)                        |  |          | -           |   |                          |  | 6,945,518   |                              |  |  | -           |   |  |           | (4,962,288  | ) |                               |  | (1,247,563 | )     | 
|Segment net (loss)/profit                           |  |          | (49,135,967 | ) |                          |  | 46,689,572  |                              |  |  | (15,467,847 | ) |  |           | 11,565,723  |   |                               |  | 21,881,851 |       | 
|                                                    |  |          |             |   |                          |  |             |                              |  |  |             |   |  |           |             |   |                               |  |            |       | 
|Segment assets                                      |  |          | 390,448,139 |   |                          |  | 444,687,129 |                              |  |  | 7,925,856   |   |  |           | 201,906,476 |   |                               |  | 69,624,747 |       | 
|Unallocated:                                        |  |          |             |   |                          |  |             |                              |  |  |             |   |  |           |             |   |                               |  |            |       | 
|Deferred tax                                        |  |          |             |   |                          |  |             |                              |  |  |             |   |  |           |             |   |                               |  |            |       | 
|Total assets per the balance
    sheet              |  |          |             |   |                          |  |             |                              |  |  |             |   |  |           |             |   |                               |  |            |       | 
|                                                    |  |          |             |   |                          |  |             |                              |  |  |             |   |  |           |             |   |                               |  |            |       | 
|Segment liabilities                                 |  |          | 79,730,935  |   |                          |  | 139,105,842 |                              |  |  | 8,759,273   |   |  |           | 85,110,349  |   |                               |  | 74,025,870 |       | 
|Unallocated:                                        |  |          |             |   |                          |  |             |                              |  |  |             |   |  |           |             |   |                               |  |            |       | 
|Deferred tax                                        |  |          |             |   |                          |  |             |                              |  |  |             |   |  |           |             |   |                               |  |            |       | 
|Total liabilities per the
    balance sheet         |  |          |             |   |                          |  |             |                              |  |  |             |   |  |           |             |   |                               |  |            |       | 
|                                                    |  |          |             |   |                          |  |             |                              |  |  |             |   |  |           |             |   |                               |  |            |       | 
|Capital expenditure (net
    of cash calls)         |  |          | 107,558,028 |   |                          |  | 15,861,056  |                              |  |  | 5,173,603   |   |  |           | 10,240,083  |   |                               |  | 3,118,687  |       | 



Consolidated Financial Statements   INTEROIL CORPORATION    38







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



| | 5. | Segmented financial information (cont’d)
| | -- | ----------------------------------------



|Year ended December 31, 2010                        |  | Upstream |             |   | Midstream - 
    Refining |  |             | Midstream - 
    Liquefaction |  |  | Downstream |   |  | Corporate |             |   | Consolidation
    adjustments |  |             | Total | 
|--------------------------------------------------- |  | -------- | ----------- | - | ------------------------- |  | ----------- | ----------------------------- |  |  | ---------- | - |  | --------- | ----------- | - | ----------------------------- |  | ----------- | ----- | 
|Revenues from external customers                    |  |          | -           |   |                           |  | 298,070,718 |                               |  |  | -          |   |  |           | 504,303,681 |   |                               |  | -           |       | 
|Intersegment revenues                               |  |          | -           |   |                           |  | 379,343,999 |                               |  |  | -          |   |  |           | 483,134     |   |                               |  | 32,563,686  |       | 
|Interest revenue                                    |  |          | 14,757      |   |                           |  | 58,229      |                               |  |  | 643        |   |  |           | 23,490      |   |                               |  | 24,334,629  |       | 
|Other revenue                                       |  |          | 3,290,721   |   |                           |  | 107,714     |                               |  |  | -          |   |  |           | 1,048,251   |   |                               |  | 23,362      |       | 
|Total segment revenue                               |  |          | 3,305,478   |   |                           |  | 677,580,660 |                               |  |  | 643        |   |  |           | 505,858,556 |   |                               |  | 56,921,677  |       | 
|                                                    |  |          |             |   |                           |  |             |                               |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Cost of sales and operating expenses                |  |          | -           |   |                           |  | 605,602,656 |                               |  |  | -          |   |  |           | 470,771,827 |   |                               |  | -           |       | 
|Administrative, professional and general expenses   |  |          | 13,746,219  |   |                           |  | 11,939,500  |                               |  |  | 7,022,644  |   |  |           | 15,975,882  |   |                               |  | 40,291,485  |       | 
|Derivative loss/(gain)                              |  |          | -           |   |                           |  | 1,591,878   |                               |  |  | -          |   |  |           | -           |   |                               |  | (526,690    | )     | 
|Foreign exchange loss/(gain)                        |  |          | 3,043,907   |   |                           |  | 7,517,961   |                               |  |  | 90,367     |   |  |           | 1,175,894   |   |                               |  | (1,051,306  | )     | 
|Gain on conveyance of exploration assets            |  |          | (2,140,783  | ) |                           |  | -           |                               |  |  | -          |   |  |           | -           |   |                               |  | -           |       | 
|Loss on extinguishment of IPI liability             |  |          | 30,568,710  |   |                           |  | -           |                               |  |  | -          |   |  |           | -           |   |                               |  | -           |       | 
|Litigation settlement expense                       |  |          | -           |   |                           |  | -           |                               |  |  | -          |   |  |           | -           |   |                               |  | 12,000,000  |       | 
|Exploration costs, excluding exploration impairment |  |          | 16,981,929  |   |                           |  | -           |                               |  |  | -          |   |  |           | -           |   |                               |  | -           |       | 
|Depreciation and amortisation                       |  |          | 1,132,118   |   |                           |  | 10,355,057  |                               |  |  | 25,227     |   |  |           | 2,786,500   |   |                               |  | 105,988     |       | 
|Interest expense                                    |  |          | 18,527,881  |   |                           |  | 6,584,584   |                               |  |  | 1,252,796  |   |  |           | 3,739,297   |   |                               |  | 1,540,594   |       | 
|Total segment expenses                              |  |          | 81,859,981  |   |                           |  | 643,591,636 |                               |  |  | 8,391,034  |   |  |           | 494,449,400 |   |                               |  | 52,360,071  |       | 
|Segment (loss)/profit before income taxes           |  |          | (78,554,503 | ) |                           |  | 33,989,024  |                               |  |  | (8,390,391 | ) |  |           | 11,409,156  |   |                               |  | 4,561,606   |       | 
|Income tax (expense)/benefit                        |  |          | -           |   |                           |  | (504,387    | )                             |  |  | 35,905     |   |  |           | (4,701,386  | ) |                               |  | (1,239,855  | )     | 
|Segment net (loss)/profit                           |  |          | (78,554,503 | ) |                           |  | 33,484,637  |                               |  |  | (8,354,486 | ) |  |           | 6,707,770   |   |                               |  | 3,321,751   |       | 
|                                                    |  |          |             |   |                           |  |             |                               |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Segment assets                                      |  |          | 266,169,785 |   |                           |  | 325,089,253 |                               |  |  | 7,823,600  |   |  |           | 117,708,440 |   |                               |  | 265,233,362 |       | 
|Unallocated:                                        |  |          |             |   |                           |  |             |                               |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Deferred tax                                        |  |          |             |   |                           |  |             |                               |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Total assets per the balance
    sheet              |  |          |             |   |                           |  |             |                               |  |  |            |   |  |           |             |   |                               |  |             |       | 
|                                                    |  |          |             |   |                           |  |             |                               |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Segment liabilities                                 |  |          | 81,193,873  |   |                           |  | 109,332,954 |                               |  |  | 11,561,364 |   |  |           | 35,055,512  |   |                               |  | 66,139,037  |       | 
|                                                    |  |          |             |   |                           |  |             |                               |  |  |            |   |  |           |             |   |                               |  |             |       | 
|Capital expenditure (net
    of cash calls)         |  |          | 82,811,176  |   |                           |  | 6,972,505   |                               |  |  | 1,876,736  |   |  |           | 7,623,024   |   |                               |  | 3,661,267   |       | 



| | 6. | Cash and cash equivalents
| | -- | -------------------------



The components of cash and cash equivalents
are as follows:



|                                 |  | December 31, |            |  | December 31, |  |            | December 31, | 
|-------------------------------- |  | ------------ | ---------- |  | ------------ |  | ---------- | ------------ | 
|                                 |  | 2012         |            |  | 2011         |  |            | 2010         | 
|                                 |  | $            |            |  | $            |  |            | $            | 
|Cash on deposit                  |  |              | 49,600,460 |  |              |  | 45,970,047 |              | 
|Bank term deposits               |  |              |            |  |              |  |            |              | 
|- Papua New Guinea kina deposits |  |              | 259,584    |  |              |  | 22,876,394 |              | 
|                                 |  |              | 49,860,044 |  |              |  | 68,846,441 |              | 



In 2012, cash and cash equivalents earned
an average interest rate of 0.14% per annum (2011 – 0.23%, 2010 – 0.21%).



Consolidated Financial Statements   INTEROIL CORPORATION    39







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



| | 7. | Supplemental cash flow information
| | -- | ----------------------------------



|                                                              |  | Year ended   |           
|------------------------------------------------------------- |  | ------------ | ----------
|                                                              |  | December 31, |           
|                                                              |  | 2012         |           
|                                                              |  | $            |           
|Cash paid during the period                                   |  |              |           
|Interest (including interest withholding tax)                 |  |              | 17,660,696
|Income taxes                                                  |  |              | 8,061,922 
|Interest received                                             |  |              | 239,284   
|Non-cash investing activities:                                |  |              |           
|Fair value of Flex LNG option received                        |  |              | -         
|Increase in share capital from:                               |  |              |           
|buyback of non-controlling interest                           |  |              | -         
|Non-cash financing activities:                                |  |              |           
|Increase in share capital from:                               |  |              |           
|the exercise of share options and vesting of restricted stock |  |              | 11,649,459
|buyback of IPI #3 investor rights                             |  |              | -         
|litigation settlement settled in shares                       |  |              | -         



| | 8. | Short term treasury bills
| | -- | -------------------------



During July 2011, the Company purchased
two treasury bills from the Bank of Papua New Guinea totaling approximately $11,832,110 (PGK 25,363,312). Both of these treasury
bills had a 182 day term and matured in January 2012.



Based on the guidance under IAS 39 ‘Financial
Instruments Recognition and Measurement’, these investments were classified as held-to-maturity financial assets and were
therefore recorded at amortized cost using the effective interest method.



| | 9. | Financial instruments
| | -- | ---------------------



| | (a) | Cash and cash equivalents
| | --- | -------------------------



With the exception of cash and cash equivalents,
restricted cash and short term treasury bills, all financial assets are non-interest bearing. In 2012, the Company earned nil interest
(2011 – nil, 2010 - nil) on the cash on deposit which related to the working capital facility. However, the cash deposit
relating to the BNP working capital facility reduced the interest costs relating to the facility usage in 2012 by 3.49% (2011 –
3.38%, 2010 – 3.33%).



Cash restricted, which mainly relates to
the working capital facility, is comprised of the following:



|                                                            |  | December 31, |            |  | December 31, |  |            | December 31, | 
|----------------------------------------------------------- |  | ------------ | ---------- |  | ------------ |  | ---------- | ------------ | 
|                                                            |  | 2012         |            |  | 2011         |  |            | 2010         | 
|                                                            |  | $            |            |  | $            |  |            | $            | 
|Cash deposit on working capital facility (0.1%)             |  |              | 37,340,631 |  |              |  | 32,982,001 |              | 
|Cash restricted - Current                                   |  |              | 37,340,631 |  |              |  | 32,982,001 |              | 
|                                                            |  |              |            |  |              |  |            |              | 
|Bank term deposits on Petroleum Prospecting Licenses (2.1%) |  |              | 167,329    |  |              |  | 161,801    |              | 
|Cash deposit on office premises (4.3%)                      |  |              | 207,426    |  |              |  | 203,480    |              | 
|Cash deposit on secured loan (0.0%)                         |  |              | 11,295,708 |  |              |  | 5,903,481  |              | 
|Cash restricted - Non-current                               |  |              | 11,670,463 |  |              |  | 6,268,762  |              | 
|                                                            |  |              | 49,011,094 |  |              |  | 39,250,763 |              | 



Cash held as deposit on the BNP working
capital facility supports the Company’s working capital facility with BNP Paribas. The balance is based on 20% of the outstanding
balance of the BNP working capital facility 1 (refer note 18) plus any amounts that are fully cash secured. The cash deposit on
this facility did not receive interest during the year as these deposit amounts reduced the interest being charged by BNP on the
facility utilization.



Consolidated Financial Statements   INTEROIL CORPORATION    40







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



| | 9. | Financial instruments (cont’d)
| | -- | ------------------------------



The cash held as deposit on the secured
loan for the year ended December 31, 2012 is used to support the $100.0 million ANZ, BSP & BNP Syndicated Loan and relates
to next half year installment of $8.0 million and the related interest that will be payable for the next half yearly installment.



The cash held as deposit on secured loan
for the years ended December 2011 and 2010 were used to support the Company’s secured loan borrowings with the Overseas Private
Investment Corporation (“OPIC”) and related to one half yearly installment of $4.5 million and the related interest
that would be payable with the next installment. All outstanding amounts under the term loan with OPIC was fully repaid during
the quarter ended December 31, 2012.



Bank term deposits on PPL’s are unavailable
for use while PPL 236, 237 and 238 are being utilized by the Company.



| | (b) | Commodity derivative contracts
| | --- | ------------------------------



InterOil uses derivative commodity instruments
to manage its exposure to price volatility on a portion of its refined product and crude inventories in accordance with risk management
policy described in note 4.



At December 31, 2012, InterOil had a net
receivable of $233,922 (Dec 2011 - $595,440, Dec 2010 – payable of $178,578) relating to outstanding derivative contracts
for which hedge accounting was not applied or had been discontinued.



The Company had no outstanding hedge accounted
derivative contracts as at December 31, 2012, December 31, 2011 and December 31, 2010.



