|InterOil Corporation
        Management
        Discussion and Analysis
        

For the Year ended December 31, 2011
        March 16, 2012 | 
|--------------------------------------------------------------------------------------------------------------------------------------------- | 



|TABLE OF CONTENTS
|-----------------



|FORWARD-LOOKING STATEMENTS                                                        | 2 
|--------------------------------------------------------------------------------- | --
|OIL AND GAS DISCLOSURES                                                           | 4 
|INTRODUCTION                                                                      | 4 
|BUSINESS STRATEGY                                                                 | 5 
|OPERATIONAL HIGHLIGHTS                                                            | 5 
|SELECTED ANNUAL FINANCIAL INFORMATION AND HIGHLIGHTS                              | 9 
|YEAR AND QUARTER IN REVIEW                                                        | 15
|LIQUIDITY AND CAPITAL RESOURCES                                                   | 23
|INDUSTRY TRENDS AND KEY EVENTS                                                    | 32
|RISK FACTORS                                                                      | 34
|CRITICAL ACCOUNTING ESTIMATES                                                     | 35
|NEW ACCOUNTING STANDARDS                                                          | 36
|NON-GAAP MEASURES AND RECONCILIATION                                              | 39
|PUBLIC SECURITIES FILINGS                                                         | 41
|DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROLS OVER FINANCIAL REPORTING | 41
|GLOSSARY OF TERMS                                                                 | 41



The following 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, 2011 and our annual information form (the “2011 Annual Information Form”) for
the year ended December 31, 2011. The MD&A was prepared by management and provides a review of our performance in the year
ended December 31, 2011, 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, including IFRS
1 – ‘First-time Adoption of International Financial Reporting Standards’, and are presented in United States
dollars (“USD”) unless otherwise specified. Our transition date to IFRS was January 1, 2010. Financial information
for 2010 included in this MD&A has been restated in accordance with IFRS. Financial information for 2009 included in this MD&A
has been prepared in accordance with previous GAAP.



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, 2011 and for the quarter
and year ended December 31, 2011, unless otherwise specified. A listing of specific defined terms can be found in the “Glossary
of Terms” section of this document.



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, 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 our joint venture partners;
the construction of proposed liquefaction facilities and condensate stripping facilities in Papua New Guinea; the development of
such liquefaction and condensate stripping facilities; 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 development of liquefaction and condensate stripping facilities;
| | - | -------------------------------------------------------------------------------------------



| | · | our ability to negotiate definitive agreements following conditional agreements or heads of
agreement relating to the development of liquefaction and condensate stripping facilities, 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 our liquefaction and condensate stripping facilities
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 PNG government authorities to develop our gas and condensate resources and to develop liquefaction and condensate stripping
facilities 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;
| | - | --------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION     2







| | · | 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;
| | - | ----------------------------------------------------



| | · | 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 2011 Annual Information
Form.



Furthermore, the forward-looking information
contained in this MD&A is made as of the date hereof, unless otherwise specified 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.



Management Discussion and Analysis   INTEROIL CORPORATION     3







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



We are required to comply with Canadian
Securities Administrators’ National Instrument 51-101 Standards for Disclosure of Oil and Gas Activities (“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, 2011 in accordance with NI 51-101, which
evaluation is summarized in our 2011 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 United States Securities
and Exchange Commission (“SEC”), as at December 31, 2011.



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.



|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.  Currently developing infrastructure for the Elk and Antelope fields which includes condensate stripping and associated facilities, and the gas gathering and associated facilities, in connection with commercializing gas discoveries.  This segment also manages our construction business which services the 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 – The LNG Project. 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 the 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.



Management Discussion and Analysis   INTEROIL CORPORATION     4







|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 current 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.



InterOil plans to achieve this strategy
by:



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

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

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

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

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



Further details of our business strategy
can be found under the heading “Business Strategy” in our 2011 Annual Information Form available at www.sedar.com.



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

| | · | The PPL 236 phase 1 exploratory seismic data acquisition program, which included 70 kilometers
with six dip lines transecting the Whale, Tuna, Barracuda, Wahoo, Mako and Shark prospects, was completed during the first quarter
of 2011. Processing and interpretation of this first phase of seismic data has been completed, and the Wahoo/Mako leads (PPL 236)
and the Tuna lead (PPL 236 and PPL 238) have been selected for follow up. Subsequently the Kwalaha seismic data acquisition program
was activated consisting of 56 kilometres and seven dip lines. Work commenced on September 16, 2011 and was completed on December
20, 2011. The objective of the survey was to further delineate the Wahoo and Mako prospects and identify potential drilling locations.
Processing and interpretation of the data is ongoing. A third phase of seismic data acquisition, which consists of two dip orientated
lines totaling 21 kilometres in length over the Tuna prospect, commenced on December 22, 2011. Line preparation is currently in
progress.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The PPL 237 phase 3 Triceratops seismic acquisition program, which included four lines for a total
of 50 kilometres, was acquired between April and August 2011. This program increased our total seismic data acquisition over the
area to 140 kilometers in eleven lines. The objective of the program was to investigate the structure, seismic character, and the
aerial closure of the Triceratops field. Following the interpretation of the new seismic data, a review of the field was completed
and the conclusion reached that both the Bwata-1 and Triceratops-1 wells lay in the same zone, the same pool and the same field.
Subsequently, the field was renamed the Triceratops field. Following the mapping of the seismic there has also been a review and
increase in what we believe is the prospective size of the Triceratops field. This potential increase is due to increased size
of the closure and the identification of several potential shallow marine reefal carbonate build ups.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The preparation of the Triceratops 2 well site was completed at the end of 2011 and the Triceratops
2 well was spudded on January 15, 2012. The Triceratops 2 well is an appraisal well to test the presence of hydrocarbons and determine
whether a potential reefal carbonate reservoir exists in the Triceratops field.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION     5







| | · | During 2011, we contracted for airborne magnetic, gravity and gamma ray prospecting over PPL 236,
PPL 237 and PPL 238. Five acquisition blocks were acquired for a total of 14,288 line kilometers of airborne data. Data processing
over this airborne data is currently undergoing final quality control assessment.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | During 2011, the FEED work was carried out on Condensate Stripping Project. The FEED phase generated
deliverables to technically and commercially define the project and prepare it for execution (detailed engineering, procurement,
construction, fabrication, commissioning, and hand-over to operations) and proposals were solicited from potential Engineering,
Procurement and Construction (“EPC”) contractors. We are continuing the planning and preparation efforts for Condensate
Stripping Project execution which includes preparing a detailed project execution plan, execution schedule and risk assessment
work. At the end of 2011, agreement was reached with Mitsui to extend the target date for FID on the CSP Project until March 31,
2012, which has been extended from the previously disclosed targeted date of December 31, 2011 to be realigned with the targeted
FID dates for our LNG Project.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In June 2011, our Board of Directors approved capital expenditures on certain critical steel infrastructure
ahead of FID on our LNG Project in order to help preserve the proposed schedule and take advantage of advantageous steel pricing.
Total expenditure of up to $100.0 million was authorized for condensate and processed gas line pipe, and other required items with
long lead times.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | At the end of 2011, we agreed with Petromin that the Investment Agreement we entered into in 2008
was no longer valid or intended to operate and should terminate. The agreement provided for Petromin to take a direct interest
in the Elk and Antelope fields and fund 20.5% of the costs of their development, if certain conditions were met. Petromin remains
the State’s nominee to acquire this interest under relevant Papua New Guinean’s legislation, once a PDL is granted.
We have proposed to Petromin that cash contributions made by Petromin under the Agreement to fund development, amounting to approximately
$15.4 million, be held and credited against the State’s obligation to refund its portion of such costs upon grant of the
PDL.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Midstream – Refining

