|InterOil
                                                Corporation
        Management
        Discussion and Analysis
        
        
        For the year ended December
        31, 2012
        February 27, 2013 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 



|TABLE OF CONTENTS                                                                 |   
|--------------------------------------------------------------------------------- | --
|                                                                                  |   
|FORWARD-LOOKING STATEMENTS                                                        | 2 
|OIL AND GAS DISCLOSURES                                                           | 3 
|INTRODUCTION                                                                      | 4 
|BUSINESS STRATEGY                                                                 | 4 
|OPERATIONAL HIGHLIGHTS                                                            | 5 
|SELECTED FINANCIAL INFORMATION AND HIGHLIGHTS                                     | 9 
|QUARTER AND YEAR IN REVIEW                                                        | 18
|LIQUIDITY AND CAPITAL RESOURCES                                                   | 26
|INDUSTRY TRENDS AND KEY EVENTS                                                    | 36
|RISK FACTORS                                                                      | 38
|CRITICAL ACCOUNTING ESTIMATES                                                     | 39
|NEW ACCOUNTING STANDARDS                                                          | 40
|NON-GAAP MEASURES AND RECONCILIATION                                              | 42
|PUBLIC SECURITIES FILINGS                                                         | 43
|DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING | 44
|GLOSSARY OF TERMS                                                                 | 44



This Management Discussion and Analysis
(“MD&A”) should be read in conjunction with our audited annual consolidated financial statements and accompanying
notes for the year ended December 31, 2012 and our annual information form (the “2012 Annual Information Form”) for
the year ended December 31, 2012. The MD&A was prepared by management and provides a review of our performance in the year
ended December 31, 2012, and of our financial condition and future prospects.



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



References to “we,” “us,”
“our,” “Company,” and “InterOil” refer to InterOil Corporation or InterOil Corporation and
its subsidiaries as the context requires. Information presented in this MD&A is as at December 31, 2012 and for the quarter
and year ended December 31, 2012, unless otherwise specified. A listing of specific defined terms can be found in the “Glossary
of Terms” section of this MD&A.



Management Discussion and Analysis   INTEROIL CORPORATION   1







|FORWARD-LOOKING
    STATEMENTS
|------------------------------



This MD&A contains “forward-looking
statements” as defined in U.S. federal and Canadian securities laws. Such statements are generally identifiable by the terminology
used such as “may,” “plans,” “believes,” “expects,” “anticipates,”
“intends,” “estimates,” “forecasts,” “budgets,” “targets” or other
similar wording suggesting future outcomes or statements regarding an outlook. We have based these forward-looking statements
on our current expectations and projections about future events. All statements, other than statements of historical fact, included
in or incorporated by reference in this MD&A are forward-looking statements.



Forward-looking statements include, without
limitation, statements regarding our business strategies and plans; plans for our exploration (including drilling plans) and other
business activities and results therefrom; characteristics of our properties; entering into definitive agreements with joint venture
partners; the construction of the LNG Project and the Condensate Stripping Project in Papua New Guinea; the development of the
LNG Project and the Condensate Stripping Project; the timing and cost of such development; the commercialization and monetization
of any resources; whether sufficient resources will be established; the likelihood of successful exploration for gas and gas condensate
or other hydrocarbons; re-commissioning of our CRU; cash flows from operations; sources of capital and its sufficiency; operating
costs; contingent liabilities; environmental matters; and plans and objectives for future operations; the timing, maturity and
amount of future capital and other expenditures.



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



| | · | our
                                                                                                                 ability to finance
                                                                                                                 the construction
                                                                                                                 and development
                                                                                                                 of the LNG Project
                                                                                                                 and the Condensate
                                                                                                                 Stripping Project;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | our
                                                                                                                 ability to negotiate
                                                                                                                 definitive agreements
                                                                                                                 following conditional
                                                                                                                 agreements or
                                                                                                                 heads of agreement
                                                                                                                 relating to the
                                                                                                                 development of
                                                                                                                 the LNG Project
                                                                                                                 and the Condensate
                                                                                                                 Stripping Project,
                                                                                                                 or to otherwise
                                                                                                                 negotiate and
                                                                                                                 secure arrangements
                                                                                                                 with other entities
                                                                                                                 for such development
                                                                                                                 and the associated
                                                                                                                 financing thereof;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | · | our
                                                                                                                 ability to construct
                                                                                                                 and commission
                                                                                                                 the LNG Project
                                                                                                                 and the Condensate
                                                                                                                 Stripping Project
                                                                                                                 together with
                                                                                                                 the construction
                                                                                                                 of the common
                                                                                                                 facilities and
                                                                                                                 pipelines, on
                                                                                                                 time and within
                                                                                                                 budget;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | our
                                                                                                                 ability to obtain
                                                                                                                 and maintain
                                                                                                                 necessary permits,
                                                                                                                 concessions,
                                                                                                                 licenses and
                                                                                                                 approvals from
                                                                                                                 relevant State
                                                                                                                 authorities to
                                                                                                                 develop our gas
                                                                                                                 and condensate
                                                                                                                 resources and
                                                                                                                 to develop the
                                                                                                                 LNG Project and
                                                                                                                 the Condensate
                                                                                                                 Stripping Project
                                                                                                                 within reasonable
                                                                                                                 time periods
                                                                                                                 and upon reasonable
                                                                                                                 terms;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | · | the
                                                                                                                 availability
                                                                                                                 of crude feedstock
                                                                                                                 at economic rates;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                                 uncertainty associated
                                                                                                                 with the regulated
                                                                                                                 prices at which
                                                                                                                 our products
                                                                                                                 may be sold;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | · | losses
                                                                                                                 from our hedging
                                                                                                                 activities;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | fluctuations
                                                                                                                 in currency exchange
                                                                                                                 rates;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

| | · | the
                                                                                                                 inability of
                                                                                                                 our refinery
                                                                                                                 to operate at
                                                                                                                 full capacity;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                                 impact of competition;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                                 adverse effects
                                                                                                                 from importation
                                                                                                                 of competing
                                                                                                                 products contrary
                                                                                                                 to our legal
                                                                                                                 rights;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                                 margins for our
                                                                                                                 products and
                                                                                                                 adverse effects
                                                                                                                 on the value
                                                                                                                 of our refinery;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | · | contractual
                                                                                                                 defaults.
| | - | --------------------------------------------------------------------------------------------------------------------------------------

| | · | interest
                                                                                                                 rate risk;
| | - | ------------------------------------------------------------------------------------------------------------------------------------

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



Management Discussion and Analysis   INTEROIL CORPORATION   2







| | · | general
                                                                                                                 economic conditions,
                                                                                                                 including any
                                                                                                                 further economic
                                                                                                                 downturn, the
                                                                                                                 availability
                                                                                                                 of credit the
                                                                                                                 European sovereign
                                                                                                                 debt credit crisis
                                                                                                                 and the downgrading
                                                                                                                 of United States
                                                                                                                 government debt;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                                 impact of our
                                                                                                                 current debt
                                                                                                                 on our ability
                                                                                                                 to obtain further
                                                                                                                 financing;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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



Forward-looking statements and information
are based on our current beliefs as well as assumptions made by, and information currently available to, us concerning anticipated
financial conditions and performance, business prospects, strategies, regulatory developments, the ability to attract joint venture
partners, future hydrocarbon commodity prices, the ability to secure adequate capital funding, the ability to obtain equipment
in a timely manner to carry out development activities, the ability to market products successfully to current and new customers,
the effects from increasing competition, the ability to obtain financing on acceptable terms, and the ability to develop reserves
and production through development and exploration activities. Although we consider these assumptions to be reasonable based on
information currently available to us, they may prove to be incorrect.



Although we believe that the assumptions
underlying our forward-looking statements are reasonable, any of the assumptions could be inaccurate, and, therefore, we cannot
assure you that the forward-looking statements will eventuate. In light of the significant uncertainties inherent in our forward-looking
statements, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives
and plans will be achieved. Some of these and other risks and uncertainties that could cause actual results to differ materially
from such forward-looking statements are more fully described under the heading “Risk Factors” in our 2012 Annual
Information Form.



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



|OIL
    AND GAS DISCLOSURES
|---------------------------



We are required to comply with Canadian
Securities Administrators’ NI 51-101, which prescribes disclosure of oil and gas reserves and resources. GLJ Petroleum Consultants
Ltd., an independent qualified reserve evaluator based in Calgary, Canada, has evaluated our resources data as at December 31,
2012 in accordance with NI 51-101, which evaluation is summarized in our 2012 Annual Information Form available at www.sedar.com.
We do not have any production or reserves, including proved reserves, as defined under NI 51-101 or as per the guidelines set
by the SEC, as at December 31, 2012.



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



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



Management Discussion and Analysis   INTEROIL CORPORATION   3







|INTRODUCTION
|------------



We are developing a fully integrated energy
company operating in Papua New Guinea and the surrounding Southwest Pacific region. Our operations are organized into four major
segments:



|Segments   |  | Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|---------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Upstream   |  | Exploration and Production – Explores, appraises and develops crude oil and natural
    gas structures in Papua New Guinea. Developing infrastructure for the Elk and Antelope fields which includes wells, gas gathering
    pipelines, condensate stripping facilities and pipelines for the proposed delivery of natural gas to the Midstream Liquefaction
    segment and condensate to the Midstream Refining segment. This segment also conducts appraisal drilling of the Triceratops
    field and manages our construction business which services our development projects underway in Papua New Guinea.                                                                                                                            
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Midstream  |  | Refining – Produces refined
        petroleum products at Napa Napa in Port Moresby, Papua New Guinea for the domestic market and for export.
        Liquefaction – Developing
        liquefaction and associated facilities in Papua New Guinea for the export of LNG.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Downstream |  | Wholesale and Retail Distribution– Markets and distributes refined products
    domestically in Papua New Guinea on a wholesale and retail basis.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Corporate  |  | Corporate – Provides support to our other business segments by engaging in business
    development and improvement activities and providing general and administrative services and management, undertakes financing
    and treasury activities, and is responsible for government and investor relations. General and administrative and integrated
    costs are recovered from business segments on an equitable basis. 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. Our Corporate segment results also include consolidation adjustments.



|BUSINESS
    STRATEGY
|---------------------



Our strategy is to develop a vertically
integrated energy company in Papua New Guinea and the surrounding region, focusing on niche market opportunities which provide
financial rewards for our shareholders, while being environmentally responsible, providing a quality working environment and contributing
positively to the communities in which we operate. A significant element of that strategy is to develop gas liquefaction and condensate
stripping facilities in Papua New Guinea and to establish gas and gas condensate reserves.



We plan to achieve this strategy by:



| | · | Developing
                                                                                                                                                        our
                                                                                                                                                        position
                                                                                                                                                        as
                                                                                                                                                        a
                                                                                                                                                        prudent
                                                                                                                                                        and
                                                                                                                                                        responsible
                                                                                                                                                        business
                                                                                                                                                        operator;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Enhancing
                                                                                                                                                        our
                                                                                                                                                        existing
                                                                                                                                                        refining
                                                                                                                                                        and
                                                                                                                                                        distribution
                                                                                                                                                        businesses;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Monetizing
                                                                                                                                                        our
                                                                                                                                                        discovered
                                                                                                                                                        resources;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Maximizing
                                                                                                                                                        the
                                                                                                                                                        value
                                                                                                                                                        of
                                                                                                                                                        our
                                                                                                                                                        exploration
                                                                                                                                                        assets;
                                                                                                                                                        and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Positioning
                                                                                                                                                        for
                                                                                                                                                        long
                                                                                                                                                        term
                                                                                                                                                        success.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Further details of our business strategy
can be found under the heading “Business Strategy” in our 2012 Annual Information Form available at www.sedar.com.



Management Discussion and Analysis   INTEROIL CORPORATION   4







|OPERATIONAL
    HIGHLIGHTS
|--------------------------



Summary of operational highlights



A summary of the key operational matters
and events for the year, for each of the segments is as follows:



Upstream



| | · | Triceratops
                                                                                                               field appraisal
                                                                                                               program:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | On January 15, 2012, we
                                                                       spudded the Triceratops-2 appraisal well in PPL 237 in
                                                                       PNG. The Triceratops-2 well is located approximately 3.5
                                                                       kilometers west of the Bwata-1 discovery well and 4.7 kilometers
                                                                       southwest from the Triceratops-1 well. The primary objectives
                                                                       of the Triceratops-2 well were to confirm the presence
                                                                       of gas and condensate, test for the presence of reefal
                                                                       carbonate reservoir, and, in the event of success, complete
                                                                       the well as a future production well. We drilled the entire
                                                                       reservoir interval with a total depth of 7,336 feet (2,236
                                                                       meters) on April 6, 2012 and the acquisition of wireline
                                                                       logs was completed on April 14, 2012.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | On May 14, 2012, we successfully
                                                                       drill stem tested the upper reservoir section in the Triceratops-2
                                                                       well. The DST #8 was conducted in the open hole interval
                                                                       from 4,111 feet (1,253 meters) to 4,859 feet (1,481 meters)
                                                                       and the well was opened to increasing choke settings before
                                                                       being closed for final buildup. The well flowed natural
                                                                       gas and condensate at a rate of 17.6 Mmscfpd through a
                                                                       48/64 inch choke with an observed CGR at separator conditions
                                                                       of between 13.6 and 16.3 barrels per million standard cubic
                                                                       feet of gas. The corresponding wellhead pressure was recorded
                                                                       as 1,382 psig. This gas flow rate compared favorably with
                                                                       results from equivalent DST intervals at the Antelope-1
                                                                       and Antelope-2 wells which were a rate of 12.4 to 18 Mmscfpd
                                                                       and a rate of 11.2 to 17.4 Mmscfpd, respectively.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | The Triceratops-2 well
                                                                       logs and DST pressure data indicated two stratigraphically
                                                                       separate carbonate reservoir intervals with separate pressure
                                                                       systems and potentially separate or stacked hydrocarbon
                                                                       pay. The upper reservoir interval contains gas and condensate
                                                                       which preliminary pressure data (DST #7) indicates is on
                                                                       the same pressure trend as the gas and condensate tested
                                                                       3.5 kilometers away in the Bwata-1 well. The deeper zone
                                                                       is separated from the upper reservoir interval by a 264
                                                                       feet (80.5 meters) marl and argillaceous limestone interval
                                                                       from 4,869 feet (1,484 meters) to 5,133 feet (1,564 meters)
                                                                       a potential intraformational seal. DST #2 tested the interval
                                                                       between 6,358 feet (1,938 meters) and 6,454 feet (1,967
                                                                       meters) in this deeper section and this data indicates
                                                                       a separate pressure system in this interval from the upper
                                                                       reservoir interval.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | Following successful flow
                                                                       from DST #9 of 27 Mmscfpd on June 6, 2012, the Triceratops-2
                                                                       well was declared a discovery on June 14, 2012 by the DPE.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | Between June 14, 2012 and
                                                                       August 13, 2012, the well was cased and cased hole logging
                                                                       and testing was completed. DST #10 established gas in the
                                                                       lower limestone and production logs established a gas water
                                                                       contact. A number of rotary side wall cores were also taken,
                                                                       and underwent petrophysical analysis, routine core analysis
                                                                       and special core analysis to help determine the hydrocarbon
                                                                       saturation in the reservoir, which is an important input
                                                                       into the resource estimates.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | The DPE granted approval
                                                                       to remove Rig#2 from the Triceratops-2 well on August 13,
                                                                       2012. The Triceratops-2 well has been suspended as a new
                                                                       discovery for recompletion at a later date as a future
                                                                       production well. Demobilization of the rig began immediately
                                                                       for relocation to the Antelope-3 well.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | Completion of vertical
                                                                       seismic profile processing of the Triceratops field reaffirmed
                                                                       the connection between the well and seismic data, and remapping
                                                                       of this seismic data is ongoing. Triceratops seismic data
                                                                       indicates there is a large attic in terms of height and
                                                                       areal extent to the south, west and northwest of the Triceratops-2
                                                                       well, which will be our focus during forward seismic acquisition
                                                                       and well programs on this field. Planning of new seismic
                                                                       and drilling location is in progress, and will be finalized
                                                                       once the remapping is complete. Although in the early stages
                                                                       of appraisal, an initial resource estimate of the Triceratops
                                                                       field has been included in our 2012 year end resource estimate,
                                                                       which is set forth in the 2012 Annual Information Form.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   5