As at December 31, 2012, the Company had
the following open non-hedge accounted derivative contracts outstanding.



|                                                                      |  |                    |         | Notional |         |  |        |  |                                                                                                                         |                     |  | Fair Value                                                            | 
|--------------------------------------------------------------------- |  | ------------------ | ------- | -------- | ------- |  | ------ |  | ----------------------------------------------------------------------------------------------------------------------- | ------------------- |  | --------------------------------------------------------------------- | 
|                                                                      |  |                    |         | Volumes  |         |  |        |  |                                                                                                                         |                     |  | December 31, 2012                                                     | 
|Derivative                                                            |  | Type               |         | (bbls)   |         |  | Expiry |  |                                                                                                                         | Derivative
    type |  | $                                                                     | 
|Brent Swap                                                            |  | Sell Brent         |         |          | 260,000 |  |        |  | Q1
                                                                                           2013                      |                     |  | Cash flow hedge - Manages the export price risk of naphtha            | 
|Brent Swap                                                            |  | Buy Brent          |         |          | 280,000 |  |        |  | Q1
                                                                                2013                                 |                     |  | Cash flow hedge - Manages the export price risk of naphtha            | 
|Naphtha Crack Swap                                                    |  | Sell Naphtha Crack |         |          | 160,000 |  |        |  | Q1
                                                                                2013                                 |                     |  | Cash flow hedge - Manages the sales price risk of naphtha             | 
|Gasoil Crack Swap                                                     |  | Sell Gasoil Crack  |         |          | 45,000  |  |        |  | Q1
                                                                                2013                                 |                     |  | Cash flow hedge - Manages the sales price risk of gasoil (diesel)     | 
|Naphtha Crack Swap                                                    |  | Sell Naphtha Crack |         |          | 96,000  |  |        |  | Q2
                                                                                2013                                 |                     |  | Cash flow hedge - Manages the sales price risk of naphtha             | 
|Gasoil Crack Swap                                                     |  | Sell Gasoil Crack  |         |          | 45,000  |  |        |  | Q2
                                                                                2013                                 |                     |  | Cash flow hedge - Manages the sales price risk of gasoil (diesel)     | 
|Naphtha Crack Swap                                                    |  | Sell Naphtha Crack |         |          | 48,000  |  |        |  | Q3
                                                                                2013                                 |                     |  | Cash flow hedge - Manages the sales price risk of naphtha             | 
|Gasoil Crack Swap                                                     |  | Sell Gasoil Crack  |         |          | 45,000  |  |        |  | Q3
                                                                                2013                                 |                     |  | Cash flow hedge - Manages the sales price risk of gasoil (diesel)     | 
|Naphtha Crack Swap                                                    |  | Sell Naphtha Crack |         |          | 48,000  |  |        |  | Q4
                                                                                2013                                 |                     |  | Cash flow hedge - Manages the sales price risk of naphtha             | 
|Gasoil Crack Swap                                                     |  | Sell Gasoil Crack  |         |          | 45,000  |  |        |  | Q4
                                                                                                                2013 |                     |  | Cash flow hedge - Manages the sales price risk
    of gasoil (diesel) | 
|                                                                      |  |                    |         |          |         |  |        |  |                                                                                                                         |                     |  |                                                                       | 
|Add: Priced out non-hedge accounted contracts as at December 31, 2012 |  |                    | 463,565 |         
|                                                                      |  |                    |         |          |         |  |        |  |                                                                                                                         |                     |  |                                                                       | 



As at December 31, 2011, the Company had
the following open non-hedge accounted derivative contracts outstanding.



Consolidated Financial Statements   INTEROIL CORPORATION    41







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



| | 9. | Financial instruments (cont’d)
| | -- | ------------------------------



|                                                                      |  |                   |        | Notional |         |  |        |  |                                                                                     |                     |  | Fair Value                                                            | 
|--------------------------------------------------------------------- |  | ----------------- | ------ | -------- | ------- |  | ------ |  | ----------------------------------------------------------------------------------- | ------------------- |  | --------------------------------------------------------------------- | 
|                                                                      |  |                   |        | Volumes  |         |  |        |  |                                                                                     |                     |  | December 31, 2011                                                     | 
|Derivative                                                            |  | Type              |        | (bbls)   |         |  | Expiry |  |                                                                                     | Derivative
    type |  | $                                                                     | 
|Brent Swap                                                            |  | Sell Brent        |        |          | 70,000  |  |        |  | Q1
                                                       2012                      |                     |  | Cash flow hedge - Manages the export price risk of naphtha            | 
|Gasoil Crack Swap                                                     |  | Sell Gasoil Crack |        |          | 195,000 |  |        |  | Q1
                                            2012                                 |                     |  | Cash flow hedge - Manages the sales price risk of gasoil (diesel)     | 
|Gasoil Crack Swap                                                     |  | Sell Gasoil Crack |        |          | 195,000 |  |        |  | Q2
                                            2012                                 |                     |  | Cash flow hedge - Manages the sales price risk of gasoil (diesel)     | 
|Gasoil Crack Swap                                                     |  | Sell Gasoil Crack |        |          | 195,000 |  |        |  | Q3
                                                                            2012 |                     |  | Cash flow hedge - Manages the sales price risk
    of gasoil (diesel) | 
|                                                                      |  |                   |        |          |         |  |        |  |                                                                                     |                     |  |                                                                       | 
|Add: Priced out non-hedge accounted contracts as at December 31, 2011 |  |                   | 97,950 |         
|                                                                      |  |                   |        |          |         |  |        |  |                                                                                     |                     |  |                                                                       | 



As at December 31, 2010, the Company had
the following open non-hedge accounted derivative contracts outstanding.



|                                                                      |  |                         |   | Notional |        |  |        |  |                                                                                     |                     |  | Fair Value                                                     | 
|--------------------------------------------------------------------- |  | ----------------------- | - | -------- | ------ |  | ------ |  | ----------------------------------------------------------------------------------- | ------------------- |  | -------------------------------------------------------------- | 
|                                                                      |  |                         |   | Volumes  |        |  |        |  |                                                                                     |                     |  | December 31, 2010                                              | 
|Derivative                                                            |  | Type                    |   | (bbls)   |        |  | Expiry |  |                                                                                     | Derivative
    type |  | $                                                              | 
|Naphtha Swap                                                          |  | Sell Naphtha            |   |          | 54,000 |  |        |  | Q1
                                                       2011                      |                     |  | Cash flow hedge - Manages the export price risk of naphtha     | 
|Brent Swap                                                            |  | Buy Brent               |   |          | 54,000 |  |        |  | Q1
                                            2011                                 |                     |  | Cash flow hedge - Manages the export price risk of naphtha     | 
|Naphtha/Brent Swap                                                    |  | Sell Naphtha/ Buy Brent |   |          | 54,000 |  |        |  | Q1
                                                                            2011 |                     |  | Cash flow hedge - Manages the export price
    risk of naphtha | 
|                                                                      |  |                         |   |          |        |  |        |  |                                                                                     |                     |  |                                                                | 
|Add: Priced out non-hedge accounted contracts as at December 31, 2010 |  |                         | - |         
|                                                                      |  |                         |   |          |        |  |        |  |                                                                                     |                     |  |                                                                | 



A loss of $4,240,647 was recognized on
the non-hedge accounted derivative contracts for the year ended December 31, 2012 (Dec 2011 – gain of $2,017,778, Dec 2010
– loss of $1,591,878). This loss is included in derivative (losses)/gains in the consolidated income statement.



| | (c) | Currency derivative contracts
| | --- | -----------------------------



During the year ended December 31, 2010,
the Company started to enter into AUD to USD foreign currency forward contracts to minimize the foreign exchange risk in relation
to the expenses to be incurred in AUD. As at December 31, 2012, the Company had a net payable of nil (Dec 2011 - $11,457, Dec 2010
- $nil) in relation to outstanding non-hedge accounted currency derivative contracts.



A gain of $11,457 was recognized on the
non-hedge accounted currency derivative contracts for the year ended December 31, 2012 (Dec 2011 – loss of $11,457, Dec 2010
– gain of $526,690). This gain is included in derivative (losses)/gains in the consolidated income statement.



| | 10. | Trade and other receivables
| | --- | ---------------------------





|                  |  |              |             |  |              |  |             |              | 
|----------------- |  | ------------ | ----------- |  | ------------ |  | ----------- | ------------ | 
|                  |  | December 31, |             |  | December 31, |  |             | December 31, | 
|                  |  | 2012         |             |  | 2011         |  |             | 2010         | 
|                  |  | $            |             |  | $            |  |             | $            | 
|Trade receivables |  |              | 112,321,273 |  |              |  | 112,239,803 |              | 
|Other receivables |  |              | 34,626,954  |  |              |  | 23,033,797  |              | 
|Total             |  |              | 146,948,227 |  |              |  | 135,273,600 |              | 





Consolidated Financial Statements   INTEROIL CORPORATION    42







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



| | 10. | Trade and other receivables
                                                                   (cont’d)
| | --- | -------------------------------------------------------------------------------------------------------



InterOil has a discounting facility with
BNP Paribas on specific monetary receivables under which the Company is able to sell, on a revolving basis, trade receivables
up to $60,000,000 (refer to note 18). As at December 31, 2012, $47,087,328 (Dec 2011 - $10,030,131, Dec 2010 - $nil) in outstanding
trade receivables had been sold with recourse under the facility. As the sale is with recourse, the discounted trade receivables,
if any, are retained on the balance sheet and included in the accounts receivable and the sale proceeds are recognized in the
working capital facility. The Company has retained the responsibility for administering and collecting accounts receivable sold.
The discounted trade receivables are usually settled within a month of their discounting and there have not been any collection
issues relating to these discounted trade receivables.



At December 31, 2012, $80,564,430 (Dec
2011 - $74,265,832, Dec 2010 - $26,884,664) of the trade receivables secures the BNP Paribas working capital facility disclosed
in note 18. This balance includes $24,668,107 (Dec 2011 - $53,815,857, Dec 2010 - $21,797,631) of intercompany receivables which
were eliminated on consolidation.



Other receivables balance mainly relates
to cash calls receivable from joint venture partners in the Upstream segment.



| | 11. | Inventories
| | --- | -----------



|                                                 |  | December 31, |             |  | December 31, |  |             | December 31, | 
|------------------------------------------------ |  | ------------ | ----------- |  | ------------ |  | ----------- | ------------ | 
|                                                 |  | 2012         |             |  | 2011         |  |             | 2010         | 
|                                                 |  | $            |             |  | $            |  |             | $            | 
|Midstream - Refining (crude oil feedstock)       |  |              | 75,240,634  |  |              |  | 40,311,108  |              | 
|Midstream - Refining (refined petroleum product) |  |              | 49,080,697  |  |              |  | 70,267,854  |              | 
|Midstream - Refining (parts inventory)           |  |              | 3,710,903   |  |              |  | 2,721,147   |              | 
|Downstream (refined petroleum product)           |  |              | 66,839,105  |  |              |  | 57,771,690  |              | 
|                                                 |  |              | 194,871,339 |  |              |  | 171,071,799 |              | 



As at December 31, 2012 and December 31,
2011, inventory had been written down to its net realizable value. The write down of $322,535 at December 31, 2012 (Dec 2011 -
$259,406) relating to refined petroleum products is included in ‘Changes in inventories of finished goods and work in progress’
within the consolidated income statement. As at December 31, 2010 no net realizable value write down was necessary. At December
31, 2012, $128,032,234 (Dec 2011 - $113,300,109, Dec 2010 - $90,685,107) of the Midstream Refining inventory balance secures the
BNP Paribas working capital facility disclosed in note 18.



| | 12. | Goodwill
| | --- | --------



(a) Acquisition of interest from Merrill
Lynch

On February 27, 2009, InterOil LNG Holdings
Inc. acquired half of Merrill Lynch’s interest in the LNG Joint Venture Company for $11,250,000. As part of the acquisition,
InterOil LNG Holdings Inc. was transferred 548,806 ‘B’ Class shares held by Merrill Lynch. The amount recognized as
goodwill of $5,761,940 represents the amount of purchase consideration paid to Merrill Lynch over and above the fair value of
the identifiable net assets acquired.



(b) Acquisition of interest from Pacific
LNG

During September 2009, InterOil also acquired
a further 2.5% of Pacific LNG’s economic interest in the joint venture LNG Project from Pacific LNG as part of the Elk and
Antelope interest acquisition. The fair value of 2.5% of Pacific LNG’s economic interest in the joint venture LNG Project
was valued at $864,377 based on the previous transaction with Merrill Lynch that was completed in February 2009, being the most
appropriate guide to the fair value of the interest acquired. This fair value has been recognized as goodwill on acquisition of
the LNG interest in the Balance Sheet.



(c) Impairment tests for goodwill

Management reviews the business performance
based on operating segments and goodwill is monitored by the management at the operating segment level. The goodwill recognized
at December 31, 2012 is allocated to the Midstream – Liquefaction segment.



The recoverable amount of the Midstream
– Liquefaction segment has been determined based on fair value less costs to sell calculations. These calculations use cash
flow projections covering a twenty-year period and the key assumptions used in the calculations include an oil price of $100/bbl
and an annual inflation rate of 2%.