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

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

| | · | The catalytic reformer unit ("CRU"), which allows the refinery to produce reformate for
gasoline, remained shut down through the year due to technical operating issues. As a result, we were required to import unleaded
gasoline to satisfy PNG’s domestic needs.  It is anticipated that the CRU will be re-commissioned and returned to service
during 2012, upon the successful conclusion of major maintenance and catalyst regeneration.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | During the year, a decommissioning provision of $4.1 million relating to the future retirement
obligations associated with the refinery was initially recognized. This decommissioning provision represents the net present value
of the estimated costs of future dismantlement, site restoration and abandonment of properties based upon regulations and economic
circumstances. This provision balance as at December 31, 2011 was $4.6 million.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In June 2011, OPIC signed agreements agreeing to release all of the sponsor support collateral
and requirements for the loan granted to us in 2001 in recognition of our financial and operational maturity.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On May 23, 2011, the BNP Paribas working capital facility agreement was amended to allow a $10.0
million increase in the facility limit. Total facility limit stood at $230.0 million subsequent to its amendment. In November 2011,
our Midstream working capital facility with BNP Paribas was increased temporarily by $30.0 million to $260.0 million till January
31, 2012, and reverting back to $230.0 million on that date. Subsequent to the year end, the facility has been extended and further
amended in February 2012 with the allowance of a further $10.0 million increase in the facility limit to $240.0 million until January
31, 2013.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Midstream – Liquefaction

| | · | On February 2, 2011, we signed a Project Funding and Construction Agreement and Shareholder Agreement
with Energy World Corporation Limited (“EWC”) governing the parameters in respect of the development, construction,
financing and operation of the planned 3 mtpa land based modular LNG plant in the Gulf Province of Papua New Guinea. The agreements
with EWC, as amended, contemplate the negotiation of further definitive agreements and are conditional on reaching FID to proceed
with the LNG plant no later than March 31, 2012.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION     6







| | · | On April 11, 2011, we and Pac LNG entered into certain conditional framework agreements with FLEX
LNG and Samsung Heavy Industries for the proposed construction of a 1.8 mtpa or 2 mtpa fixed-floating liquefied natural gas vessel.
The framework agreements provided that the parties were to undertake project specific FEED work and negotiate final binding agreements
in time for a FID decision in mid-December 2011. Project specific FEED work was carried out. However, as FID was not reached by
mid-December 2011, these framework agreements with FLEX LNG and Samsung lapsed and were not extended. We are continuing to negotiate
with FLEX LNG. Under the framework agreement we entered into with FLEX LNG, an equity purchase option was granted to us to acquire
common shares in FLEX LNG at an average strike price of 4.5909 Norwegian Kroner. On May 16, 2011, this option was exercised, with
our acquisition of 8,938,913 common shares of FLEX LNG at a cost of $7.5 million.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | During the year, site-specific engineering for the land based modular LNG and fixed-floating LNG
facilities were undertaken along with other pre-investment in the LNG Project to lower bidder risks and to secure our LNG Project
timeline and costs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On August 1, 2011, Rt. Hon Sir Rabbie Namaliu, former Prime Minister and former Petroleum and Energy
Minister of Papua New Guinea, joined us to chair our PNG Advisory Board. The PNG Advisory Board is a management group formed to
assist us in discussions with government departments in developing the LNG Project.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On August 3, 2011, we signed a Heads of Agreement with Noble Clean Fuels Limited, a wholly owned
subsidiary of Noble Group Limited, for the supply of one mtpa of LNG per annum from the LNG Project for a ten year period beginning
in 2014. Definitive, binding agreements are currently being negotiated.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | The PNG government’s Minister for Petroleum and Energy and the Secretary of his department
issued certain press releases and correspondence during 2011 asserting that our development of the LNG Project may not, were it
to continue without amendment to its current form, be in compliance with the terms of the LNG Project Agreement signed with the
State in December 2009, and would not be approved by the State. We have provided appropriate assurances to the PNG government in
relation to the development of this Project and are continuing to work with the PNG government and its relevant departments in
relation to our development plans for the Elk and Antelope fields and the LNG Project. Additionally, the constitution of the PNG
government became a matter of dispute during 2011 and remains so. National elections are due to take place in mid-2012.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | In September 2011, we retained Morgan Stanley & Co.LLC, Macquarie Capital (USA) Inc. and UBS
AG as joint financial advisors to assist us with soliciting and evaluating proposals from potential strategic partners. We anticipate
that these proposals will relate to obtaining an internationally recognized LNG operating and equity partner for development of
the LNG Project’s gas liquefaction and associated facilities in the Gulf Province of Papua New Guinea, and may include a
sale of an interest in the Elk and Antelope fields, and in our other exploration tenements in Papua New Guinea. No assurances can
be given that we will be able to attract strategic partners on terms acceptable to us, how such an agreement will affect our current
LNG Project plans or whether such a partner will be acceptable to the PNG government.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On November 25, 2011, a Heads of Agreement was signed with Gunvor Singapore Pte. Ltd. for the supply
of one mtpa of LNG from the LNG Project in Papua New Guinea. Definitive binding agreements are currently being negotiated.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On December 2, 2011, a further Heads of Agreement was signed with ENN Energy Trading Company Ltd
of China, for the supply of one to one and one half mtpa of LNG from the LNG Project. The Heads of Agreement, while not binding,
provides exclusivity on the LNG volumes, during negotiation of the definitive agreement, and set out the basis upon which the parties
intend to negotiate and document terms for the purchase and sale of LNG, for a period of 15 years, commencing in 2015.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Downstream

| | · | In 2011, we signed supply agreements with several key contractors and sub-contractors associated
with the Exxon Mobil LNG project, Papua New Guinea’s largest resource project to date. In addition, we re-signed all existing
major customers in the agricultural, commercial and aviation sectors to further three year term supply agreements.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Year on year, sales volumes for 2011 were 678.0 million liters and were up by 51.5 million liters,
or 8.2%, on the 2010 volumes of 626.5 million liters.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION     7







| | · | Our retail business accounted for approximately 13% of our total downstream sales in 2011. Investments
were made in 2010 and 2011 in new electronic systems for both pumps and the forecourt control units to support the further development
of this business.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | On December 8, 2011, the ICCC advised that margins for wholesale will increase in line with the
ICCC mandated formula for a five year period. A CPI increase of 7% 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, 2012.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Subsequent to year end in February 2012, Westpac working capital facility was increased by $4.7
million (PGK 10.0 million) bringing the total Downstream working capital facility to $65.3 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 + 4.4% per annum.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Corporate

| | · | The shipping business, which operates two vessels transporting petroleum products for us and external
customers both within PNG and for export in the South Pacific region, was transferred from our Downstream business segment to Corporate
during the year.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION     8







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



Consolidated Results for the
years ended December 31, 2011, 2010 and 2009



|Consolidated – Operating results                             |  | Year ended December 31, |           
|------------------------------------------------------------ |  | ----------------------- | ----------
|($ thousands, except per share data)                         |  | 2011                    |           
|Sales and operating revenues                                 |  |                         | 1,106,534 
|Interest revenue                                             |  |                         | 1,356     
|Other non-allocated revenue                                  |  |                         | 11,058    
|Total revenue                                                |  |                         | 1,118,948 
|Cost of sales and operating expenses                         |  |                         | (1,020,932
|Office and administration and other expenses                 |  |                         | (52,793   
|Derivative gain/(loss)                                       |  |                         | 2,006     
|Exploration costs                                            |  |                         | (18,435   
|Gain on sale of oil and gas properties assets                |  |                         | -         
|Loss on extinguishment of IPI liability                      |  |                         | -         
|Litigation settlement expense                                |  |                         | -         
|Loss on Flex LNG Investment                                  |  |                         | (3,420    
|Foreign exchange gain/(loss)                                 |  |                         | 25,019    
|EBITDA (1)                                                   |  |                         | 50,393    
|Depreciation and amortization                                |  |                         | (20,137   
|Interest expense                                             |  |                         | (13,333   
|Profit/(loss) before income taxes                            |  |                         | 16,923    
|Income tax benefit/(expense)                                 |  |                         | 736       
|Net profit/(loss)                                            |  |                         | 17,659    
|Net profit/(loss) per share (dollars) (basic)                |  |                         | 0.37      
|Net profit/(loss) per share (dollars) (diluted)              |  |                         | 0.36      
|Total assets                                                 |  |                         | 1,088,355 
|Total liabilities                                            |  |                         | 328,464   
|Total long-term liabilities                                  |  |                         | 128,072   
|Gross margin (2)                                             |  |                         | 85,602    
|Cash flows generated from/(used in) operating activities (3) |  |                         | 62,670    



Notes:

| | (1) | EBITDA, is a non-GAAP measure and is reconciled to IFRS in the section to this document entitled
“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 in the section to this document entitled ”Non-GAAP Measures
and Reconciliation”.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Refer to “Liquidity and Capital Resources – Summary of Cash Flows” for detailed
cash flow analysis.
| | --- | ---------------------------------------------------------------------------------------------------

| | (4) | The 2009 selected financial information was prepared in accordance with the Company’s former
GAAP, and has not been restated in accordance with IFRS.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

Management Discussion and Analysis   INTEROIL CORPORATION     9







Analysis of Financial Condition
Comparing Years Ended December 31, 2011, 2010 and 2009



During the year ended December 31, 2011,
our debt-to-capital ratio (being debt/[shareholders’ equity + debt]) was 12% (13% as at December 31, 2010 and 11% as at December
31, 2009), 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/current
liabilities), which measures our ability to meet short term obligations, was 2.1 times as at December 31, 2011 (3.2 times as at
December 31, 2010 and 2.2 times as at December 31, 2009). The quick ratio (or acid test ratio, (being [current assets less inventories]/current
liabilities)) which is a more conservative measure of our ability to meet short term obligations, was 1.3 times as at December
31, 2011 (2.3 times as at December 31, 2010 and 1.5 times as at December 31, 2009). These ratios satisfy our internal targets to
be above 1.5 times for the current ratio and 1.0 times for the quick ratio.



