##### 



AMENDED AND RESTATED INDIRECT PARTICIPATION
INTEREST AGREEMENT
 by and among
 INTEROIL CORPORATION
 AND
 the
 INVESTORS
 (Listed on Exhibit A)
 FEBRUARY 25, 2005




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TABLE OF CONTENTS
 PageARTICLE I. DEFINED TERMS
    
    
    1Section 1.1 Definitions
    
    
    1Section 1.2 Construction
    
    
    6ARTICLE II. PURCHASE OF INDIRECT PARTICIPATION INTEREST
    
    
    6Section 2.1 Payment by Investor
    
    
    6Section 2.2 Terms of Payment
    
    
    6Section 2.3 Payments to Investor Upon State Election
    
    
    6Section 2.4 Distributions
    
    
    7ARTICLE III. EXPLORATION PROGRAM
    
    
    8Section 3.1 Exploration Program
    
    
    8Section 3.2 Designated Exploration Wells
    
    
    8Section 3.3 Optional Exploration Wells
    
    
    8Section 3.4 InterOil Services
    
    
    9Section 3.5 Substitute Wells
    
    
    10Section 3.6 InterOil to Pay Costs
    
    
    10Section 3.7 Timing; Drilling to Total Depth
    
    
    10Section 3.8 Reports
    
    
    10Section 3.9 Disclosure
    
    
    11ARTICLE IV. DISCOVERIES
    
    
    11Section 4.1 Activities after Total Depth
    
    
    11Section 4.2 Completion Elections
    
    
    11Section 4.3 PDL
    
    
    12Section 4.4 Participation in PDL
    
    
    12ARTICLE V. SUBSEQUENT OPERATIONS; NON-CONSENT; FEES
    
    
    13Section 5.1 Subsequent Work Programs
    
    
    13Section 5.2 Non-Consent Operations
    
    
    13Section 5.3 Debt Financing
    
    
    14Section 5.4 Incentive Discovery Fee
    
    
    14Section 5.5 Infrastructure Fee
    
    
    15ARTICLE VI. STOCK ISSUANCE
    
    
    15Section 6.1 Conversion Right
    
    
    15Section 6.2 Restrictive Legend
    
    
    15Section 6.3 No Rights as Shareholder until Issuance
    
    
    16Section 6.4 Certain Adjustments
    
    
    16Section 6.5 Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets
    
    
    16Section 6.6 Other Distributions
    
    
    17Section 6.7 Representations and Warranties of Investors
    
    
    17
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PageSection 6.8 Registration Rights Agreement
    
    
    18ARTICLE VII. REPRESENTATIONS AND WARRANTIES OF INTEROIL
    
    
    18Section 7.1 Representations and Warranties
    
    
    18ARTICLE VIII. ASSIGNMENT
    
    
    21Section 8.1 Generally
    
    
    21Section 8.2 Binding Effect
    
    
    21Section 8.3 Ability to Encumber
    
    
    21Section 8.4 Tag-Along Right
    
    
    22ARTICLE IX. CALL OPTION
    
    
    22Section 9.1 Reduction of IPI Percentage
    
    
    22Section 9.2 Conditions for Reduction of IPI Percentage
    
    
    23ARTICLE X. CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS
    
    
    23Section 10.1 Confidentiality
    
    
    23ARTICLE XI. TERM AND TERMINATION
    
    
    24Section 11.1 Term
    
    
    24ARTICLE XII. FORCE MAJEURE
    
    
    25Section 12.1 Force Majeure
    
    
    25Section 12.2 Notice
    
    
    25Section 12.3 Obligations Reinstated
    
    
    25ARTICLE XIII. NOTICES
    
    
    25Section 13.1 Address
    
    
    25Section 13.2 Address
    
    
    26Section 13.3 Change of Address
    
    
    26ARTICLE XIV. MISCELLANEOUS
    
    
    26Section 14.1 Amendment
    
    
    26Section 14.2 Waiver
    
    
    26Section 14.3 Entire Agreement
    
    
    26Section 14.4 Costs
    
    
    26Section 14.5 Accounts
    
    
    26Section 14.6 Governing Law
    
    
    27Section 14.7 Relationship
    
    
    27Section 14.8 Standard of Performance
    
    
    27Section 14.9 Counterparts
    
    
    27Section 14.10 Dispute Resolution
    
    
    27Section 14.11 Additional Investors
    
    
    28Section 14.12 Previous Agreements
    
    
    28Section 14.13 Other Agreements
    
    
    28Section 14.14 Tax Matters
    
    
    28Section 14.15 Completion Cost Cap
    
    
    29
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List of Investors
    
    Exhibit AAccounting Procedures
    
    Exhibit BRegistration Rights Agreement
    
    Exhibit C
 iii




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AMENDED AND RESTATED INDIRECT PARTICIPATION INTEREST
AGREEMENT
 THIS AGREEMENT InterOil Corporation InterOil Exhibit A Investor Investors
 RECITALS
 Subsidiaries
   Previous Agreements
  NOW THIS AGREEMENT WITNESSES
 ARTICLE I.
Defined Terms
 Section 1.1 Definitions.
 Abandonment Security
 Accounting Procedure Exhibit B
  Agreed Interest Rate  The Wall Street Journal Financial
 1




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Times of London
 AFE Section
5.2
 Affiliate
 barrel
 Block Section 17
 BOE
 Common Shares
 Completion Section 4.1
 Confidential Information Section 10.1
 Conversion Right Section 6.1
 Conversion Right Period Section
9.1
 (a)
    