| | · | Pacific
                                                                                                               Rubiales Farm-In
                                                                                                               Agreement:
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | On April 18, 2012, we signed
                                                                       a binding HOA with PRE for PRE to be able to earn a 10.0%
                                                                       net (12.9% gross) participating interest in the PPL 237
                                                                       onshore PNG, 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. During the year,
                                                                       PRE has paid $40.0 million of the staged cash payments
                                                                       and subsequent to year end, in January 2013 a further $20.0
                                                                       million of the staged cash payment was received. PRE has
                                                                       the option to terminate the HOA 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 July 27, 2012, we 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. Completion
                                                                       of the farm-in transaction is subject to satisfaction of
                                                                       additional conditions within 18 months.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | On November 29, 2012, we
                                                                       executed the PRE JVOA and related documents associated
                                                                       with the Farm-In Agreement with PRE.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | Pac LNG 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
                                                                       Pac LNG’s indirect participating interest in the
                                                                       Triceratops structure. Under this agreement, Pac LNG will
                                                                       receive credits (to be offset against cash call receivable
                                                                       for them for their IPI interest) for 25% of the payments
                                                                       PRE makes under the farm-in transaction relating to the
                                                                       Triceratops structure. Pac LNG will also receive a commission
                                                                       fee of 2.5% of cash payments made by PRE (other than carried
                                                                       costs). Certain other indirect participating interest holders
                                                                       may also participate in the farm-in transaction.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | Subsequent to year end,
                                                                       on January 24, 2013, the DPE approved and registered the
                                                                       transfer of interest in PPL 237 to PRE.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | The PPL 237 JV Operating
                                                                       Committee (“JVOC”) established with PRE will
                                                                       review and approve the forward work program, and submit
                                                                       an application for a PRL over the Triceratops discovery.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Antelope
                                                                                                               field appraisal
                                                                                                               program
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | On September 30, 2012,
                                                                       we spudded the Antelope-3 appraisal well in PRL 15. The
                                                                       Antelope-3 well is located approximately 1 kilometer south
                                                                       of the Antelope-1 well and 2.6 kilometers north of the
                                                                       Antelope-2 well. The primary objectives in drilling the
                                                                       Antelope-3 well were to confirm reservoir depth, composition,
                                                                       character and continuity, provide samples for analysis
                                                                       to further assist in development well planning, satisfy
                                                                       work program obligations for PRL 15 and complete the well
                                                                       as a future production well.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | On November 30, 2012, the
                                                                       top of the reservoir at the Antelope-3 well was penetrated
                                                                       at a depth of 5,328 feet (1,624 meters). This was 217 feet
                                                                       (66 meters) above the pre-drill estimate and 92 feet (28
                                                                       meters) higher than the Antelope-1 well.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | On December 10, 2012, at
                                                                       a depth of 5,906 feet (1,800 meters) DST #1 in the Antelope-3
                                                                       well showed natural gas and condensate. The well flowed
                                                                       at a maximum rate of 44.8 Mmscfpd with 10.4 to 14.9 barrels
                                                                       of condensate per million cubic feet through a 64/64 -
                                                                       inch choke. The analyzed gas composition is similar to
                                                                       the Antleope-1 and Antelope-2 wells. Total depth of 8,379
                                                                       feet (2,554 meters) was attained on December 25, 2012.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | The preliminary independent
                                                                       analysis of the wireline log results demonstrated a carbonate
                                                                       reservoir (limestone and dolomite) with similar reefal
                                                                       reservoir character and quality as the offset Antelope-1
                                                                       and Antelope-2 wells. The formation character is consistent
                                                                       with, and supplements, the results of our initial DST #1.
                                                                       Preliminary interpretation indicated that the Antelope-3
                                                                       well shares the same water contact with these wells at
                                                                       7,310 feet (2,228 meters) below sea level. With the top
                                                                       of the reservoir encountered at 5,328 feet (1,624 meters)
                                                                       measured depth in the well, equivalent to a true vertical
                                                                       depth of 5,009 feet (1,527 meters) below sea level, this
                                                                       equates to a hydrocarbon column height of approximately
                                                                       2,301 feet (701 meters). This represents the tallest vertical
                                                                       column encountered in the Antelope field to date.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | Subsequent to year end,
                                                                       on January 24, 2013, we completed the logging program and
                                                                       as in the previous wells, conventional wireline logs (porosity,
                                                                       resistivity and sonic) were acquired in addition to formation
                                                                       imaging, vertical well bore seismic and rotary sidewall
                                                                       coring conducted while under pressure. The independent
                                                                       formation evaluation indicates an average porosity in the
                                                                       pay interval of 10.2% and a net to gross ratio of 66%.
                                                                       This compares favorably with the results from the Antelope-1
                                                                       and Antelope-2 wells with average porosities of 8.8% and
                                                                       13.1% respectively. We believe these results indicate that
                                                                       the reservoir quality at the Antelope-3 well location is
                                                                       of similar quality to the Antelope-1 and -2 wells, and
                                                                       fully support our reservoir model.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   6







| | – | Production logging is in
                                                                       progress, and once this is complete, the well will be suspended
                                                                       for future completion as a production well.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Elk
                                                                                                               field appraisal
                                                                                                               program:
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | On October 26, 2012, our
                                                                       Rig#3 commenced mobilization to the Elk-3 well drill site
                                                                       following completion of the roadway from the Hou Creek
                                                                       supply base. Drilling of the Elk-3 development well is
                                                                       the final well required to satisfy the first two year work
                                                                       commitment on PRL 15.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | On November 27, 2012, we
                                                                       were notified by the DPE that it had been granted an approval
                                                                       of license variation to PRL 15, allowing us to defer the
                                                                       required drilling of a second commitment well from the
                                                                       first two year work program into the second two year work
                                                                       program.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Seismic
                                                                                                               and exploration
                                                                                                               program:
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | Kwalaha Phase 3 Seismic
                                                                       Data on PPL 236 and PPL 238 was acquired and analyzed during the second
                                                                       quarter of 2012, providing further understanding of the
                                                                       previously named Tuna and Wahoo prospects. Airborne gravity acquired
                                                                       in the second quarter of 2012 for PPL 236 and PPL 237 continues
                                                                       to be analyzed and added to previous airborne gravity data.
                                                                       Indications are of additional leads within PPL 236 and
                                                                       PPL 237 licenses, and these leads will be assessed for
                                                                       further seismic acquisition.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | – | Proposed well locations
                                                                       have currently been selected for Tuna and Wahoo prospects.
                                                                       Potential exploration well locations for future lease obligation
                                                                       wells were selected following completion of seismic acquisition,
                                                                       processing and mapping. However, with the success of the
                                                                       Triceratops gas discovery and the better than expected
                                                                       results of the Antelope-3 well, we have had discussions
                                                                       with the DPE on our forward focus and priorities. We believe
                                                                       that a clear mutual objective is focus on progressing the
                                                                       LNG Project. To progress development of our core assets,
                                                                       we have applied for variations to modify the well commitments
                                                                       for PPL 236 and PPL 238. We are awaiting formal variations
                                                                       in relation our commitments.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Midstream – Refining



| | · | Total
                                                                                                               refinery throughput
                                                                                                               for the year ended
                                                                                                               December 31, 2012
                                                                                                               was 24,483 barrels
                                                                                                               per operating day,
                                                                                                               compared with 24,856
                                                                                                               barrels per operating
                                                                                                               day during the
                                                                                                               year ended December
                                                                                                               31, 2011, and 24,682
                                                                                                               barrels per operating
                                                                                                               day during 2010.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Capacity
                                                                                                               utilization of
                                                                                                               the refinery for
                                                                                                               the year ended
                                                                                                               December 31, 2012,
                                                                                                               based on 36,500
                                                                                                               barrels per day
                                                                                                               operating capacity,
                                                                                                               was 58% compared
                                                                                                               with 54% for 2011
                                                                                                               and 53% for 2010.
                                                                                                               During the years
                                                                                                               ended December
                                                                                                               31, 2012, 2011
                                                                                                               and 2010, our refinery
                                                                                                               was shut down for
                                                                                                               51 days, 82 days
                                                                                                               and 81 days, respectively,
                                                                                                               for general maintenance
                                                                                                               activities.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The
                                                                                                               CRU, which allows
                                                                                                               the refinery to
                                                                                                               produce reformate
                                                                                                               for gasoline has
                                                                                                               been shutdown since
                                                                                                               August 3, 2012.
                                                                                                               During the year
                                                                                                               ended December
                                                                                                               31, 2012, we produced
                                                                                                               gasoline for an
                                                                                                               interrupted period
                                                                                                               of 4 months, which
                                                                                                               was then supplemented
                                                                                                               by imports whilst
                                                                                                               the CRU was shutdown.
                                                                                                               We expect the CRU
                                                                                                               to be restarted
                                                                                                               in the second quarter
                                                                                                               of 2013 following
                                                                                                               the installation
                                                                                                               of a new catalyst.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | During
                                                                                                               the year, the BNP
                                                                                                               working capital
                                                                                                               facility was renewed
                                                                                                               for another year
                                                                                                               with a $10.0 million
                                                                                                               increase in the
                                                                                                               limit, bringing
                                                                                                               the total facility
                                                                                                               limit to $240.0
                                                                                                               million to accommodate
                                                                                                               increasing volumes
                                                                                                               and crude prices.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On
                                                                                                               October 16, 2012,
                                                                                                               we entered into
                                                                                                               a five year amortizing
                                                                                                               $100.0 million
                                                                                                               secured term loan
                                                                                                               facility with BNP,
                                                                                                               BSP, and ANZ).
                                                                                                               The loan is secured
                                                                                                               over the fixed
                                                                                                               assets of our refinery
                                                                                                               and bears interest
                                                                                                               at LIBOR plus 6.5%.
                                                                                                               The drawdown of
                                                                                                               the loan was completed
                                                                                                               on November 9,
                                                                                                               2012.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On
                                                                                                               November 9, 2012,
                                                                                                               part of the borrowings
                                                                                                               under the new term
                                                                                                               loan facility were
                                                                                                               used to repay all
                                                                                                               outstanding amounts
                                                                                                               under the term
                                                                                                               loan granted by
                                                                                                               OPIC.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   7







Midstream – Liquefaction



| | · | Asset
                                                                                                               sell down process:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| | - | Throughout
                                                                                                                              the
                                                                                                                              year,
                                                                                                                              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
                                                                                                                              certain
                                                                                                                              exploration
                                                                                                                              licenses.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | Subsequent
                                                                                                                              to
                                                                                                                              year
                                                                                                                              end,
                                                                                                                              on
                                                                                                                              January
                                                                                                                              24,
                                                                                                                              2013,
                                                                                                                              we
                                                                                                                              announced
                                                                                                                              that
                                                                                                                              we
                                                                                                                              have
                                                                                                                              advised
                                                                                                                              bidders
                                                                                                                              with
                                                                                                                              whom
                                                                                                                              we
                                                                                                                              have
                                                                                                                              been
                                                                                                                              in
                                                                                                                              discussions
                                                                                                                              that
                                                                                                                              the
                                                                                                                              final
                                                                                                                              binding
                                                                                                                              bid
                                                                                                                              solicitation
                                                                                                                              period
                                                                                                                              for
                                                                                                                              the
                                                                                                                              partnering
                                                                                                                              process
                                                                                                                              currently
                                                                                                                              being
                                                                                                                              undertaken
                                                                                                                              will
                                                                                                                              close
                                                                                                                              on
                                                                                                                              February
                                                                                                                              28,
                                                                                                                              2013.
                                                                                                                              Our
                                                                                                                              Board
                                                                                                                              of
                                                                                                                              Directors
                                                                                                                              intends
                                                                                                                              to
                                                                                                                              meet
                                                                                                                              our
                                                                                                                              advisors
                                                                                                                              during
                                                                                                                              March
                                                                                                                              2013
                                                                                                                              for
                                                                                                                              the
                                                                                                                              purpose
                                                                                                                              of
                                                                                                                              evaluating
                                                                                                                              bids
                                                                                                                              received
                                                                                                                              and
                                                                                                                              selecting
                                                                                                                              our
                                                                                                                              partner(s)
                                                                                                                              for
                                                                                                                              the
                                                                                                                              development
                                                                                                                              of
                                                                                                                              the
                                                                                                                              LNG
                                                                                                                              Project
                                                                                                                              utilizing
                                                                                                                              gas
                                                                                                                              from
                                                                                                                              the
                                                                                                                              Elk
                                                                                                                              and
                                                                                                                              Antelope
                                                                                                                              fields.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | We
                                                                                                                              have
                                                                                                                              made
                                                                                                                              significant
                                                                                                                              progress
                                                                                                                              with
                                                                                                                              pre-FEED
                                                                                                                              and
                                                                                                                              FEED
                                                                                                                              engineering
                                                                                                                              studies,
                                                                                                                              construction
                                                                                                                              of
                                                                                                                              roads
                                                                                                                              and
                                                                                                                              camps,
                                                                                                                              social
                                                                                                                              mapping
                                                                                                                              and
                                                                                                                              genealogical
                                                                                                                              studies,
                                                                                                                              which
                                                                                                                              will
                                                                                                                              assist
                                                                                                                              in
                                                                                                                              the
                                                                                                                              final
                                                                                                                              partnering
                                                                                                                              and
                                                                                                                              project
                                                                                                                              execution.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | During
                                                                                                                              the
                                                                                                                              year,
                                                                                                                              we
                                                                                                                              have
                                                                                                                              extended
                                                                                                                              the
                                                                                                                              dates
                                                                                                                              in
                                                                                                                              the
                                                                                                                              CSP
                                                                                                                              agreements
                                                                                                                              with
                                                                                                                              Mitsui
                                                                                                                              to
                                                                                                                              provide
                                                                                                                              flexibility
                                                                                                                              for
                                                                                                                              FID.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | During
                                                                                                                              the
                                                                                                                              year,
                                                                                                                              we
                                                                                                                              extended
                                                                                                                              the
                                                                                                                              dates
                                                                                                                              in
                                                                                                                              the
                                                                                                                              contingent
                                                                                                                              LNG
                                                                                                                              Project
                                                                                                                              agreements
                                                                                                                              with
                                                                                                                              EWC
                                                                                                                              to
                                                                                                                              provide
                                                                                                                              flexibility
                                                                                                                              for
                                                                                                                              partner
                                                                                                                              selection
                                                                                                                              and
                                                                                                                              FID.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | The
                                                                                                                              conditional
                                                                                                                              framework
                                                                                                                              agreement
                                                                                                                              with
                                                                                                                              Samsung
                                                                                                                              Heavy
                                                                                                                              Industries
                                                                                                                              and
                                                                                                                              FLEX
                                                                                                                              LNG
                                                                                                                              related
                                                                                                                              to
                                                                                                                              the
                                                                                                                              construction
                                                                                                                              and
                                                                                                                              operation
                                                                                                                              of
                                                                                                                              a
                                                                                                                              planned
                                                                                                                              2
                                                                                                                              million
                                                                                                                              tonnes
                                                                                                                              per
                                                                                                                              annum
                                                                                                                              floating
                                                                                                                              LNG
                                                                                                                              processing
                                                                                                                              vessel
                                                                                                                              was
                                                                                                                              not
                                                                                                                              renewed.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | LNG
                                                                                                               Project Agreement:
| | - | -------------------------------------------------------------------------------------------------------------------------------------