As at December 31, 2011, our total assets
amounted to $1,088.4 million, compared with $975.7 million as at December 31, 2010 and $631.8 million as at December 31, 2009.
The increase of $112.7 million or 11.5% from December 31, 2010 was primarily due to increases in the value of 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; an increase in inventory balances and trade receivable balances of $43.9
million and $87.2 million respectively due to higher working capital needs on higher average crude prices during the current period;
a net $20.8 million increase in plant and equipment (after depreciation) from capitalization of refinery asset retirement obligations,
tank upgrades, camp and office building works, and new business system implementation costs; $7.5 million increase in deferred
tax benefits mainly due to the temporary difference arising on foreign exchange translation of non-monetary assets of the refinery
operation; and $3.7 million for our investment in shares in FLEX LNG. These increases were offset by net decreases in our cash,
cash equivalents, cash restricted, and short term treasury bills of $160.9 million, due primarily to expenditure on development
of our oil and gas properties. The increase in total assets of $344.0 million or 54.4% from December 31, 2009 to December 31, 2010
was due primarily to a $187.1 million increase in cash and cash equivalents following the concurrent common share and convertible
notes offerings, increases in our oil and gas properties of $82.8 million associated with the appraisal and development of the
Elk and Antelope fields and furthering of the Condensate Stripping Project and LNG Project, and an increase in inventory balances
of $57.0 million at our refinery due to the timing of shipments.



As at December 31, 2011, our total liabilities
amounted to $328.5 million, compared with $272.8 million at December 31, 2010 and $189.8 million as at December 31, 2009. The increase
of $55.7 million or 20.4% from December 31, 2010 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. The increase in liability of $83.0 million or 43.7% as at December 31, 2010 from
December 31, 2009 was primarily due to the recognition of a $52.4 million liability relating to the fair value of the debt component
of the unsecured 2.75% convertible notes issuance in November 2010 and an increase in the working capital facility balance of $26.6
million.



Analysis of Consolidated Financial
Results Comparing Years and Quarters Ended December 31, 2011, 2010 and 2009



Annual
Comparative



Net profit for the year ended December
31, 2011 was $17.7 million compared with a net loss of $44.5 million for the same period in 2010, an improvement of $62.2 million.
The operating segments of Corporate, Midstream Refining and Downstream collectively returned a net profit for the year of $82.3
million. The development segments of Upstream and Midstream Liquefaction yielded a net loss of $64.6 million.



The main items contributing towards the
loss in 2010 were unusual, 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.



Management Discussion and Analysis   INTEROIL CORPORATION     10







Total revenues for the year ended December
31, 2011 were $1,118.9 million compared with $807.0 million and $693.1 million respectively for the same periods in 2010 and 2009.
This increase in the year ended 2011 compared to the same period in 2010 was due to the higher crude price environment in the 2011
year and an increase in domestic volumes of product sold for higher margin products. The total volume of all products sold by us
was 7.5 million barrels for fiscal year 2011, compared with 7.2 million barrels in 2010 and 6.5 million barrels in 2009.



EBITDA for the year ended December 31,
2011 was $50.4 million, an increase of $66.9 million over negative EBITDA of $16.5 million for the same period in 2010, mainly
due to the unusual, one time charges in 2011 as detailed above. The current year also had an improvement in our net foreign exchange
gain/loss for the year of $35.8 million compared to the prior period as a result of rising Papua New Guinea Kina (“PGK”)
against USD.



The Upstream segment realized a net loss
of $49.1 million in 2011 (2010 – loss of $78.6 million, 2009 – loss of $39.5 million). The reduction in the loss in
2011 by $29.4 million from 2010 was mainly due to one-time events in the prior year of $30.6 million loss on extinguishment of
IPI liability and $2.1 million gain on sale of oil and gas properties. During 2011, there has been an increase of $11.5 million
on intercompany interest charges due to higher loan balances from the parent entity (Corporate segment) to fund the exploration
activities. This increase has been offset by a $8.6 million reduction in office and administration expenses as more expenses have
been capitalized (mainly relating to rig expenditure associated with mud corrosion caused during the drilling of Antelope 2 well,
and expenditure associated with rig standby on Triceratops 2 well drilling due to delays in finalization of the location of the
well and weather associated delays), and a $6.5 million increase in other revenue driven by higher recovery of construction and
related equipments on their better utilization during the period on LNG Project related civil works and related infrastructure
development. The increase in the loss in 2010 by $39.1 million from 2009 was mainly due to a $16.8 million increase in exploration
costs relating to the Triceratops field and Wolverine seismic, $9.2 million higher intercompany interest charges, and a $5.2 million
reduction in the gain on sale of exploration assets in 2010 compared to 2009 as the prior year included conveyance accounting on
the IPI agreement for conversion rights waived by certain IPI investors.



The Midstream Refining segment generated
a net profit of $46.7 million in 2011 (2010 - $33.5 million, 2009 - $41.8 million) mainly on account of a $34.0 million increase
in foreign exchange gains as a result of rising PGK against USD, a $7.5 million improvement to income tax expense arising primarily
from the temporary differences due to translation of the non-monetary assets held by the Refinery using period end rates, and a
$3.6 million increase in derivative gains. These increases have been partly offset by lower gross margins (a decrease of $27.1
million from 2010) due primarily to lower crack spreads, and a $3.1 million increase in interest expense charged on higher loan
balances from the parent entity. The net profit in 2010 decreased from 2009 mainly on account of the initial recognition of $14.3
million of deferred tax assets in 2010.



The Midstream Liquefaction segment had
a net loss of $15.5 million during the 2011 year (2010 – loss of $8.4 million, 2009 – loss of $8.4 million) resulting
from higher management expenses and share compensation costs related to the LNG Project development which are not capitalized.
As the LNG Project Agreement was signed by the Government of Papua New Guinea in December 2009, all direct project related costs
since that date have been capitalized to the project rather than expensed.



The Downstream segment generated a net
profit of $11.6 million in 2011 (2010 – profit of $6.7 million, 2009 – profit of $8.5 million). The increased profit
was mainly due to a $5.6 million improvement in gross margins due to an increase in domestic volumes resulting from various development
projects being undertaken in Papua New Guinea, 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. This improvement
in gross margins has been partly offset by a $1.2 million increase in depreciation and amortization on capital purchases related
primarily to office refurbishment and upgrade projects across various terminals and depots. The decreased profit in 2010 compared
to 2009 was mainly due to a $3.0 million increase in office and administration expenses, a $2.0 million increase in foreign exchange
loss and a $1.7 million increase in income tax expense offset in part by a $4.6 million improvement in gross margin.



The Corporate segment generated a net profit
of $21.9 million (2010 – profit of $3.3 million, 2009 – loss of $4.3 million). The 2010 results included a $12.0 million
settlement expense to finalize certain long-standing litigation, and a $14.2 million increase in interest charges to other business
segments on increased loan balances. These expenses have been partly offset by a $4.5 million increase in interest expense due
to the 2.75% convertible notes issued on November 10, 2010 and a $3.4 million impairment loss 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.





Management Discussion and Analysis   INTEROIL CORPORATION     11













Quarterly Comparative



The net profit for the quarter ended December
31, 2011 was $13.2 million compared with a loss of $34.8 million for the same quarter of 2010, an improvement of $48.0 million.
This movement was mainly due to a $21.8 million loss on extinguishment of IPI liability in the prior year quarter in relation
to a 1.0% IPI interest buyback, an $11.8 million reduction in expensed exploration costs on lower seismic activity, a $10.5 million
increase in foreign exchange gains, and an $18.7 million improvement in income tax expense primarily from the impact of foreign
exchange movements impacting temporary differences on translation of the nonmonetary assets of the refinery operation using period
end rates. These gains have been offset in part by an $18.3 million reduction in gross margin for the quarter due primarily to
decreased export product crack spreads and the impact of both the CRU and Crude Distillation Unit ("CDU") being shut
down.



The operating segments of Corporate, Midstream
Refining and Downstream collectively derived a net profit for the fourth quarter of $27.2 million, while the development segments
of Upstream and Midstream Liquefaction had a net loss of $14.0 million, for an aggregate net profit of $13.2 million.



Total revenues increased by $95.2 million
from $194.4 million in the quarter ended December 31, 2010 to $289.6 million in the quarter ended December 31, 2011 primarily
due to higher volumes and prices during the quarter. The total volume of all products sold by us was 1.9 million barrels for quarter
ended December 2011, compared with 1.6 million barrels in the same quarter of 2010.