Consolidated Financial Statements   INTEROIL CORPORATION    43







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



| | 13. | Plant and equipment
| | --- | -------------------



|                                           |  | Refinery |             |   | Land and Buildings |  |             | Plant and Equipment |  |  | Motor Vehicles |   |  | Deferred Project Costs
    and Work in Progress |            |   | Totals | 
|------------------------------------------ |  | -------- | ----------- | - | ------------------ |  | ----------- | ------------------- |  |  | -------------- | - |  | ----------------------------------------------- | ---------- | - | ------ | 
|At January 1, 2010:                        |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|Cost                                       |  |          | 242,397,179 |   |                    |  | 15,932,657  |                     |  |  | 31,842,143     |   |  |                                                 | 3,224,542  |   |        | 
|Accumulated depreciation                   |  |          | (51,718,661 | ) |                    |  | (8,859,006  | )                   |  |  | (20,323,035    | ) |  |                                                 | (2,316,808 | ) |        | 
|Net book value                             |  |          | 190,678,518 |   |                    |  | 7,073,651   |                     |  |  | 11,519,108     |   |  |                                                 | 907,734    |   |        | 
|                                           |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|Year ended December 31, 2010:              |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|Opening net book value                     |  |          | 190,678,518 |   |                    |  | 7,073,651   |                     |  |  | 11,519,108     |   |  |                                                 | 907,734    |   |        | 
|Additions                                  |  |          | 1,371,819   |   |                    |  | 69,375      |                     |  |  | 706,503        |   |  |                                                 | 766,235    |   |        | 
|Disposals                                  |  |          | -           |   |                    |  | (5,678      | )                   |  |  | (13,248        | ) |  |                                                 | (28,388    | ) |        | 
|Transfers from work in progress            |  |          | 2,832,316   |   |                    |  | 1,780,516   |                     |  |  | 3,812,781      |   |  |                                                 | 541,703    |   |        | 
|Reclassification to other asset categories |  |          | (3,082,278  | ) |                    |  | 2,982,970   |                     |  |  | 141,614        |   |  |                                                 | (42,306    | ) |        | 
|Depreciation for the period                |  |          | (9,525,893  | ) |                    |  | (947,248    | )                   |  |  | (2,223,661     | ) |  |                                                 | (446,279   | ) |        | 
|Exchange differences                       |  |          | -           |   |                    |  | 157,005     |                     |  |  | 313,345        |   |  |                                                 | (42,460    | ) |        | 
|Closing net book value                     |  |          | 182,274,482 |   |                    |  | 11,110,591  |                     |  |  | 14,256,442     |   |  |                                                 | 1,656,239  |   |        | 
|                                           |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|At December 31, 2010:                      |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|Cost                                       |  |          | 243,519,036 |   |                    |  | 20,042,453  |                     |  |  | 36,563,947     |   |  |                                                 | 4,046,294  |   |        | 
|Accumulated depreciation                   |  |          | (61,244,554 | ) |                    |  | (8,931,862  | )                   |  |  | (22,307,505    | ) |  |                                                 | (2,390,055 | ) |        | 
|Net book value                             |  |          | 182,274,482 |   |                    |  | 11,110,591  |                     |  |  | 14,256,442     |   |  |                                                 | 1,656,239  |   |        | 
|                                           |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|Year ended December 31, 2011:              |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|Opening net book value                     |  |          | 182,274,482 |   |                    |  | 11,110,591  |                     |  |  | 14,256,442     |   |  |                                                 | 1,656,239  |   |        | 
|Additions                                  |  |          | 4,624,888   |   |                    |  | 4,297,395   |                     |  |  | 4,614,370      |   |  |                                                 | 1,547,508  |   |        | 
|Disposals                                  |  |          | -           |   |                    |  | (33,950     | )                   |  |  | (395,961       | ) |  |                                                 | (7,234     | ) |        | 
|Transfers from work in progress            |  |          | 570,847     |   |                    |  | 671,101     |                     |  |  | 7,396,780      |   |  |                                                 | 34,892     |   |        | 
|Reclassification to other asset categories |  |          | -           |   |                    |  | 6,493       |                     |  |  | (1,024,903     | ) |  |                                                 | 1,018,410  |   |        | 
|Depreciation for the period                |  |          | (10,703,288 | ) |                    |  | (981,574    | )                   |  |  | (4,132,887     | ) |  |                                                 | (1,064,228 | ) |        | 
|Exchange differences                       |  |          | -           |   |                    |  | 1,713,531   |                     |  |  | 2,918,193      |   |  |                                                 | 650,839    |   |        | 
|Closing net book value                     |  |          | 176,766,929 |   |                    |  | 16,783,587  |                     |  |  | 23,632,034     |   |  |                                                 | 3,836,426  |   |        | 
|                                           |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|At December 31, 2011:                      |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|Cost                                       |  |          | 248,714,771 |   |                    |  | 28,419,395  |                     |  |  | 53,076,624     |   |  |                                                 | 8,325,671  |   |        | 
|Accumulated depreciation                   |  |          | (71,947,842 | ) |                    |  | (11,635,808 | )                   |  |  | (29,444,590    | ) |  |                                                 | (4,489,245 | ) |        | 
|Net book value                             |  |          | 176,766,929 |   |                    |  | 16,783,587  |                     |  |  | 23,632,034     |   |  |                                                 | 3,836,426  |   |        | 
|                                           |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|Year ended December 31, 2012:              |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|Opening net book value                     |  |          | 176,766,929 |   |                    |  | 16,783,587  |                     |  |  | 23,632,034     |   |  |                                                 | 3,836,426  |   |        | 
|Additions                                  |  |          | 2,048,211   |   |                    |  | 1,505,281   |                     |  |  | 1,935,145      |   |  |                                                 | 229,539    |   |        | 
|Disposals                                  |  |          | -           |   |                    |  | (1,225,329  | )                   |  |  | (993,525       | ) |  |                                                 | (60,996    | ) |        | 
|Transfers from work in progress            |  |          | 4,740,349   |   |                    |  | 12,233,962  |                     |  |  | 7,392,127      |   |  |                                                 | 1,550,643  |   |        | 
|Reclassification to other asset categories |  |          | (88,547     | ) |                    |  | -           |                     |  |  | 88,547         |   |  |                                                 | -          |   |        | 
|Depreciation for the period                |  |          | (11,904,138 | ) |                    |  | (1,485,314  | )                   |  |  | (5,321,013     | ) |  |                                                 | (1,477,509 | ) |        | 
|Exchange differences                       |  |          | (418,932    | ) |                    |  | 9,676       |                     |  |  | 256,675        |   |  |                                                 | (9,911     | ) |        | 
|Closing net book value                     |  |          | 171,143,872 |   |                    |  | 27,821,863  |                     |  |  | 26,989,990     |   |  |                                                 | 4,068,192  |   |        | 
|                                           |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|At December 31, 2012:                      |  |          |             |   |                    |  |             |                     |  |  |                |   |  |                                                 |            |   |        | 
|Cost                                       |  |          | 255,394,975 |   |                    |  | 40,715,833  |                     |  |  | 62,110,670     |   |  |                                                 | 9,810,445  |   |        | 
|Accumulated depreciation                   |  |          | (84,251,103 | ) |                    |  | (12,893,970 | )                   |  |  | (35,120,680    | ) |  |                                                 | (5,742,253 | ) |        | 
|Net book value                             |  |          | 171,143,872 |   |                    |  | 27,821,863  |                     |  |  | 26,989,990     |   |  |                                                 | 4,068,192  |   |        | 



Consolidated Financial Statements   INTEROIL CORPORATION    44







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



| | 14. | Oil and gas properties
| | --- | ----------------------



Costs of oil and gas properties which
are not subject to depletion are as follows:



|                                                           |  | December 31, |             |  | December 31, |  |             | December 31, | 
|---------------------------------------------------------- |  | ------------ | ----------- |  | ------------ |  | ----------- | ------------ | 
|                                                           |  | 2012         |             |  | 2011         |  |             | 2010         | 
|                                                           |  | $            |             |  | $            |  |             | $            | 
|Drilling and construction equipment                        |  |              | 145,854,653 |  |              |  | 79,367,759  |              | 
|Drilling consumables and spares                            |  |              | 17,847,114  |  |              |  | 14,129,959  |              | 
|Petroleum Prospecting License drilling programs (Unproved) |  |              | 351,353,521 |  |              |  | 269,355,048 |              | 
|Gross Capitalized Costs                                    |  |              | 515,055,288 |  |              |  | 362,852,766 |              | 
|Accumulated depletion and amortization                     |  |              |             |  |              |  |             |              | 
|Unproved oil and gas properties                            |  |              | -           |  |              |  | -           |              | 
|Proved oil and gas properties                              |  |              | -           |  |              |  | -           |              | 
|Net Capitalized Costs                                      |  |              | 515,055,288 |  |              |  | 362,852,766 |              | 



The majority of the costs capitalized
under ‘Petroleum Prospective License drilling programs (Unproved)’ above relates to the exploration and development
expenditure on the Elk and Antelope fields. The development and monetization efforts of these fields are ongoing, and include
the condensate stripping and associated facilities, the gas gathering and associated common facilities, and developing a liquefied
natural gas plant and associated facilities in PNG. The majority of the current year’s increase in the PPL drilling programs
relates to the drilling activity on the Triceratops field for the Triceratops 2 appraisal well and activity on the Elk and Antelope
field for the drilling of the Antelope 3 appraisal well, and site preparation work on Elk 3 appraisal well.



The following table discloses a breakdown
of the exploration costs incurred for the periods ended:



|                                                                                                                  |  |              |             |   | Year ended   |  |             |              | 
|----------------------------------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ------------ |  | ----------- | ------------ | 
|                                                                                                                  |  | December 31, |             |   | December 31, |  |             | December 31, | 
|                                                                                                                  |  | 2012         |             |   | 2011         |  |             | 2010         | 
|                                                                                                                  |  | $            |             |   | $            |  |             | $            | 
|Property Acquisition Costs                                                                                        |  |              | -           |   |              |  | -           |              | 
|Exploration Costs                                                                                                 |  |              | -           |   |              |  | -           |              | 
|Development Costs                                                                                                 |  |              | 184,165,722 |   |              |  | 116,493,004 |              | 
|Add: Amounts capitalized in relation to the appraisal
    program cash calls on IPI interest buyback transactions |  |              | -           |   |              |  | -           |              | 
|Add: Premium paid on IPI buyback transactions                                                                     |  |              | -           |   |              |  | -           |              | 
|Less: Conveyance accounting offset against properties                                                             |  |              | (12,999,752 | ) |              |  | -           |              | 
|Less: Costs allocated against
    cash calls                                                                      |  |              | (18,963,448 | ) |              |  | (8,934,976  | )            | 
|Total Costs capitalized                                                                                           |  |              | 152,202,522 |   |              |  | 107,558,028 |              | 
|Charged to expense                                                                                                |  |              |             |   |              |  |             |              | 
|Geophysical and other costs                                                                                       |  |              | 13,901,558  |   |              |  | 18,435,150  |              | 
|Total charged to expense                                                                                          |  |              | 13,901,558  |   |              |  | 18,435,150  |              | 
|Oil and Gas Property Additions
    (capitalized and expensed)                                                     |  |              | 166,104,080 |   |              |  | 125,993,178 |              | 



The following table discloses a breakdown
of the gain realized on conveyance of oil and gas properties for the periods ended:



|                                                     |  | Year ended   |          
|---------------------------------------------------- |  | ------------ | ---------
|                                                     |  | December 31, |          
|                                                     |  | 2012         |          
|                                                     |  | $            |          
|                                                     |  |              |          
|Gain on conveyance of oil and gas properties         |  |              |          
|Conveyance of PPL 244 interest (15% of the property) |  |              | -        
|Conveyance of PPL 237 interest to PRE                |  |              | 2,894,957
|Conveyance accounting of IPI Agreement (note 20)     |  |              | 1,523,213
|                                                     |  |              | 4,418,170



Consolidated Financial Statements   INTEROIL CORPORATION    45







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



| | 14. | Oil and gas properties (cont’d)
| | --- | -------------------------------



Since the date of the IPI Agreement in
February 2005 up to the year ended December 31, 2012, certain IPI investors’ with a combined 13.085% interest out of the
remaining 15.1386% IPI interest in the eight well drilling program have waived their right to convert their IPI percentage into
1,744,667 common shares. An additional investor with a 1% interest has had their right to convert their IPI percentage into 133,333
common shares forfeited as a result of being registered on PRL 15. These waivers or forfeitures of the conversion option have
triggered conveyance under the IPI Agreement for their respective share of interest. An amount of $1,523,213 for the year was
recognized as a gain on conveyance.



Refer to note 22 for details in relation
to the sale of an interest in PPL 237.



| | 15. | Available-for-sale Investments
| | --- | ------------------------------



On April 11, 2011, the Company and Pacific
LNG Operations Ltd. executed a framework agreement with Flex LNG Ltd related to the construction and operation of a two million
tonnes per annum floating liquefied natural gas processing vessel. Under the framework agreement, an equity purchase option was
issued to the Company and Pacific LNG Operations Ltd. to acquire up to 11,315,080 common shares in Flex LNG Ltd at an average
strike price of 4.5909 Norwegian Kroner.



On May 16, 2011, the Company and Pacific
LNG Operations Ltd. exercised this option with the Company acquiring 8,938,913 common shares of Flex LNG Ltd at a cost of $7,461,407
and Pacific LNG Operations Ltd acquiring the remaining 2,376,167 common shares. Based on guidance under IAS 39, the Company recognized
the financial asset, the Flex LNG Ltd options, on the date of grant of those options to the Company, April 11, 2011. Considering
the various classification options available and managements intention to hold the options/shares after exercising for the medium
term, the options were classified as a derivative financial instrument at initial recognition and then reclassified as ‘available-for-sale’
when the options were exercised and the common shares acquired.



Management used the Black Scholes pricing
model to fair value the options at grant date and subsequently the derivative through to the date of exercise. The option value
on exercise date was $4,214,258 and the exercise price paid was $7,461,407. The cumulative fair value of the options received
of $4,214,258 was recognized in the consolidated income statement under ‘Gain on Flex LNG options received’. Transaction
costs of $17,350 were also incurred in relation to the transaction and were allocated to the investment. Management has determined
that recognition of this gain is appropriate as there is no ongoing obligation or commitment that the Company needs to fulfill
as a result of receiving these options. The total amount recognized as the long term investment in relation to the Flex LNG shares
in the balance sheet after the exercise of the options was $11,693,015.