    December 15, 2006,(b)
    
    ninety (90) days after the drilling to Total Depth, and, if applicable,
Completion of the eighth (8th) Exploration Well drilled by InterOil or its
Subsidiaries hereunder has been concluded.
 Corporations Law
 Drilling Program
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Exploration Well Section 3.1
 Extended Well Test
 Field
    Gross Negligence 
 InterOil Refinery
 IPI Percentage Exhibit A Exhibit A Article IX
 Joint Account
 JVOA Sections 5.4 and 5.5
 3




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Licence
 Licence Areas
 Majority Interest
  Material Adverse Effect 
 Non-Consent Risk Penalty Section
5.2(a)(ii)
 (a)
    
    800% of the total amount InterOil paid on behalf of Investors IPI Percentage
of the costs of any Subsequent Work Program in which Investor did not elect to
participate; and(b)
    
    interest on the unrecovered balance of such amount accruing daily at the
Agreed Interest Rate.
 Oil and Gas Act
 Operator
 Operator Standard Section 14.8
 Operators Direct Charges
 Operators Indirect Charges
 Participation Area Section 4.3
 Participation Interest
 PDL
 4




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Petroleum
 (a)
    
    any naturally occurring hydrocarbons, whether in a gaseous, liquid, or solid
state; or(b)
    
    any naturally occurring mixture of hydrocarbons, whether in a gaseous,
liquid, or solid state; or(c)
    
    any naturally occurring mixture of one or more hydrocarbons, whether in a
gaseous, liquid, or solid state and any other substance; or(d)
    
    any fraction, mixture or product derived from sub-paragraphs (a), (b) or (c)
as a result of Production or processing; or(e)
    
    any Petroleum as defined in sub-paragraphs (a), (b), (c) or (d) which has
been returned to a natural reservoir, but does not include coal or any other substance
which can only be recovered by mechanical mining processes.
 Petroleum Agreement
 Petroleum Pool
 PPL
 PPL 236
 PPL 237
 PPL 238
 Purchase Price Section 2.2
 Registration Rights Agreement Exhibit C
 Regulation
 Securities Act
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State
 Subsequent Work Program Section 5.1
 Total Depth
 Transaction Documents
 Wilful Misconduct
 Zone
 Section 1.2 Construction .
 (a)
    
    reference to a clause means a clause of this Agreement; and(b)
    
    reference to legislation or any document includes any amendments or
replacements to the legislation or document.
 ARTICLE II.
PURCHASE OF INDIRECT PARTICIPATION INTEREST
 Section 2.1 Payment by Investor. Exhibit A
 Section 2.2 Terms of Payment. Section
2.1 Purchase Price Exhibit A Section 14.5
 Section 2.3 Payments to Investor Upon State Election.
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Section 2.4 Distributions.
 (a)
    
    As soon as practical following the end of each fiscal quarter, InterOil
shall calculate for each Investor, the amount of such Investors Quarterly
Distribution. Within 45 days following the end of each of the first three fiscal
quarters of each year, and within 90 days following the end of each fiscal year,
subject to Section 5.2 regarding the payment to InterOil of the Non-Consent
Risk Penalty, InterOil shall pay, or cause Subsidiaries to pay, to each Investor, the
amount (if positive) of such Investors Quarterly Distribution by wire transfer to an
account specified by Investor (or if no account has been specified, by company check
mailed to Investor).(b)
    
    As used herein, for each Investor, Quarterly Distributionfor any fiscal
quarter means the following amount multiplied by the Investors IPI Percentage:
 (i)
    
    all cash representing the proceeds of the sale of Petroleum
during such Quarter produced from wells in Fields (including, without
limitation, Exploration Wells and any wells that are part of a Subsequent Work
Program) in which Investor has not forfeited its rights under Section
4.2; less the sum of the following:
 (A)
    
    Operators Direct Charges allocable to operations in
such Fields;(B)
    
    Operators Indirect Charges allocable to operations in
such Fields;(C)
    
    Any amounts, including principal, interest and fees to
repay loans solely pursuant to the provision therefore in Section
5.3; and(D)
    
    Royalties, taxes, imposts, levies and other amounts and
taxes, including income taxes, value added, goods and services taxes or
dividend withholding taxes paid or payable with respect to such cash
proceeds or
production during the quarter with respect to such Fields (provided that
any such amounts subsequently recovered by InterOil shall be distributed to
the appropriate Investors).
 (c)
    
    Notwithstanding the provisions of paragraph (a) of this Section, InterOil may
retain from an Investors Quarterly Distribution the following amounts:
 (i)
    
    Investors IPI Percentage of Abandonment Security for
operations in Fields in which Investor has not forfeited its interest under
Section 4.2; and
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(ii)
    
    The incentive fee payable under Section 5.4 and the
infrastructure fee payable under Section 5.5.
  (d)
    
    Notwithstanding any other provision of this Agreement, InterOil and
Subsidiaries shall have the right to offset any amounts payable to an Investor
hereunder against amounts Investor owes to InterOil or Subsidiaries under this
Agreement.
 ARTICLE III.
EXPLORATION PROGRAM
 Section 3.1 Exploration Program. Section 3.2 Designated Exploration Wells Section 3.3 Optional
Exploration Wells
 Section 3.2 Designated Exploration Wells. Section 3.7
 Section 3.3 Optional Exploration Wells. Location and Total Depth of Optional Exploration Well(s) Acceptance of Location and Total Depth of Optional Exploration Well(s)
 8