| | - | On
                                                                                                                              November
                                                                                                                              16,
                                                                                                                              2012,
                                                                                                                              we
                                                                                                                              were
                                                                                                                              notified
                                                                                                                              by
                                                                                                                              the
                                                                                                                              Prime
                                                                                                                              Minister
                                                                                                                              of
                                                                                                                              Papua
                                                                                                                              New
                                                                                                                              Guinea
                                                                                                                              Hon.
                                                                                                                              Peter
                                                                                                                              O’Neill
                                                                                                                              that
                                                                                                                              the
                                                                                                                              NEC
                                                                                                                              had
                                                                                                                              conditionally
                                                                                                                              approved
                                                                                                                              our
                                                                                                                              LNG
                                                                                                                              development
                                                                                                                              project
                                                                                                                              in
                                                                                                                              the
                                                                                                                              Gulf
                                                                                                                              Province.
                                                                                                                              This
                                                                                                                              decision
                                                                                                                              clears
                                                                                                                              the
                                                                                                                              way
                                                                                                                              to
                                                                                                                              proceed
                                                                                                                              with
                                                                                                                              our
                                                                                                                              plans
                                                                                                                              for
                                                                                                                              the
                                                                                                                              development
                                                                                                                              of
                                                                                                                              an
                                                                                                                              LNG
                                                                                                                              plant
                                                                                                                              in
                                                                                                                              the
                                                                                                                              Gulf
                                                                                                                              Province
                                                                                                                              with
                                                                                                                              initial
                                                                                                                              planned
                                                                                                                              output
                                                                                                                              of
                                                                                                                              a
                                                                                                                              minimum
                                                                                                                              of
                                                                                                                              3.8
                                                                                                                              million
                                                                                                                              tonnes
                                                                                                                              per
                                                                                                                              annum.
                                                                                                                              The
                                                                                                                              decision
                                                                                                                              also
                                                                                                                              approves
                                                                                                                              an
                                                                                                                              option
                                                                                                                              for
                                                                                                                              the
                                                                                                                              State
                                                                                                                              to
                                                                                                                              acquire
                                                                                                                              an
                                                                                                                              additional
                                                                                                                              27.5%
                                                                                                                              interest
                                                                                                                              in
                                                                                                                              the
                                                                                                                              Elk
                                                                                                                              and
                                                                                                                              Antelope
                                                                                                                              gas
                                                                                                                              fields,
                                                                                                                              over
                                                                                                                              and
                                                                                                                              above
                                                                                                                              the
                                                                                                                              22.5%
                                                                                                                              interest
                                                                                                                              to
                                                                                                                              which
                                                                                                                              it
                                                                                                                              is
                                                                                                                              entitled
                                                                                                                              under
                                                                                                                              the
                                                                                                                              Oil
                                                                                                                              &
                                                                                                                              Gas
                                                                                                                              Act,
                                                                                                                              on
                                                                                                                              terms
                                                                                                                              to
                                                                                                                              be
                                                                                                                              negotiated
                                                                                                                              with
                                                                                                                              us.
                                                                                                                              The
                                                                                                                              NEC
                                                                                                                              further
                                                                                                                              approved
                                                                                                                              the
                                                                                                                              establishment
                                                                                                                              of
                                                                                                                              a
                                                                                                                              State
                                                                                                                              negotiating
                                                                                                                              team
                                                                                                                              to
                                                                                                                              discuss
                                                                                                                              and
                                                                                                                              agree
                                                                                                                              to
                                                                                                                              the
                                                                                                                              necessary
                                                                                                                              amendments
                                                                                                                              to
                                                                                                                              the
                                                                                                                              2009
                                                                                                                              LNG
                                                                                                                              Project
                                                                                                                              Agreement
                                                                                                                              between
                                                                                                                              the
                                                                                                                              State
                                                                                                                              and
                                                                                                                              Liquid
                                                                                                                              Niugini
                                                                                                                              Gas
                                                                                                                              Limited,
                                                                                                                              to
                                                                                                                              give
                                                                                                                              effect
                                                                                                                              to
                                                                                                                              the
                                                                                                                              NEC
                                                                                                                              decision,
                                                                                                                              and
                                                                                                                              to
                                                                                                                              agree
                                                                                                                              on
                                                                                                                              the
                                                                                                                              terms
                                                                                                                              on
                                                                                                                              which
                                                                                                                              the
                                                                                                                              State
                                                                                                                              could
                                                                                                                              acquire
                                                                                                                              the
                                                                                                                              additional
                                                                                                                              interest.
                                                                                                                              The
                                                                                                                              NEC
                                                                                                                              decision
                                                                                                                              confirms
                                                                                                                              that
                                                                                                                              the
                                                                                                                              basis
                                                                                                                              of
                                                                                                                              the
                                                                                                                              acquisition
                                                                                                                              will
                                                                                                                              be
                                                                                                                              on
                                                                                                                              commercial
                                                                                                                              market
                                                                                                                              terms.
                                                                                                                              The
                                                                                                                              NEC
                                                                                                                              decision
                                                                                                                              also
                                                                                                                              includes
                                                                                                                              as
                                                                                                                              a
                                                                                                                              condition
                                                                                                                              of
                                                                                                                              its
                                                                                                                              approval
                                                                                                                              that
                                                                                                                              the
                                                                                                                              LNG
                                                                                                                              plant
                                                                                                                              operator
                                                                                                                              must
                                                                                                                              be
                                                                                                                              an
                                                                                                                              internationally
                                                                                                                              recognized
                                                                                                                              operator
                                                                                                                              of
                                                                                                                              the
                                                                                                                              planned
                                                                                                                              LNG
                                                                                                                              facilities.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | - | The
                                                                                                                              PNG
                                                                                                                              Cabinet
                                                                                                                              also
                                                                                                                              approved
                                                                                                                              the
                                                                                                                              establishment
                                                                                                                              of
                                                                                                                              the
                                                                                                                              Ministerial
                                                                                                                              Gas
                                                                                                                              Committee
                                                                                                                              comprised
                                                                                                                              of
                                                                                                                              key
                                                                                                                              economic
                                                                                                                              ministers
                                                                                                                              to
                                                                                                                              fast
                                                                                                                              track
                                                                                                                              commercialization
                                                                                                                              of
                                                                                                                              the
                                                                                                                              LNG
                                                                                                                              Project.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Downstream



| | · | The
                                                                                                               PNG economy continued
                                                                                                               to grow strongly
                                                                                                               throughout 2012
                                                                                                               largely due to
                                                                                                               resource development
                                                                                                               projects, which
                                                                                                               has also led to
                                                                                                               growth in our aviation
                                                                                                               and retail businesses
                                                                                                               within our Downstream
                                                                                                               segments. Total
                                                                                                               sales volumes for
                                                                                                               year ended December
                                                                                                               31, 2012 were 752.5
                                                                                                               million litres
                                                                                                               (December 2011
                                                                                                               – 678.0 million
                                                                                                               litres, December
                                                                                                               2010 – 626.5
                                                                                                               million litres),
                                                                                                               an increase of
                                                                                                               74.5 million litres,
                                                                                                               or 11.0% over the
                                                                                                               same period in
                                                                                                               2011.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Our
                                                                                                               retail business
                                                                                                               accounted for approximately
                                                                                                               15% of our total
                                                                                                               downstream sales
                                                                                                               in 2012 (2011 –
                                                                                                               13%, 2010 - 15%).
                                                                                                               Investments have
                                                                                                               been made over
                                                                                                               the last three
                                                                                                               years in new electronic
                                                                                                               systems for both
                                                                                                               pumps and the forecourt
                                                                                                               control units to
                                                                                                               support the further
                                                                                                               development of
                                                                                                               this business.
                                                                                                               During 2012, one
                                                                                                               new retail site
                                                                                                               was opened as well
                                                                                                               as a truck stop
                                                                                                               commercial site.
                                                                                                               One existing retail
                                                                                                               site was purchased
                                                                                                               to secure tenure,
                                                                                                               and additional
                                                                                                               land was purchased
                                                                                                               for a future retail
                                                                                                               site.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On
                                                                                                               December 14, 2012,
                                                                                                               the ICCC advised
                                                                                                               that margins for
                                                                                                               wholesale will
                                                                                                               increase in line
                                                                                                               with the ICCC mandated
                                                                                                               formula for a five
                                                                                                               year period. A
                                                                                                               consumer price
                                                                                                               index increase
                                                                                                               of 2.0% is reflected
                                                                                                               in these revised
                                                                                                               margins. These
                                                                                                               increases apply
                                                                                                               to unleaded gasoline,
                                                                                                               diesel and kerosene
                                                                                                               and are effective
                                                                                                               for the fiscal
                                                                                                               year ending December
                                                                                                               31, 2013.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   8







| | · | During
                                                                                                               the year, the Westpac
                                                                                                               working capital
                                                                                                               facility was increased
                                                                                                               by $4.8 million
                                                                                                               (PGK 10.0 million)
                                                                                                               bringing the total
                                                                                                               Downstream working
                                                                                                               capital facility
                                                                                                               to $66.6 million
                                                                                                               (PGK 140.0 million).
                                                                                                               In addition, a
                                                                                                               secured loan of
                                                                                                               $15.0 million was
                                                                                                               provided by Westpac
                                                                                                               which is repayable
                                                                                                               in equal installments
                                                                                                               over 3.5 years
                                                                                                               with an interest
                                                                                                               rate of LIBOR plus
                                                                                                               4.4% per annum.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Corporate



| | · | In
                                                                                                               March 2011, InterOil
                                                                                                               Corporate PNG Limited
                                                                                                               was incorporated
                                                                                                               under the laws
                                                                                                               of 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





|SELECTED
    FINANCIAL INFORMATION AND HIGHLIGHTS
|-------------------------------------------------



Consolidated Results for the
Years Ended December 31, 2012, 2011 and 2010



|Consolidated – Operating results                            |  | Year ended December 31, |           
|----------------------------------------------------------- |  | ----------------------- | ----------
|($ thousands, except per share data)                        |  | 2012                    |           
|Sales and operating revenues                                |  |                         | 1,308,052 
|Interest revenue                                            |  |                         | 248       
|Other non-allocated revenue                                 |  |                         | 12,258    
|Total revenue                                               |  |                         | 1,320,558 
|Cost of sales and operating expenses                        |  |                         | (1,219,188
|Office and administration and other expenses                |  |                         | (51,692   
|Derivative (loss)/gain                                      |  |                         | (4,229    
|Exploration costs                                           |  |                         | (13,902   
|Gain on conveyance of oil and gas properties                |  |                         | 4,418     
|Loss on extinguishment of IPI liability                     |  |                         | -         
|Litigation settlement expense                               |  |                         | -         
|Loss on Flex LNG Investment                                 |  |                         | -         
|Foreign exchange (loss)/gain                                |  |                         | (43       
|EBITDA (1)                                                  |  |                         | 35,922    
|Depreciation and amortization                               |  |                         | (21,863   
|Interest expense                                            |  |                         | (23,166   
|(Loss)/profit before income taxes                           |  |                         | (9,107    
|Income tax benefit/(expense)                                |  |                         | 10,711    
|Net profit/(loss)                                           |  |                         | 1,604     
|Net profit/(loss) per share (basic)                         |  |                         | 0.03      
|Net profit/(loss) per share (diluted)                       |  |                         | 0.03      
|Total assets                                                |  |                         | 1,299,819 
|Total liabilities                                           |  |                         | 523,762   
|Total long-term liabilities                                 |  |                         | 190,838   
|Gross margin (2)                                            |  |                         | 88,864    
|Cash flows (used in)/generated from operating activities(3) |  |                         | (36,029   



Management Discussion and Analysis   INTEROIL CORPORATION   9







Notes:

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

| | (2) | Gross margin is a non-GAAP measure
                                                            and is “sales and operating revenues” less “cost
                                                            of sales and operating expenses” and is reconciled to IFRS under
                                                            the heading “Non-GAAP Measures and Reconciliation”.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Refer to “Liquidity and Capital
                                                            Resources – Summary of Cash Flows” for detailed cash flow
                                                            analysis, and certain revisions made to the comparative period balances
                                                            for the years ended December 31, 2011 and 2010.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Analysis of Financial Condition
Comparing Years Ended December 31, 2012, 2011 and 2010



During the year ended December 31, 2012,
our debt-to-capital ratio (being debt divided by [shareholders’ equity plus debt]) was 19% (12% as at December 31, 2011
and 13% as at December 31, 2010), well below our targeted maximum gearing level of 50%. Gearing targets are based on a number
of factors including operating cash flows, future cash needs for development, capital market conditions, economic conditions,
and are assessed regularly.



Our current ratio (being current assets
divided by current liabilities), which measures our ability to meet short-term obligations, was 1.3 times as at December 31, 2012
(2.1 times as at December 31, 2011 and 3.2 times as at December 31, 2010). The quick ratio (or acid test ratio (being [current
assets less inventories] divided by current liabilities)), which is a more conservative measure of our ability to meet short term
obligations, was 0.7 times as at December 31, 2012 (1.3 times as at December 31, 2011 and 2.3 times as at December 31, 2010).
These ratios were below our internal targets of above 1.5 times for the current ratio and 1.0 times for the quick ratio. The completion
of the PRE farm-in transaction (expected to be completed during quarter ended March 31, 2013) and the closing of the transactions
to sell down interests in the Elk and Antelope fields and the LNG Project, are expected to bring these ratios well within our
internal targets.



As at December 31, 2012, our total assets
amounted to $1,299.8 million, compared with $1,088.4 million as at December 31, 2011 and $975.7 million as at December 31, 2010.
This increase of $211.4 million, or 19%, from December 31, 2011 was primarily due to further capitalization of expenditure on
our oil and gas properties of $152.2 million associated with the appraisal and development of the Elk and Antelope fields including
the drilling of Antelope-3 well, preparation and drilling of the Triceratops-2 well, Herd Base and Hou Creek infrastructure construction
and continued development of the LNG Project; a $27.6 million increase in deferred tax benefits mainly related to the increase
in refinery’s carried forward tax losses as at December 31, 2012, resulting from current year results and interest deductibility
recognized subsequent to the payment of interest withholding tax in November 2012 on certain intercompany loan interest accrued
from January 2007 to October 2012; a $23.8 million increase in inventory balances due to the timing of shipments; an increase
in our trade and other receivables balance of $11.7 million on higher joint venture billings to upstream partners; and a $9.0
million increase in plant and equipment (after depreciation) from Downstream infrastructure upgrades across locations, Napa Napa
camp, office building works and tank works. These increases were partially offset by the net decreases in our cash, cash equivalents,
and restricted cash of $9.2 million and short term treasury bills of $11.8 million primarily due to expenditure on the development
of oil and gas properties.



Comparing December 31, 2010 to December
31, 2011, the increase in total assets of $112.7 million or 12% was primarily due to further capitalization of expenditure on
our oil and gas properties of $107.6 million associated with the appraisal and development of the Elk and Antelope fields, preparation
for drilling the Triceratops-2 well, and continued development of the LNG Project.



As at December 31, 2012, our total liabilities
amounted to $523.8 million, compared with $328.5 million at December 31, 2011 and $272.8 million at December 31, 2010. The increase
of $195.3 million, or 59%, from December 31, 2011 was primarily due to a $77.8 million increase in working capital facilities
payable (including trade receivables discounted with recourse); and a net increase of $75.4 million in secured loans payable on
drawdown of the ANZ, BSP and BNP syndicated secured loan facility of $95.9 million (net of transaction costs) and drawdown of
Westpac secured facility of $15.0 million, OPIC loan repayment of $35.5 million and Westpac’s secured loan principal repayment
of $2.1 million made during the year; an increase of $20.1 million in accounts payable and accrued liabilities, mainly related
to timing of payments on certain crude cargo purchases; a receipt of the $20.0 million staged cash payment under the advance payment
facility from PRE held as a liability due to their option to exit the Farm-In Agreement; and a $7.9 million increase in income
tax payable on increased profits in our Downstream segment. These increases however have been partially offset by the decrease
of deferred gain on contribution to LNG project by $5.8 million as this has now been fully offset against the capitalized project
costs held within Midstream – Liquefaction segment, and a $3.0 million reduction in IPI liability mainly attributed to the
waiver or forfeiture of 1.5% IPI interest conversion rights into common shares during the year.



Management Discussion and Analysis   INTEROIL CORPORATION   10







Comparing December 31, 2010 to December
31, 2011, the increase of $55.7 million, or 20%, was primarily due to an increase in accounts payable and accrued liabilities
of $84.7 million, offset in part by a reduction of $34.8 million in the working capital facility which is mainly a function of
timing of crude purchases for the refining operation.



Analysis of Consolidated Financial
Results Comparing Quarters ended December 31, 2012 and 2011, and Years ended December 31, 2012, 2011 and 2010



Quarterly Comparative



Our net profit for the quarter ended December
31, 2012 was $18.5 million compared with a net profit of $13.2 million for the same quarter of 2011, an increase of $5.3 million.
The operating segments of Corporate, Midstream Refining and Downstream collectively derived a net profit for the quarter of $32.0
million, while the investments in development segments of Upstream and Midstream Liquefaction resulted in a net loss of $13.5
million.



The improvement in net profit for the
fourth quarter in 2012 as compared to 2011 was mainly due to a $26.0 million increase in gross margin attributable to the improved
crude and product price movements, higher margins from export cargos, and lower premium and freight paid for the purchased crudes
during the quarter; a $2.6 million reduction of exploration costs incurred for seismic activity for PPL 236; a $1.6 million decrease
in the loss on available-for-sale investment in the shares in FLEX LNG, and a $1.6 million increase in gain on conveyance of oil
and gas properties recognized due to the waiver or forfeiture of 1.5% IPI interest conversion rights into common shares.



These increases in profit was partly offset
by a $11.4 million reduction in foreign exchange gain, mainly due to the weakening of PGK against USD (foreign exchange rate decreased
from 0.4805 to 0.4755) compared to fourth quarter of 2011 (foreign exchange rate increased from 0.4465 to 0.4665); a $9.5 million
increase in borrowing costs relates primarily to the $9.7 million withholding tax paid in November 2012 for intercompany loan
interests incurred from January 2007 to October 2012; and a $6.0 million decrease in income tax benefit resulting from the taxable
temporary differences, which in the prior year was mainly arising from the translation of the non-monetary assets of the refinery
operation using period end rates (strengthening of PGK against USD was higher in prior year quarter).



Total revenues increased by $66.8 million
from $289.6 million in the quarter ended December 31, 2011 to $356.4 million in the quarter ended December 31, 2012, primarily
due to higher sales volumes made during the year. The total volume of all products sold by us was 2.3 million barrels for quarter
ended December 31, 2012, compared with 1.9 million barrels in the same quarter of 2011.



Annual Comparative



Our net profit for the year ended December
31, 2012 was $1.6 million compared with $17.7 million for the same period of 2011, a decrease of $16.1 million, while a net loss
for the same period of 2010 was $44.5 million. The operating segments of Corporate, Midstream Refining and Downstream collectively
derived a net profit for the year ended December 31, 2012 of $61.2 million, while the investments in development segments of Upstream
and Midstream Liquefaction resulted in a net loss of $59.6 million.