Variance Analysis



A complete discussion of each of our business
segments’ results can be found under the section ”Year and Quarter 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 years
and quarters ended December 31, 2011 and 2010.



|Yearly  Variance ($ millions) | Quarterly  Variance ($ millions) |   |   |       |  
|----------------------------- | -------------------------------- | - | - | ----- | -
|                              |                                  |   |   |       |  
|$                             | 62.2                             |   | $ | 48.0  |  
|                              |                                  |   |   |       |  
|$                             | (15.2                            | ) | $ | (18.3 | )
|                              |                                  |   |   |       |  
|$                             | 6.6                              |   | $ | 1.5   |  
|                              |                                  |   |   |       |  
|$                             | (0.1                             | ) | $ | 4.9   |  
|                              |                                  |   |   |       |  
|$                             | 3.1                              |   | $ | 1.4   |  



Management Discussion and Analysis   INTEROIL CORPORATION     12









|$ | (1.5  | ) | $ | 11.8 |   |  |  | Higher exploration costs for seismic activity on our licenses PPL 236, 237 and 238 during the year.  The majority of the seismic costs were incurred during the first three quarters of the current year and the fourth quarter of 2010.  These seismic costs were expensed as incurred. | 
|- | ----- | - | - | ---- | - |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|  |       |   |   |      |   |  |  |                                                                                                                                                                                                                                                                                          | 
|$ | 30.6  |   | $ | 21.8 |   |  |  | Loss on extinguishment of IPI liability in 2010 in relation to the interest buyback of 1.4%, 1.0% of which was purchased in the fourth quarter.  There have been no such buybacks during 2011.                                                                                           | 
|  |       |   |   |      |   |  |  |                                                                                                                                                                                                                                                                                          | 
|$ | 12.0  |   |   | -    |   |  |  | Litigation settlement expense in the third quarter of 2010 on settlement of the Todd Peters et al litigation for which we issued 199,677 common shares to the plaintiffs valued at $12.0 million.                                                                                        | 
|  |       |   |   |      |   |  |  |                                                                                                                                                                                                                                                                                          | 
|$ | (3.4  | ) | $ | (1.6 | ) |  |  | Loss recognized 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.                                                                                                            | 
|  |       |   |   |      |   |  |  |                                                                                                                                                                                                                                                                                          | 
|$ | 35.8  |   | $ | 10.5 |   |  |  | The PGK strengthened against the USD from 0.3785 at the start of the year to 0.4665 as at December 31, 2011.  We are currently holding more PGK cash balances in PNG to partly mitigate the risk of a rising PGK which would affect exploration and development costs.                   | 
|  |       |   |   |      |   |  |  |                                                                                                                                                                                                                                                                                          | 
|$ | (5.9  | ) | $ | (2.0 | ) |  |  | Increase in depreciation expense mainly due to the depreciation of construction machinery which was acquired over the last year, and the depreciation of the new ERP system.                                                                                                             | 
|  |       |   |   |      |   |  |  |                                                                                                                                                                                                                                                                                          | 
|$ | (6.0) |   | $ | (1.0 | ) |  |  | Higher interest expense for the quarter and year primarily due to higher utilization of our Midstream and Downstream working capital facilities, and interest on the 2.75% convertible senior notes issued on November 10, 2010.                                                         | 
|  |       |   |   |      |   |  |  |                                                                                                                                                                                                                                                                                          | 
|$ | 7.1   |   | $ | 18.7 |   |  |  | Decrease in income tax expense for the year primarily from the impact of foreign exchange movements impacting temporary differences on translation of the nonmonetary assets of the refinery operation using period end rates.                                                           | 



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



As at December 31, 2011, we had cash,
cash equivalents, and cash restricted of $108.1 million (December 2010 – $280.9 million), of which $39.3 million (December
2010 - $47.3 million) was restricted. In addition, we also had $11.8 million equivalent of PGK in short term treasury bills issued
by the Bank of Papua New Guinea (December 2010 – nil). Of the total cash restricted of $39.3 million, $33.0 million (December
2010 - $40.7 million) was restricted pursuant to the BNP Paribas working capital facility utilization requirements, $5.9 million
(December 2010 – $6.3 million) was restricted as a cash deposit on the OPIC secured loan relating to our half yearly instalment
of $4.5 million and the related interest that will be payable with the next instalment on June 30, 2012, and the balance was made
up of a cash deposit on office premises together with term deposits on our PPLs.



Our cash inflows from operations for the
year ended December 31, 2011 were $62.7 million compared with outflows of $13.6 million for the year ended December 31, 2010,
a net increase in cash inflows of $76.3 million. This increase in cash inflows is mainly due to a $26.2 million change in cash
generated by operations prior to changes in operating working capital, related to net 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 outflows for investing activities
for the year ended December 31, 2011 were $204.2 million compared with $111.2 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 $134.1 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.



Management Discussion and Analysis   INTEROIL CORPORATION     13







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 shares and 2.75% convertible notes offerings in November 2010.



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, 2011 by business segment, and on a consolidated basis. Our IFRS
transition date was January 1, 2010 and as such, the 2010 comparative information in the table below has been restated in accordance
with IFRS.



|                                                         |  |  | 2011     |   |  |  | 2010     |  
|-------------------------------------------------------- |  |  | -------- | - |  |  | -------- | -
|Quarters ended  ($ thousands
    except per share  data) |  |  | Dec-31   |   |  |  | Sep-30   |  
|Upstream                                                 |  |  | 1,891    |   |  |  | 2,645    |  
|Midstream – Refining                                     |  |  | 237,640  |   |  |  | 231,455  |  
|Midstream – Liquefaction                                 |  |  | -        |   |  |  | -        |  
|Downstream                                               |  |  | 209,678  |   |  |  | 186,304  |  
|Corporate                                                |  |  | 21,831   |   |  |  | 25,078   |  
|Consolidation entries                                    |  |  | (181,428 | ) |  |  | (163,584 | )
|Total revenues                                           |  |  | 289,612  |   |  |  | 281,898  |  
|Upstream                                                 |  |  | 665      |   |  |  | (6,169   | )
|Midstream – Refining                                     |  |  | 2,604    |   |  |  | 3,461    |  
|Midstream – Liquefaction                                 |  |  | (4,123   | ) |  |  | (3,602   | )
|Downstream                                               |  |  | 6,808    |   |  |  | 3,570    |  
|Corporate                                                |  |  | 10,134   |   |  |  | 1,548    |  
|Consolidation entries                                    |  |  | (11,280  | ) |  |  | (10,263  | )
|EBITDA (1)                                               |  |  | 4,808    |   |  |  | (11,455  | )
|Upstream                                                 |  |  | (9,402   | ) |  |  | (15,080  | )
|Midstream – Refining                                     |  |  | 15,684   |   |  |  | (1,201   | )
|Midstream – Liquefaction                                 |  |  | (4,574   | ) |  |  | (3,980   | )
|Downstream                                               |  |  | 3,621    |   |  |  | 1,146    |  
|Corporate                                                |  |  | 7,616    |   |  |  | (473     | )
|Consolidation entries                                    |  |  | 252      |   |  |  | (190     | )
|Net profit/(loss)                                        |  |  | 13,197   |   |  |  | (19,778  | )
|Net profit/(loss) per share (dollars)                    |  |  |          |   |  |  |          |  
|Per Share – Basic                                        |  |  | 0.27     |   |  |  | (0.41    | )
|Per Share – Diluted                                      |  |  | 0.27     |   |  |  | (0.41    | )

| | (1) | EBITDA is a non-GAAP measure and is
                                                          reconciled to IFRS in the section to this document entitled “Non-GAAP
                                                          Measures and Reconciliation”.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION     14







YEAR AND QUARTER IN REVIEW








The following section provides a review
of the year and quarter ended December 31, 2011 for each of our business segments.