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Section 3.4 InterOil Services.
 (a)
    
    Acquire all permits, consents and other governmental approvals necessary to
drill such wells to Total Depth, and otherwise exercise commercially reasonable
efforts in accordance with the Operator Standard to comply with the applicable PPL and
other governmental laws and regulations, including without limitation, the Oil and Gas
Act and the Regulation;(b)
    
    Construct access roads, clear and prepare the drill site;(c)
    
    Arrange for a drilling rig reasonably capable of drilling the Exploration
Well to the proposed Total Depth;(d)
    
    Spud and drill to Total Depth the Exploration Well;(e)
    
    Provide all materials, services and labor reasonably necessary for drilling
the Exploration Well to Total Depth in a good and workmanlike manner in accordance
with customary oilfield practice and the Operator Standard;(f)
    
    Make reasonable tests of formations encountered during drilling which give
indication of containing oil and gas in quantities sufficient, in the opinion of
InterOil, to test;(g)
    
    If the well is unsuccessful, plug and abandon the well location, and restore
the surrounding area as required by the applicable Licence and governmental
regulations;(h)
    
    Retain and pay for such supervisory and technical employees having
engineering, geological or other professional skills necessary for operations
hereunder;
 9




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(i)
    
    Receive, approve and timely pay, before they are delinquent, invoices for
materials, services and labor provided hereunder;(j)
    
    Pay or cause to be paid all taxes imposed on or with respect to production or
handling of each partys share of Petroleum produced under the terms of this
Agreement;(k)
    
    Handle, settle or otherwise discharge at the joint expense of the parties
hereto any claim or suit arising out of operations hereunder; and(l)
    
    Prepare and file on behalf of the parties hereunder such operational notices,
reports, applications or certifications as may be required by any governmental or
quasi-governmental body having jurisdiction of the Licence Areas.
 Section 3.5 Substitute Wells. Section 3.2 Section
3.3
 Section 3.6 InterOil to Pay Costs.
 Section 3.7 Timing; Drilling to Total Depth.
 Section 3.8 Reports.
 10




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Section 3.9 Disclosure.
 (a)
    
    Within two business days of the date of this Agreement, InterOil shall make
public disclosure (as defined in Regulation FD under the U.S. Securities Exchange
Act of 1934) of this Agreement.(b)
    
    If InterOil or any of its Affiliates provides material information to an
Investor that such Investor did not request, InterOil shall, within 10 business days
following a subsequent written request from such Investor, make public disclosure
(as defined in Regulation FD under the U.S. Securities Exchange Act of 1934) of such
material information.(c)
    
    If InterOil or any of its Affiliates provides material information to an
Investor that is material to any election to be made under this Agreement (including
an election pursuant to Section 4.2 or Section 5.2), InterOil shall
(whether or not the providing of such information was requested by such Investor)
within 10 business days following a subsequent written request from such Investor,
make public disclosure (as defined in Regulation FD under the U.S. Securities
Exchange Act of 1934) of such material information.(d)
    
    Within two business days of a written request of an Investor, InterOil shall
confirm to such Investor whether or not all material information furnished to it by
InterOil has been publicly disclosed (as defined in Regulation FD under the U.S.
Securities Exchange Act of 1934) .
 ARTICLE IV.
DISCOVERIES
 Section 4.1 Activities after Total Depth. Completion Section 5.1
 Section 4.2 Completion Elections.
 (a)
    
    InterOil shall give each Investor written notice of the intent to proceed
with Completion, together with technical, geological and other logging data and a
proposal for such Completion, including cost estimates, that can reasonably be
supplied which is relevant to Investor making its decision in Section 4.2(b).
Such notice shall prominently state that a response is due from the Investor within 48
hours of receipt of the notice. InterOil shall confirm each Investors receipt of
such notice by return fax or by return e-mail.
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(b)
    
    Within 48 hours of any confirmation of receipt of notice from InterOil
pursuant to Section 4.2(a), Investor must give written notice to InterOil that
either:
 (i)
    
    Investor agrees to pay its IPI Percentage of the costs incurred with
respect to the aforementioned Completion; or(ii)
    
    that Investor will not to pay its IPI Percentage of the costs of the
aforementioned Completion, and forfeit (A) Investors rights to that well and the
development of any Field discovered from such well and (B) Investors rights to
convert its IPI Percentage into Common Shares as contemplated by Section
6.1.
 Section 4.2(b)(ii)
 (c)
    
    If an Investor agrees to pay its IPI Percentage of costs incurred with
respect to Completion, Investor must make its payment to InterOil of such costs of
Completion not later than 30 days after such election. If Investor fails to pay such
Completion costs within the 30-day period as provided for in the preceding sentence,
InterOil may give written notice to Investor of such failure to pay, and if Investor
fails to pay
such amounts owing within five (5) days after actual receipt and confirmation of such
notice by InterOil, (i) Investor shall be deemed to have elected pursuant to
Section 4.2(b)(ii) and will forfeit its right in such well and any Field
discovered by such well and (ii) Investor shall forfeit any right to convert its IPI
Percentage into Common Shares under Section 6.1.(d)
    
    For greater clarity, the non-consent provisions of Section 5.2 shall
not apply to Completion operations under Section 4.2.
 Section 4.3 PDL. Participation Area
 Section 4.4 Participation in PDL. parri passu
 12