The decrease in net profit for the year
2012 compared to the year 2011 of $16.1 million was mainly due to a $25.1 million decrease in foreign exchange gain, due to the
PGK being relatively stable in the year ended December 31, 2012 (foreign exchange rate increased from 0.4665 to 0.4755) compared
to same period in 2011 when it strengthened significantly (foreign exchange rate increased from 0.3785 to 0.4665); a $9.8 million
increase in interest expense, resulting from the $9.7 million interest withholding tax paid in November 2012 for certain intercompany
loan interests accrued from January 2007 to October 2012 and settled in November 2012; and a $6.3 million decrease in derivative
gain, primarily from the losses incurred for the commodity contracts settled in September 2012. These decreases in profit have
been partly offset by a $10.0 million increase in income tax benefits resulting mainly from current year results and interest
deductibility recognized subsequent to the payment of interest withholding tax in November 2012 on certain intercompany loan interest
accrued from January 2007 to October 2012; a $4.5 million reduction in exploration costs incurred for seismic activity for PPL
236; a $4.4 million increase in gain on conveyance of oil and gas properties, which was recognized on sale of interest in PPL
237 to PRE and the waiver or forfeiture of 1.5% IPI interest conversion rights into common shares. In addition, an improvement
of $3.3 million in gross margin on account of the increased pricing due to ICCC price revisions in fourth quarter of 2011, and
increasing Downstream domestic sales volumes resulting from various development projects being undertaken in Papua New Guinea
has further lessened the unfavorable movement in current year profit.



Management Discussion and Analysis   INTEROIL CORPORATION   11







Net profit for the year ended December
31, 2011 was $17.7 million compared with a net loss of $44.5 million for 2010, an improvement of $62.2 million. The main items
contributing towards the loss in 2010 were one time charges including a loss on extinguishment of IPI liability of $30.6 million
and a $12.0 million expense relating to settlement of certain long-standing litigation. Foreign exchange gains also increased
in 2011 by $35.8 million compared to 2010 due to the PGK strengthening against the USD from 0.3785 at the start of the year to
0.4665 as at December 31, 2011.



Total revenues increased by $201.6 million
from $1,118.9 million in the year ended December 31, 2011 to $1,320.6 million in the year ended December 31, 2012, primarily due
to higher volumes and export prices during the period. Total revenues in the year ended December 31, 2010 were $807.0 million.
The total volume of all products sold by us was 8.5 million barrels for year ended December 31, 2012, compared with 7.4 million
barrels in the same period of 2011, and 7.2 million barrels in 2010.



The Upstream segment realized a net loss
of $56.8 million in 2012 (2011 – loss of $49.1 million, 2010 – loss of $78.6 million). The increase in the loss in
2012 by $7.7 million from 2011 was mainly due to an increase of $13.1 million on intercompany interest charges due to higher loan
balances from the parent entity (Corporate segment) to fund the exploration and development activities. During 2012, there has
also been an increase in office and administration expenses of $6.8 million as a result of increased operating expenses associated
with the operation of the construction and logistics departments. These increases have been offset by a $4.5 million reduction
in exploration costs incurred for seismic activity on PPL 236, and a $4.4 million increase in gain on conveyance of oil and gas
properties recognized on sale of interest in PPL 237 to PRE, and the waiver or forfeiture of 1.5% IPI interest conversion rights
into common shares. The reduction in the loss in 2011 by $29.4 million from 2010 was mainly due to one-time events in 2010 of
$30.6 million loss on extinguishment of IPI liability and offset partly by a $2.1 million gain on conveyance of oil and gas properties.



The Midstream Refining segment generated
a net loss of $2.9 million in 2012 (2011 – profit of $46.7 million, 2010 – profit of $33.5 million) mainly due to
lower gross margins (a decrease of $17.4 million from 2011) from negative crude and product price movements particularly during
the quarter ended June 30, 2012, increases in premiums and freight paid on crude purchases and lower distillate yields on available
crude cargoes; a $34.3 million decrease in foreign exchange gain, mainly due to the PGK being relatively stable in the year ended
December 31, 2012 (foreign exchange rate increased from 0.4665 to 0.4755) compared to 2011 (foreign exchange rate increased from
0.3785 to 0.4665); a $8.2 million increase in interest expense, mainly resulting from the $9.7 million interest withholding tax
paid in November 2012 for certain intercompany loan interests accrued from January 2007 to October 2012 and settled in November
2012; and a $6.3 million decrease in derivative gain, primarily from the losses incurred for the commodity contracts settled in
September 2012. These decreases have been partly offset by a $18.8 million increase in income tax benefits resulting mainly from
current year results and interest deductibility recognized subsequent to the payment of interest withholding tax in November 2012
on certain intercompany loan interest accrued from January 2007 to October 2012. The net profit in 2011 increased from 2010 mainly
on account of a $34.0 million increase in foreign exchange gains as a result of rising PGK against USD during 2011, which were
partially offset by lower gross margins on decreases in export product crack spreads on increased crude costs and reduced demand
for export products.



The Midstream Liquefaction segment had
a net loss of $2.8 million during the 2012 year (2011 – loss of $15.5 million, 2010 – loss of $8.4 million) resulting
from lower management expenses and share compensation costs related to the midstream facilities of the LNG Project development
which are not capitalized. The decrease in expenses from prior year is in line with reduced expenditure being approved till the
sell down process is completed, to seek a strategic partner to acquire an interest in the Elk and Antelope fields, the LNG Project
and well exploration licenses, is completed.



Management Discussion and Analysis   INTEROIL CORPORATION   12







The Downstream segment generated a net
profit of $32.6 million in 2012 (2011 – profit of $11.6 million, 2010 – profit of $6.7 million). The increased profit
was mainly due to a $23.1 million improvement in gross margins on increased domestic sales volumes resulting from various development
projects being undertaken in Papua New Guinea, and a $8.5 million increase in foreign exchange gain mainly due to the required
transfer of exchange gain on translation of loan balances from other comprehensive income in equity to profit and loss upon repayment
of intercompany loans during the quarter ended March 31, 2012. This improvement in profit has been partly offset by an $8.6 million
increase in income tax expense on account of higher operating profits for the year. The increased profit in 2011 compared to 2010
was mainly due to a $5.6 million improvement in gross margins due to an increase in domestic volumes and the positive impact from
the revised pricing formula that came into effect in late 2010 following the ICCC’s review of wholesale, distribution and
retail margins set by the PNG State for the petroleum industry, and the impact of the increasing price environment during the
period leading to higher margins on inventories sold.



The Corporate segment generated a net
profit of $33.1 million in 2012 (2011 – profit of $21.9 million, 2010 – profit of $3.3 million). The increased profit
was mainly on account of a $10.7 million increase in interest charges to other business segments on increased loan balances and
due to a $3.4 million impairment loss recognized in 2011 on our investment in shares in Flex LNG held by us as part of the framework
agreements entered into with FLEX LNG and Samsung Heavy Industries in April 2011. The 2010 results included a $12.0 million one
time litigation settlement expense on account of the agreed settlement of the Todd Peters et al litigation for which we issued
199,677 common shares to the plaintiffs.



Variance Analysis



A complete discussion of each of our business
segments’ results can be found under the section “Quarter and Year in Review”. The following analysis outlines
the key variances, the net of which are the primary explanations for the changes in the consolidated results between the quarters
and years ended December 31, 2012 and 2011.



Management Discussion and Analysis   INTEROIL CORPORATION   13







|Quarterly  Variance

($ millions) |         | YearlyVariance
        ($ millions) |         | 
|--------------------------------- | ------- | ----------------------------------- | ------- | 
|                                  |         |                                     |         | 
|                                  | $5.3    |                                     | ($16.1) | 
|                                  |         |                                     |         | 
|Ø                                 | $26.0   |                                     | $3.3    | 
|                                  |         |                                     |         | 
|Ø                                 | ($1.3)  |                                     | $1.1    | 
|                                  |         |                                     |         | 
|Ø                                 | ($0.0)  |                                     | ($6.2)  | 
|                                  |         |                                     |         | 
|Ø                                 | $2.6    |                                     | $4.5    | 
|                                  |         |                                     |         | 
|Ø                                 | $1.5    |                                     | $4.4    | 
|                                  |         |                                     |         | 
|Ø                                 | $1.6    |                                     | $3.4    | 
|                                  |         |                                     |         | 
|Ø                                 | ($11.4) |                                     | ($25.1) | 
|                                  |         |                                     |         | 
|Ø                                 | ($9.5)  |                                     | ($9.8)  | 
|                                  |         |                                     |         | 
|Ø                                 | ($6.0)  |                                     | $10.0   | 



Management Discussion and Analysis   INTEROIL CORPORATION   14







Analysis of Consolidated Cash
Flows Comparing Quarters Ended December 31, 2012 and 2011, and Years Ended December 31, 2012, 2011 and 2010



As at December 31, 2012, we had cash,
cash equivalents, and restricted cash of $98.9 million (December 31, 2011 – $108.1 million, December 31, 2010 - $280.9 million),
of which $49.0 million (December 31, 2011 - $39.3 million, December 31, 2010 - $47.3 million) was restricted. Of the total restricted
cash of $49.0 million, $37.3 million (December 31, 2011 - $33.0 million, December 31, 2010 - $40.7 million) was restricted pursuant
to the BNP Paribas working capital facility utilization requirements, $11.3 million (December 31, 2011 – $5.9 million, December
31, 2010 - $6.3 million) was restricted as a cash deposit on the secured loans (ANZ, BSP and BNP syndicated secured loan facility
as at December 31, 2012, and OPIC facility as at December 31, 2011 and 2010), and the balance was made up of a cash deposit on
office premises together with term deposits on our PPLs.



A revision of the prior period comparatives
for the years ended December 31, 2011 and 2010 and the respective interim periods for those years have been made to the Statement
of Cash Flows for revising the classification of oil and gas properties expensed (exploration costs, excluding exploration impairment)
to an operating activity in the Statement of Cash Flows, as opposed to our earlier classification of this item as an investing
activity. This revision was made as we had failed to consider 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 being eligible for classification
as investing activities. Please refer to “Liquidity and Capital Resources – Summary of Cash Flows” section for
further details.



Cash flows from operations



Our cash outflows from operations for
the quarter ended December 31, 2012 were $27.7 million compared with an inflow of $26.3 million for the quarter ended December
31, 2011, a net increase in cash outflows of $54.0 million. This increase in cash outflows was mainly due to a $65.6 million net
increase in working capital outflows associated with trade and other receivables, inventories and accounts payables and a $11.6
million increase in net cash inflow used in operations prior to changes in operating working capital, related to the net profit
generated by the operations less any non-cash expenses for the quarter ended December 31, 2012.



Our cash outflows from operations for
the year ended December 31, 2012 were $36.0 million compared with an inflow of $44.2 million for the year ended December 31, 2011,
a net increase in cash outflows of $80.2 million. This increase in cash outflows was mainly due to a $31.4 million net increase
in working capital outflows associated with trade and other receivables, inventories and accounts payables and a $48.8 million
decrease in net cash inflow generated from operations prior to changes in operating working capital, related to the lower profits
generated by the operations less any non-cash expenses for the year ended December 31, 2012.



Our cash inflows from operations for the
year ended December 31, 2011 were $44.2 million compared with outflows of $30.5 million for the year ended December 31, 2010,
a net increase in cash inflows of $74.7 million.  This increase in cash inflows is mainly due to a $24.6 million change in
cash generated by operations prior to changes in operating working capital, related to higher profits generated from operations
less any non-cash expenses for the year.  There was also a $50.1 million decrease in working capital associated with trade
receivables, inventories and accounts payables.



Cash flows from investing activities



Cash outflows for investing activities
for the quarter ended December 31, 2012 were $52.3 million compared with $41.4 million for the quarter ended December 31, 2011.
These outflows mainly relate to the net cash expenditures on exploration, appraisal and development activities (net of IPI cash
calls) of $34.9 million, expenditures on plant and equipment of $10.6 million and a $9.4 million increase in restricted cash held
as security under BNP Paribas working capital facility and ANZ, BSP and BNP syndicated secured loan facility. These outflows were
partly offset by a $2.6 million decrease in working capital requirements of development segments relating to the timing of payments.



Cash outflows for investing activities for the year ended December 31, 2012 were $169.7 million compared
with $185.8 million for the year ended December 31, 2011. These outflows mainly relate to the net cash expenditures on exploration,
appraisal and development activities (net of IPI cash calls) of $180.7 million, expenditures on plant and equipment of $36.7 million
and a $9.8 million increase in restricted cash held as security under BNP Paribas working capital facility and ANZ, BSP and BNP
syndicated secured loan facility. These outflows were partly offset by the receipt of $20.0 million non-refundable initial staged
cash proceeds from PRE for the sell down of a net 10.0% (12.9% gross) participating interest in PPL 237; maturity of short
term PGK treasury bills of $11.8 million during the year; and a $25.5 million increase in working capital requirements of development
segments relating to the timing of payments.



Management Discussion and Analysis   INTEROIL CORPORATION   15







Cash outflows for investing activities
for the year ended December 31, 2011 were $185.8 million compared with $94.2 million for the year ended December 31, 2010. 
These outflows mainly relate to the net cash expenditure on exploration, appraisal and development activities (net of IPI cash
calls) of $115.7 million, expenditure on plant and equipment of $42.1 million, acquisition of FLEX LNG shares net of transaction
costs of $7.5 million, investments in short term PGK treasury bills of $11.8 million, a $10.0 million increase in trade receivables
and a $6.7 million decrease in working capital requirements of development segments relating to the timing of receipts and payments. 
These outflows were partly offset by a decrease of $8.0 million in the restricted cash balance under the BNP Paribas working capital
facility.



Cash flows from financing activities



Cash inflows from financing activities
for the quarter ended December 31, 2012 amounted to $72.5 million, compared with outflows of $31.9 million for the quarter ended
December 31, 2011. The increase in these cash inflows are primarily due to the $95.9 million drawdown of ANZ, BSP and BNP syndicated
secured loan facility (net of transaction costs); a $7.2 million increase in proceeds from the Westpac, BSP and BNP working capital
facilities; and a $0.4 million increase in receipts of cash from the exercise of stock options by employees under our stock incentive
plan. These increases have been partially offset by the repayment of OPIC secured loan of $31.0 million.



Cash inflows from financing activities
for the year ended December 31, 2012 amounted to $185.7 million, compared with outflows of $27.2 million for the year ended December
31, 2011. The increase in these cash inflows are primarily due to the $95.9 million drawdown of ANZ, BSP and BNP syndicated secured
loan facility (net of transaction costs); a $77.8 million increase in proceeds from the Westpac, BSP and BNP Paribas working capital
facilities; the receipt of $20.0 million advance payment facilities received from PRE for the sell down of a net 10.0% (12.9%
gross) participating interest in PPL 237 in accordance with the Farm-In Agreement; a $15.0 million increase from the drawdown
of the Westpac secured loan facility; a $11.0 million increase in receipts of cash from the exercise of stock options by employees
under our stock incentive plan; and an increase of $3.6 million receipts of cash contribution from Mitsui for the Condensate Stripping
Project. These increases have been partially offset by the full repayment of OPIC secured loan of $35.5 million and semi-annual
Westpac secured loan principal repayment of $2.1 million.



Cash outflows from financing activities
for the year ended December 31, 2011 amounted to $27.2 million, compared with $311.8 million inflows for the year ended December
31, 2010. These cash outflows include two repayments of the OPIC secured loan of $9.0 million and $34.8 million repayments of
the working capital facility. These outflows have been partly offset by receipts of cash contributions from Mitsui for the Condensate
Stripping Project of $9.9 million, receipts from PNG LNG cash call of $2.2 million, and receipts of cash from the exercise of
stock options of $4.5 million. The cash inflows/outflows associated with the working capital facility drawdown/repayments are
due to the timing of cash flows and the use of working capital. The inflows from financing activities in the prior year relate
primarily to the receipt of cash from the concurrent common share and 2.75% convertible note public offerings in November 2010.



Management Discussion and Analysis   INTEROIL CORPORATION   16







Summary of Consolidated Quarterly Financial
Results for Past Eight Quarters



The following is a table containing the
consolidated results for the eight quarters ended December 31, 2012 by business segment, and on a consolidated basis.





|Quarters ended                          |  | 2012   |          |   | 2011   | 
|--------------------------------------- |  | ------ | -------- | - | ------ | 
|($ thousands except per
    share data) |  | Dec-31 |          |   | Sep-30 | 
|Upstream                                |  |        | 4,136    |   |        | 
|Midstream – Refining                    |  |        | 301,925  |   |        | 
|Midstream – Liquefaction                |  |        | -        |   |        | 
|Downstream                              |  |        | 220,512  |   |        | 
|Corporate                               |  |        | 37,552   |   |        | 
|Consolidation entries                   |  |        | (207,686 | ) |        | 
|Total revenues                          |  |        | 356,439  |   |        | 
|Upstream                                |  |        | (873     | ) |        | 
|Midstream – Refining                    |  |        | 12,370   |   |        | 
|Midstream – Liquefaction                |  |        | 192      |   |        | 
|Downstream                              |  |        | 12,258   |   |        | 
|Corporate                               |  |        | 14,133   |   |        | 
|Consolidation entries                   |  |        | (12,199  | ) |        | 
|EBITDA (1)                              |  |        | 25,881   |   |        | 
|Upstream                                |  |        | (13,081  | ) |        | 
|Midstream – Refining                    |  |        | 13,401   |   |        | 
|Midstream – Liquefaction                |  |        | (394     | ) |        | 
|Downstream                              |  |        | 7,716    |   |        | 
|Corporate                               |  |        | 10,519   |   |        | 
|Consolidation entries                   |  |        | 384      |   |        | 
|Net profit/(loss)                       |  |        | 18,545   |   |        | 
|Net profit/(loss) per share (dollars)   |  |        |          |   |        | 
|Per Share – Basic                       |  |        | 0.38     |   |        | 
|Per Share – Diluted                     |  |        | 0.38     |   |        | 





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





Management Discussion and Analysis   INTEROIL CORPORATION   17









QUARTER
AND YEAR IN REVIEW



The following section provides a review
of the quarter and year ended December 31, 2012 for each of our business segments.