Based on guidance under IAS 39, changes
in the fair value of the Flex LNG Ltd shares after initial recognition are to be recognized in other comprehensive income within
shareholders equity, except for impairment losses which can be evidenced by a significant or prolonged decline in the fair value
of an investment. The fair value at December 31, 2012 was $4,304,176 (Dec 2011 - $3,650,786) and was calculated using quoted prices
on Oslo stock exchange Axess.



| | 16. | Income taxes
| | --- | ------------



| | (a) | Income tax expense
| | --- | ------------------



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



Consolidated Financial Statements   INTEROIL CORPORATION    46







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



| | 16. | Income taxes (cont’d)
| | --- | ---------------------



|                                                                                        |  | December 31, |             |   | December 31, |  |             | December 31, | 
|--------------------------------------------------------------------------------------- |  | ------------ | ----------- | - | ------------ |  | ----------- | ------------ | 
|                                                                                        |  | 2012         |             |   | 2011         |  |             | 2010         | 
|                                                                                        |  | $            |             |   | $            |  |             | $            | 
|(Loss)/profit before income taxes and non controlling interest                          |  |              | (9,107,500  | ) |              |  | 16,922,995  |              | 
|Statutory income tax rate                                                               |  |              | 30.00       | % |              |  | 31.50       | %            | 
|Computed tax (benefit)/expense                                                          |  |              | (2,732,250  | ) |              |  | 5,330,743   |              | 
|                                                                                        |  |              |             |   |              |  |             |              | 
|Effect on income tax of:                                                                |  |              |             |   |              |  |             |              | 
|(Income)/losses in foreign jurisdictions not (assessable)/deductible                    |  |              | (723,440    | ) |              |  | 3,236,314   |              | 
|Non-deductible stock compensation expense                                               |  |              | 709,133     |   |              |  | 897,703     |              | 
|Non-deductible pre-LNG Project Agreement costs                                          |  |              | 144,101     |   |              |  | 983,644     |              | 
|Non-deductible premium paid on buyback of IPI interest                                  |  |              | -           |   |              |  | -           |              | 
|Non-taxable gain on conveyance of exploration assets                                    |  |              | (868,487    | ) |              |  | -           |              | 
|Effect of currency translation on tax base                                              |  |              | (1,938,136  | ) |              |  | (3,236,709  | )            | 
|Tax rate differential in foreign jurisdictions                                          |  |              | (71,038     | ) |              |  | (556,744    | )            | 
|Under provision for income tax in prior years                                           |  |              | 504,853     |   |              |  | 588,333     |              | 
|Midstream - Refining tax exempt income as per Refinery Project Agreement                |  |              | -           |   |              |  | -           |              | 
|Tax losses for which no future tax benefit has been brought to account                  |  |              | 10,512,556  |   |              |  | 8,718,157   |              | 
|Deduction claimed for prior years undeducted interest expense                           |  |              | (15,184,369 | ) |              |  | -           |              | 
|Initial recognition of future tax assets/liabilities based on recoverability assessment |  |              | -           |   |              |  | (15,498,147 | )            | 
|Other - net                                                                             |  |              | (1,064,132  | ) |              |  | (1,198,961  | )            | 
|                                                                                        |  |              | (10,711,209 | ) |              |  | (735,667    | )            | 



| | (b) | Deferred income tax
| | --- | -------------------



|                          |  | December 31, |            |  | December 31, |  |            | December 31, | 
|------------------------- |  | ------------ | ---------- |  | ------------ |  | ---------- | ------------ | 
|                          |  | 2012         |            |  | 2011         |  |            | 2010         | 
|                          |  | $            |            |  | $            |  |            | $            | 
|Deferred tax assets       |  |              | 63,526,458 |  |              |  | 35,965,273 |              | 
|Deferred tax liabilities  |  |              | -          |  |              |  | (1,889,391 | )            | 
|Deferred tax assets (net) |  |              | 63,526,458 |  |              |  | 34,075,882 |              | 



The gross movement on the deferred income
tax account is as follows:



|                                                     |  | December 31, |            |  | December 31, |  |            | December 31, | 
|---------------------------------------------------- |  | ------------ | ---------- |  | ------------ |  | ---------- | ------------ | 
|                                                     |  | 2012         |            |  | 2011         |  |            | 2010         | 
|                                                     |  | $            |            |  | $            |  |            | $            | 
|At January 1                                         |  |              | 34,075,882 |  |              |  | 28,477,690 |              | 
|Charge to the income statement                       |  |              | 11,410,309 |  |              |  | 6,248,509  |              | 
|Interest deductibility on payment of withholding tax |  |              | 15,184,369 |  |              |  | -          |              | 
|Exchange differences                                 |  |              | 2,855,898  |  |              |  | (650,317   | )            | 
|At December 31                                       |  |              | 63,526,458 |  |              |  | 34,075,882 |              | 



The movement in deferred income tax assets
and liabilities during the year, without taking into consideration the offsetting of balances within the same tax jurisdiction,
is as follows:



Consolidated Financial Statements   INTEROIL CORPORATION    47







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



| | 16. | Income taxes (cont’d)
| | --- | ---------------------



|                                                     |  | Tax losses |            |   | Other |  |            | Tax depreciation |  |  | Unrealized foreign exchange (gains)/losses |   |  | Total |           
|---------------------------------------------------- |  | ---------- | ---------- | - | ----- |  | ---------- | ---------------- |  |  | ------------------------------------------ | - |  | ----- | ----------
|Deferred tax assets and liabilities                  |  | $          |            |   | $     |  |            | $                |  |  | $                                          |   |  | $     |           
|At January 1, 2010                                   |  |            | 23,800,726 |   |       |  | 2,620,198  |                  |  |  | 5,535,521                                  |   |  |       | (1,637,282
|Charge to the income statement                       |  |            | (21,663    | ) |       |  | (1,244,491 | )                |  |  | (1,168,649                                 | ) |  |       | (76,853   
|Exchange differences                                 |  |            | 547,561    |   |       |  | 181,093    |                  |  |  | (216,347                                   | ) |  |       | 157,876   
|At December 31, 2010                                 |  |            | 24,326,624 |   |       |  | 1,556,800  |                  |  |  | 4,150,525                                  |   |  |       | (1,556,259
|Charge to the income statement                       |  |            | (3,691,894 | ) |       |  | 389,142    |                  |  |  | 14,252,367                                 |   |  |       | (4,701,106
|Exchange differences                                 |  |            | 4,136,543  |   |       |  | 262,241    |                  |  |  | (2,723,692                                 | ) |  |       | (2,325,409
|At December 31, 2011                                 |  |            | 24,771,273 |   |       |  | 2,208,183  |                  |  |  | 15,679,200                                 |   |  |       | (8,582,774
|Charge to the income statement                       |  |            | 6,586,578  |   |       |  | 73,552     |                  |  |  | (1,896,360                                 | ) |  |       | 6,646,539 
|Interest deductibility on payment of withholding tax |  |            | 15,184,369 |   |       |  | -          |                  |  |  | -                                          |   |  |       | -         
|Exchange differences                                 |  |            | 336,733    |   |       |  | 68,849     |                  |  |  | 325,325                                    |   |  |       | 2,124,991 
|At December 31, 2012                                 |  |            | 46,878,953 |   |       |  | 2,350,584  |                  |  |  | 14,108,165                                 |   |  |       | 188,756   



The deferred tax assets and liabilities
recorded in the consolidated balance sheet mainly relate to Midstream – Refining and Downstream assets in PNG. The amounts
are non-current as at December 31, 2012.



In addition to the above, the Company
has temporary differences and losses carried forward in relation to exploration expenditure incurred in PNG of $480,518,279 at
December 31, 2012. No deferred tax assets have been recognized for the exploration expenditure pending final investment decision
on projects for monetization of resources from the licenses held.



The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the actual levels of past taxable income, scheduled reversal of deferred tax liabilities, projected
future taxable income, projected tax rates and tax planning strategies in making this assessment.



The Refinery Project Agreement gave “pioneer”
status to InterOil Limited (”IOL”). This status gave IOL a tax holiday beginning upon the date of the commencement
of commercial production, January 1, 2005 and ended December 31, 2010. In relation to the refinery, tax losses incurred prior
to January 1, 2005 were frozen during the tax holiday and became available for use after the tax holiday ceased on December 31,
2010. Tax losses incurred during the tax holiday also became available for use after December 31, 2010. Tax losses carried forward
to offset against future earnings total PGK 330,788,487 ($157,293,622) at December 31, 2012. All losses incurred by InterOil Limited
have a twenty year carry forward period.



| | 17. | Trades and other payables
| | --- | -------------------------



|                                               |  | December 31, |             |  | December 31, |  |             | December 31, | 
|---------------------------------------------- |  | ------------ | ----------- |  | ------------ |  | ----------- | ------------ | 
|                                               |  | 2012         |             |  | 2011         |  |             | 2010         | 
|                                               |  | $            |             |  | $            |  |             | $            | 
|Trade payables - crude import                  |  |              | 35,992,153  |  |              |  | 69,042,031  |              | 
|Trade payables - product import                |  |              | 29,539,390  |  |              |  | 10,470,860  |              | 
|Other accounts payable and accrued liabilities |  |              | 85,607,600  |  |              |  | 53,541,263  |              | 
|Petromin cash calls received                   |  |              | 15,435,000  |  |              |  | 15,435,000  |              | 
|Mitsui cash calls received                     |  |              | 13,452,238  |  |              |  | 11,393,023  |              | 
|Total trade and other payables                 |  |              | 180,026,381 |  |              |  | 159,882,177 |              | 



Consolidated Financial Statements   INTEROIL CORPORATION    48







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



| | 17. | Trades and other payables
                                                                   (cont’d)
| | --- | -----------------------------------------------------------------------------------------------------



(a) Petromin participation in Elk and
Antelope fields

On October 30, 2008, Petromin PNG Holdings
Limited (”Petromin”), a government entity mandated to invest in resource projects on behalf of the State, entered
into an agreement to take a 20.5% direct interest in the Elk and Antelope fields if and once nominated by the State to take its
legislative interest. Petromin contributed an initial deposit and agreed to conditionally fund 20.5% of the costs of developing
these fields. The State’s (and Petromin’s) right to take an interest arises upon issuance of the Prospecting Development
License (”PDL”), which has not yet occurred. The obligation to fund its portion of the costs of developing the field,
including sunk costs, also applies upon issuance of the PDL. As at December 31, 2012, $15,435,000 in advance payments received
from Petromin has been held under ‘Petromin cash calls received’ above. At the end of the 2011 year, the parties agreed
that the Agreement’s intended operation had ended, and that it should terminate. Petromin remains the State’s nominee
to acquire the State’s interest under relevant Papua New Guinean legislation, once a PDL is granted. InterOil has proposed
that cash contributions made by Petromin to date to fund the development will be held and credited against the State’s obligation
to contribute its portion of sunk costs upon grant of the PDL.



(b) Mitsui & Co. participation
in Condensate Stripping Plant

On April 15, 2010, the Company entered
into a preliminary works joint venture and preliminary works financing agreement with Mitsui relating to the CS Project. The proposed
joint venture is to be entered into for equal shares between Mitsui and InterOil. Mitsui will be responsible for arranging or
providing financing for the capital costs of the plant. On August 4, 2010, the JVOA for the CS Project was finalized. Refer to
note 19(d) for further details in relation to this agreement.



The portion of funding that relates to
Mitsui’s share of the project as at December 31, 2012, amounting to $13,452,238 (Dec 2011 - $11,393,023, Dec 2010 - $6,456,757)
is held in current liabilities as the agreement requires repayment if FID is not reached. The portion of funding that relates
to InterOil’s share of the project, funded by Mitsui, is classified as an unsecured loan (refer to note 19(d)).



| | 18. | Working capital facilities
| | --- | --------------------------



|                                                                     |  | December 31, |            |  | December 31, |  |            | December 31, | 
|-------------------------------------------------------------------- |  | ------------ | ---------- |  | ------------ |  | ---------- | ------------ | 
|Amounts drawn down                                                   |  | 2012         |            |  | 2011         |  |            | 2010         | 
|                                                                     |  | $            |            |  | $            |  |            | $            | 
|BNP Paribas working capital facility - midstream                     |  |              | 94,290,479 |  |              |  | 10,030,131 |              | 
|Westpac and Bank South Pacific working capital facility - downstream |  |              | -          |  |              |  | 6,450,372  |              | 
|Total working capital facility                                       |  |              | 94,290,479 |  |              |  | 16,480,503 |              | 



(a) BNP Paribas working capital facility

InterOil has a syndicated
working capital credit facility led by BNP Paribas (Singapore branch) with a maximum availability of $240,000,000 (increased temporarily
to $260,000,000 in November 2011, reverted to $230,000,000 on January 31, 2012, and then increased to $240,000,000 on February
01, 2012). The total facility was renewed in February 2012 until January 31, 2013 with an increase in Facility 1 limit by an additional
$10,000,000 to $180,000,000, and a maximum availability of $240,000,000 for the combined facility. In October 2012, the working
capital facility agreement with BNP Paribas was amended so that the facility was made evergreen and the annual renewal requirement
removed. The total facility is split into Facility 1 and Facility 2 as per the agreement with BNP Paribas. Facility 1 is for $180,000,000
and finances purchases of hydrocarbons via the issuance of documentary letters of credit and or standby letters of credit, short
term advances, advances on merchandise, freight loans, and includes a sublimit of Euro 18,000,000 or USD equivalent for hedging
transactions via BNP Paribas Commodity Indexed Transaction Group or other acceptable counter parties.



Facility 2 is for
$60,000,000 partly cash-secured short term advances and for discounting of any monetary receivables acceptable to BNP Paribas
in order to reduce Facility 1 balances. The facility is secured by sales contracts, purchase contracts, certain cash accounts
associated with the refinery, all crude and refined products of the refinery and trade receivables. During the quarter ended December
31, 2012, there was a temporary reallocation of $10,000,000 limit from Facility 2 to Facility 1.



The facility bears
interest at LIBOR + 3.5% on the short term advances. During the year the weighted average interest rate was 2.67% (2011 –
2.96%, 2010 – 2.69%) after considering the reduction in interest due to the deposit amounts maintained which reduces the
interest being charged on the facility utilization (refer section ‘Cash and cash equivalents’ under note 9).