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ARTICLE V.
SUBSEQUENT OPERATIONS; NON-CONSENT; FEES
 Section 5.1 Subsequent Work Programs. (Subsequent Work Program
 Section 5.2 Non-Consent Operations.
 (a)
    
    InterOil must submit an AFE for that Subsequent Work Program to Investor for
its consideration. If the Subsequent Work Program described in the AFE is an Extended
Well Test, Investor must, within 15 days after receipt of the AFE, or (ii) if the
Subsequent Work Program described in the AFE is not an Extended Well Test, the
Investor must, within 60 days after receipt of that AFE, which receipt shall be
confirmed by each Investor by return fax or by return e-mail, give written notice to
InterOil that either:
 (i)
    
    Investor agrees to pay its IPI Percentage of the costs incurred or to
be incurred with respect to a proposed Subsequent Work Program proposed by
InterOil; or(ii)
    
    that Investor intends not to pay its IPI Percentage of such costs of
the aforementioned Subsequent Work Program and to relinquish its IPI Percentage of
the revenues attributable to the wells affected by the Subsequent Work Program
until InterOil has recovered the Non-Consent Risk Penalty from Quarterly
Distributions that would otherwise have been payable to such Investor from the
revenues attributable to the wells affected by the Subsequent Work Program had
Investor elected to pay its IPI Percentage share of the costs associated with such
Subsequent Work Program.
 Section 5.2(a)(ii)
 (b)
    
    If an Investor agrees to pay its IPI Percentage cost of a Subsequent Work
Program pursuant to Investors election under Section 5.2(a)(i), such Investor
must make its payment to InterOil of all of the costs of such Subsequent Work Program
not later than 30 days after such election. If Investor fails to pay such costs
within the 30-day period as provided for in the preceding sentence, InterOil may give
written notice to Investor of such failure to pay, and if Investor fails to pay such
amounts owing within five (5) days after receipt and confirmation of such notice by
InterOil, Investor shall be deemed to have elected pursuant to Section
5.2(a)(ii) to incur the
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Section 6.1
 Section 5.3 Debt Financing. Section 5.3 Section 2.4
 Section 5.4 Incentive Discovery Fee.
 (a)
    
    Each Investors Share of Productionshall mean, at any time, the sum of (i)
the aggregate production attributable to Investors direct interest in any Field
assigned to Investor under Section 4.4 plus (ii) the aggregate production
allocable to Investors IPI Percentage in any Field owned by InterOil in which
Investor has an indirect interest under this Agreement. Investors Share of
Production will include production attributable to an Investors direct or indirect
interest in a Field in which Investor has exercised non-consent rights under this
Agreement or an applicable JVOA as if such non-consent rights had not been exercised.
Investor shall pay to InterOil an incentive discovery fee of US $0.20 per BOE of
Investors Share of Production produced and sold in excess of the product of (i) 50
million BOE multiplied by (ii) Investors IPI Percentage. Such fee shall be payable
at the end of each calendar quarter. Such fee may be deducted by InterOil from
Quarterly Distributions payable under Section 2.4 and any JVOA entered into
under Section 4.4 shall provide for the deduction of such fee.(b)
    
    If an Investor proposes to sell a direct interest under a JVOA or an indirect
interest represented by Investors IPI Percentage, including sales subject to
Article VIII and Article IX of this Agreement, InterOil shall cause an
internationally recognized independent petroleum engineering firm to prepare an
estimate of the proved and probable oil and gas reserves attributable to the direct
interests and indirect interests owned by such Investor. Such reserve report shall be
prepared as of a date selected by InterOil that is reasonably close to the anticipated
date of sale. Such reserve report shall be prepared using definitions of proved and
probable reserves
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Section 5.4(a) Section 5.4(a)
 Section 5.5 Infrastructure Fee.
 ARTICLE VI.
STOCK ISSUANCE
 Section 6.1 Conversion Right. Section 6.1 Article IX Section 6.1 Section 6.1 Sections 4.2(b)(ii)(B), 4.2(c)(ii) and 5.2(b)
 Section 6.2 Restrictive Legend.
 (a)
    
    Common Shares issued to Investor under Section 6.1 will bear the
following legend:
  (b)
    
    InterOil may require, as a condition of allowing any transfer of the Common
Shares (i) that the holder or transferee of the Common Shares, as the case may be,
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furnish to InterOil a written opinion of counsel (which opinion shall be in form,
substance and scope reasonably satisfactory to InterOil) to the effect that such
transfer may be made without registration under the Securities Act and under
applicable state securities or blue sky laws and without the necessity to prepare a
prospectus under provincial securities law in Canada, (ii) that the holder or
transferee execute and deliver to InterOil an investment letter in form and substance
reasonably acceptable to InterOil and (iii) that the transferee be an accredited
investor as defined in Rule 501(a) under the Securities Act or a qualified
institutional buyer as defined in Rule 144A(a) under the Securities Act.
 Section 6.3 No Rights as Shareholder until Issuance. Section 6.1 Section 6.1
 Section 6.4 Certain Adjustments. Section
6.1 Section 6.1 Section 6.1
 Section 6.5 Reorganization, Reclassification, Merger, Consolidation or Disposition of Assets. Acquiring
Entity
 16




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Other Property Section 6.1 Section 6.1 Section 6.1 Section 6.5 Section 6.5 Section 6.5
 Section 6.6 Other Distributions. Section 6.5 Section 6.1 Section 6.1
 Section 6.7 Representations and Warranties of Investors.
 (a)
    