UPSTREAM – YEAR AND QUARTER
IN REVIEW



|Upstream – Operating results                 |  | Year ended December 31, |        
|-------------------------------------------- |  | ----------------------- | -------
|($ thousands)                                |  | 2011                    |        
|Other non-allocated revenue                  |  |                         | 9,841  
|Total revenue                                |  |                         | 9,841  
|Office and administration and other expenses |  |                         | (5,122 
|Exploration costs                            |  |                         | (18,435
|Gain on sale of oil and gas properties       |  |                         | -      
|Loss on extinguishment of IPI liability      |  |                         | -      
|Foreign exchange loss                        |  |                         | (2,153 
|EBITDA (1)                                   |  |                         | (15,869
|Depreciation and amortization                |  |                         | (3,255 
|Interest expense                             |  |                         | (30,013
|Loss before income taxes                     |  |                         | (49,137
|Income tax expense                           |  |                         | -      
|Net loss                                     |  |                         | (49,137



| | (1) | EBITDA is a non-GAAP measure and is
                                                          reconciled to IFRS in the section to this document entitled “Non-GAAP
                                                          Measures and Reconciliation”.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Analysis of Upstream Financial
Results Comparing Year and Quarter Ended December 31, 2011 and 2010



The following analysis outlines the key
movements, the net of which primarily explains the difference in the results between the years and quarters ended December 31,
2011 and 2010.



|  |  | Yearly  Variance ($ millions) |      |   | Quarterly  Variance ($ millions) |   |      |  | 
|- |  | ----------------------------- | ---- | - | -------------------------------- | - | ---- |  | 
|  |  |                               |      |   |                                  |   |      |  | 
|  |  | $                             | 29.4 |   |                                  | $ | 38.4 |  | 
|  |  |                               |      |   |                                  |   |      |  | 
|Ø |  | $                             | 6.5  |   |                                  | $ | 1.6  |  | 
|  |  |                               |      |   |                                  |   |      |  | 
|Ø |  | $                             | (1.5 | ) |                                  | $ | 11.8 |  | 
|  |  |                               |      |   |                                  |   |      |  | 
|Ø |  | $                             | (2.1 | ) |                                  |   | -    |  | 



Management Discussion and Analysis   INTEROIL CORPORATION     15







|Ø |  | $ | 30.6  |   |  | $ | 21.8 |   |  |  | Loss on extinguishment of IPI liability in 2010 in relation to the buyback of IPI interests  amounting to 1.4%, 1.0% of which was purchased in the fourth quarter of 2010.  There have been no such buybacks during 2011.                                                                                                                             | 
|- |  | - | ----- | - |  | - | ---- | - |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|  |  |   |       |   |  |   |      |   |  |  |                                                                                                                                                                                                                                                                                                                                                       | 
|Ø |  | $ | 8.6   |   |  | $ | 7.0  |   |  |  | Reduction in office and administration expenses as more expenses have been capitalized (mainly relating to rig expenditure associated with corrosion caused by drilling mud, and expenditure associated with rig standby on the Triceratops 2 well drilling due to delays in finalization of the location of the well and weather associated delays). | 
|  |  |   |       |   |  |   |      |   |  |  |                                                                                                                                                                                                                                                                                                                                                       | 
|Ø |  | $ | (11.5 | ) |  | $ | (3.2 | ) |  |  | Higher interest expense due to an increase in inter-company loan balances provided to fund exploration and development activities.                                                                                                                                                                                                                    | 





MIDSTREAM - REFINING – YEAR
AND QUARTER IN REVIEW



|Midstream Refining – Operating results       |  | Year ended December 31, |         
|-------------------------------------------- |  | ----------------------- | --------
|($ thousands)                                |  | 2011                    |         
|External sales                               |  |                         | 362,606 
|Inter-segment revenue - Sales                |  |                         | 576,672 
|Inter-segment revenue - Recharges            |  |                         | 8,841   
|Interest and other revenue                   |  |                         | 831     
|Total segment revenue                        |  |                         | 948,950 
|Cost of sales and operating expenses         |  |                         | (897,825
|Office and administration and other expenses |  |                         | (18,939 
|Derivative gain/(loss)                       |  |                         | 2,018   
|Foreign exchange gain/(loss)                 |  |                         | 26,458  
|EBITDA (1)                                   |  |                         | 60,662  
|Depreciation and amortization                |  |                         | (11,254 
|Interest expense                             |  |                         | (9,664  
|Profit before income taxes                   |  |                         | 39,744  
|Income tax benefit/(expense)                 |  |                         | 6,946   
|Net profit                                   |  |                         | 46,690  
|                                             |  |                         |         
|Gross Margin (2)                             |  |                         | 41,453  



| | (1) | EBITDA is a non-GAAP measure
                                                                 and is reconciled to IFRS in the section to this document entitled
                                                                 “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 in the section to this
                                                                 document entitled “Non-GAAP Measures and Reconciliation”.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION     16







Midstream - Refining Operating
Review



|                                                                          |  | Quarter ended December 31, |        |   | Year ended December 31, |  
|------------------------------------------------------------------------- |  | -------------------------- | ------ | - | ----------------------- | -
|Key Refining Metrics                                                      |  | 2011                       |        |   | 2010                    |  
|Throughput (barrels per day)(1)                                           |  |                            | 24,644 |   |                         |  
|Capacity utilization (based on 36,500 barrels per day operating capacity) |  |                            | 50     | % |                         |  
|Cost of production per barrel(2)                                          |  | $                          | 5.18   |   |                         | $
|Working capital financing cost per barrel of production(2)                |  | $                          | 0.76   |   |                         | $
|Distillates as percentage of production                                   |  |                            | 57.1   | % |                         |  

| | (1) | Throughput per day has been calculated
                                                            excluding shut down days. During 2011 and 2010, the refinery was shut
                                                            down for 82 days and 81 days, respectively.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Our cost of production per barrel
                                                            and working capital financing cost per barrel have been calculated
                                                            based on a notional throughput. Our actual throughput has been adjusted
                                                            to include the throughput that would have been necessary to produce
                                                            the equivalent amount of finished product that we imported during
                                                            the year. The increase in the cost of production per barrel for the
                                                            current periods is mainly due to the depreciation of the USD against
                                                            the PGK and AUD, the currencies in which we incur our operating expenditures,
                                                            and a general inflationary increase, higher personnel costs and system
                                                            and IT upgrades performed during the current periods.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the second half of 2011, the PNG
Customs Service commenced an audit of our petroleum product imports into Papua New Guinea for the years 2007 to 2010.  We
received a letter in November 2011 from the then Commissioner of Customs setting out certain findings from the audit. This letter
included comments alleging that payment of import goods and services taxes (“GST”) was required and had not been made
on imports of certain refined products. As well as requiring payment of GST, the letter noted that administrative penalties were
able to be levied by Customs in the range of 50% to 200% of the assessed amounts as per the PNG Customs Act. We have since met
with the Customs Service and provided it with supporting documentation to demonstrate that the GST amounts claimed in their letter
have all been paid. We have currently made a provision based on our best estimate in relation to this matter and are working closely
with the authority to provide all requested information in order to finalize the audit.



Analysis of Midstream - Refining
Financial Results Comparing the Year and Quarter Ended December 31, 2011 and 2010



The following analysis outlines the key
changes, the net of which primarily explains the variance in the results between the years and quarters ended December 31, 2011
and 2010.





|  |  | Yearly 
Variance
($ millions) |       |   | Quarterly  Variance ($ millions) |   |       |   | 
|- |  | ----------------------------- | ----- | - | -------------------------------- | - | ----- | - | 
|  |  | $                             | 13.2  |   |                                  | $ | 6.2   |   | 
|  |  |                               |       |   |                                  |   |       |   | 
|Ø |  | $                             | (27.1 | ) |                                  | $ | (19.9 | ) | 
|  |  |                               |       |   |                                  |   |       |   | 
|Ø |  | $                             | 34.0  |   |                                  | $ | 8.0   |   | 







Management Discussion and Analysis   INTEROIL CORPORATION     17









|Ø |  | $ | (1.4 | ) |  | $ | (0.8 | ) |  |  | Increase in office and administration costs net of recharge revenue for the year was driven by higher salaries, wages and share compensation expenses, which were to a large extent impacted by the strengthening of the PGK and Australian Dollar (“AUD”) against the USD during the period.  | 
|- |  | - | ---- | - |  | - | ---- | - |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|  |  |   |      |   |  |   |      |   |  |  |                                                                                                                                                                                                                                                                                                | 
|Ø |  | $ | 3.6  |   |  | $ | 1.3  |   |  |  | Movement in gains from derivative contracts that were not accounted for as hedge accounted contracts.                                                                                                                                                                                          | 
|  |  |   |      |   |  |   |      |   |  |  |                                                                                                                                                                                                                                                                                                | 
|Ø |  | $ | (3.1 | ) |  | $ | (1.8 | ) |  |  | Increase in interest expense on higher utilization of the working capital facilities.                                                                                                                                                                                                          | 
|  |  |   |      |   |  |   |      |   |  |  |                                                                                                                                                                                                                                                                                                | 
|Ø |  | $ | 7.5  |   |  | $ | 19.3 |   |  |  | Decrease in income tax expense in 2011 primarily from the impact of foreign exchange movements impacting temporary differences on translation of the nonmonetary assets of the refinery operation using period end rates, offset by income tax expense on profits generated by the operations. | 



MIDSTREAM - LIQUEFACTION – YEAR
AND QUARTER IN REVIEW









|                                                         |  | Year ended December 31, |        
|-------------------------------------------------------- |  | ----------------------- | -------
|Midstream Liquefaction – Operating results
($ thousands) |  | 2011                    |        
|Interest and other revenue                               |  |                         | -      
|Total segment revenue                                    |  |                         | -      
|Office and administration and other expenses             |  |                         | (14,121
|Foreign exchange loss                                    |  |                         | (13    
|EBITDA (1)                                               |  |                         | (14,134
|Depreciation and amortization                            |  |                         | (26    
|Interest expense                                         |  |                         | (1,308 
|Loss before income taxes                                 |  |                         | (15,468
|Income tax benefit                                       |  |                         | -      
|Net loss                                                 |  |                         | (15,468







(1)EBITDA is a non-GAAP measure
and is reconciled to IFRS in the section to this document entitled “Non-GAAP Measures and Reconciliation”.