UPSTREAM – QUARTER AND YEAR
IN REVIEW



|Upstream – Operating results                 |  | Quarter ended December
    31, |         |   | Year ended December 31, | 
|-------------------------------------------- |  | ------------------------------ | ------- | - | ----------------------- | 
|($ thousands)                                |  | 2012                           |         |   | 2011                    | 
|Other non-allocated revenue                  |  |                                | 4,136   |   |                         | 
|Total revenue                                |  |                                | 4,136   |   |                         | 
|Office and administration and other expenses |  |                                | (7,274  | ) |                         | 
|Exploration costs                            |  |                                | 758     |   |                         | 
|Gain on conveyance of oil and gas properties |  |                                | 1,523   |   |                         | 
|Foreign exchange loss                        |  |                                | (16     | ) |                         | 
|EBITDA (1)                                   |  |                                | (873    | ) |                         | 
|Depreciation and amortization                |  |                                | (474    | ) |                         | 
|Interest expense                             |  |                                | (11,734 | ) |                         | 
|Loss before income taxes                     |  |                                | (13,081 | ) |                         | 
|Income tax expense                           |  |                                | -       |   |                         | 
|Net loss                                     |  |                                | (13,081 | ) |                         | 



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





Management Discussion and Analysis   INTEROIL CORPORATION   18







Analysis of Upstream Financial
Results Comparing the Quarters and Years Ended December 31, 2012 and 2011



The following analysis outlines the key
movements, the net of which primarily explains the variance in the results between the quarters and years ended December 31, 2012
and 2011.





|QuarterlyVariance($ millions) |        | Yearly Variance($ millions) |         | 
|----------------------------- | ------ | --------------------------- | ------- | 
|                              |        |                             |         | 
|                              | ($3.7) |                             | ($7.7)  | 
|                              |        |                             |         | 
|Ø                             | $2.2   |                             | $0.5    | 
|                              |        |                             |         | 
|Ø                             | ($8.8) |                             | ($6.8)  | 
|                              |        |                             |         | 
|Ø                             | $2.6   |                             | $4.5    | 
|                              |        |                             |         | 
|Ø                             | $1.5   |                             | $4.4    | 
|                              |        |                             |         | 
|Ø                             | $1.0   |                             | $1.2    | 
|                              |        |                             |         | 
|Ø                             | ($3.0) |                             | ($13.1) | 



MIDSTREAM - REFINING – QUARTER
AND YEAR IN REVIEW



|Midstream Refining – Operating results       |  | Quarter ended December 31, |          |   | Year ended December 31, | 
|-------------------------------------------- |  | -------------------------- | -------- | - | ----------------------- | 
|($ thousands)                                |  | 2012                       |          |   | 2011                    | 
|External sales                               |  |                            | 131,768  |   |                         | 
|Inter-segment revenue - Sales                |  |                            | 169,183  |   |                         | 
|Inter-segment revenue - Recharges            |  |                            | 967      |   |                         | 
|Interest and other revenue                   |  |                            | 7        |   |                         | 
|Total segment revenue                        |  |                            | 301,925  |   |                         | 
|Cost of sales and operating expenses         |  |                            | (283,432 | ) |                         | 
|Office and administration and other expenses |  |                            | (2,811   | ) |                         | 
|Derivative gain/(loss)                       |  |                            | 486      |   |                         | 
|Foreign exchange (loss)/gain                 |  |                            | (3,798   | ) |                         | 
|EBITDA (1)                                   |  |                            | 12,370   |   |                         | 
|Depreciation and amortization                |  |                            | (4,153   | ) |                         | 
|Interest expense                             |  |                            | (11,390  | ) |                         | 
|(Loss)/profit before income taxes            |  |                            | (3,173   | ) |                         | 
|Income tax benefit                           |  |                            | 16,574   |   |                         | 
|Net profit/(loss)                            |  |                            | 13,401   |   |                         | 
|                                             |  |                            |          |   |                         | 
|Gross Margin (2)                             |  |                            | 17,519   |   |                         | 



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

| | (2) | Gross margin is a non-GAAP measure
                                                                 and is “external sales” and “inter-segment
                                                                 revenue – sales” less “cost of sales and operating
                                                                 expenses” and is reconciled to IFRS under the heading “Non-GAAP
                                                                 Measures and Reconciliation”.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   19







Midstream - Refining Operating
Review



|                                                                          |  | Quarter ended December 31, |        |   | Year ended December 31, |  
|------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ----------------------- | -
|Key Refining Metrics                                                      |  | 2012                       |        |   | 2011                    |  
|Throughput (barrels per day)(1)                                           |  |                            | 26,438 |   |                         |  
|Capacity utilization (based on 36,500 barrels per day operating capacity) |  |                            | 58     | % |                         |  
|Cost of production per barrel                                             |  | $                          | 3.73   |   |                         | $
|Working capital financing cost per barrel of production                   |  | $                          | 0.57   |   |                         | $
|Distillates as percentage of production                                   |  |                            | 47.4   | % |                         |  



| | (1) | Throughput per day has been calculated
                                                            excluding shut down days. During year 2012 and 2011, the refinery
                                                            was shut down for 51 days and 82 days, respectively.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Analysis of Midstream - Refining
Financial Results Comparing the Quarters and Years ended December 31, 2012 and 2011



The following analysis outlines the key
movements, the net of which primarily explains the variance in the results between the quarters and years ended December 31, 2012
and 2011.







|Quarterly

Variance

($ millions) |        | Yearly 
Variance
        ($ millions) |         | 
|--------------------------------- | ------ | ------------------------------------- | ------- | 
|                                  |        |                                       |         | 
|                                  | ($2.3) |                                       | ($49.6) | 
|                                  |        |                                       |         | 
|Ø                                 | $18.4  |                                       | ($17.4) | 
|                                  |        |                                       |         | 
|Ø                                 | $0.3   |                                       | ($6.3)  | 
|                                  |        |                                       |         | 
|Ø                                 | ($9.6) |                                       | ($34.3) | 
|                                  |        |                                       |         | 
|Ø                                 | ($1.3) |                                       | ($1.6)  | 
|                                  |        |                                       |         | 
|Ø                                 | ($8.1) |                                       | ($8.2)  | 
|                                  |        |                                       |         | 
|Ø                                 | ($2.7) |                                       | $18.8   | 



Management Discussion and Analysis   INTEROIL CORPORATION   20







MIDSTREAM - LIQUEFACTION – QUARTER
AND YEAR IN REVIEW



|Midstream Liquefaction – Operating results   |  | Quarter ended December 31, |      |   | Year ended December 31, | 
|-------------------------------------------- |  | -------------------------- | ---- | - | ----------------------- | 
|($ thousands)                                |  | 2012                       |      |   | 2011                    | 
|Interest and other revenue                   |  |                            | -    |   |                         | 
|Total segment revenue                        |  |                            | -    |   |                         | 
|Office and administration and other expenses |  |                            | 192  |   |                         | 
|Foreign exchange gain/(loss)                 |  |                            | -    |   |                         | 
|EBITDA (1)                                   |  |                            | 192  |   |                         | 
|Depreciation and amortization                |  |                            | -    |   |                         | 
|Interest expense                             |  |                            | (586 | ) |                         | 
|Loss before income taxes                     |  |                            | (394 | ) |                         | 
|Income tax expense                           |  |                            | -    |   |                         | 
|Net loss                                     |  |                            | (394 | ) |                         | 



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



Management Discussion and Analysis   INTEROIL CORPORATION   21







Analysis of Midstream - Liquefaction
Financial Results Comparing the Quarters and Year ended December 31, 2012 and 2011



This segment’s results include the
proportionate consolidation of our interest in the joint venture development of the proposed midstream facilities of the LNG Project.
The development of these facilities is being progressed in joint venture with Pac LNG through PNG LNG. We currently have an economic
interest of 84.582% in PNG LNG.



The following analysis outlines the key
movements, the net of which primarily explains the variance in the results between the quarters and years ended December 31, 2012
and 2011.



|  | QuarterlyVariance($ millions) |  | YearlyVariance($ millions) |  |                                                                                                                                                                                                                          
|- | ----------------------------- |  | -------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  |                               |  |                            |  |                                                                                                                                                                                                                          
|  | $4.2                          |  | $12.6                      |  | Net loss variance for the comparative period
    primarily due to:                                                                                                                                                       
|  |                               |  |                            |  |                                                                                                                                                                                                                          
|Ø | $4.3                          |  | $13.6                      |  | Decrease in office, administration and other expenses was due to lower management expenses
    and share compensation costs related to the midstream facilities of the LNG Project development which are not capitalized.



DOWNSTREAM – QUARTER AND YEAR
IN REVIEW



|Downstream – Operating results               |  | Quarter ended December 31, |          |   | Year ended December 31, | 
|-------------------------------------------- |  | -------------------------- | -------- | - | ----------------------- | 
|($ thousands)                                |  | 2012                       |          |   | 2011                    | 
|External sales                               |  |                            | 219,892  |   |                         | 
|Inter-segment revenue - Sales                |  |                            | 59       |   |                         | 
|Interest and other revenue                   |  |                            | 561      |   |                         | 
|Total segment revenue                        |  |                            | 220,512  |   |                         | 
|Cost of sales and operating expenses         |  |                            | (203,202 | ) |                         | 
|Office and administration and other expenses |  |                            | (4,897   | ) |                         | 
|Foreign exchange (loss)/gain                 |  |                            | (155     | ) |                         | 
|EBITDA (1)                                   |  |                            | 12,258   |   |                         | 
|Depreciation and amortization                |  |                            | (1,135   | ) |                         | 
|Interest expense                             |  |                            | (337     | ) |                         | 
|Profit before income taxes                   |  |                            | 10,786   |   |                         | 
|Income tax expense                           |  |                            | (3,070   | ) |                         | 
|Net profit                                   |  |                            | 7,716    |   |                         | 
|                                             |  |                            |          |   |                         | 
|Gross Margin (2)                             |  |                            | 16,749   |   |                         | 



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

| | (2) | Gross margin is a non-GAAP measure
                                                            and is “external sales” and “inter-segment revenue
                                                            - sales” less “cost of sales and operating expenses”
                                                            and is reconciled to IFRS under the heading “Non-GAAP Measures
                                                            and Reconciliation”.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   22







Downstream Operating Review



|                                   |  | Quarter ended December 31, |       |  | Year ended December 31, |     
|---------------------------------- |  | -------------------------- | ----- |  | ----------------------- | ----
|Key Downstream Metrics             |  | 2012                       |       |  |                         | 2011
|Sales volumes (millions of liters) |  |                            | 188.8 |  |                         |     
|Average sales price per liter      |  | $                          | 2.37  |  |                         | $   



Analysis of Downstream Financial
Results Comparing the Quarters and Year ended December 31, 2012 and 2011



The following analysis outlines the key
movements, the net of which primarily explains the variance in the results between the quarters and years ended December 31, 2012
and 2011.



|QuarterlyVariance($ millions) |        | YearlyVariance($ millions) |        | 
|----------------------------- | ------ | -------------------------- | ------ | 
|                              |        |                            |        | 
|                              | $4.1   |                            | $21.0  | 
|                              |        |                            |        | 
|Ø                             | $7.2   |                            | $23.1  | 
|                              |        |                            |        | 
|Ø                             | ($0.2) |                            | ($3.0) | 
|                              |        |                            |        | 
|Ø                             | ($1.8) |                            | $8.5   | 
|                              |        |                            |        | 
|Ø                             | $0.3   |                            | ($1.1) | 
|                              |        |                            |        | 
|Ø                             | $0.8   |                            | $1.5   | 
|                              |        |                            |        | 
|Ø                             | ($2.5) |                            | ($8.6) | 



Management Discussion and Analysis   INTEROIL CORPORATION   23









CORPORATE – QUARTER AND YEAR
IN REVIEW



|Corporate – Operating results                |  | Quarter ended December 31, |         |   | Year ended December 31, | 
|-------------------------------------------- |  | -------------------------- | ------- | - | ----------------------- | 
|($ thousands)                                |  | 2012                       |         |   | 2011                    | 
|External sales                               |  |                            | 56      |   |                         | 
|Inter-segment revenue - Sales                |  |                            | 6,087   |   |                         | 
|Inter-segment revenue - Recharges            |  |                            | 18,838  |   |                         | 
|Interest revenue                             |  |                            | 12,567  |   |                         | 
|Other non-allocated revenue                  |  |                            | 4       |   |                         | 
|Total revenue                                |  |                            | 37,552  |   |                         | 
|Cost of sales and operating expenses         |  |                            | (5,217  | ) |                         | 
|Office and administration and other expenses |  |                            | (18,138 | ) |                         | 
|Derivative gain                              |  |                            | -       |   |                         | 
|Foreign exchange (loss)/gain                 |  |                            | (64     | ) |                         | 
|Loss on Flex LNG investment                  |  |                            | -       |   |                         | 
|EBITDA (1)                                   |  |                            | 14,133  |   |                         | 
|Depreciation and amortization                |  |                            | (683    | ) |                         | 
|Interest expense                             |  |                            | (1,601  | ) |                         | 
|Profit before income taxes                   |  |                            | 11,849  |   |                         | 
|Income tax expense                           |  |                            | (1,330  | ) |                         | 
|Net profit                                   |  |                            | 10,519  |   |                         | 
|                                             |  |                            |         |   |                         | 
|Gross Margin (2)                             |  |                            | 926     |   |                         | 



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

(2)   	     Gross
margin is a non-GAAP measure and is “external sales” and “inter-segment revenue - sales” less “cost
of sales and operating expenses” and is reconciled to IFRS under the heading “Non-GAAP Measures and Reconciliation”.



Analysis of Corporate Financial
Results Comparing the Quarters and Year ended December 31, 2012 and 2011



The following analysis outlines the key
movements, the net of which primarily explains the variance in the results between the quarters and years ended December 31, 2012
and 2011.



|QuarterlyVariance

($ millions) |         | YearlyVariance
        ($ millions) |        | 
|------------------------------- | ------- | ----------------------------------- | ------ | 
|                                |         |                                     |        | 
|                                | $2.9    |                                     | $11.2  | 
|                                |         |                                     |        | 
|Ø                               | $0.3    |                                     | $1.2   | 
|                                |         |                                     |        | 
|Ø                               | $14.3   |                                     | $2.4   | 
|                                |         |                                     |        | 
|Ø                               | $1.0    |                                     | $10.7  | 
|                                |         |                                     |        | 
|Ø                               | ($12.0) |                                     | ($5.0) | 
|                                |         |                                     |        | 
|Ø                               | $1.6    |                                     | $3.4   | 
|                                |         |                                     |        | 
|Ø                               | ($0.9)  |                                     | ($0.3) | 



Management Discussion and Analysis   INTEROIL CORPORATION   24







CONSOLIDATION ADJUSTMENTS –
QUARTER AND YEAR IN REVIEW



|Consolidation adjustments – Operating results    |  | Quarter ended December 31, |          |   | Year ended December 31, | 
|------------------------------------------------ |  | -------------------------- | -------- | - | ----------------------- | 
|($ thousands)                                    |  | 2012                       |          |   | 2011                    | 
|Inter-segment revenue - Sales                    |  |                            | (175,329 | ) |                         | 
|Inter-segment revenue - Recharges                |  |                            | (19,805  | ) |                         | 
|Interest revenue (1)                             |  |                            | (12,552  | ) |                         | 
|Total revenue                                    |  |                            | (207,686 | ) |                         | 
|Cost of sales and operating expenses (2)         |  |                            | 175,622  |   |                         | 
|Office and administration and other expenses (3) |  |                            | 19,865   |   |                         | 
|EBITDA (4)                                       |  |                            | (12,199  | ) |                         | 
|Depreciation and amortization(5)                 |  |                            | 31       |   |                         | 
|Interest expense(1)                              |  |                            | 12,552   |   |                         | 
|Profit/(loss) before income taxes                |  |                            | 384      |   |                         | 
|Income tax expense                               |  |                            | -        |   |                         | 
|Net profit/(loss)                                |  |                            | 384      |   |                         | 
|                                                 |  |                            |          |   |                         | 
|Gross Margin (6)                                 |  |                            | 293      |   |                         | 



| | (1) | Includes the elimination of interest accrued between
segments.
| | --- | --------------------------------------------------------------

| | (2) | Represents the elimination upon consolidation of our
refinery sales to other segments and other minor inter-company product sales.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------

| | (3) | Includes the elimination of inter-segment administration
service fees.
| | --- | ----------------------------------------------------------------------

| | (4) | EBITDA is a non-GAAP measure and is reconciled to IFRS
under the heading “Non-GAAP Measures and Reconciliation”.
| | --- | ----------------------------------------------------------------------------------------------------------------

| | (5) | Represents the amortization of a portion
                                                            of costs capitalized to assets on consolidation.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Gross margin is a non-GAAP measure and is “inter-segment
revenue elimination” less “cost of sales and operating expenses” and represents elimination upon consolidation
of our refinery sales to other segments. This measure is reconciled to IFRS under the heading “Non-GAAP Measures and Reconciliation”.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   25