    It is acquiring its interest under this Agreement represented by its IPI
Percentage and any Common Shares issuable under this Agreement for its own account for
investment and not with a view towards the resale, transfer or distribution thereof,
nor with any present intention of distributing the interest represented by the IPI
Percentage or the Common Shares. Investor understands that the Common Shares are
restricted securities as defined in Rule 144 under the Securities Act.(b)
    
    It has full power and legal right to execute and deliver this Agreement and
all other documents contemplated by this Agreement and to perform its obligations
hereunder and thereunder.
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(c)
    
    If such Investor is a limited partnership, limited liability company or
corporation, it is a validly existing limited partnership, limited liability company
or corporation, as the case may be, duly formed, organized or incorporated under the
laws of its jurisdiction of formation, organization or incorporation.(d)
    
    It has taken all action necessary for the authorization, execution, delivery,
and performance of this Agreement and all other documents contemplated by this
Agreement, and its obligations hereunder and thereunder, and, upon execution and
delivery by the InterOil, this Agreement and the other documents shall constitute the
valid and binding obligation of such Investor, enforceable against such Investor in
accordance with its terms, except that such enforcement may be limited by bankruptcy,
insolvency, reorganization, fraudulent conveyance, moratorium, liquidation or other
similar law now or hereafter in effect relating to creditors rights and general
principles of equity.(e)
    
    It has such knowledge and experience in financial and business matters that
it is capable of evaluating the merits and risks of its investment represented by the
IPI Percentage and in the Common Shares as contemplated by this Agreement, and is able
to bear the economic risk of such investment for an indefinite period of time. It has
been furnished access to such information and documents as it has requested and has
been afforded an opportunity to ask questions of and receive answers from
representatives of InterOil concerning the terms and conditions of this Agreement and
the Common Shares.(f)
    
    It is an accredited investor as defined in Rule 501(a) promulgated under
the Securities Act and has such knowledge and experience in financial and business
matters that it is fully capable of evaluating the risks and merits of its investment
under this Agreement and in the Common Shares.
 Section 6.8 Registration Rights Agreement.
 ARTICLE VII.
REPRESENTATIONS AND WARRANTIES OF INTEROIL
 Section 7.1 Representations and Warranties.
 (a)
    
    InterOil is a corporation duly incorporated and existing in good standing
under the laws of the Province of New Brunswick and has the requisite corporate power
to own its properties and to carry on its business as now being conducted. Each of
InterOil and its Subsidiaries is duly qualified as a foreign corporation to do
business and is in good standing in every jurisdiction in which the nature of the
business conducted or property owned by it makes such qualification necessary other
than those in which the failure so to qualify would not have a Material Adverse
Effect.
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(b)
    
    (i) InterOil has all requisite corporate power and authority to enter into
and perform the Transaction Documents and to issue the interest represented by the IPI
Percentages in accordance with the terms hereof, (ii) the execution and delivery of
the Transaction Documents by InterOil and the consummation by it of the transactions
contemplated thereby, including the issuance of the interest represented by the IPI
Percentages, have been duly authorized by all necessary corporate action, and no
further consent or authorization of InterOil or its Board of Directors (or any
committee or subcommittee thereof) or stockholders, other than stockholder consent
that has been obtained or effected on or prior to the date hereof, is required, (iii)
when delivered, the Transaction Documents will have been duly executed and delivered
by InterOil, (iv) when delivered, the Transaction Documents will constitute valid and
binding obligations of InterOil enforceable against InterOil in accordance with their
terms, except (A) as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of creditors rights and remedies, the discretion
that a court may exercise in the granting of equitable remedies or by other equitable
principles of general application, and (B) to the extent the indemnification
provisions contained in this Agreement and the Registration Rights Agreement may be
limited by applicable law and (v) the interest represented by the IPI Percentages and
the Common Shares issuable upon the conversion and/or exercise thereof have been duly
authorized and, upon issuance thereof and payment therefor in accordance with the
terms of this Agreement, the interest represented by the IPI Percentages will be
validly issued, free and clear of any and all liens, claims and encumbrances, except
for restrictions on transfer imposed by applicable securities laws and referenced in
Section 6.2.(c)
    
    The authorized capital stock of InterOil consists of an unlimited number of
Common Shares, of which as of the date hereof prior to giving effect to this
transaction, 28,418,009 shares are issued and outstanding and 2,577,985 shares are
issuable and reserved for issuance pursuant to InterOils stock option plans or
securities exercisable or exchangeable for, or convertible into, Common Shares. All
of such outstanding shares have been, or upon issuance will be, validly issued, fully
paid and nonassessable. As of the date hereof, except as disclosed in Section
7.1(c), (i) no shares of InterOils capital stock are subject to pre-emptive
rights or any other similar rights or any liens or encumbrances suffered or permitted
by InterOil, (ii) there are no outstanding debt securities, (iii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or commitments of
any character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of InterOil or any of its Subsidiaries, or contracts,
commitments, understandings or arrangements by which InterOil or any of its
Subsidiaries is or may become bound to issue additional shares of capital stock of
InterOil or any of its subsidiaries or options, warrants, scrip, rights to subscribe
to, calls or commitments of any character whatsoever relating to, or securities or
rights convertible into, any shares of capital stock of InterOil or any of its
Subsidiaries, (iv) there are no agreements or arrangements under which InterOil or any
of its Subsidiaries is obligated to register or qualify the sale of any of their
securities the
 19