Consolidated Financial Statements   INTEROIL CORPORATION    49







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



| | 18. | Working capital facilities
                                                                   (cont’d)
| | --- | ------------------------------------------------------------------------------------------------------



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



|                                                                 |  | December 31, |              |   | December 31, |  |              | December 31, | 
|---------------------------------------------------------------- |  | ------------ | ------------ | - | ------------ |  | ------------ | ------------ | 
|                                                                 |  | 2012         |              |   | 2011         |  |              | 2010         | 
|                                                                 |  | $            |              |   | $            |  |              | $            | 
|Working capital credit facility                                  |  |              | 240,000,000  |   |              |  | 260,000,000  |              | 
|                                                                 |  |              |              |   |              |  |              |              | 
|Less amounts included in the working capital facility liability: |  |              |              |   |              |  |              |              | 
|Short term advances/facilities drawn down                        |  |              | (47,203,152  | ) |              |  | -            |              | 
|Discounted receivables                                           |  |              | (47,087,327  | ) |              |  | (10,030,131  | )            | 
|                                                                 |  |              | (94,290,479  | ) |              |  | (10,030,131  | )            | 
|Less: other amounts outstanding under the facility:              |  |              |              |   |              |  |              |              | 
|Letters of credit outstanding                                    |  |              | (139,500,000 | ) |              |  | (164,910,000 | )            | 
|Working capital credit facility available for use                |  |              | 6,209,521    |   |              |  | 85,059,869   |              | 



At December 31, 2012,
the company had six letters of credit outstanding totaling $139,500,000. The first letter of credit for $5,000,000 was for a gasoline
cargo and was drawn down on January 3, 2013. The second letter of credit for $25,000,000 was for a diesel cargo and was drawn
down on January 3, 2013. The third letter of credit for $36,700,000 was for a crude cargo and was drawn down on January 4, 2013.
The fourth letter of credit for $29,400,000 was for a crude cargo and was drawn down on January 27, 2013. The fifth letter of
credit for $23,200,000 was for a crude cargo and was drawn down on February 6, 2013. The sixth letter of credit for $20,200,000
was for a crude cargo and was drawn down on February 7, 2013.



The cash deposit on working capital facility,
as separately disclosed in note 9, included restricted cash of $37,340,631 (2011 - $32,982,001, 2010 - $40,664,995) which is being
maintained as a security margin for the facility. In addition, inventory of $128,032,234 (2011 - $113,300,109, 2010 - $90,685,107)
and trade receivables of $80,564,430 (2011 - $74,265,832, 2010 – $26,884,664) also secured the facility. The trade receivable
balance securing the facility includes $24,668,107 (2011 - $53,815,857, 2010 - $21,797,631) of inter-company receivables which
were eliminated on consolidation.



(b) Westpac and Bank South Pacific
working capital facility

The Company has an approximate $66,570,000
(PGK 140,000,000) revolving working capital facility for its Downstream operations in PNG from BSP and Westpac. Westpac facility
limit is approximately $42,795,000 (PGK 90,000,000) and the BSP facility limit is approximately $23,775,000 (PGK 50,000,000).
The Westpac facility is for an initial term of three years and was renewed in November 2011 through to November 2014. The Westpac
facility was increased in February 2012, by $4,755,000 (PGK 10,000,000). The BSP facility is renewable annually and was renewed
in October 2012 through to October 2013. As at December 31, 2012, none of this combined facility has been utilized, and the entire
amount of this facility remains available for use. During the year the weighted average interest rate was 10% (Dec 2011 –
9.6%). These facilities are secured by a fixed and floating charge over the assets of Downstream operations.



| | 19. | Secured and unsecured loans
| | --- | ---------------------------



|                                                                     |  | December 31, |             |   | December 31, |  |            | December 31, | 
|-------------------------------------------------------------------- |  | ------------ | ----------- | - | ------------ |  | ---------- | ------------ | 
|                                                                     |  | 2012         |             |   | 2011         |  |            | 2010         | 
|                                                                     |  | $            |             |   | $            |  |            | $            | 
|Secured loan (OPIC) - current portion                                |  |              | -           |   |              |  | 9,000,000  |              | 
|Secured loan (Westpac) - current portion                             |  |              | 4,286,000   |   |              |  | -          |              | 
|Secured loan (ANZ, BSP & BNP Syndication) - current portion          |  |              | 16,000,000  |   |              |  | -          |              | 
|Secured loan (ANZ, BSP & BNP Syndication) - deferred financing costs |  |              | (815,182    | ) |              |  | -          |              | 
|Unsecured loan (Mitsui)                                              |  |              | 11,912,297  |   |              |  | 10,393,023 |              | 
|Total current portion of loans                                       |  |              | 31,383,115  |   |              |  | 19,393,023 |              | 
|                                                                     |  |              |             |   |              |  |            |              | 
|Secured loan (OPIC) - non current portion                            |  |              | -           |   |              |  | 26,500,000 |              | 
|Secured loan (OPIC) - deferred financing costs                       |  |              | -           |   |              |  | (462,834   | )            | 
|Secured loan (ANZ, BSP & BNP Syndication) - non current portion      |  |              | 84,000,000  |   |              |  | -          |              | 
|Secured loan (ANZ, BSP & BNP Syndication) - deferred financing costs |  |              | (3,124,863  | ) |              |  | -          |              | 
|Secured loan (Westpac) - non current portion                         |  |              | 8,571,000   |   |              |  | -          |              | 
|Total non current secured loan                                       |  |              | 89,446,137  |   |              |  | 26,037,166 |              | 
|                                                                     |  |              |             |   |              |  |            |              | 
|Total secured and unsecured loans                                    |  |              | 120,829,252 |   |              |  | 45,430,189 |              | 



Consolidated Financial Statements   INTEROIL CORPORATION    50







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



| | 19. | Secured and unsecured loans
                                                                   (cont’d)
| | --- | -------------------------------------------------------------------------------------------------------



(a) OPIC Secured Loan

On June 12, 2001, the Company entered
into a loan agreement with OPIC to secure a project financing facility of $85,000,000. The interest rate on the loan was equal
to the treasury cost applicable to each promissory note outstanding plus the OPIC spread (3%). During the year ended December
31, 2012 the weighted average interest rate was 6.94% (Dec 2011 - 6.93%, Dec 2010 – 6.80%) and the total interest expense
included in finance costs was $2,024,306 (Dec 2011 - $2,901,250, Dec 2010 - $3,461,800). During the quarter ended December 31,
2012, all outstanding amounts under the term loan with OPIC was fully repaid by the Company.



(b) Westpac Secured Loan

A secured loan of $15,000,000 was provided
as part of the increased Westpac working capital facility which is repayable in equal installments over 3.5 years with an interest
rate of LIBOR + 4.4% per annum. During the year ended December 31, 2012 the weighted average interest rate was 4.73% and the total
interest expense included in finance costs was $574,197. The loan agreement stipulates half yearly principal payments of $2,143,000,
with the final repayment to be made in August 2015. As at December 31, 2012, two installment payments amounting to $4,286,000
which will be due for payment on March 2, 2013 and September 2, 2013 have been classified into the current portion of the liability.
The loan is secured by a fixed and floating charge over the assets of Downstream operations.



(c) ANZ, BSP & BNP Syndicated Loan

On October 16, 2012, the Company entered
into a five year amortizing $100 million syndicated secured term loan facility with BNP Paribas Singapore, Bank South Pacific
Limited, and Australia and New Zealand Banking Group (PNG) Limited. The loan is secured over the fixed assets of the refinery
which have a carrying value of $192,811,695 at December 31, 2012. The interest rate on the loan is equal to LIBOR plus 6.5%. During
the year ended December 31, 2012 the weighted average interest rate was 6.81% and the total interest expense included in finance
costs was $946,833.



The principal of the secured loan facility
is repayable in ten half yearly installments over the period of five years. The first four half yearly installments are for an
amount of $8,000,000 each, the next two installments are for an amount of $10,000,000 each, and the final four installments are
for an amount of $12,000,000 each. The interest payments are to be made either in quarterly or half yearly payments, at the Company’s
election which has be made in advance of the interest period. As at December 31, 2012, two installment payments amounting to $8,000,000
each which will be due for payment on May 9, 2013 and November 9, 2013 have been reclassified into the current portion of the
liability. The agreement contains certain financial covenants which include the maintenance of minimum levels of equity cover
and debt service cover and limitations on the incurrence of additional indebtedness. As of December 31, 2012, the company was
in compliance with all applicable covenants. Deferred financing costs relating to the loan of $3,940,045 as at December 31, 2012
are being amortized over the period until November 2017.



(d) Mitsui Unsecured Loan

On April 15, 2010, the Company entered
into preliminary joint venture and financing agreements with Mitsui relating to the Condensate Stripping Project. The proposed
joint venture is to be entered into for equal shares between Mitsui and InterOil. On August 4, 2010, the JVOA for the CS Project
was finalized. The amount financed by Mitsui for InterOil’s proportion of cash calls is treated as an unsecured loan with
interest being accrued daily at LIBOR plus a margin of 6.00%. During the year ended December 31, 2012 the weighted average interest
rate was 6.24% and the total interest expense included in finance costs was $749,033. The portion of funding that relates to Mitsui’s
share of the project is held in current liabilities. In the event that a positive FID is not reached or made, InterOil will be
required to refund Mitsui’s share of capital expenditure incurred and the unsecured loan within a specified period.



| | 20. | Indirect participation interests
| | --- | --------------------------------



|                                                              |  | December 31, |            |  | December 31, |  |            | December 31, | 
|------------------------------------------------------------- |  | ------------ | ---------- |  | ------------ |  | ---------- | ------------ | 
|                                                              |  | 2012         |            |  | 2011         |  |            | 2010         | 
|                                                              |  | $            |            |  | $            |  |            | $            | 
|Indirect participation interest (PNGDV) - current portion     |  |              | 1,384,492  |  |              |  | 540,002    |              | 
|Indirect participation interest ("IPI") - current portion     |  |              | 13,861,905 |  |              |  | -          |              | 
|Total current indirect participation interest                 |  |              | 15,246,397 |  |              |  | 540,002    |              | 
|                                                              |  |              |            |  |              |  |            |              | 
|Indirect participation interest (PNGDV) - non current portion |  |              | -          |  |              |  | 844,490    |              | 
|Indirect participation interest ("IPI") - non current portion |  |              | 16,405,393 |  |              |  | 33,290,350 |              | 
|Total non current indirect participation interest             |  |              | 16,405,393 |  |              |  | 34,134,840 |              | 
|                                                              |  |              |            |  |              |  |            |              | 
|Total indirect participation interest                         |  |              | 31,651,790 |  |              |  | 34,674,842 |              | 



Consolidated Financial Statements   INTEROIL CORPORATION    51







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



| | 20. | Indirect participation interests
                                                                   (cont’d)
| | --- | ------------------------------------------------------------------------------------------------------------



As at December 31, 2012, the IPI liability
relating to two exploration wells that are expected to be drilled within the next twelve month period have been transferred to
the current portion of the liability.



(a) Indirect participation interest
(“IPI”)



The IPI balance relates to $125,000,000
received by InterOil subject to the terms of the agreement dated February 25, 2005 between the Company and a number of investors.
In exchange InterOil had provided the investors with a 25% interest in an eight well drilling program to be conducted in InterOil’s
PPL 236, 237 and 238.



Under the IPI agreement, InterOil is responsible
for drilling eight exploration wells, four of which will be in PPL 238, one in PPL 236, and one in PPL 237. The location of the
other two wells is yet to be determined. The investors will be able to approve the location of the final two wells to be drilled.
In the instance that InterOil proposes appraisal or completion of an exploration or development well, the investors will be asked
to contribute to the completion work in proportion to their IPI percentage and InterOil will bear the remaining cost.



InterOil has made cash calls for the completion,
appraisal and development programs performed on the exploration or development wells that form part of the IPI Agreement. Cash
calls made in advance are shown as a liability when received and reduced as amounts are spent on the extended well programs, whereas
cash calls made in arrears are shown as a reduction to amounts previously recognized as receivable as the amounts were spent on
the extended well programs. Should an investor choose not to participate in the completion works of an exploration well, the investor
will forfeit certain rights to the well in question as well as their right to convert into common shares. InterOil has drilled
four exploration wells under the IPI agreement as at December 31, 2012.



The funds of $125,000,000 were partly
accounted for as a non-financial liability and partly as a conversion option. The non-financial liability was initially valued
at $105,000,000, being the estimated expenditures to complete the eight well drilling program, and the residual value of $20,000,000
has been allocated to the conversion option presented under Shareholder’s equity. InterOil paid financing fees and transaction
costs of $8,138,741 related to the indirect participation interest on behalf of the indirect participation interest investors
in 2005. These fees have been allocated against the non-financial liability, reducing the liability to $96,861,259. InterOil will
maintain the liability at its initial value until conveyance is triggered on the lapse of the conversion option available to the
investors, or they elect to participate in the PRL for a successful well. InterOil will account for the exploration costs relating
to the eight well program under the successful efforts accounting policy adopted by the Company. All geological and geophysical
costs relating to the exploration program will be expensed as incurred and all drilling costs will be capitalized and assessed
for recovery at each period.



When an investor elects to participate
in a PRL or when the investor forfeits the conversion option, conveyance accounting will be applied. This entails determination
of proceeds for the interests conveyed and the cost of that interest as represented in the ‘Oil and gas properties’
in the balance sheet. The difference between proceeds on conveyance and capitalized costs to the interests conveyed will be recognized
as gain or loss in the income statement.



Under the agreement, all or part of the
25% initial indirect participation interest could have been converted to a maximum of 3,333,334 common shares in the company,
at a price of $37.50 per share, between June 15, 2006 and the later of December 15, 2006, or 90 days after the completion of the
eighth well. Any partial conversion of an indirect participation interest into common shares will result in a corresponding decrease
in the investors’ interest in the eight well drilling program. As at December 31, 2012, the balance of the indirect participation
interest that may be converted into shares is a maximum of 140,480 common shares (Dec 2011 – 340,480, Dec 2010 – 340,480).
Should the option to convert to shares not be exercised, the indirect participation interest in the eight well drilling program
will be maintained and distributions from success in these wells will be paid in accordance with the agreement.