Analysis of Consolidation
Adjustments Comparing the Quarter and Year ended December 31, 2012 and 2011



The following table outlines the key movements,
the net of which primarily explains the variance in the results between the quarters and years ended December 31, 2012 and 2011.



|QuarterlyVariance

($ millions) |      | YearlyVariance
        ($ millions) |        | 
|------------------------------- | ---- | ----------------------------------- | ------ | 
|                                |      |                                     |        | 
|                                | $0.1 |                                     | ($3.7) | 
|                                |      |                                     |        | 
|Ø                               | $0.1 |                                     | ($3.7) | 



LIQUIDITY AND CAPITAL RESOURCES










Summary of Debt Facilities



Summarized below are the debt facilities
available to us and the balances outstanding as at December 31, 2012.



|Organization                                      |  | Facility |             |  | Balance outstanding 
    December 31, 2012 |   |             | Effective interest
    rate |  |  | Maturity date |     
|------------------------------------------------- |  | -------- | ----------- |  | ------------------------------------------ | - | ----------- | --------------------------- |  |  | ------------- | ----
|ANZ, BSP and BNP syndicated secured loan facility |  | $        | 100,000,000 |  |                                            | $ | 100,000,000 |                             |  |  | 6.81          | %   
|BNP working capital facility                      |  | $        | 240,000,000 |  |                                            | $ | 94,290,479  | (1)                         |  |  | 2.67          | %   
|Westpac PGK working capital facility              |  | $        | 43,245,000  |  |                                            |   | -           |                             |  |  | -             |     
|BSP PGK working capital facility                  |  | $        | 24,025,000  |  |                                            |   | -           |                             |  |  | -             |     
|Westpac secured loan                              |  | $        | 12,857,000  |  |                                            | $ | 12,857,000  |                             |  |  | 4.73          | %   
|2.75% convertible notes                           |  | $        | 70,000,000  |  |                                            | $ | 70,000,000  |                             |  |  | 7.91          | %(3)
|Mitsui unsecured loan (2)                         |  | $        | 11,912,297  |  |                                            | $ | 11,912,297  |                             |  |  | 6.24          | %   





| | (1) | Excludes letters
                                                                              of credit totaling $139.5 million, which reduces
                                                                              the available borrowings under the facility to $6.2
                                                                              million at December 31, 2012.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Facility is to
                                                                            fund our share of the Condensate Stripping Project
                                                                            costs as they are incurred pursuant to the CSP JVOA
                                                                            with Mitsui.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Effective rate
                                                                            after bifurcating the equity and debt components of
                                                                            the $70 million principal amount of 2.75% convertible
                                                                            senior notes due 2015.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | In October 2012,
                                                                            the BNP Paribas working capital facility agreement
                                                                            with a maximum availability of $240,000,000 was amended
                                                                            so that the facility was made evergreen and the annual
                                                                            renewal requirement removed.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   26







While cash flows from operations are expected
to be sufficient to cover our operating commitments, should there be a major long term deterioration in refining or wholesale
and retail margins, our operations may not generate sufficient cash flows to cover all of the interest and principal payments
under our debt facilities noted above. Also, our exploration and development activities, planned development of the LNG Project
and Condensate Stripping Project require funding beyond our operational cash flows and the cash balances we currently hold. As
a result, we will be required to raise additional capital and/or refinance these facilities in the future. We can provide no assurances
that we will be able to obtain such additional capital or that our lenders will agree to refinance these debt facilities, or,
if available, that the terms of any such capital raising or refinancing will be acceptable to us.



ANZ, BSP and BNP Syndicated
Secured Loan (Midstream- Refinery)



On October 16, 2012, we entered into a
five year amortizing $100.0 million syndicated secured term loan facility with BNP, BSP, and ANZ. 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%. During the year ended December 31, 2012, the weighted average interest
rate under the facility was 6.81%.



The principal of the syndicated 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 $8.0 million each, the next two installments are for an amount of $10.0 million each, and the final four
installments are for an amount of $12.0 million each. The interest payments are to be made either in quarterly or half yearly
payments, at our election which has to be made in advance of the interest period. As at December 31, 2012, we have two installment
payments of $8.0 million each due for payment on this secured loan on May 9, 2013 and November 9, 2013. A cash restricted balance
of $ 11.3 million was held on deposit as at December 31, 2012 to secure our principal installment due on May 9, 2013 and interest
payments on the syndicated secured loan facility.



BNP Paribas Working Capital
Facility (Midstream - Refinery)



This working capital facility is used
to finance purchases of crude feedstock for our refinery. In accordance with the agreement with BNP Paribas, the total facility
is split into two components, Facility 1 and Facility 2, which are renewable annually and were renewed in February 2012 for another
year. In October 2012, the working capital facility agreement with a maximum availability of $240.0 million was amended so that
the facility was made evergreen and the annual renewal requirement removed. At December 31, 2012, Facility 1 had a limit of $190.0
million (after a temporary reallocation of $10.0 million limit from Facility 2 to Facility 1) and finances the purchases of crude
and hydrocarbon products through the issuance of documentary letters of credit and standby letters of credit, short term advances,
advances on merchandise, freight loans, and has a sublimit of Euro 18.0 million or the USD equivalent for hedging transactions.
Facility 2 allows borrowings of up to $60.0 million (reduced to $50.0 million at December 31, 2012 due to temporary reallocation
to Facility 1) and can be used for 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.



As of December 31, 2012, $6.2 million
remained available for use under the facility. The facility bears interest at LIBOR plus 3.5% on short term advances. The weighted
average interest rate under the working capital facility was 2.67% for the year ended December 31, 2012 (compared with 2.96% for
the same period of 2011), after including the reduction in interest due to the deposit amounts (restricted cash) maintained as
security.



Bank South Pacific and Westpac
Working Capital Facility (Downstream)



On October 24, 2008, we secured a combined
revolving working capital facility for our Downstream wholesale and retail petroleum products distribution business from BSP and
Westpac. The facility limit as at December 31, 2012 was PGK 140.0 million (approximately $66.6 million).



The Westpac facility limit is PGK 90.0
million (approximately $42.8 million). This facility was for an initial term of three years and was renewed in November 2011 for
a further three years to November 2014. The Westpac facility was increased in February 2012 by PGK 10.0 million (approximately
$4.8 million). The BSP facility limit is PGK 50.0 million (approximately $23.8 million), and was renewed in November 2012 for
another year ending in August 2013. As at December 31, 2012, none of this combined facility had been drawn down.



Management Discussion and Analysis   INTEROIL CORPORATION   27







The weighted average interest rate under
the Westpac facility was 10.0% for the year ended December 31, 2012, and the weighted average interest rate under the BSP facility
was 9.95% for the year ended December 31, 2012.



Westpac Secured Loan (Downstream)



During the quarter ended March 31, 2012,
we 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.



2.75% Convertible Notes (Corporate)



On November 10, 2010, we completed the
issuance of $70.0 million unsecured 2.75% convertible notes with a maturity of five years. The convertible notes rank junior to
any secured indebtedness and to all existing and future liabilities of us and our subsidiaries, including the BNP Paribas working
capital facility, the ANZ, BSP and BNP syndicated secured loan facility, the Westpac secured loan facility, the BSP and Westpac
working capital facilities, the Mitsui preliminary financing agreement, trade payables and lease obligations.



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



Mitsui Unsecured Loan (Upstream)



On April 15, 2010, we entered into preliminary
joint venture and financing agreements with Mitsui relating to the Condensate Stripping Project. On August 4, 2010, we entered
into the Condensate Stripping Project Joint Venture with Mitsui for the condensate stripping facilities. Mitsui and InterOil hold
equal interest in the joint venture. Mitsui is to be responsible for arranging or providing financing for the capital costs of
the condensate stripping facility.



The portion of funding that relates to
Mitsui’s share of the Condensate Stripping Project as at December 31, 2012, amounting to approximately $13.5 million, is
held in current liabilities as the agreement requires refund of all funds advanced by Mitsui under the preliminary financing agreement
if a positive FID is not reached. The portion of funding that relates to our share of the Condensate Stripping Project (amounting
to $11.9 million), funded by Mitsui, is classed as an unsecured loan and interest accrues daily based on LIBOR plus a margin of
6%. During the year ended December 31, 2012 the weighted average interest rate was 6.24%.



Other Sources of Capital



Currently our share of expenditures on
exploration wells, appraisal wells and extended well programs is funded by a combination of contributions made by capital raising
activities, operational cash flows, IPI holders, PNGDV, joint venture partners and asset sales.



Management Discussion and Analysis   INTEROIL CORPORATION   28







Cash calls are made on IPI holders, PNGDV
and Pac LNG (for its 2.5% direct interest in the Elk and Antelope fields acquired during 2009) for their share of amounts spent
on certain appraisal wells and extended well programs where they participate in such wells and programs pursuant to the relevant
agreements in place with them. Cash calls will also be made on PRE for exploration activities in PPL 237 and appraisal activities
in the Triceratops field.



The preliminary financing agreement entered
into with Mitsui provides for funding by Mitsui of all the costs relating to the Condensate Stripping Project. 50% of the funding
is for Mitsui’s share of the project and the other 50% is funding by Mitsui of our share of the project. There were $3.58
million contributions from Mitsui during the year ended December 31, 2012 for either Mitsui’s or our share, therefore leaving
the total contributions at $25.4 million. In the event that a positive FID is not reached or made within the time specified, we
will be required to refund all of Mitsui’s contributions (i.e. for our share and Mitsui’s) within a specified period.



On April 18, 2012, we signed a binding
HOA with PRE for PRE to be able to earn a 10.0% net (12.9% gross) participating interest in the PPL 237 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, we 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. On November 29, 2012, we executed the PRE JVOA and
related documents associated with the Farm-In Agreement. 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.



As at December 31, 2012, PRE has 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. The second cash payment of $20.0 million was paid in accordance with the Farm-In Agreement
under the advance payment facility. Subsequent to year end, in January 2013 a further $20.0 million of the staged cash payment
was received from PRE.



Summary of Cash Flows



|                                            |  | Year ended December 31, |         
|------------------------------------------- |  | ----------------------- | --------
|($ thousands)                               |  | 2012                    |         
|                                            |  |                         |         
|Net cash inflows/(outflows) from:           |  |                         |         
|Operations                                  |  |                         | (36,029 
|Investing                                   |  |                         | (169,713
|Financing                                   |  |                         | 185,698 
|Net cash movement                           |  |                         | (20,044 
|Opening cash                                |  |                         | 68,846  
|Exchange gains on cash and cash equivalents |  |                         | 1,058   
|Closing cash                                |  |                         | 49,860  



Revision to Consolidated Statement
of Cash Flows of 2011 and 2010



Under
Canadian GAAP, we 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. We 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
being eligible for classification as investing activities. The revision has no impact on basic or diluted earnings per share and
is a Cash Flow Statement reclassification only.



Management Discussion and Analysis   INTEROIL CORPORATION   29







Refer
to Note 3 of the audited annual consolidated financial statements for the year ended December 31, 2012 for further information
in relation to 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. In addition, the note also details the revisions made to the interim
Consolidated Statement of Cash Flows in our first and subsequent IFRS quarterly financial statements for the periods three months
ended March 31, 2012 and 2011, six months and quarters ended June 30, 2012 and 2011, and nine months and quarters ended September
30, 2012 and 2011.



Analysis of Cash Flows (Used
In)/Generated From Operating Activities Comparing the Years ended December 31, 2012 and 2011



The following table outlines the key variances
in the cash (outflows)/inflows from operating activities between the years ended December 31, 2012 and 2011:



|Yearly

variance

($ millions) |         | 
|------------------------------ | ------- | 
|                               |         | 
|                               | ($80.3) | 
|                               |         | 
|Ø                              | ($48.9) | 
|                               |         | 
|Ø                              | ($31.4) | 





Analysis of Cash Flows Used
In Investing Activities Comparing the Years ended December 31, 2012 and 2011



The following table outlines the key variances
in the cash (outflows)/inflows from investing activities between the years ended December 31, 2012 and 2011:



|Yearly

variance |         | 
|---------------- | ------- | 
|($ millions)     |         | 
|                 |         | 
|                 | $16.1   | 
|                 |         | 
|Ø                | ($67.7) | 
|                 |         | 
|Ø                | $2.7    | 
|                 |         | 
|Ø                | $5.4    | 
|                 |         | 
|Ø                | $20.0   | 
|                 |         | 
|Ø                | $23.7   | 
|                 |         | 
|Ø                | $7.5    | 
|                 |         | 
|Ø                | ($17.8) | 
|                 |         | 
|Ø                | $42.3   | 





Management Discussion and Analysis   INTEROIL CORPORATION   30







Analysis of Cash Flows Generated
From/(Used In) Financing Activities Comparing the Years ended December 31, 2012 and 2011



The following table outlines the key variances
in the cash inflows/(outflows) from financing activities between years ended December 31, 2012 and 2011:



|Yearly

variance

($ millions) |         | 
|------------------------------ | ------- | 
|                               |         | 
|                               | $212.9  | 
|                               |         | 
|Ø                              | ($26.5) | 
|                               |         | 
|Ø                              | ($6.3)  | 
|                               |         | 
|Ø                              | $12.9   | 
|                               |         | 
|Ø                              | ($2.3)  | 
|                               |         | 
|Ø                              | $20.0   | 
|                               |         | 
|Ø                              | $112.6  | 
|                               |         | 
|Ø                              | $95.9   | 
|                               |         | 
|Ø                              | $6.6    | 



Capital Expenditures



Upstream Capital Expenditures



Capital expenditures for our Upstream
segment in Papua New Guinea for the year ended December 31, 2012 were $147.8 million, compared with $107.6 million during the
same period of 2011.



Management Discussion and Analysis   INTEROIL CORPORATION   31







The following table outlines the key expenditures
in the year ended December 31, 2012:



|Yearly

($ millions) |        | 
|-------------------- | ------ | 
|                     |        | 
|                     | $147.8 | 
|                     |        | 
|Ø                    | $26.3  | 
|                     |        | 
|Ø                    | $26.4  | 
|                     |        | 
|Ø                    | $26.4  | 
|                     |        | 
|Ø                    | $25.0  | 
|                     |        | 
|Ø                    | $9.4   | 
|                     |        | 
|Ø                    | $19.5  | 
|                     |        | 
|Ø                    | $2.5   | 
|                     |        | 
|Ø                    | $12.3  | 



Midstream – Refining
Capital Expenditures



Capital expenditures totaled $12.2 million
in our Midstream - Refining segment for the year ended December 31, 2012, mainly associated with camp, office building works and
tank works.



Midstream – Liquefaction
Capital Expenditures



Capital expenditures for our LNG segment
in Papua New Guinea for the year ended December 31, 2012 were $10.2 million, mainly associated with project management teams’
costs and sub-contractors costs incurred for the LNG Project.



Downstream Capital Expenditures



Capital expenditures for the Downstream
segment totaled $12.7 million for the year ended December 31, 2012. These expenditures mainly related to a number of upgrade projects
across various terminals and depots, and also included amounts spent on our first retail site.



Capital Requirements



The oil and gas exploration and development,
refining and liquefaction industries are capital intensive and our business plans necessitate raising of additional capital. The
availability and cost of such capital is highly dependent on market conditions at the time we raise such capital. No assurance
can be given that we will be successful in obtaining new capital on terms that are acceptable to us, particularly given current
market volatility.



Management Discussion and Analysis   INTEROIL CORPORATION   32







The majority of our “net cash from
operating activities” adjusted for “proceeds from/(repayments of) working capital facilities” is used in our
appraisal and development programs for the Elk, Antelope, and Triceratops fields in PNG. Our net cash from operating activities
is not sufficient to fund those appraisal and development programs, the LNG Project or the Condensate Stripping Project.



Upstream



We are required under our $125.0 million
IPI Agreement of 2005 to drill eight exploration wells. We have drilled four wells to date. As at December 31, 2012, we are committed
under the terms of our exploration licenses or PPL’s to spend a further $49.3 million through 2014. As at December 31, 2012,
management estimates that satisfying these license commitments with the expenditure of $49.3 million 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.
The actual gross costs of drilling final exploration four wells in relation to the IPI Agreement may cost more than what is required
to satisfy our license commitments.