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applicable securities laws and regulations of any jurisdiction
(Securities Laws) other than pursuant to the Registration Rights Agreement, (v)
there are no outstanding securities of InterOil or any of its Subsidiaries which
contain any
redemption or similar provisions, and there are no contracts, commitments,
understandings or arrangements by which InterOil or any of its Subsidiaries is or may
become bound to redeem a security of InterOil or any of its Subsidiaries, (vi) there
are no securities or instruments containing anti-dilution or similar provisions that
will be triggered by the issuance, exercise or conversion of the IPI Percentages or
the Warrants as described in this Agreement and (vii) InterOil does not have any
stock appreciation rights or phantom stock plans or agreements or any similar plan
or agreement.(d)
    
    Upon issuance in accordance with this Agreement, the Common Shares will be
validly issued, fully paid and nonassessable and free from all taxes, liens and
charges with respect to the issue thereof.(e)
    
    Except as disclosed in Section 7.1(e), the execution, delivery and
performance of the Transaction Documents by InterOil and the consummation by InterOil
of the transactions contemplated hereby and thereby and issuance of the interest
represented by the IPI Percentages and the Common Shares will not (i) result in a
violation of InterOils Articles of Amalgamation or the By-laws; (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both would
become a default) under, or give to others any rights of termination, amendment,
acceleration or cancellation of, any material agreement, indenture or instrument to
which InterOil or any of its Subsidiaries is a party, or (iii) result in a violation
of any material law, rule, regulation, order, judgment or decree (including United
States federal and state securities laws and regulations and the rules and regulations
of the American Stock Exchange, Canadian and provincial securities laws and
regulations and the rules and regulations of the Toronto Stock Exchange or other
securities exchange or trading market on which the Common Shares are traded or listed)
applicable to InterOil or any of its Subsidiaries or by which any property or asset of
InterOil or any of its Subsidiaries is bound or affected. Except as disclosed in
Section 7.1(e), neither InterOil nor its Subsidiaries is in violation of any
term of, or in default under, (x) its articles of incorporation, any certificate of
designations, preferences and rights of any outstanding series of preferred stock or
by-laws or their organizational charter or by-laws, respectively, (y) any material
contract, agreement, mortgage, indebtedness, indenture, instrument, or (z)(i) any
judgment, decree or order or (ii) any statute, rule or regulation applicable to
InterOil or its Subsidiaries, the non-compliance with which, would be material to
InterOil or its Subsidiaries or interfere with the performance of its obligations
under the Transaction Documents. Except as set forth on Section 7.1(e) or as
specifically contemplated by this Agreement and as required under Securities Laws and
the rules of the Toronto Stock Exchange and the American Stock Exchange, InterOil is
not required to obtain any consent, authorization or order of, or make any filing or
registration with, any court, governmental agency or any regulatory or
self-regulatory agency in order for it to execute, deliver or perform any of its
obligations under, or contemplated by, the Transaction Documents or the issuance of
the interest represented by the IPI Percentages and the Common Shares, in
 20




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accordance
with the terms hereof or thereof. Except as disclosed in Section 7.1(e), all
consents, authorizations, orders, filings and registrations which InterOil is
required to obtain pursuant to the preceding sentence have been obtained or effected
on or prior to the date hereof.(f)
    
    Each of SPI (210) Limited, SPI (220) Limited and SPI (208) Limited are
indirect, wholly-owned subsidiaries of InterOil. Each Licence (a true and complete
copy of which has been provided to the Investors who requested a copy thereof) is in
full force and effect and is in good standing, and each of SPI (210) Limited, SPI
(220) Limited and SPI (208) Limited is the holder of a one hundred percent (100%)
legal and beneficial interest in PPL 236, PPL 237 and PPL 238, respectively, free and
clear of all mortgages, charges, pledges, liens, options, pre-emptive rights and other
claims or encumbrances other than royalties or other entitlements of the State
pursuant to the laws and regulations of Papua New Guinea. The execution and delivery
of this Agreement is not in violation of or otherwise conflict with or cause a default
under any provision of a Licence.
 ARTICLE VIII.
ASSIGNMENT
 Section 8.1 Generally.
 Section 8.2 Binding Effect. Section 8.1
 Section 8.3 Ability to Encumber. Article VIII
 (a)
    
    prevent InterOil from freely mortgaging or encumbering its share of
production and transferring or assigning to such mortgagee or lender the rights to the
proceeds of sale of any Petroleum sold hereunder on behalf of InterOil as security for
such debt. The provisions of this Article VIII shall not apply to the
granting of any such security interest; or(b)
    
    prevent Investor from freely mortgaging or encumbering its rights, subject to
its obligations, under this Agreement and assigning to such mortgagee or lender the
 21




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rights to the distributions as defined in this Agreement as security for such debt,
subject to Article VIV.
 Section 8.4 Tag-Along Right.
 ARTICLE IX.
CALL OPTION
 Section 9.1 Reduction of IPI Percentage.
 (a)
    
    In connection with a sale to a purchaser not affiliated with InterOil
(Purchaser) of a direct or indirect interest in a PPL or PDL covering a Field into
which an Exploration Well or another well has been drilled under this Agreement
(Subject Field), InterOil may elect to reduce pro rata the IPI Percentage in the
Subject Field of each Investor (Subject Field Investor) which has not forfeited its
interest in the Subject Field in an amount up to 50% of the direct or indirect
interest being acquired by Purchaser from InterOil, subject to subsection (e) and
Section 9.2 hereof. For example, if InterOil proposed to sell a direct or
indirect 10% interest in a Subject Field, InterOil could reduce the IPI Percentage in
the relevant Subject Field of the Subject Field Investors by up to 5% (e.g., from
15.0% to 10.0%).(b)
    