From the date of the agreement up to December
31, 2012, the following transactions have occurred:



(i) Increase in InterOil’s
direct interest in the IPI program by 9.8614% due to the following:



| | - | Conversion
                                                                                              of IPI interests:Prior
                                                                                              to the year ended December 31, 2012,
                                                                                              certain IPI investors representing
                                                                                              a 3.575% interest in the IPI agreement
                                                                                              have exercised their right to convert
                                                                                              their interest into common shares
                                                                                              resulting in issuance of 476,667
                                                                                              InterOil common shares. These conversions
                                                                                              reduced the initial IPI liability
                                                                                              balance by $13,851,160 and the initial
                                                                                              conversion option balance by $2,860,000.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Buyback
                                                                                              of IPI interests by the Company:Prior to the year ended
                                                                                              December 31, 2012, certain IPI investors
                                                                                              representing a 6.2864% interest
                                                                                              in the IPI agreement have sold their
                                                                                              interest to the Company. Detailed
                                                                                              disclosure of this transaction is
                                                                                              provided in the section ‘Extinguishment
                                                                                              of IPI liability’ below.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Consolidated Financial Statements   INTEROIL CORPORATION    52







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



| | 20. | Indirect participation interests
                                                                   (cont’d)
| | --- | ------------------------------------------------------------------------------------------------------------



As at December 31, 2012, InterOil’s
direct interest in exploration licenses is 75.6114%, assuming that all remaining indirect participation interest investors take
up their working interest rights in such licenses, and excluding the 20.5% interest that the State is able to take up under relevant
legislation.



(ii) Waiver or forfeiture of conversion
rights resulting in conveyance accounting



| | - | Certain
                                                                                              IPI investors representing a 13.085%
                                                                                              interest in the IPI agreement have
                                                                                              waived their right to convert their
                                                                                              IPI percentage into 1,744,667 common
                                                                                              shares, including 0.5% interest
                                                                                              waived during the year ended December
                                                                                              31, 2012. As a result, conveyance
                                                                                              was triggered on this portion of
                                                                                              the IPI agreement, which reduced
                                                                                              the IPI liability by $26,371,089.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | During
                                                                                              the year ended December 31, 2012,
                                                                                              several IPI investors were registered
                                                                                              on PRL 15. Under the IPI Agreement,
                                                                                              when an investor is registered on
                                                                                              a PRL, they forfeit their right
                                                                                              to convert their IPI percentage
                                                                                              into common shares. One of the investors
                                                                                              now registered on PRL 15 had not
                                                                                              previously waived their right to
                                                                                              convert their 1% percent interest
                                                                                              into 133,333 common shares. Therefore,
                                                                                              following registration on PRL 15,
                                                                                              their conversion rights have now
                                                                                              been forfeited and conveyance was
                                                                                              triggered on this portion of the
                                                                                              IPI agreement, which reduced the
                                                                                              IPI liability by $2,015,368.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | As
                                                                                              at December 31, 2012, IPI investors
                                                                                              with a combined 1.0536% interest
                                                                                              in the IPI agreement still have
                                                                                              the conversion rights outstanding
                                                                                              resulting in a maximum of 140,480
                                                                                              common shares being issued if all
                                                                                              these IPI investors choose to exercise
                                                                                              their conversion options. During
                                                                                              the year ended December 31, 2012,
                                                                                              the gain recognized for the conveyance
                                                                                              accounting of IPI accounting was
                                                                                              $ 1,523,213.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(iii) Extinguishment of IPI liability



Prior to the year ended December 31, 2012,
the Company has bought a combined 6.2864% interest in the IPI agreement from investors. Management has adopted the extinguishment
liability model. Under this model the consideration paid is allocated to the various components involved in the exchange transactions.
These components include:



| | - | cash
                                                                                              calls made from the IPI investors
                                                                                              in relation to the completion, appraisal
                                                                                              and development program undertaken
                                                                                              in Elk and Antelope fields as part
                                                                                              of the IPI agreement. These cash
                                                                                              call amounts were previously offset
                                                                                              against the capitalized oil and
                                                                                              gas properties, and have been reinstated
                                                                                              in the oil and gas properties asset
                                                                                              to their full historical cost basis
                                                                                              for those programs following this
                                                                                              exchange transaction.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | fair
                                                                                              value of the conversion options
                                                                                              extinguished as part of the exchange
                                                                                              transactions.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | IPI
                                                                                              liability extinguished as part of
                                                                                              the exchange transactions whereby
                                                                                              the difference between the fair
                                                                                              value of the shares issued and the
                                                                                              book value of the IPI liability
                                                                                              post allocation to the other components
                                                                                              mentioned above has been recorded
                                                                                              as an expense in the statement of
                                                                                              operations.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table discloses a breakdown
of the loss on extinguishment of IPI liability for the periods ended:



|                                                                                                                      |  | Year ended   |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------ | -
|                                                                                                                      |  | December 31, |  
|                                                                                                                      |  | 2012         |  
|                                                                                                                      |  | $            |  
|                                                                                                                      |  |              |  
|Loss on extinguishment of IPI liability                                                                               |  |              |  
|Consideration paid for exchange transactions                                                                          |  |              | -
|less amounts capitalized in relation to the appraisal program cash calls                                              |  |              | -
|less book value of IPI liability extinguished                                                                         |  |              | -
|less book value of conversion options extinguished                                                                    |  |              | -
|less difference between book value and fair value of conversion options
    extinguished taken to contributed surplus |  |              | -
|                                                                                                                      |  |              | -



Consolidated Financial Statements   INTEROIL CORPORATION    53







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



| | 20. | Indirect participation interests
                                                                   (cont’d)
| | --- | ------------------------------------------------------------------------------------------------------------



(b) Indirect participation interest
– PNGDV



As at December 31, 2012, the balance of
the PNG Drilling Ventures Limited ("PNGDV") indirect participation interest in the Company’s phase one exploration
program within the area governed by PPL 236, 237 and 238 is $1,384,492 (Dec 2011 - $1,384,492, Dec 2010 - $1,384,492). This balance
is based on the initial liability recognized in 2006 of $3,588,560 relating to its obligation to drill the four exploration wells
on behalf of the investors, being reduced by amounts already incurred in fulfilling the obligation. PNGDV has a 6.75% interest
in the four exploration wells starting with Elk-1 (with an additional two exploration wells to be drilled after Elk-4/A). PNGDV
also has the right to participate in the 16 wells that follow the first four mentioned above up to an interest of 5.75% at a cost
of $112,500 per 1% per well (with higher amounts to be paid if the depth exceed 3,500 meters and the cost exceeds $8,500,000).



(c) PNG Energy Investors



PNG Energy Investors (“PNGEI”),
an indirect participation interest investor who converted all of its interest to common shares in fiscal year 2004, has the right
to participate up to a 4.25% interest in 16 wells commencing from exploration wells numbered 9 to 24. As at the end of December
31, 2012 we have drilled 6 exploration wells since inception of the Company’s exploration program within PPL 236, 237 and
238 in PNG. In order to participate, PNGEI would be required to contribute for each exploration well, a) $112,500 per percentage
point or b) where the well is planned to be drilled beyond 2,000 meters, $112,500 per percentage point plus actual cost over $1,000,000
charged pro-rata per percentage point.



| | 21. | Deferred gain on contributions
                                                                   to LNG Project
| | --- | ----------------------------------------------------------------------------------------------------------------



On July 30, 2007, a Shareholders’
Agreement was signed between InterOil LNG Holdings Inc., Pacific LNG Operations Ltd., Merrill Lynch Commodities (Europe) Limited
and PNG LNG Inc.. As part of the Shareholders’ Agreement, five ‘A’ Class shares were issued by PNG LNG Inc.
with full voting rights with each share controlling one board position. Two ‘A’ Class shares were owned by InterOil
LNG Holdings Inc., two by Merrill Lynch Commodities (Europe) Limited, and one by Pacific LNG Operations Ltd. All key operational
matters require ‘Unanimous’ or ‘Super-majority’ Board resolution which confirms that none of the joint
ventures are in a position to exercise unilateral control over the joint venture.



On February 27, 2009, InterOil LNG Holdings
Inc. and Pacific LNG Operations Ltd, acquired Merrill Lynch’s interest in the Joint Venture Company. InterOil issued 499,834
common shares valued at $11,250,000 for its share of the settlement. After the completion of this transaction, Merrill Lynch did
not retain any ownership or other interest in the PNG LNG project. The two ‘A’ Class shares held by Merrill Lynch
have been transferred to InterOil LNG Holdings Inc. and Pacific LNG Operations Ltd respectively. A further 172 ‘A’
Class shares have been issued to InterOil LNG Holdings Inc. and 173 ‘A’ Class shares have been issued to Pacific LNG
Operations Ltd bringing the ‘A’ Class shareholding of both remaining joint venture partners to 175 ‘A’
Class shares each, giving equal voting rights and board positions in the joint venture.



As part of the Shareholders’ Agreement
on July 30, 2007, InterOil was also provided with ‘B’ Class shares in the Joint Venture Company with a fair value
of $100,000,000 in recognition of its contribution to the LNG Project at the time of signing the Shareholders’ Agreement.
The main items contributed by InterOil into the Joint Venture Company were infrastructure developed by InterOil near the proposed
LNG site at Napa Napa, stakeholder relations within Papua New Guinea, general supply agreements secured with landowners for supply
of gas, advanced stage of project development, etc. Fair value was determined based on the agreement between the independent joint
venture partners.



The other Joint Venture partner is being
issued ‘B’ Class shares as it contributes cash into the Joint Venture Company by way of cash calls.



During September 2009, as part of acquisition
by Pacific LNG of a 2.5% direct working interest in the Elk and Antelope fields, Pacific LNG transferred to InterOil 2.5% of Pacific
LNG’s unexercised economic interest in the joint venture LNG Project. Based on this transaction, as at December 31, 2010,
InterOil and Pacific LNG hold 52.5% and 47.5% economic interest respectively in the LNG project, subject to the exercise of all
their rights to the ‘B’ Class shares on payment of cash calls.



To date InterOil has a recognized deferred
gain on its contributions to the Joint Venture based on the share of other joint venture partners in the project. As InterOil’s
shareholding within the Joint Venture Company as at December 31, 2012 is 84.582% (Dec 2011 – 84.582%, Dec 2010 – 86.66%),
the gain on contribution of non cash assets to the project by InterOil relating to other joint venture partners’ shareholding
(15.418% - amounting to $15,113,190) has been recognized by InterOil in its balance sheet as a deferred gain. This deferred gain
may increase/decrease as the other Joint Venture partners decrease/increase their shareholding in the project.



Consolidated Financial Statements   INTEROIL CORPORATION    54







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



| | 21. | Deferred gain on contributions
                                                                   to LNG Project (cont’d)
| | --- | -------------------------------------------------------------------------------------------------------------------------



This amount has been recorded as a reduction
of deferred LNG project costs of $15,113,190 at December 31, 2012 (Dec 2011 - $9,302,415, Dec 31, 2010 - $4,126,415), which has
reduced the LNG project costs to $4,385,857 at December 31, 2012 (Dec 2011 – nil, Dec 2010 – nil), with the remaining
balance of nil (Dec 31, 2011 - $5,810,775, Dec 31, 2010 - $8,949,857) being recorded as a deferred gain. Any deferred gain will
be recognized in the consolidated income statement when/if the risks and rewards have considered to be passed. The intangible
assets of the Joint Venture Company, contributed by InterOil, have been eliminated on proportionate consolidation of the joint
venture balances.



| | 22. | Contributions from joint
                                                                   venture partner
| | --- | -----------------------------------------------------------------------------------------------------------



On April 18, 2012, the Company signed
a binding Heads of Agreement (“HOA”) with Pacific Rubiales Energy Corp. (“PRE”) for PRE to be able to
earn a 10.0% net (12.9% gross) participating interest in the PPL237 Petroleum Prospecting License onshore Papua New Guinea, including
the Triceratops structure located within that license. The transaction contemplates staged initial cash payments totaling $116.0
million, an additional carry of 25% of the costs of an agreed exploration work program, and a final resource payment. On July
27, 2012, the Company executed a farm in agreement with PRE relating to the Triceratops structure and the participating interest
in the PPL 237 license materially in line with the HOA signed on April 18, 2012. Completion of the farm-in transaction remains
subject to satisfaction of additional conditions within 18 months, including PNG Government approval. PRE's gross participating
interest will be subject to the Government of Papua New Guinea's back-in rights provided for in relevant PNG legislation. Additionally,
PRE has the option to terminate the Farm-In Agreement at various stages of the work program and to be reimbursed up to US$96.0
million of the $116.0 million initial cash payment (which does not include carried costs) out of future upstream production proceeds.



Pacific LNG Operations Ltd., an affiliate
of Clarion Finanz A.G., and its affiliates (“PacLNG”) are participating on a 25% beneficial equity basis in the portion
of the farm-in transaction relating to the Triceratops structure (2.5% net and 3.2% gross participating interest), by reducing
PacLNG’s indirect participating interest in the Triceratops structure. As a result, PacLNG will receive credits for 25%
of the payments PRE makes under the farm-in transaction relating to the Triceratops structure, which will be adjusted against
their cash calls receivable balance. PacLNG will also receive a commission fee of 2.5% of resource payments made by Pacific Rubiales
(other than carried costs). Certain other indirect participating interest holders may also participate in the farm-in transaction.
Amounts paid to PacLNG or other indirect participating interest holders as part of this transaction will be reimbursable back
to the Company (under same terms as reimbursable to PRE) if PRE exercises its option to terminate the Farm-In Agreement at any
stage of the work program.



As at December 31, 2012, PRE have paid
$40.0 million of the staged cash payments. The first $20.0 million was paid in accordance with the HOA and became non-refundable
on execution of the Farm-In Agreement. Based on the agreement, $3.0 million of the HOA Payment has been allocated to the PPL237
(XT) Area and $17.0 million of the HOA Payment has been allocated to the Triceratops Area. The PPL237 (XT) Area currently has
no cost base recognized on the balance sheet on the date of execution of the Farm-In Agreement. The Triceratops Area had a cost
base on the balance sheet of approximately $55.0 million (SPI’s net share after allocations to other investors) at the date
of execution of the Farm-In Agreement.