In addition, the terms of grant of PRL
15 require us to spend $73.0 million on the development of the Elk and Antelope fields by the end of 2014. All work program commitments
with the exception of two wells, are complete. We have spent $268.0 million on PRL 15 which includes seismic, Herd Base/Hou Creek
wharf and camps, roads, FEED for wells, gas gathering, condensate stripping, and pipelines. $56.0 million of the expenditures
to date relates to the $73.0 million commitment. Expenditure on the drilling of the Elk-3 well will, in addition to a second well
prior to license renewal date in 2014, meet our well commitment requirements under the license.



We do not have sufficient funds to complete
planned exploration and development activities and we will need to raise additional funds in order for us to complete the programs
and meet our exploration commitments. Therefore, we must extend or secure sufficient funding through renewed borrowings, equity
raising and/or asset sales to enable the availability of sufficient cash to meet these obligations over time and complete these
long term plans. No assurances can be given that we will be successful in obtaining new capital on terms acceptable to us, or
at all, particularly given recent market volatility.



We will also be required to obtain substantial
amounts of financing for the development of the Elk, Antelope and Triceratops fields, condensate stripping and associated facilities,
pipelines and LNG export terminal facilities, and it will take a number of years to complete these projects. In the event that
positive FID is reached in respect of these projects, we seek to be in a position to access the capital markets and/or sell an
interest in our upstream properties in order to raise adequate capital. In September 2011, we retained financial advisors to help
solicit and evaluate proposals from potential strategic partners to acquire interests in our Elk and Antelope fields, LNG Project
and exploration licenses. The solicitation process is now under way and we believe if successful, it will provide a further source
of funds for exploration and development activities. No assurances can be given that we will be able to attract strategic partners
on terms acceptable to us.



The availability and cost of various sources
of financing is highly dependent on market conditions and our condition at the time we raise such capital and we can provide no
assurances that we will be able to obtain such financing or conduct such sales on terms that are acceptable.



Midstream - Refining



We believe that we will have sufficient
funds from our operating cash flows to pay our estimated capital expenditures associated with our Midstream Refining segment in
2013. We also believe cash flows from operations will be sufficient to cover the costs of operating our refinery and the financing
charges incurred under our crude import facility. Should there be long term deterioration in refining margins, our refinery may
not generate sufficient cash flows to cover all of the interest and principal payments under our secured loan agreements. As a
result, we may be required to raise additional capital and/or refinance these facilities in the future.



Management Discussion and Analysis   INTEROIL CORPORATION   33







Midstream - Liquefaction



Completion of the LNG Project will require
substantial amounts of financing and construction will take a number of years to complete. As a joint venture partner in development,
if the project is completed, we would be required to fund our share of certain common facilities of the development. No assurances
can be given that we will be able to source sufficient gas, successfully construct such a facility, or as to the timing of such
construction. The availability and cost of capital is highly dependent on market conditions and our circumstances at the time
we raise such capital.



In September 2011, we retained Morgan
Stanley & Company LLC, Macquarie Capital (USA) Inc. and UBS AG to help solicit and evaluate proposals from potential strategic
partners to, amongst other things, obtain an interest in, operate and help finance the development of the LNG Project. We have
received conforming and non-conforming bids for the LNG partnering and sell down of an interest in the Elk and Antelope fields
that we believe would be accretive to shareholders. Final bids are due by February 28, 2013, following which we expect to choose
a partner in March 2013. The end result of the partnering process is expected to fully satisfy all the terms of the 2009 LNG Project
Agreement. No assurances can be given that we will be able to attract a strategic partner on terms acceptable to us, and we cannot
advise at this time as to how such an agreement will affect our current LNG Project plans or whether such a partner will be acceptable
to the PNG government.



Downstream



We believe on the basis of current market
conditions and the status of our business that our cash flows from operations will be sufficient to meet our estimated capital
expenditures for our wholesale and retail distribution business segment for 2013. Should there be a major long term deterioration
in wholesale or retail margins, our downstream business operations may not generate sufficient cash flows to cover all of the
interest and principal payments under our loan agreements. As a result, we may be required to raise additional capital and/or
refinance these facilities in the future.



Contractual Obligations and Commitments



The following table contains information
on payments required to meet contracted exploration and debt obligations due for each of the next five years and thereafter. It
should be read in conjunction with our audited consolidated financial statements for year ended December 31, 2012 and the notes
thereto:



|                                                 |  | Payments Due by Period |        
|------------------------------------------------ |  | ---------------------- | -------
|Contractual obligations  ($ thousands)           |  | Total                  |        
|Petroleum prospecting and retention licenses (a) |  |                        | 69,952 
|Secured and unsecured loans                      |  |                        | 159,779
|2.75% Convertible notes obligations              |  |                        | 75,615 
|Indirect participation interest - PNGDV          |  |                        | 1,384  
|Total                                            |  |                        | 306,730



| | (a) | The amount pertaining to the petroleum
                                                            prospecting and retention licenses represents the amount we have committed
                                                            as a condition on renewal of these licenses. We are committed to spend
                                                            a further $49.3 million as a condition of renewal of our petroleum
                                                            prospecting licenses through 2014 under our exploration licenses.
                                                            As at December 31, 2012, management estimates that satisfying this
                                                            license commitment with the expenditure of $49.3 million 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 PRL 15, requires
                                                            us to spend a further $20.7 million on the development of the Elk
                                                            and Antelope fields by the end of 2014.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   34







The following table contains information
on payments required to meet our operating lease commitments. It should be read in conjunction with our audited financial statements
for the year ended December 31, 2012 and the notes thereto:



|                                             |  | Year ended December 31, |       
|-------------------------------------------- |  | ----------------------- | ------
|($ thousands)                                |  | 2012                    |       
|                                             |  |                         |       
|Not later than 1 year                        |  |                         | 16,252
|Later than 1 year and not later than 5 years |  |                         | 8,006 
|Later than 5 years                           |  |                         | 3,123 
|Total                                        |  |                         | 27,381



Off Balance Sheet Arrangements



Neither during the year ended, nor as
at December 31, 2012, did we have any off balance sheet arrangements or any relationships with unconsolidated entities or financial
partnerships.



Transactions with Related Parties



During the year ended December 31, 2012,
we did not have any transactions with any related parties.



Share Capital



Our authorized share capital consists
of an unlimited number of common shares and unlimited number of preferred shares, of which 1,035,554 series A preferred shares
are authorized (none of which are outstanding). As of December 31, 2012, we had 48,607,398 common shares (50,899,454 common shares
on a fully diluted basis) and no preferred shares issued and outstanding. The potential dilutive instruments outstanding as at
December 31, 2012 included employee stock options and restricted stock in respect of 1,219,551 common shares, IPI conversion rights
to 140,480 common shares and 732,025 common shares relating to the $70.0 million principal amount 2.75% convertible senior notes
due November 15, 2015.



Derivative Instruments



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



Generally, we purchase crude feedstock
two months in advance, whereas the supply/export of finished products will take place after the crude feedstock is discharged
and processed. Due to the fluctuation in prices during this period, we use various derivative instruments as a tool to reduce
the risks of changes in the relative prices of our crude feedstocks and refined products. These derivatives, which we use to manage
our price risk, effectively enable us to lock-in the refinery margin such that we are protected in the event that the difference
between our sale price of the refined products and the acquisition price of our crude feedstocks contracts is reduced. Conversely,
when we have locked-in the refinery margin and if the difference between our sales price of the refined products and our acquisition
price of crude feedstocks expands or increases, then the benefits would be limited to the locked-in margin.



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



Management Discussion and Analysis   INTEROIL CORPORATION   35







At December 31, 2012, we had a net receivable
of $0.2 million (December 31, 2011 – receivable of $0.6 million) relating to open contracts to sell gasoil crack swaps;
buy/sell dated Brent swaps; and sell Naphtha crack swaps for which hedge accounting has not been applied, and the swaps that have
been priced out as of December 31, 2012 and will be settled in future.



INDUSTRY
TRENDS AND KEY EVENTS



Competitive Environment and Regulated
Pricing



We are currently the sole refiner of hydrocarbons
in Papua New Guinea although there is no legal restraint upon other refineries being established. The PNG Government has agreed
to ensure that all domestic distributors purchase their refined petroleum products from our refinery, or any other refinery which
is constructed in Papua New Guinea, at an Import Parity Price (“IPP”). The IPP is monitored by the ICCC. In general,
the IPP is the price that would be paid in Papua New Guinea for a refined product being imported. For all price controlled products
(diesel, unleaded petrol, kerosene and aviation fuel) produced and sold locally in Papua New Guinea, the IPP is calculated by
adding the costs that would typically be incurred to import such product to MOPS, which is the benchmark price for refined products
in the region in which we operate.



In our refining business, we compete with
several companies for available supplies of crude oil and other feedstocks and for outlets for our refined products. Many of our
competitors obtain a significant portion of their feedstocks from company-owned production, which may enable them to obtain feedstocks
at a lower cost. The high cost of transporting goods to and from Papua New Guinea reduces the availability of alternate fuel sources
and retail outlets for our refined products. Competitors that have their own production or extensive distribution networks are
at times able to offset losses from refining operations with profits from producing or retailing operations, and may be better
positioned to withstand periods of depressed refining margins or feedstock shortages. In addition, new technology is making refining
more efficient, which could lead to lower prices and reduced margins. We cannot be certain that we will be able to implement new
technologies in a timely basis or at a cost that is acceptable to us.



We are also a significant participant
in the retail and wholesale distribution business in Papua New Guinea. The ICCC regulates the maximum prices and margins that
may be charged by the wholesale and retail hydrocarbon distribution industry in Papua New Guinea. Margins were last reviewed by
the ICCC in quarter ended December 31, 2012 and will be further reviewed in quarter ended December 31, 2013. We and our competitors
may charge less than the maximum margin set by the ICCC in order to maintain competitiveness.



Our main competitor in the wholesale and
retail distribution business in Papua New Guinea is ExxonMobil. We also compete with smaller local distributors of petroleum products.
Our competitors source small quantities from our refinery from both the refinery gantry for the Port Moresby market and by tanker
vessel for the markets outside Port Moresby. Our major competitive advantage is the large widespread distribution network we maintain
with adequate storage capacity that services most areas of PNG. We also believe that our commitment to the distribution business
in Papua New Guinea at a time when major-integrated oil and gas companies exited the Papua New Guinea fuel distribution market
provides us with a competitive advantage. However, major-integrated oil and gas companies such as ExxonMobil have greater resources
than we do and could if they decided to do so, expand much more rapidly in this market than we can.



Management Discussion and Analysis   INTEROIL CORPORATION   36







Our proposed LNG Project faces competition,
including competing liquefaction facilities and related infrastructure, from competitors with far greater resources, including
major international energy companies. Many competing companies have secured access to, or are pursuing development or acquisition
of, liquefaction facilities to serve the same markets we intend to target. In addition, competitors have developed or reopened
additional liquefaction facilities in other international markets, which may also compete with our LNG Project. Almost all of
these competitors have longer operating histories, more development experience, greater name recognition, larger staffs and substantially
greater financial, technical and marketing resources and access to natural gas and LNG supplies than we do. The superior resources
that these competitors have available for deployment could allow them to compete successfully against our LNG businesses, which
could have a material adverse effect on our business, results of operations, financial condition, liquidity and prospects.



Financing Arrangements



We continue to monitor liquidity risk
by setting of acceptable gearing levels and ensuring they are monitored. Our aim is to maintain our debt-to-capital ratio, or
gearing levels, (debt divided by (shareholders’ equity plus debt)) at 50% or less. This was achieved throughout 2012 and
2011. Gearing levels were 19% in December 2012, 12% in December 2011 and 13% in December 2010.



On November 10, 2010, we completed concurrent
public offerings of $70.0 million aggregate principal amount of 2.75% convertible senior notes due 2015 and 2,800,000 common shares
at a price of $75.00 per share for proceeds of $210.0 million, raising gross proceeds of $280.0 million from the combined offerings.



During the year ended December 31, 2012,
we entered into a five year amortizing $100 million syndicated secured term loan facility with BNP, BSP and ANZ. The borrowings
under the facility were used to repay all outstanding amounts under the term loan granted by OPIC, and the remaining funds will
be used for general corporate purposes.



For details of other financial arrangements
in place, see “Liquidity and Capital Resources – Summary of Debt Facilities”.



We had
cash, cash equivalents and cash restricted of $98.9 million as at December 31, 2012, of which $49.0 million was restricted (as
governed by BNP working capital facility utilization requirements and ANZ, BSP and BNP syndicated secured loan facility). With
regard to our cash and cash equivalents, we invest in bankers acceptances and money market instruments with major financial institutions
that we believe are creditworthy. We also had $6.2 million of the combined BNP working capital facility available for use in our
Midstream – Refining operations, and $66.6 million of the Westpac/BSP combined working capital facility available for use
in our Downstream operations.



Crude Prices



Crude prices fluctuated throughout 2012,
with the price of Dated Brent crude oil (as quoted by Platts) starting the year at $111 per barrel and closing the year at $110
per barrel. The average price for Dated Brent for 2012 was $112 per barrel compared with $111 per barrel for Dated Brent for 2011
and $81 per barrel for Dated Brent for 2010. Dated Brent peaked in March 2012 at $128 per barrel and was at its lowest in June
2012 at $88 per barrel.



At year end, we had $6.2 million of the
combined BNP working capital facility available for use in our Midstream – Refining operations, and approximately $66.6
million of the Westpac/BSP combined working capital facility available for use in our Downstream operations. Any increase in prices
will have an impact on the utilization of our working capital facilities, and related interest and financing charges on the utilized
amounts.



Any volatility of crude prices means that
we face significant timing and margin risk on our crude cargos. A significant portion of this timing and margin risk is managed
by us through short and long term hedges. There was a net receivable of $0.2 million relating to open contracts to sell gasoil
crack swaps and Naphtha crack swaps and buy/sell Dated Brent swaps for which hedge accounting has not been applied.



Refining Margin



The distillation process used by our refinery
to convert crude feedstocks into refined products is commonly referred to as hydroskimming.  While the Singapore Tapis hydroskimming
margin is a useful indicator of the general margin available for hydroskimming refineries in the region in which we operate, it
should be noted that the differences in our approach to crude selection, transportation costs and IPP pricing work so that our
realized margin generally differs to some extent.



Management Discussion and Analysis   INTEROIL CORPORATION   37







Distillate margins to Dated Brent strengthened
during 2012 compared with historical levels due to increasing demand. Naphtha crack spreads were negative for all of 2012, which
negatively affects our gross margin for the period.



Domestic Demand



Sales results for our refinery for 2012
indicate that Papua New Guinea’s domestic demand for middle distillates (which includes diesel and jet fuels) from the refinery
has increased by approximately 10.8% compared with 2011.  However, the total volume of all products sold by us was 8.5 million
barrels for fiscal year 2012 compared with 7.2 million barrels in 2011 and 7.2 million barrels in 2010.  Total volume of
PNG domestic sales only for 2012 was 5.3 million barrels as compared with 4.6 million barrels in 2011 and 4.3 million barrels
in 2010.



The refinery on average sold 13,978 barrels
per day of refined petroleum products to the domestic market during fiscal year 2011 compared with 12,649 barrels per day in 2011
and 11,780 barrels per day in 2010.



Interest Rates



The LIBOR USD overnight rate is the benchmark
floating rate used in our midstream working capital facility and therefore accounts for a significant proportion of our interest
rate exposure. The LIBOR USD overnight rate remained constant between 0.15% and 0.20% for the majority of 2012. Any rate increases
would add additional cost to financing our crude cargoes and vice versa as our BNP Paribas working capital facility is linked
to LIBOR rates. See “Liquidity and Capital Resources – Summary of Debt Facilities”.



Exchange Rates



Changes in the PGK to USD exchange rate
can affect our Midstream Refinery results as there is a timing difference between the foreign exchange rates utilized when setting
the monthly IPP, which is set in PGK, and the foreign exchange rate used to convert the subsequent receipt of PGK proceeds to
USD to repay our crude cargo borrowings. The PGK has weakened against the USD in the second half of the financial year ended December
31, 2012 (from 0.4840 to 0.4755).



Changes in the AUD and SGD to USD exchange
rate can affect our 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, we are 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. We have entered
into AUD to USD foreign currency forward contracts to manage the foreign exchange risk in relation to the expenses to be incurred
in AUD.



RISK
FACTORS



Our business operations and financial
position are subject to a range of risks. A summary of the key risks that may impact upon the matters addressed in this document
have been included under section “Forward Looking Statements” above. Detailed risk factors can be found under the
heading “Risk Factors” in our 2012 Annual Information Form available at www.sedar.com.



Management Discussion and Analysis   INTEROIL CORPORATION   38







CRITICAL
ACCOUNTING ESTIMATES



The preparation of financial statements
in accordance with IFRS requires our management to make estimates and assumptions that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual results could differ from those estimates. The effect of changes in estimates
on future periods have not been disclosed in the consolidated financial statements as estimating it is impracticable. The following
accounting policies involve estimates that are considered critical due to the level of sensitivity and judgment involved, as well
as the impact on our consolidated financial position and results of operations. The information about our critical accounting
estimates should be read in conjunction with Note 2 of the notes to our consolidated financial statements for the year ended
December 31, 2012, available at www.sedar.com which summarizes our significant accounting policies.