    If InterOil proposes to sell a direct or indirect interest to a Purchaser in
any PPL or PDL covering a Subject Field and InterOil proposes to reduce the IPI
Percentages of the Subject Field Investors with respect to the Subject Field, InterOil
shall notify Subject Field Investors of the proposed sale by InterOil at least 15 days
prior to the anticipated closing date of such sale. Such notice shall include the
anticipated amount to be paid to such Subject Field Investor, the anticipated amount
of the reduction in the IPI Percentage as a result of the sale and the anticipated
closing date of the sale. InterOil shall provide each Subject Field Investor such
information about the terms of the proposed sale as such Investor may reasonably
request and which is in InterOils possession and not subject to a confidentiality
agreement.(c)
    
    On the closing date of the sale of InterOils direct or indirect interest to
a Purchaser in the PPL or PDL in the Subject Field, or as soon thereafter as
practicable,
InterOil shall pay each Subject Interest Investor an amount equal to the
consideration received by InterOil from the Purchaser multiplied by a fraction the
numerator of which is the reduction in such Investors IPI Percentage and the
denominator of which is the total interest acquired by Purchaser and such Investors
IPI Percentage in the Subject Field shall be reduced as provided in the notice.
 22




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(d)
    
    Without the prior written consent of the Subject Field Investors which own a
majority of the IPI Percentages owned by Subject Field Investors in the relevant
Subject Field, InterOil shall not sell an interest in the Subject Field other than for
cash or securities listed on the New York, American or Toronto Stock Exchange, traded
over the National Association of Securities Dealers, Inc. Automated Quotation System,
or listed on another internationally recognized securities market. If the
consideration received by InterOil in connection with the sale of an interest in the
Subject Field to a Purchaser is other than cash, InterOil shall take all commercially
reasonable efforts to distribute the appropriate portion of such consideration or an
interest therein to the Subject Field Investors entitled thereto. If InterOil is
unable to distribute such non-cash consideration to the Subject Field Investors,
InterOil shall retain such non-cash consideration and shall convert it to cash as soon
as reasonably practicable and distribute such cash to Investors entitled thereto
promptly thereafter.(e)
    
    InterOil may not cause the IPI Percentage of an Investor in a Subject Field
to decrease by more than 50% of such Investors initial IPI Percentage pursuant to
this Section.(f)
    
    InterOil shall adjust the amount payable to each Subject Field Investor under
this Section to account for the effective date of any sale, so that the Subject Field
Investors and InterOil are treated substantially the same taking into account any
purchase price adjustments with respect to an effective date and Distributions payable
to the Investor under this Agreement.(g)
    
    InterOil and Subsidiaries may offset amounts payable to a Subject Field
Investor under this Section against any Non-Consent Penalty or other amount owed by
such Subject Field Investor to InterOil or Subsidiaries.
 Section 9.2 Conditions for Reduction of IPI Percentage. Section
9.1 Section 9.1 Section 9.2 inter alia
 ARTICLE X.
CONFIDENTIALITY AND PUBLIC ANNOUNCEMENTS
 Section 10.1 Confidentiality.
 23




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Confidential Information
 (a)
    
    to any Affiliate or bona fide intended assignee of such party upon obtaining
a similar undertaking of confidentiality from such Affiliate or assignee in favor of
all affected parties;(b)
    
    to any outside consultants, upon obtaining a similar undertaking of
confidentiality from such consultants in favor of all affected parties;(c)
    
    to any bank or financial institution from whom such party is seeking or
obtaining finance, upon obtaining a similar undertaking of confidentiality from such
bank or institution;(d)
    
    to the extent required by the Act, the Licence, any other applicable laws or
regulations or the having jurisdiction over a party to this Agreement or the
regulations of any recognised stock exchange on which are listed for quotation shares
in the capital of such party or any Affiliate of such party;(e)
    
    in a prospectus registered by a stock exchange, or any delegate thereof,
where such disclosure is required by law;(f)
    
    to the extent that the same has become generally available to the public; or(g)
    
    to the extent acquired independently from a third party whom the disclosing
party believed on reasonable grounds was under no obligation of confidentiality
relating thereto.
 ARTICLE XI.
TERM AND TERMINATION
 Section 11.1 Term. Article VI Section 4.4 Article X
 24




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##### 



ARTICLE XII.
FORCE MAJEURE
 Section 12.1 Force Majeure. Force Majeure Force Majeure
 Section 12.2 Notice.
 Section 12.3 Obligations Reinstated.
 ARTICLE XIII.
NOTICES
 Section 13.1 Address.
 25




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##### 



Section 13.2 Address.
 Party
    
    AddressINTEROIL
    
    InterOil Corporation and its subsidiaries
c/o InterOil Australia Pty Ltd.
Suite 2 Level 2 Orchid Plaza
78 Abbott Street
Cairns QLD 4870INVESTOR
    
    As set forth on Exhibit A
 Section 13.3 Change of Address.
 ARTICLE XIV.
MISCELLANEOUS
 Section 14.1 Amendment.
 Section 14.2 Waiver.
 Section 14.3 Entire Agreement.
 Section 14.4 Costs.
 Section 14.5 Accounts. Section 2.2
 26