Based on the company’s disclosed
policy on successful efforts accounting for oil and gas properties and accounting guidance under ASC 932-360, as the HOA Payment
is non-refundable, conveyance accounting has been applied to this payment, and the $3.0 million allocated to the PPL 237 (XT)
Area has been recognized as a gain on conveyance in the consolidated income statement (after any associated sale costs, including
the 2.5% commission payable to PacLNG), while the $17.0 million allocated to Triceratops has been allocated against the cost base
of Triceratops field included within oil and gas properties on the balance sheet. The $17.0 million allocated to Triceratops is
gross of PacLNG’s 25% credit ($4.25 million) and the 2.5% commission payable to PacLNG.



The second cash payment of $20.0 million
was paid in accordance with the Farm-In Agreement under the Advance Payment Facility. However, the Advance Payment Facility is
refundable if PRE decides to exit the program or the agreement is not completed, hence conveyance accounting has not been triggered
on this payment. As such, cash payments received under the Advance Payment Facility are to be retained on the balance sheet as
a long-term liability until the Initial Resource Payment has been received, at which time management expects the conveyance to
be triggered on these payments. The Initial Resource Payment is payable by PRE within one month after a discovery in Triceratops
is considered to be commercial and the necessary resource certifications have been obtained.



The 25% credit of $5.0 million due to
PacLNG as a result of the second cash payment of $20.0 million has been adjusted against their cash calls receivable balance.
However, as the $20.0 million is potentially refundable to PRE if they decide to exit the program, the $5.0 million credit allocated
to PacLNG is also receivable from PacLNG and has therefore been recognized as a non-current receivable.



Consolidated Financial Statements   INTEROIL CORPORATION    55







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



| | 23. | Asset retirement obligations
| | --- | ----------------------------



The Company plans to dismantle the refinery
and restore the site when the refinery is decommissioned. During the quarter ended June 30, 2011, Management received the final
results of an independent assessment of the potential asset retirement obligations of the refinery at the time of decommissioning
and a provision of $4,100,735 was recognized for the present value of the estimated expenditure required to complete this obligation.
The inflation factor used in the independent assessment of the retirement obligation is 2.6% and the fair value of the best estimate
was derived based on discounting the obligation to the current period end using a discount rate of 7.78%. These costs have been
capitalized as part of the cost of the refinery and are depreciated over the life of the asset. The provision will be accreted
over the remaining useful life of the refinery to bring the provision to the estimated expenditure required at the time of decommissioning.
The accretion expense for the year ended December 31, 2012 was $331,096 (Dec 2011 - $159,356, Dec 2010 - $nil).



The following table shows the movement
in the asset retirement obligation during the period:



|                                                    |  | December 31, |           |  | December 31, |  |           | December 31, | 
|--------------------------------------------------- |  | ------------ | --------- |  | ------------ |  | --------- | ------------ | 
|                                                    |  | 2012         |           |  | 2011         |  |           | 2010         | 
|                                                    |  | $            |           |  | $            |  |           | $            | 
|Opening balance                                     |  |              | 4,562,269 |  |              |  | -         |              | 
|Initial recognition of provision                    |  |              | -         |  |              |  | 4,100,735 |              | 
|Accretion of provision                              |  |              | 331,096   |  |              |  | 159,356   |              | 
|Foreign exchange impact on translation of provision |  |              | 84,969    |  |              |  | 302,178   |              | 
|Closing balance                                     |  |              | 4,978,334 |  |              |  | 4,562,269 |              | 



| | 24. | Non controlling interest
| | --- | ------------------------



The non controlling interest as at December
31, 2010 related to Petroleum Independent and Exploration Corporation’s (“PIE Corp.”) 0.01% minority shareholding
in SPI InterOil LDC. InterOil had entered into an agreement with PIE Corp. under which the remaining 5,000 shares of SPI InterOil
LDC held by PIE Corp. may be exchanged, at InterOil’s election, for Common Shares on a one-for-one basis. On September 30,
2011, the Company elected to exchange the 5,000 shares of SPI InterOil LDC held by PIE Corp. with the issue of 5,000 Common Shares
of InterOil Corporation. The 5,000 Common Shares issued by InterOil Corporation were valued at $243,850. The Company now holds
100% of the equity share capital of SPI InterOil LDC. The carrying amount of the non-controlling interest in the Company on the
date of acquisition was $26,300. The Company derecognized non-controlling interests of $26,300 and recorded a decrease in equity
attributable to owners of the Company of $217,550. The effect of changes in the ownership interest of SPI InterOil LDC on the
equity attributable to owners of the Company during the year is summarized as follows:



|                                                            |  | December 31, |   |  | December 31, |  |          | December 31, | 
|----------------------------------------------------------- |  | ------------ | - |  | ------------ |  | -------- | ------------ | 
|                                                            |  | 2012         |   |  | 2011         |  |          | 2010         | 
|                                                            |  | $            |   |  | $            |  |          | $            | 
|Carrying amount of non-controlling interests acquired       |  |              | - |  |              |  | 26,300   |              | 
|Consideration paid to non-controlling interests             |  |              | - |  |              |  | (243,850 | )            | 
|Excess of consideration paid recognised in Company's equity |  |              | - |  |              |  | (217,550 | )            | 



| | 25. | Share capital and reserves
| | --- | --------------------------



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



Consolidated Financial Statements   INTEROIL CORPORATION    56







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



| | 25. | Share capital and reserves
                                                                   (cont’d)
| | --- | ------------------------------------------------------------------------------------------------------



(a) Common shares -Changes
to issued share capital were as follows:



|                                                                              |  | Number of shares |            |  | $ | 
|----------------------------------------------------------------------------- |  | ---------------- | ---------- |  | - | 
|January 1, 2010                                                               |  |                  | 43,545,654 |  |   | 
|                                                                              |  |                  |            |  |   | 
|Shares issued on exercise of options under Stock Incentive Plan               |  |                  | 479,733    |  |   | 
|Shares issued on vesting of restricted stock units under Stock Incentive Plan |  |                  | 20,700     |  |   | 
|Shares issued on buyback of IPI#3 Interest                                    |  |                  | 754,788    |  |   | 
|Shares issued on litigation settlement                                        |  |                  | 199,677    |  |   | 
|Shares issued on public offering                                              |  |                  | 2,800,000  |  |   | 
|                                                                              |  |                  |            |  |   | 
|December 31, 2010                                                             |  |                  | 47,800,552 |  |   | 
|                                                                              |  |                  |            |  |   | 
|Shares issued on exercise of options under Stock Incentive Plan               |  |                  | 265,440    |  |   | 
|Shares issued on vesting of restricted stock units under Stock Incentive Plan |  |                  | 50,079     |  |   | 
|Shares issued on buyback of non-controlling interest                          |  |                  | 5,000      |  |   | 
|                                                                              |  |                  |            |  |   | 
|December 31, 2011                                                             |  |                  | 48,121,071 |  |   | 
|                                                                              |  |                  |            |  |   | 
|Shares issued on exercise of options under Stock Incentive Plan               |  |                  | 411,760    |  |   | 
|Shares issued on vesting of restricted stock units under Stock Incentive Plan |  |                  | 74,567     |  |   | 
|                                                                              |  |                  |            |  |   | 
|December 31, 2012                                                             |  |                  | 48,607,398 |  |   | 



(b) Nature and purpose of reserves



| | - | Foreign
                                                                                              currency translation reserve:Exchange
                                                                                              differences arising on translation
                                                                                              of the foreign controlled entity
                                                                                              are recognized in other comprehensive
                                                                                              income and accumulated in a separate
                                                                                              reserve within equity. The cumulative
                                                                                              amount is reclassified to profit
                                                                                              or loss when the net investment
                                                                                              is disposed of.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Available-for-sale
                                                                                              financial assets:Changes
                                                                                              in the fair value and exchange differences
                                                                                              arising on translation of investments,
                                                                                              such as equities classified as available-for-sale
                                                                                              financial assets, are recognized
                                                                                              in other comprehensive income and
                                                                                              accumulated in a separate reserve
                                                                                              within equity. Amounts are reclassified
                                                                                              to profit or loss when the associated
                                                                                              assets are sold or impaired.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Conversion
                                                                                              options:This reserve is
                                                                                              used to recognize the value of the
                                                                                              conversion option included in the
                                                                                              agreement with IPI investors (refer
                                                                                              to note 20). This balance will reduce
                                                                                              when IPI investors sell their interest
                                                                                              back to the Company.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Contributed
                                                                                              surplus:The contributed
                                                                                              surplus reserve is used to recognize
                                                                                              the fair market value of employee
                                                                                              stock options and restricted stock
                                                                                              units that have not been forfeited
                                                                                              or been exercised.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 26. | 2.75% convertible notes
| | --- | -----------------------



On November 10, 2010, the Company completed
the issue of $70,000,000 unsecured 2.75% convertible notes with a maturity of five years. The note holders have the right to convert
their note into common shares at any time at a conversion rate of 10.4575 common shares per $1,000 principal amount of notes (which
results in an effective initial conversion price of approximately $95.625 per share). The Company has the right to redeem the
notes if the daily closing sale price of the common shares has been at least 125% of the conversion price then in effect for at
least 15 trading days during any 20 consecutive trading day period. Accrued interest on these notes is to be paid semi-annually
in arrears, in May and November of each year, commencing May 2011.



The liability component on initial recognition
after adjusting for the underwriting placement fee and transaction costs amounted to $51,992,857 and the equity component amounted
to $14,298,036. The liability component will be accreted over the five year maturity period to bring the liability back to the
carrying value. The accretion expense relating to the note liability for the year ended December 31, 2012 was $3,408,951 (Dec
2011 - $3,212,141, Dec 2010 - $432,632). In addition to the accretion, interest at 2.75% per annum has been expensed for the year
ended December 31, 2012 amounting to $1,925,000 (Dec 2011 - $1,925,000, Dec 2010 - $278,056). The interest payable up to November
2012 was paid in cash.



Consolidated Financial Statements   INTEROIL CORPORATION    57







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



| | 27. | Stock compensation
| | --- | ------------------



(a) Stock options



Options are issued at no less than market
price to directors, certain employees and to a limited number of contractor personnel. Options are exercisable for common shares
on a 1:1 basis. Individuals are granted options which only vest if certain performance standards are met, with the vesting of
the majority of options issued only being reliant on the individual remaining employed with the Company for a certain time period,
while the vesting of some options granted are reliant on various performance conditions. Options vest at various dates in accordance
with the applicable individual option agreements, vesting generally between one to four years after the date of grant, have an
exercise period of three to five years after the date of grant, and are subject to the option plan rules. Upon resignation or
retirement, vested options must generally be exercised within 90 days or before expiry of the options if this occurs earlier.



|                                   |  | December 31, 2012 |           |   | December 31, 2011                 |  |        | December 31, 2010 | 
|---------------------------------- |  | ----------------- | --------- | - | --------------------------------- |  | ------ | ----------------- | 
|Stock options outstanding          |  | Number of options |           |   | Weighted average exercise price $ |  |        | Number of options | 
|Outstanding at beginning of period |  |                   | 1,487,827 |   |                                   |  | 30.97  |                   | 
|Granted                            |  |                   | 90,000    |   |                                   |  | 57.24  |                   | 
|Exercised                          |  |                   | (411,760  | ) |                                   |  | (28.32 | )                 | 
|Forfeited                          |  |                   | (100,000  | ) |                                   |  | (9.80  | )                 | 
|Expired                            |  |                   | -         |   |                                   |  | -      |                   | 
|Outstanding at end of period       |  |                   | 1,066,067 |   |                                   |  | 36.20  |                   | 



At December 31, 2012, in addition to the
options outstanding as per the above table, there were an additional 1,101,357 (2011 – 1,176,531, 2010 – 1,315,617)
common shares reserved for issuance under the Company’s 2009 stock incentive plan as approved on June 19, 2009.



|Options issued and outstanding |  | Options exercisable |          
|------------------------------ |  | ------------------- | ---------
|Range of exercise prices $     |  | Number of options   |          
|8.01 to 12.00                  |  |                     | 285,000  
|12.01 to 24.00                 |  |                     | 110,000  
|24.01 to 31.00                 |  |                     | 34,400   
|31.01 to 41.00                 |  |                     | 106,667  
|41.01 to 51.00                 |  |                     | -        
|51.01 to 61.00                 |  |                     | 470,000  
|61.01 to 71.00                 |  |                     | 30,000   
|71.01 to 81.00                 |  |                     | 30,000   
|                               |  |                     | 1,066,067



Aggregate intrinsic value of the 1,066,067
options issued and outstanding as at December 31, 2012 is $23,728,194. Aggregate intrinsic value of 596,067 options exercisable
as at December 31, 2012 is $8,298,003.



The weighted-average grant-date fair value
of options granted during 2012 was $36.30 (2011 - $37.46, 2010 - $32.26). The total intrinsic value of options exercised during
the year ended December 31, 2012 was $7,197,804 (2011 - $2,598,871, 2010 - $7,035,772). Cash received from option exercise under
all share-based payment arrangements for the year ended December 31, 2012 was $11,663,059 (2011 - $4,488,703, 2010 - $12,274,885).



The weighted-average share price at the
date of exercise of options exercised during the year ended December 31, 2012 was $74.95 (2011 - $61.54, 2010 - $68.32).



Consolidated Financial Statements   INTEROIL CORPORATION    58







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



| | 27. | Stock compensation (cont’d)
| | --- | ---------------------------



The fair value of the 90,000 (2011 –
110,000, 2010 – 330,000) options granted subsequent to January 1, 2012 has been estimated at the date of grant in the amount
of $3,267,229 (2011 - $4,121,016 , 2010 - $10,645,501) using a Black-Scholes pricing model. An amount of $2,903,133 (2011 - $9,839,824,
2010 - $7,628,017) has been recognized as compensation expense for the year ended December 31, 2012. The current year compensation
expense of $2,903,133 (2011 - $9,839,824, 2010 - $7,628,017) was adjusted against contributed surplus under equity and $7,197,804
(2011 - $2,598,871, 2010 - $7,035,773) was transferred to share capital on exercise of options, leaving a net impact of $4,294,671
(2011 - $7,240,953, 2010 - $592,244) on contributed surplus.