Income Taxes



We use the asset and liability method
of accounting for income taxes. Under the asset and liability method, 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, we consider 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 we adjust the estimates in future periods, a reduction
in our deferred tax assets will result in a corresponding increase in deferred tax expenses.



Oil and Gas Properties



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



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. During the quarter ended June 30, 2011, Management received
the 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.
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 asset retirement obligation as at December 31, 2012 was $4,978,334. If we adjust the estimates
in future periods, it may result in increased capital expenditures and a corresponding increase in liabilities.



Management Discussion and Analysis   INTEROIL CORPORATION   39







Environmental Remediation



Remediation costs are accrued based on
estimates of known environmental remediation exposure. Ongoing environmental compliance costs, including maintenance and monitoring
costs, are expensed as incurred. Provisions are determined on an assessment of current costs, current legal requirements and current
technology. Changes in estimates are dealt with on a prospective basis. We currently do not have any amounts accrued for environmental
remediation obligations as current legislation does not require it. Future legislative action and regulatory initiatives could
result in changes to our operating permits which may result in increased capital expenditures and operating costs.



Impairment of Long-Lived Assets



We are required to review the carrying
value of all property, plant and equipment, including the carrying value of oil and gas assets, and goodwill for potential impairment.
We test long-lived assets for recoverability whenever events or changes in circumstances indicate that its carrying amount may
not be recoverable by the future discounted cash flows. Due to the significant
subjectivity of the assumptions used to test for recoverability and to determine fair value, changes in market conditions could
result in significant impairment charges in the future, thus affecting our earnings. Our impairment evaluations are based on assumptions
that are consistent with our business plans.



Legal and Other Contingent
Matters



We are required to determine whether a
loss is probable based on judgment and interpretation of laws and regulations and whether the loss can reasonably be estimated.
When the amount of a contingent loss is determined it is charged to earnings. Our management continually monitors known and potential
contingent matters and makes appropriate provisions by charges to earnings when warranted by circumstances.



NEW
ACCOUNTING STANDARDS



New accounting standards not yet
applicable as at December 31, 2012



The
following new standards 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
                                                                                                                          we currently
                                                                                                                          consolidate
                                                                                                                          as 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
                                                                                                                          we will
                                                                                                                          therefore
                                                                                                                          equity
                                                                                                                          account
                                                                                                                          for
                                                                                                                          its
                                                                                                                          interest
                                                                                                                          in the
                                                                                                                          LNG
                                                                                                                          Project
                                                                                                                          as compared
                                                                                                                          to the
                                                                                                                          current
                                                                                                                          treatment
                                                                                                                          of proportional
                                                                                                                          consolidation.
                                                                                                                          We will
                                                                                                                          reassess
                                                                                                                          the
                                                                                                                          impact
                                                                                                                          of this
                                                                                                                          standard
                                                                                                                          taking
                                                                                                                          into
                                                                                                                          consideration
                                                                                                                          the
                                                                                                                          final
                                                                                                                          outcome
                                                                                                                          of the
                                                                                                                          ongoing
                                                                                                                          sell
                                                                                                                          down
                                                                                                                          transaction
                                                                                                                          process
                                                                                                                          in relation
                                                                                                                          to the
                                                                                                                          Elk
                                                                                                                          and
                                                                                                                          Antelope
                                                                                                                          fields.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   40







| | - | 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,
                                                                                                                          we 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
                                                                                                                          in our
                                                                                                                          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 our
                                                                                                                          financial
                                                                                                                          statements.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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,
                                                                                                                          we will
                                                                                                                          have
                                                                                                                          to equity
                                                                                                                          account
                                                                                                                          for
                                                                                                                          its
                                                                                                                          interest
                                                                                                                          in the
                                                                                                                          LNG
                                                                                                                          Project
                                                                                                                          in accordance
                                                                                                                          with
                                                                                                                          IAS
                                                                                                                          28.
                                                                                                                          We 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION   41







NON-GAAP
MEASURES AND RECONCILIATION



Non-GAAP measures, including gross margin
and EBITDA, included in this MD&A are not defined nor have a standardized meaning prescribed by IFRS or our previous GAAP;
accordingly, they may not be comparable to similar measures provided by other issuers. Gross margin is a non-GAAP measure and
is “sales and operating revenues” less “cost of sales and operating expenses”. The following table reconciles
sales and operating revenues, a GAAP measure, to gross margin:



|Consolidated – Operating results     |  | Year ended December 31, |           
|------------------------------------ |  | ----------------------- | ----------
|($ thousands)                        |  | 2012                    |           
|Midstream – Refining                 |  |                         | 1,095,925 
|Downstream                           |  |                         | 862,958   
|Corporate                            |  |                         | 22,846    
|Consolidation Entries                |  |                         | (673,677  
|Sales and operating revenues         |  |                         | 1,308,052 
|Midstream – Refining                 |  |                         | (1,071,852
|Downstream                           |  |                         | (800,217  
|Corporate (1)                        |  |                         | (18,905   
|Consolidation Entries                |  |                         | 671,786   
|Cost of sales and operating expenses |  |                         | (1,219,188
|Midstream – Refining                 |  |                         | 24,073    
|Downstream                           |  |                         | 62,741    
|Corporate (1)                        |  |                         | 3,941     
|Consolidation Entries                |  |                         | (1,891    
|Gross Margin                         |  |                         | 88,864    



| | (1) | Corporate expenses are classified
                                                            below the gross margin line and mainly relates to ‘Office and
                                                            admin and other expenses’ and ‘Interest expense’.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



EBITDA represents our net income/(loss)
plus total interest expense (excluding amortization of debt issuance costs), income tax expense, depreciation and amortization
expense. EBITDA is used by us to analyze operating performance. EBITDA does not have a standardized meaning prescribed by GAAP
(i.e. IFRS) and, therefore, may not be comparable with the calculation of similar measures for other companies. The items excluded
from EBITDA are significant in assessing our operating results. Therefore, EBITDA should not be considered in isolation or as
an alternative to net earnings, operating profit, net cash provided from operating activities and other measures of financial
performance prepared in accordance with IFRS. Further, EBITDA is not a measure of cash flow under IFRS and should not be considered
as such.



Management Discussion and Analysis   INTEROIL CORPORATION   42







The following table reconciles net income
(loss), a GAAP measure, to EBITDA, a non-GAAP measure for each of the last eight quarters.



|Quarters ended                                                     |  | 2012   |         |   | 2011   | 
|------------------------------------------------------------------ |  | ------ | ------- | - | ------ | 
|($ thousands)                                                      |  | Dec-31 |         |   | Sep-30 | 
|Upstream                                                           |  |        | (873    | ) |        | 
|Midstream – Refining                                               |  |        | 12,370  |   |        | 
|Midstream – Liquefaction                                           |  |        | 192     |   |        | 
|Downstream                                                         |  |        | 12,258  |   |        | 
|Corporate                                                          |  |        | 14,133  |   |        | 
|Consolidation Entries                                              |  |        | (12,199 | ) |        | 
|Earnings before interest, taxes, depreciation
    and amortization |  |        | 25,881  |   |        | 
|Subtract:                                                          |  |        |         |   |        | 
|Upstream                                                           |  |        | (11,734 | ) |        | 
|Midstream – Refining                                               |  |        | (11,390 | ) |        | 
|Midstream – Liquefaction                                           |  |        | (586    | ) |        | 
|Downstream                                                         |  |        | (337    | ) |        | 
|Corporate                                                          |  |        | (1,601  | ) |        | 
|Consolidation Entries                                              |  |        | 12,552  |   |        | 
|Interest expense                                                   |  |        | (13,096 | ) |        | 
|Upstream                                                           |  |        | -       |   |        | 
|Midstream – Refining                                               |  |        | 16,574  |   |        | 
|Midstream – Liquefaction                                           |  |        | -       |   |        | 
|Downstream                                                         |  |        | (3,070  | ) |        | 
|Corporate                                                          |  |        | (1,330  | ) |        | 
|Consolidation Entries                                              |  |        | -       |   |        | 
|Income taxes                                                       |  |        | 12,174  |   |        | 
|Upstream                                                           |  |        | (474    | ) |        | 
|Midstream – Refining                                               |  |        | (4,153  | ) |        | 
|Midstream – Liquefaction                                           |  |        | 0       |   |        | 
|Downstream                                                         |  |        | (1,135  | ) |        | 
|Corporate                                                          |  |        | (683    | ) |        | 
|Consolidation Entries                                              |  |        | 31      |   |        | 
|Depreciation and amortisation                                      |  |        | (6,414  | ) |        | 
|Upstream                                                           |  |        | (13,081 | ) |        | 
|Midstream – Refining                                               |  |        | 13,401  |   |        | 
|Midstream – Liquefaction                                           |  |        | (394    | ) |        | 
|Downstream                                                         |  |        | 7,716   |   |        | 
|Corporate                                                          |  |        | 10,519  |   |        | 
|Consolidation Entries                                              |  |        | 384     |   |        | 
|Net profit/(loss) per segment                                      |  |        | 18,545  |   |        | 



PUBLIC
SECURITIES FILINGS



You may access additional information
about us, including our 2012 Annual Information Form, in documents filed with the Canadian Securities Administrators at www.sedar.com,
and in documents, including our Form 40-F, filed with the U.S. Securities and Exchange Commission at www.sec.gov. Additional information
is also available on our website www.interoil.com.



Management Discussion and Analysis   INTEROIL CORPORATION   43







DISCLOSURE
CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING



Our certifying officers have designed
disclosure controls and procedures, as such term is defined in National Instrument 52-109 - Certification of Disclosure in
Issuer’s Annual and Interim Filings (“NI 52-109”), or caused them to be designed under their supervision,
to provide reasonable assurance that all material information required to be disclosed by us in our annual filings, interim filings
and other reports is recorded, processed, summarized and reported within the time periods specified in applicable Canadian securities
legislation, and includes controls and procedures designed to ensure that information required to be disclosed by us in our annual
filings, interim filings and other reports filed under Canadian Securities legislation is accumulated and communicated to our
management as appropriate to allow timely decisions regarding disclosure.



Our certifying officers are responsible
for establishing and maintaining internal control over financing reporting (“ICFR”), as such term is defined in NI
52-109. The control framework our officers used to design our ICFR is the framework established by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) entitled – Internals Controls – Integrated Framework.



Under the supervision of the CEO and the
CFO, the Company conducted an evaluation of the effectiveness of our ICFR as at December 31, 2012 based on the COSO Framework.
Based on this evaluation, they concluded that as of December 31, 2012, our ICFR provides reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS.



During the year ended December 31, 2012,
there were no changes in our ICFR that have materially affected, or are reasonably likely to affect, our ICFR.



GLOSSARY OF TERMS










“2012 Annual Information Form”means the Annual Information Form for the year ended December 31, 2012.



“AUD”means Australian
dollars.



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



“Barrel, Bbl” (petroleum)Unit volume measurement used for petroleum and its products.



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



“Board” means the board
of directors of InterOil.



“BSP” means Bank of
South Pacific Limited.



“CDU” means crude distillation
unit.



“CGR” means condensate
to gas ratio.



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



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



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



“CRU”means catalytic
reformer unit.



Management Discussion and Analysis   INTEROIL CORPORATION   44







“Crude oil” A mixture
consisting mainly of pentanes and heavier hydrocarbons that exists in the liquid phase in reservoirs and remains liquid at atmospheric
pressure and temperature. Crude oil may contain small amounts of sulfur and other non-hydrocarbons but does not include liquids
obtained from the processing of natural gas.



“CSP Joint Venture” or
“CSP JV” means the joint venture with Mitsui pursuant to the Joint Venture Operating Agreement (“JVOA”)
entered into for the proposed condensate stripping facilities with Mitsui or the joint venture formed to develop and operate the
proposed condensate stripping facilities as the context requires.



“CSP JVOA”means the
Joint Venture Operating Agreement entered into with Mitsui for the proposed condensate stripping facilities.



“CSP” or “Condensate
Stripping Project”means the proposed condensate stripping facilities, including gathering and condensate pipeline,
condensate storage and associated facilities being progressed in joint venture with Mitsui.



“DPE”means Department
of Petroleum and Energy of Papua New Guinea.



“DST” means drill stem
test.



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



“EWC”means Energy
World Corporation Limited., a company incorporated under the laws of Australia.



“Farm-In Agreement”means
an agreement entered into between parties to transfer a participating interest in an oil and gas property.



“FEED” means front
end engineering and design.



“Feedstock” means raw
material used in a refinery or other processing plant.



“FID”means final investment
decision. Such a decision is ordinarily the point at which a decision is made to proceed with a project and it becomes unconditional.
However, in some instances the decision may be qualified by certain conditions, including being subject to necessary approvals
by the State.



“FLEX LNG”means FLEX
LNG Limited, a British Virgin Islands Company listed on the Oslo Stock Exchange.



“GAAP”means Canadian
generally accepted accounting principles.



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



“HOA”means Head of
Agreement.



“ICCC” means Papua
New Guinea’s competition authority, the Independent Consumer and Competition Commission.



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



“IPI Agreement” means
the Amended and Restated Indirect Participation Agreement dated February 25, 2005, as amended.



Management Discussion and Analysis   INTEROIL CORPORATION   45







“IPI holders” means
investors holding IPWIs in certain exploration wells required to be drilled pursuant to the IPI Agreement.



“IPP”means import
parity price. For each refined product produced and sold locally in Papua New Guinea, IPP is calculated under agreement with the
State by adding the costs that would typically be incurred to import such product to an average posted price for such product
in Singapore as reported by Platts. The costs added to the reported Platts price include freight costs, insurance costs, landing
charges, losses incurred in the transportation of refined products, demurrage and taxes.



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



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



“LNGL” means Liquid
Niugini Gas Limited, a wholly owned subsidiary of PNG LNG, incorporated under the laws of in Papua New Guinea to contract with
the State and pursue the LNG Project, including construction of the proposed liquefaction facilities.



“LNG Project” means
the development by us of liquefaction facilities in the Gulf Province of Papua New Guinea described as our Midstream Liquefaction
business segment and being undertaken as a joint venture with Pac LNG and with other potential partners, including the State.



“LNG Project Agreement”means the LNG Project Agreement between the State and LNGL dated December 23, 2009.



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



“Mmbtu”means one million
British thermal units. One cubic foot of natural gas produces approximately 1,000 btus, so 1,000 cu.ft. of gas is comparable to
1 mmbtu.



“Mmscfpd” means million
standard cubic feet of gas per day.



“MOPS” means Mean of
Platts Singapore, which is the benchmark price for refined products in the region in which we operate.



“Mtpa”means million
tonnes per annum.



“Naphtha”means that
portion of the distillate obtained from the refinement of petroleum which is an intermediate between the lighter gasoline and
the heavier benzene. It is a feedstock destined either for the petrochemical industry or for gasoline production by reforming
or isomerisation within a refinery.



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



“NEC”meansNational
Executive Council of Papua New Guinea.



“NI 51-101” means National
Instrument 51-101 Standards for Disclosure of Oil and Gas Activities



“NRV”meansnet
realizable value.



“OPIC”meansOverseas
Private Investment Corporation, an agency of the United States Government.



Management Discussion and Analysis   INTEROIL CORPORATION   46







“Pac LNG” means Pacific
LNG Operations Ltd., a company incorporated under the laws of the Bahamas and affiliated with Clarion Finanz A.G. This company
is our joint venture partner in the LNG Project (holding equal voting shares in PNG LNG), holds a 2.5% direct interest in the
Elk and Antelope fields, is an IPI holder and a majority shareholder in PNGDV.



“PDL”meansPetroleum
Development License. The right granted by the State to develop a field for commercial production.



“Petromin” means Petromin
PNG Holdings Limited, a company incorporated under the laws of Papua New Guinea by the State.



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



“PNGDV”meansPNG
Drilling Ventures Limited,an entity with which we entered into an indirect participation agreement in May 2003, as amended.



“PNG LNG” means PNG
LNG, Inc., a joint venture company established in 2007 to hold the interests of certain joint venturers in the venture to construct
the proposed liquefaction facilities. Shareholders are InterOil LNG Holdings Inc., a wholly-owned subsidiary of InterOil, and
Pac LNG.



“PPL” means Petroleum
Prospecting License. The tenement given by the State to explore for oil and gas.



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



“PRE JVOA”means the
Joint Operating Agreement entered into with PRE for PPL 237 based on the provisions defined in the HOA and the Farm-In Agreement
with PRE.



“PRL”means Petroleum
Retention License. The tenement given by the State to allow the license holder to evaluate the commercial and technical options
for the potential development of an oil and/or gas field.



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



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



“SWC” means rotary
side wall cores



“USD”means United
States Dollars.



“VSP” means vertical
seismic profile



“Westpac” means Westpac
Bank PNG Limited.



Management Discussion and Analysis   INTEROIL CORPORATION   47