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##### 



Section 14.6 Governing Law.
 Section 14.7 Relationship.
 Section 14.8 Standard of Performance. Operator Standard
 Section 14.9 Counterparts.
 Section 14.10 Dispute Resolution.
 (a)
    
    On the request of any party hereto, whether made before or after the
institution of any legal proceeding, any action, dispute, claim or controversy of any
kind now existing or hereafter arising between any of the parties hereto in any way
arising out of, pertaining to or in connection with this Agreement (a
Dispute) shall be resolved by binding arbitration in accordance with the
terms hereof. Any party may, by summary proceedings, bring an action in court to
compel arbitration of any Dispute.(b)
    
    Any arbitration shall be administered by the American Arbitration Association
(the AAA) in accordance with the terms of this Section, the Commercial Arbitration
Rules of the AAA, and, to the maximum extent applicable, the Federal Arbitration Act.
Judgment on any award rendered by an arbitrator may be entered in any court having
jurisdiction.
 27




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##### 



(c)
    
    Any arbitration shall be conducted before one arbitrator. The arbitrator shall
be a practicing attorney licensed to practice in the State of Texas who is
knowledgeable in the subject matter of the Dispute selected by agreement between the
parties hereto. If the parties cannot agree on an arbitrator within 30 days after the
request for an arbitration, then any party may request the AAA to select an arbitrator.
The arbitrator may engage engineers, accountants or other consultants that the
arbitrator deems necessary to render a conclusion in the arbitration proceeding.(d)
    
    To the maximum extent practicable, an arbitration proceeding hereunder shall be
concluded within 180 days of the filing of the Dispute with the AAA. Arbitration
proceedings shall be conducted in Houston, Texas. Arbitrators shall be empowered to
impose sanctions and to take such other actions as the arbitrators deem necessary to
the same extent a judge could impose sanctions or take such other actions pursuant
to the Federal Rules of Civil Procedure and applicable law. At the conclusion of
any arbitration proceeding, the arbitrator shall make specific written findings of
fact and conclusions of law. The arbitrator shall have the power to award recovery
of all costs and fees to the prevailing party. Each party agrees to keep all
Disputes and arbitration proceedings strictly confidential except for disclosure of
information required by applicable law.(e)
    
    All fees of the arbitrator and any engineer, accountant or other consultant
engaged by the arbitrator shall be paid equally by the parties involved in the dispute,
unless otherwise awarded by the arbitrator.
 Section 14.11 Additional Investors. Exhibit A Section 14.11
 Section 14.12 Previous Agreements.
 Section 14.13 Other Agreements. Section 6.1 Section 14.13
 Section 14.14 Tax Matters.
 28




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##### 



Section 14.15 Completion Cost Cap. Section 4.2 Section 4.2(a)(i)
 [Signature Page Follows]
 29




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IN WITNESS WHEREOF
 INTEROIL CORPORATION
 By:
    
    /s/ Phil E. MulacekPhil E. MulacekPresident, Chief Executive Officerand Chairman




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KINGS ROAD INVESTMENTS LIMITED
 By:
    
    /s/ Erik M.W. CaspersenErik M.W. CaspersenTitle:
    Co-Head, [ILLEGIBLE] InvestmentPartners
LP as Investment Managerfor Kings Road Investments Ltd.




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IPWI PARTNERS LC
 By:
    
    /s/ Adam CohenAdam CohenTitle:
    
    General Partner




---



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LASCO DEVELOPMENT, INC.
 By:
    
    /s/ David LascoDavid LascoTitle:
    
    President




---



##### 



LASCO FAMILY TRUST
 By:
    
    /s/ David LascoDavid LascoTitle:
    
    Trustee




---



##### 



BERNARD SELZ
 By:
    
    /s/ Bernard SelzBernard SelzTitle:




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##### 



SELZ FAMILY 1997 TRUST
 By:
    
    /s/ Lisa P. SelzLisa P. SelzTitle:
    
    Trustee




---



##### 



CLARION FINANZ
 By:
    
    /s/ Carlo CivelliCarlo CivelliTitle:
    
    Director




---



##### 



PEQUOT PNG OIL, INC.
  /s/ Lawrence Cutler
Lawrence CutlerPrincipal and CCO




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/s/Bruce Hendry
Bruce Hendry




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SENECA CAPITAL LP
 By:
    
    /s/ Doug HirschName: Doug HirschTitle: Managing Member of Seneca Capital Advisors, LLC, as General Partner of Seneca Capital LP




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SENECA CAPITAL INTERNATIONAL LTD.
 By:
    
    /s/ Doug HirschName: Doug HirschTitle: Managing Member of Seneca Capital Investments, LLC, as Investment Adviser to Seneca Capital
International Ltd




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SMITHFIELD FIDUCIARY LLC
 By:
    
    /s/ Scott M. WallaceName: Scott M. WallaceTitle: Authorized Signatory




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##### 



PROVIDENT PREMIER MASTER FUND LTD
 By:
    
    /s/ Scott M. NelsonScott M. NelsonTitle:
    
    Chief Operating Officer




---



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EPIC LIMITED PARTNERSHIP
 By:
    
    /s/ David FawcettDavid FawcettTitle:




---



##### 



EPIC LIMITED PARTNERSHIP II
 By:
    
    /s/ David FawcettDavid FawcettTitle:




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##### 



Exhibit A
 Name and Address of Investors




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Exhibit B
 Accounting Procedures




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##### 



Exhibit C
 Registration Rights Agreement