Analysis of Midstream - Liquefaction
Financial Results Comparing the Year and Quarter Ended December 31, 2011 and 2010



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 this Joint Venture Company. This interest was reduced from 86.66% in December 2011 following the receipt
of cash calls from Pac LNG.



All costs incurred in connection with
the LNG Project, subsequent to the execution of the shareholders’ agreement governing the development of the midstream facilities
of the LNG Project on July 31, 2007, and through the pre-acquisition and feasibility stage have been expensed as incurred, unless
they were directly identified as property, plant and equipment. Since the execution of the LNG Project Agreement with the State
in December 2009, all project-related direct costs have been capitalized, other than overheads and other costs that are incurred
in the normal course of running the business, which are expensed.



The following analysis outlines the key
movements, the net of which primarily explains the variance in the results between the years and quarters ended December 31, 2011
and 2010.



Management Discussion and Analysis   INTEROIL CORPORATION     18











|  |  | Yearly 
Variance ($ millions) |      |   | Quarterly
 Variance ($ millions) |   |      |   | 
|- |  | ----------------------------- | ---- | - | -------------------------------- | - | ---- | - | 
|  |  | $                             | (7.1 | ) |                                  | $ | (2.5 | ) | 
|  |  |                               |      |   |                                  |   |      |   | 
|Ø |  | $                             | (7.7 | ) |                                  | $ | (3.1 | ) | 
|  |  |                               |      |   |                                  |   |      |   | 
|Ø |  | $                             | 0.6  |   |                                  | $ | 0.6  |   | 



DOWNSTREAM – YEAR AND QUARTER
IN REVIEW



|Downstream – Operating results               |  | Year ended December 31, |         
|-------------------------------------------- |  | ----------------------- | --------
|($ thousands)                                |  | 2011                    |         
|External sales                               |  |                         | 743,663 
|Inter-segment revenue - Sales                |  |                         | 197     
|Interest and other revenue                   |  |                         | 1,263   
|Total segment revenue                        |  |                         | 745,123 
|Cost of sales and operating expenses         |  |                         | (704,213
|Office and administration and other expenses |  |                         | (15,780 
|Foreign exchange loss                        |  |                         | (229    
|EBITDA (1)                                   |  |                         | 24,901  
|Depreciation and amortization                |  |                         | (4,026  
|Interest expense                             |  |                         | (4,346  
|Profit before income taxes                   |  |                         | 16,529  
|Income tax expense                           |  |                         | (4,962  
|Net profit                                   |  |                         | 11,567  
|                                             |  |                         |         
|Gross Margin (2)                             |  |                         | 39,647  

| | (1) | EBITDA is a non-GAAP measure and is
                                                            reconciled to IFRS in the section to this document entitled “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 in the section to this document entitled
                                                            “Non-GAAP Measures and Reconciliation”.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Downstream Operating Review



|Key Downstream Metrics              |  | Quarter ended December 31, |       |  | Year ended December 31, | 
|----------------------------------- |  | -------------------------- | ----- |  | ----------------------- | 
|                                    |  | 2011                       |       |  | 2010                    | 
|Sales volumes (millions of liters)  |  |                            | 187.7 |  |                         | 
|Average sales price per liter (PGK) |  |                            | 2.43  |  |                         | 



Management Discussion and Analysis   INTEROIL CORPORATION     19







Analysis of Downstream Financial
Results Comparing the Year and Quarter Ended December 31, 2011 and 2010



The following analysis outlines the key
movements, the net of which primarily explains the variance in the results between the years and quarters ended December 31, 2011
and 2010.



|  |  | Yearly Variance ($ millions) |      |   | Quarterly  Variance ($ millions) |   |      |   | 
|- |  | ---------------------------- | ---- | - | -------------------------------- | - | ---- | - | 
|  |  | $                            | 4.9  |   |                                  | $ | 1.0  |   | 
|  |  |                              |      |   |                                  |   |      |   | 
|Ø |  | $                            | 5.6  |   |                                  | $ | (0.1 | ) | 
|  |  |                              |      |   |                                  |   |      |   | 
|Ø |  | $                            | 0.9  |   |                                  | $ | 1.8  |   | 
|  |  |                              |      |   |                                  |   |      |   | 
|Ø |  | $                            | (1.2 | ) |                                  | $ | (0.7 | ) | 
|  |  |                              |      |   |                                  |   |      |   | 
|Ø |  | $                            | (0.6 | ) |                                  | $ | (0.3 | ) | 





CORPORATE – YEAR AND QUARTER
IN REVIEW



|Corporate – Operating results                |  | Year ended December 31, |        
|-------------------------------------------- |  | ----------------------- | -------
|($ thousands)                                |  | 2011                    |        
|External sales                               |  |                         | 266    
|Inter-segment revenue - Sales                |  |                         | 13,859 
|Inter-segment revenue - Recharges            |  |                         | 39,503 
|Interest revenue                             |  |                         | 38,512 
|Other non-allocated revenue                  |  |                         | (23    
|Total revenue                                |  |                         | 92,117 
|Cost of sales and operating expenses         |  |                         | (11,421
|Office and administration and other expenses |  |                         | (47,371
|Derivative (loss)/gain                       |  |                         | (11    
|Foreign exchange gain                        |  |                         | 954    
|Loss on Flex LNG investment                  |  |                         | (3,420 
|Litigation settlement expense                |  |                         | -      
|EBITDA (1)                                   |  |                         | 30,848 
|Depreciation and amortization                |  |                         | (1,706 
|Interest expense                             |  |                         | (6,012 
|Profit before income taxes                   |  |                         | 23,130 
|Income tax expense                           |  |                         | (1,248 
|Net profit                                   |  |                         | 21,882 

| | (1) | EBITDA is a non-GAAP measure and is
                                                            reconciled to IFRS in the section to this document entitled “Non-GAAP
                                                            Measures and Reconciliation”.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION     20







Analysis of Corporate Financial
Results Comparing the Year and Quarter Ended December 31, 2011 and 2010



During 2011, our Corporate segment took
over the management of our shipping business from Downstream operations. We currently operate two vessels transporting petroleum
products for our Downstream segment and external customers, both within PNG and for export in the South Pacific region. External
sales above relates to the shipping charges billed to external customers, and inter-segment revenue - sales relates to shipping
charges billed to our Downstream segment.



The following analysis outlines the key
movements, the net of which primarily explains the variance in the results between the years and quarters ended December 31, 2011
and 2010.





|  |  | Yearly Variance ($ millions) |      |   | Quarterly  Variance ($ millions) |   |      |   | 
|- |  | ---------------------------- | ---- | - | -------------------------------- | - | ---- | - | 
|  |  | $                            | 18.6 |   |                                  | $ | 4.2  |   | 
|  |  |                              |      |   |                                  |   |      |   | 
|Ø |  | $                            | 12.0 |   |                                  |   | -    |   | 
|  |  |                              |      |   |                                  |   |      |   | 
|Ø |  | $                            | (3.4 | ) |                                  | $ | (1.6 | ) | 
|  |  |                              |      |   |                                  |   |      |   | 
|Ø |  | $                            | 9.7  |   |                                  | $ | 4.6  |   | 
|  |  |                              |      |   |                                  |   |      |   | 
|Ø |  | $                            | (0.1 | ) |                                  | $ | 0.6  |   | 