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



|Year |  | Period          |  | Risk free interest rate (%) |     |  | Dividend yield |  |   | Volatility (%) |  |  | Weighted average expected life for options | 
|---- |  | --------------- |  | --------------------------- | --- |  | -------------- |  | - | -------------- |  |  | ------------------------------------------ | 
|2012 |  | Jan 1 to Dec 31 |  |                             | 0.5 |  |                |  | - |                |  |  | 80                                         | 
|2011 |  | Apr 1 to Dec 31 |  |                             | 0.4 |  |                |  | - |                |  |  | 78                                         | 
|2011 |  | Jan 1 to Mar 31 |  |                             | 1.2 |  |                |  | - |                |  |  | 79                                         | 
|2010 |  | Jul 1 to Dec 31 |  |                             | 0.8 |  |                |  | - |                |  |  | 87                                         | 
|2010 |  | Jan 1 to Jun 30 |  |                             | 1.2 |  |                |  | - |                |  |  | 87                                         | 



The expected volatility used in the Black
Scholes pricing model has been based on historical volatility of the Company’s common shares for the period based on the
expected life of the options.



(b) Restricted stock



Restricted stock may be issued to directors,
certain employees and to a limited number of contractor personnel under the Company’s 2009 stock incentive plan. Restricted
stock vests at various dates in accordance with the applicable restricted stock agreement, vesting generally between one to three
years after the date of grant.



|                                   |  | December 31, 2012                |         |   | December 31, 2011                                                  |  |        | December 31, 2010                | 
|---------------------------------- |  | -------------------------------- | ------- | - | ------------------------------------------------------------------ |  | ------ | -------------------------------- | 
|Restricted stock units outstanding |  | Number of restricted stock units |         |   | Weighted Average Grant Date Fair Value per restricted stock unit $ |  |        | Number of restricted stock units | 
|Outstanding at beginning of period |  |                                  | 152,190 |   |                                                                    |  | 61.54  |                                  | 
|Granted                            |  |                                  | 97,850  |   |                                                                    |  | 57.16  |                                  | 
|Exercised                          |  |                                  | (83,880 | ) |                                                                    |  | (53.07 | )                                | 
|Forfeited                          |  |                                  | (12,676 | ) |                                                                    |  | (66.86 | )                                | 
|Expired                            |  |                                  | -       |   |                                                                    |  | -      |                                  | 
|Total                              |  |                                  | 153,484 |   |                                                                    |  | 63.89  |                                  | 



An amount of $4,978,933 (2011 - $4,881,563,
2010 - $4,175,983) has been recognized as compensation expense for the year ended December 31, 2012. The current year compensation
expense of $4,978,933 (2011 - $4,881,563, 2010 - $4,175,983) was adjusted against contributed surplus under equity and $4,451,655
(2011 - $2,999,138, 2010 - $1,418,985) was transferred to share capital on vesting of stock units, leaving a net impact of $527,278
(2011 - $1,882,425, 2010 - $2,756,998) on contributed surplus.



| | 28. | Earnings/(Loss) per share
| | --- | -------------------------



Conversion options, convertible notes,
stock options and restricted stock units totaling 2,092,056 common shares at prices ranging from $9.80 to $95.63 were outstanding
as at December 31, 2012 and some of these were included in the computation of the diluted earnings per share for the year ended
December 31, 2012. The dilutive instruments outstanding at December 31, 2010 were not included in the computation of the diluted
loss per share in respective periods because they caused the loss per share to be anti-dilutive.



Consolidated Financial Statements   INTEROIL CORPORATION    59







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



| | 28. | Earnings/(Loss) per share
                                                                   (cont’d)
| | --- | -----------------------------------------------------------------------------------------------------



|Potential dilutive instruments outstanding               |  | Number of shares December 31, 2012 |           |  | Number of shares December 31, 2011 |  |           | Number of shares December 31, 2010 | 
|-------------------------------------------------------- |  | ---------------------------------- | --------- |  | ---------------------------------- |  | --------- | ---------------------------------- | 
|Employee stock options                                   |  |                                    | 1,066,067 |  |                                    |  | 1,487,827 |                                    | 
|Employee Restricted Stock                                |  |                                    | 153,484   |  |                                    |  | 152,190   |                                    | 
|IPI Indirect Participation interest - conversion options |  |                                    | 140,480   |  |                                    |  | 340,480   |                                    | 
|2.75% Convertible notes                                  |  |                                    | 732,025   |  |                                    |  | 732,025   |                                    | 
|Others                                                   |  |                                    | -         |  |                                    |  | -         |                                    | 
|Total stock options/shares outstanding                   |  |                                    | 2,092,056 |  |                                    |  | 2,712,522 |                                    | 



The income available to the common shareholders
and the income available to the dilutive holders, used in the calculation of the numerator in the EPS calculation for the year
ended December 31, 2012, December 31, 2011 and 2010 is the net profit/loss as per Consolidated Income Statement. This is due to
the fact that the inclusion of convertible securities in the calculation would result in the EPS being anti-dilutive.



The reconciliation between the ‘Basic’
and ‘Basic and Diluted’ shares, used in the calculation of the denominator in the EPS calculation is as follows:



|                                |  | Year ended   |           
|------------------------------- |  | ------------ | ----------
|                                |  | December 31, |           
|                                |  | 2012         |           
|                                |  | $            |           
|                                |  |              |           
|Basic                           |  |              | 48,352,822
|Employee stock options          |  |              | 584,308   
|Employee restricted stock       |  |              | 117,351   
|Indirect participation interest |  |              | 302,775   
|Other                           |  |              | -         
|Diluted                         |  |              | 49,357,256



| | 29. | Related parties
| | --- | ---------------



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

P.I.E is controlled by Phil Mulacek, an
officer and director of InterOil and acted as a sponsor of the Company's oil refinery project until late June 2011. Articles of
association of SPI InterOil LDC (“SPI”) provide for the business and affairs of the entity to be managed by a general
manager appointed by the shareholders of SPI. SPI does not have a Board of Directors, instead P.I.E has been appointed as the
general manager of SPI. Under the laws of the Commonwealth of The Bahamas, the general manager exercises all powers which would
typically be exercised by a Board of Directors, being those which are not required by laws or by SPI’s constituting documents
to be exercised by the members (shareholders) of SPI. InterOil is the majority shareholder of SPI and therefore has the power
to appoint the general manager.



During the year ended December 31, 2012,
$nil (Dec 2011 - $nil, Dec 2010 - $150,000) was expensed for the sponsor's management fees in relation to legal, accounting and
reporting costs and no costs (Dec 2011 - $nil, Dec 2010 - $112,500) were included in accrued liabilities at December 31, 2012.



In November of 2011, the Company elected
to exchange the 5,000 shares held in SP InterOil LDC by PIE for 5,000 shares in InterOil Corporation. The sponsor agreements were
terminated with PIE on exchange of the share holding interest in SPI LDC. Subsequent to year end, SPI LDC has been renamed South
Pacific Refining Limited.



(b) Breckland Limited

This entity is controlled by Roger Grundy,
a director of InterOil, and provides technical and advisory services to the Company on normal commercial terms. Amounts paid or
payable to Breckland for technical services during the year amounted to $nil (Dec 2011 - $nil, Dec 2010 - $21,923).



Consolidated Financial Statements   INTEROIL CORPORATION    60







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



| | 29. | Related parties (cont’d)
| | --- | ------------------------



(c) Key management compensation

Key management includes directors (executive
and non-executive) and executive officers. The compensation paid or payable to key management for services is shown below:



|                                                |  | December 31, |           |  | December 31, |  |            | December 31, | 
|----------------------------------------------- |  | ------------ | --------- |  | ------------ |  | ---------- | ------------ | 
|                                                |  | 2012         |           |  | 2011         |  |            | 2010         | 
|                                                |  | $            |           |  | $            |  |            | $            | 
|Salaries and other short-term employee benefits |  |              | 5,314,046 |  |              |  | 3,985,427  |              | 
|Post-employment benefits                        |  |              | 93,110    |  |              |  | 94,732     |              | 
|Share-based payments                            |  |              | 1,439,993 |  |              |  | 9,341,730  |              | 
|Total                                           |  |              | 6,847,149 |  |              |  | 13,421,889 |              | 



(d) Joint ventures

The Company’s interests in PNG LNG
Inc. is governed by a Shareholders’ Agreement signed on July 30, 2007 between the Joint Ventures’. Guidance under
IAS 31 – ‘Interest in Joint Ventures’ is followed and the entity has been proportionately consolidated in InterOil’s
consolidated financial statements. The consolidated results of InterOil’s proportionate shareholding in the LNG Project
has been disclosed separately within the segment notes under Midstream - Liquefaction, refer to note 5.



| | 30. | Commitments and contingencies
| | --- | -----------------------------



(a) Exploration and debt commitments



Payments due by period contractual obligations
are as follows:



|                                                  |  | Total |         |  | Less than 1 year |  |        | 1-2 years |  |  | 2-3 years |  |  | 3-4
years |         |  | 4-5
years |  |        | More than 5 years | 
|------------------------------------------------- |  | ----- | ------- |  | ---------------- |  | ------ | --------- |  |  | --------- |  |  | --------- | ------- |  | --------- |  | ------ | ----------------- | 
|                                                  |  | '000  |         |  | '000             |  |        | '000      |  |  | '000      |  |  | '000      |         |  | '000      |  |        | '000              | 
|Petroleum prospecting and retention licenses (a)  |  |       | 69,952  |  |                  |  | 44,702 |           |  |  | 25,250    |  |  |           | -       |  |           |  | -      |                   | 
|Secured and unsecured loans                       |  |       | 159,779 |  |                  |  | 39,545 |           |  |  | 27,414    |  |  |           | 31,200  |  |           |  | 30,810 |                   | 
|Convertible notes obligations                     |  |       | 75,615  |  |                  |  | 1,925  |           |  |  | 1,925     |  |  |           | 71,765  |  |           |  | -      |                   | 
|Indirect participation interest - PNGDV (note 20) |  |       | 1,384   |  |                  |  | 1,384  |           |  |  | -         |  |  |           | -       |  |           |  | -      |                   | 
|                                                  |  |       | 306,730 |  |                  |  | 87,556 |           |  |  | 54,589    |  |  |           | 102,965 |  |           |  | 30,810 |                   | 



| | (a) | The amount pertaining to the
                                                                 petroleum prospecting and retention licenses represents the amount
                                                                 InterOil has committed as a condition on renewal of these licenses.
                                                                 Company is committed to spend a further $49.3 million as a condition
                                                                 of renewal of our petroleum prospecting licenses up to 2014.
                                                                 Of this $49.3 million commitment, as at December 31, 2012, management
                                                                 estimates that satisfying this license commitment would also
                                                                 satisfy our commitments to the IPI investors in relation to drilling
                                                                 the final four wells and satisfy the commitments in relation
                                                                 to the IPI agreement. In addition, the terms of grant of PRL15,
                                                                 requires the Company to spend a further $20.7 million on the
                                                                 development of the Elk and Antelope fields by the end of 2014.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(b) Operating lease commitments –
Company as lessee



The Company leases various retail service
station premises, commercial office properties, residential apartments, motor vessels and office equipment under non-cancellable
operating lease agreements. The remaining lease terms are between 1 and 30 years, and the majority of lease agreements are renewable
at the end of the lease period at market rate.



The future aggregate minimum lease payments
under non-cancellable operating leases are as follows:



|                                             |  | December 31, |            |  | December 31, |  |            | December 31, | 
|-------------------------------------------- |  | ------------ | ---------- |  | ------------ |  | ---------- | ------------ | 
|                                             |  | 2012         |            |  | 2011         |  |            | 2010         | 
|                                             |  | $            |            |  | $            |  |            | $            | 
|Not later than 1 year                        |  |              | 16,252,249 |  |              |  | 6,983,149  |              | 
|Later than 1 year and not later than 5 years |  |              | 8,005,845  |  |              |  | 6,560,263  |              | 
|Later than 5 years                           |  |              | 3,123,291  |  |              |  | 2,957,605  |              | 
|Total                                        |  |              | 27,381,385 |  |              |  | 16,501,017 |              | 



Consolidated Financial Statements   INTEROIL CORPORATION    61







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



| | 30. | Commitments and contingencies
                                                                   (cont’d)
| | --- | ---------------------------------------------------------------------------------------------------------



Lease payments for the year ended December
31, 2012 in the income statement amounted to $12,386,266. This amount also includes new leases and renewals of leases negotiated
during the year 2012.



(c) Contingencies:



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



Audit by PNG Customs

During the second half of 2011, the PNG
Customs Service commenced an audit of our petroleum product imports into Papua New Guinea for the years 2007 to 2010.  The
Company received a letter in November 2011 from the then Commissioner of Customs setting out certain findings from the audit.
This letter included comments alleging that payment of import GST was required and had not been made on imports of certain refined
products. As well as requiring payment of GST, the letter noted that administrative penalties were able to be levied by Customs
in the range of 50% to 200% of the assessed amounts as per the Customs Act. The Company has since met with the Customs Service
and provided it with supporting documentation to demonstrate that the GST amounts claimed in their letter have all been paid.



During the quarter ended December 31,
2012, the Company again met with the Customs Service and received strong indications from Customs that matters would be concluded
on the basis that the only amount owing by the Company is that in respect of the ‘time value of money’ due to certain
delays in filing and any associated administrative penalties levied thereon. The Company submitted certain calculations in relation
to this to the Customs Service. Management has maintained a provision, that was initially recognized in the year ended December
31, 2011, based on their best estimate in relation to this matter.



Subsequent to the year ended December
31, 2012, the Company received confirmation from the Customs Service that they agreed with the calculations submitted and the
matter is now considered closed by the Customs Service. The Company has since paid the penalty amount which was in line with the
provision initially recognized by the Company for the year ended December 31, 2011.



| | 31. | Subsequent events
| | --- | -----------------



There are no subsequent events that require
disclosure.





Consolidated Financial Statements   INTEROIL CORPORATION    62