Management Discussion and Analysis   INTEROIL CORPORATION     21







CONSOLIDATION ADJUSTMENTS –
YEAR AND QUARTER IN REVIEW



|Consolidation adjustments – Operating results    |  | Year ended December 31, |         
|------------------------------------------------ |  | ----------------------- | --------
|($ thousands)                                    |  | 2011                    |         
|Inter-segment revenue - Sales                    |  |                         | (590,729
|Inter-segment revenue - Recharges                |  |                         | (48,344 
|Interest revenue (5)                             |  |                         | (38,010 
|Other non-allocated revenue                      |  |                         | -       
|Total revenue                                    |  |                         | (677,083
|Cost of sales and operating expenses (1)         |  |                         | 592,527 
|Office and administration and other expenses (2) |  |                         | 48,541  
|EBITDA (3)                                       |  |                         | (36,015 
|Depreciation and amortization(4)                 |  |                         | 130     
|Interest expense(5)                              |  |                         | 38,010  
|Profit/(loss) before income taxes                |  |                         | 2,125   
|Income tax expense                               |  |                         | -       
|Net profit/(loss)                                |  |                         | 2,125   
|                                                 |  |                         |         
|Gross Margin (6)                                 |  |                         | 1,798   



| | (1) | Represents the elimination upon consolidation
                                                            of our refinery sales to other segments and other minor inter-company
                                                            product sales.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes the elimination of inter-segment
                                                            administration service fees.
| | --- | ----------------------------------------------------------------------------------------------------------------------------------

| | (3) | EBITDA is a non-GAAP measure and is
                                                            reconciled to IFRS in the section to this document entitled “Non-GAAP
                                                            Measures and Reconciliation”.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Represents the amortization of a portion
                                                            of costs capitalized to assets on consolidation.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Includes the elimination of interest
                                                            accrued between segments.
| | --- | --------------------------------------------------------------------------------------------------------------------------

| | (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 in the section to this document entitled “Non-GAAP
                                                            Measures and Reconciliation”.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Analysis of Consolidation
Adjustments Comparing the Year and Quarter Ended December 31, 2011 and 2010



The following table outlines the key movements,
the net of which primarily explains the variance in the results between the years and quarters ended December 31, 2011 and 2010.





|  |  | Yearly Variance ($ millions) |     |  | Quarterly  Variance ($ millions) |   |     |  | 
|- |  | ---------------------------- | --- |  | -------------------------------- | - | --- |  | 
|  |  |                              |     |  |                                  |   |     |  | 
|  |  | $                            | 3.2 |  |                                  | $ | 0.7 |  | 
|  |  |                              |     |  |                                  |   |     |  | 
|Ø |  | $                            | 3.2 |  |                                  | $ | 0.7 |  | 





Management Discussion and Analysis   INTEROIL CORPORATION     22















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, 2011.





|Organization                         |  | Facility |             |     | Balance outstanding
December 31,
2011 |   |            | Effective
 interest 
rate |  |  | Maturity date |     
|------------------------------------ |  | -------- | ----------- | --- | ------------------------------------- | - | ---------- | ------------------------- |  |  | ------------- | ----
|OPIC secured loan                    |  | $        | 35,500,000  |     |                                       | $ | 35,500,000 |                           |  |  | 6.93          | %   
|BNP Paribas working capital facility |  | $        | 260,000,000 | (2) |                                       | $ | 10,030,131 | (1)                       |  |  | 3.38          | %   
|Westpac PGK working capital facility |  | $        | 37,320,000  | (4) |                                       | $ | 6,450,372  |                           |  |  | 9.65          | %   
|BSP PGK working capital facility     |  | $        | 23,325,000  |     |                                       | $ | 0          |                           |  |  | 9.47          | %   
|2.75% convertible notes              |  | $        | 70,000,000  |     |                                       | $ | 70,000,000 |                           |  |  | 7.91          | %(6)
|Mitsui unsecured loan (5)            |  | $        | 10,393,023  |     |                                       | $ | 10,393,023 |                           |  |  | 6.23          | %   







| | (1) | Excludes
                                                                                                                   letters of
                                                                                                                   credit totaling
                                                                                                                   $164.9 million,
                                                                                                                   which reduce
                                                                                                                   the available
                                                                                                                   balance of
                                                                                                                   the facility
                                                                                                                   to $85.1 million
                                                                                                                   at December
                                                                                                                   31, 2011.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | The
                                                                                                                 facility was
                                                                                                                 increased by
                                                                                                                 $30.0 million
                                                                                                                 during the quarter
                                                                                                                 ended March 31,
                                                                                                                 2011 from $190.0
                                                                                                                 million to $220.0
                                                                                                                 million, and
                                                                                                                 was then increased
                                                                                                                 by a further
                                                                                                                 $10.0 million
                                                                                                                 during the quarter
                                                                                                                 ended June 30,
                                                                                                                 2011 to $230.0
                                                                                                                 million. During
                                                                                                                 the quarter ended
                                                                                                                 December 31,
                                                                                                                 2011 there was
                                                                                                                 a temporary $30.0
                                                                                                                 million increase
                                                                                                                 to $260.0 million.
                                                                                                                 The facility
                                                                                                                 reverted back
                                                                                                                 to a maximum
                                                                                                                 availability
                                                                                                                 of $230.0 million
                                                                                                                 at the end of
                                                                                                                 January 2012.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | The
                                                                                                                 facility was
                                                                                                                 extended after
                                                                                                                 the end of the
                                                                                                                 year, and it
                                                                                                                 now matures on
                                                                                                                 January 31, 2013.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Subsequent
                                                                                                                 to the year end,
                                                                                                                 the limit on
                                                                                                                 this facility
                                                                                                                 was increased
                                                                                                                 by approximately
                                                                                                                 $4.7 million,
                                                                                                                 with a new limit
                                                                                                                 of approximately
                                                                                                                 $42.0 million.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Facility
                                                                                                                 is to fund our
                                                                                                                 share of the
                                                                                                                 Condensate Stripping
                                                                                                                 Project costs
                                                                                                                 as they are incurred
                                                                                                                 pursuant to the
                                                                                                                 JVOA.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (6) | Effective
                                                                                                                 rate after bifurcating
                                                                                                                 the equity and
                                                                                                                 debt components
                                                                                                                 of the $70 million
                                                                                                                 principal amount
                                                                                                                 of 2.75% convertible
                                                                                                                 senior notes
                                                                                                                 due 2015.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



OPIC Secured Loan (Midstream
- Refinery)



In 2001, one of our subsidiaries entered
into a loan agreement with OPIC for provision of an $85.0 million project financing facility for the development of our refinery
in PNG. The loan is primarily secured by the assets of the refinery. On June 20, 2011, OPIC signed agreements agreeing to release
all of the sponsor support collateral and requirements for the loan granted in 2001 in recognition of our financial and operational
maturity. The balance outstanding under the loan as at December 31, 2011 was $35.5 million. The interest rate on the loan is equal
to the agreed U.S. Government treasury cost applicable to each promissory note that was issued and is outstanding plus 3%, and
is payable quarterly in arrears. Principal repayments of $4.5 million each are due on June 30 and December 31 of each year until
December 31, 2015. At December 31, 2011, $5.9 million was, and is still, being held on deposit to secure our June 30, 2012 principal
and interest payments on the secured loan.



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. At December 31, 2011, Facility 1 had a limit
of $200.0 million (increased temporarily from $170.0 million during the quarter ended December 31, 2011) 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.
At January 31, 2012, the limit on Facility 1 reverted back to $170.0 million. Facility 2 allows borrowings of up to $60.0 million
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.



Management Discussion and Analysis   INTEROIL CORPORATION     23







As of December 31, 2011, $85.1 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 3.38% for the year ended December 31, 2011 (compared with 2.69% for
the same period of 2010), 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 PGK 150.0
million (approximately $70.0 million) combined revolving working capital facility for our Downstream wholesale and retail petroleum
products distribution business from Bank of South Pacific Limited and Westpac Bank PNG Limited. The facility limit as at December
31, 2011 was PGK 130.0 million (approximately $60.6 million).



The Westpac facility limit is PGK 80.0
million (approximately $37.3 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. Subsequent to year end, the limit of this facility was increased by PGK 10.0 million (approximately
$4.7 million) with an increased limit of PGK 90.0 million (approximately $42.0 million). In addition, a secured loan of $15.0 million
was provided as part of this increased facility which is repayable in equal installments over 3.5 years with an interest rate of
LIBOR + 4.4% per annum. The BSP facility limit is PGK 50.0 million (approximately $23.3 million), and was renewed in August 2011
for another year. As at December 31, 2011, PGK 13.8 million (approximately $6.5 million) of this combined facility had been utilized.



The weighted average interest rate under
the Westpac facility was 10.0% for the quarter and 9.65% for the year ended December 31, 2011, while the weighted average interest
rate under the BSP facility was 9.94% for the quarter and 9.47% for the year ended December 31, 2011.



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 OPIC 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.



Management Discussion and Analysis   INTEROIL CORPORATION     24







The portion of funding that relates to
Mitsui’s share of the Condensate Stripping Project as at December 31, 2011, amounting to approximately $11.4 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 $10.4 million), funded by Mitsui, is classed as an unsecured loan and interest accrues daily based on LIBOR plus a margin of
6%.



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 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.



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 investors and asset sales.



Cash calls are made on IPI investors and
Pac LNG (for its 2.5% direct interest in the Elk and Antelope field 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.



Summary of Cash Flows



|($ thousands)                               |  | Year ended December 31, |         
|------------------------------------------- |  | ----------------------- | --------
|                                            |  | 2011                    |         
|Net cash inflows/(outflows) from:           |  |                         |         
|Operations                                  |  |                         | 62,670  
|Investing                                   |  |                         | (204,241
|Financing                                   |  |                         | (27,165 
|Net cash movement                           |  |                         | (168,736
|Opening cash                                |  |                         | 233,577 
|Exchange gains on cash and cash equivalents |  |                         | 4,005   
|Closing cash                                |  |                         | 68,846  





Analysis of Cash Flows Provided
By/(Used In) Operating Activities Comparing the Years ended December 31, 2011 and 2010



The following table outlines the key variances
in the cash flows from operating activities between the years ended December 31, 2011 and 2010:





|  |  | Yearly variance ($ millions) |      |  |  | 
|- |  | ---------------------------- | ---- |  |  | 
|  |  |                              |      |  |  | 
|  |  | $                            | 76.2 |  |  | 
|  |  |                              |      |  |  | 
|Ø |  | $                            | 26.1 |  |  | 





Management Discussion and Analysis   INTEROIL CORPORATION     25









|Ø |  | $ | 50.1 |  |  | Decrease in cash used by operations relating to changes in operating working capital. The decrease in
cash used for the year is due primarily to a $28.0 million decrease in inventories due to timing of crude and export shipments
and a $71.6 million increase in accounts payable and accrued liabilities, partially offset by a $43.8 million increase in trade
receivables. | 
|- |  | - | ---- |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 



Analysis of Cash Flows Provided
By/(Used In) Investing Activities Comparing the Years Ended December 31, 2011 and 2010



The following table outlines the key variances
in the cash flows from investing activities between the years ended December 31, 2011 and 2010:



|  |  | Yearly  variance ($ millions) |       |   |  | 
|- |  | ----------------------------- | ----- | - |  | 
|  |  |                               |       |   |  | 
|  |  | $                             | (93.1 | ) |  | 
|  |  |                               |       |   |  | 
|Ø |  | $                             | (21.8 | ) |  | 
|  |  |                               |       |   |  | 
|Ø |  | $                             | (23.0 | ) |  | 
|  |  |                               |       |   |  | 
|Ø |  | $                             | (19.5 | ) |  | 
|  |  |                               |       |   |  | 
|Ø |  | $                             | (15.5 | ) |  | 
|  |  |                               |       |   |  | 
|Ø |  | $                             | (11.8 | ) |  | 
|  |  |                               |       |   |  | 
|Ø |  | $                             | (7.5  | ) |  | 
|  |  |                               |       |   |  | 
|Ø |  | $                             | 26.0  |   |  | 
|  |  |                               |       |   |  | 
|Ø |  | $                             | (20.0 | ) |  | 



Analysis of Cash Flows Provided
By/(Used In) Financing Activities Comparing the Years Ended December 31, 2011 and 2010



The following table outlines the key variances
in the cash flows from financing activities between years ended December 31, 2011 and 2010:



|  |  | Yearly variance ($ millions) |        |   |  | 
|- |  | ---------------------------- | ------ | - |  | 
|  |  |                              |        |   |  | 
|  |  | $                            | (339.0 | ) |  | 
|  |  |                              |        |   |  | 
|Ø |  | $                            | (61.4  | ) |  | 



Management Discussion and Analysis   INTEROIL CORPORATION     26









|Ø |  | $ | (206.7 | ) |  |  | Net proceeds after transaction costs from the issuance of shares relating to the issuance of 2,800,000 common shares in November 2010.                                                    | 
|- |  | - | ------ | - |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|  |  |   |        |   |  |  |                                                                                                                                                                                           | 
|Ø |  | $ | (66.3  | ) |  |  | Net proceeds after transaction costs from the issuance of $70.0 million of 2.75% convertible notes in November 2010.                                                                      | 
|  |  |   |        |   |  |  |                                                                                                                                                                                           | 
|Ø |  | $ | 1.4    |   |  |  | Proceeds received from Pac LNG for its share of costs incurred in developing the LNG Project.                                                                                             | 
|  |  |   |        |   |  |  |                                                                                                                                                                                           | 
|Ø |  | $ | (2.0   | ) |  |  | Reduction in funding received from Mitsui relating to the Condensate Stripping Project.                                                                                                   | 
|  |  |   |        |   |  |  |                                                                                                                                                                                           | 
|Ø |  | $ | (5.0   | ) |  |  | Proceeds received from Petromin for contributions towards cash calls made with respect to development activities for the Elk and Antelope fields.  No proceeds were received during 2011. | 



Capital Expenditures



Upstream Capital Expenditures



Capital expenditures for exploration in
Papua New Guinea for the year to December 31, 2011 were $107.6 million, compared with $82.8 million during the same period of 2010.



The following table outlines the key expenditures
in the year ended December 31, 2011:



|  |  | Yearly ($ millions) |       |  |  | 
|- |  | ------------------- | ----- |  |  | 
|  |  |                     |       |  |  | 
|  |  | $                   | 107.6 |  |  | 
|  |  |                     |       |  |  | 
|Ø |  | $                   | 7.1   |  |  | 
|  |  |                     |       |  |  | 
|Ø |  | $                   | 16.9  |  |  | 
|  |  |                     |       |  |  | 
|Ø |  | $                   | 24.2  |  |  | 
|  |  |                     |       |  |  | 
|Ø |  | $                   | 16.7  |  |  | 
|  |  |                     |       |  |  | 
|Ø |  | $                   | 6.2   |  |  | 
|  |  |                     |       |  |  | 
|Ø |  | $                   | 36.5  |  |  | 



IPI investors and Pac LNG (2.5% direct
interest in Elk and Antelope fields) are presently required to fund 24.3886% of the Elk and Antelope fields extended well program
costs to maintain their interest in those fields. The amounts capitalized in our books, or expensed as incurred, in relation to
the extended well program are the net amounts after adjusting for these interests.



Petromin had agreed to fund 20.5% of ongoing
costs for developing the fields. There were no contributions from Petromin during the year ended December 31, 2011 and therefore
the total advance payment received from Petromin remains at $15.4 million. At the end of the 2011 year, the parties agreed that
the investment agreement between Petromin and InterOil governing Petromin’s participation in the Elk and Antelope fields
should terminate. Petromin remains the State’s nominee to acquire the State’s interest in the Elk and Antelope fields
under relevant Papua New Guinean legislation, once a PDL is granted. We have proposed that cash contributions made by Petromin
to date to fund the development will be held and credited against the State’s obligation to contribute its portion of sunk
costs upon grant of the PDL.



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. Mitsui contributed
$9.9 million during the year for both Mitsui’s and our share, and has contributed $21.8 million in aggregate. In the event
that a positive FID is not reached or made, we will be required to refund all of Mitsui’s contributions (i.e. for our share
and Mitsui’s) within a specified period.



Management Discussion and Analysis   INTEROIL CORPORATION     27







Midstream Capital Expenditures



Capital expenditures totaled $15.9 million
in our Midstream Refining segment for the year ended December 31, 2011, mainly associated with camp and office building works,
motor vehicles and heavy pumper tanker purchases.



Following the signing of the LNG Project
Agreement with the State in December 2009, $5.3 million of costs incurred during the year in relation to the Midstream - Liquefaction
segment have been capitalized.



Downstream Capital Expenditures



Capital expenditures for the Downstream
segment totaled $10.2 million for the year ended December 31, 2011. These expenditures mainly related to a number of upgrade projects
across various terminals and depots, and office refurbishments.



Corporate Capital Expenditures



Capital expenditures for the Corporate
segment totaled $3.1 million for the year ended December 31, 2011. These expenditures mainly related to project costs in relation
to the new business system implementation in the Downstream business and costs associated with relocation of the corporate office
in Cairns, Australia.



Capital Requirements



The oil and gas exploration and development,
refining and liquefaction industries are capital intensive and our business plans necessarily involve raising 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.



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 and Antelope, and Triceratops fields in PNG. Our net cash from working activities
is not sufficient to fund those appraisal and development programs.



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, 2011, we are committed
under the terms of our exploration licenses or PPL’s to spend a further $61.9 million through 2015. As at December 31, 2011,
management estimates that satisfying these license commitments with the expenditure of $61.9 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 require us to spend a further $73.0 million on the development of the Elk and Antelope fields by the end of 2014.



We do not have sufficient funds to complete
planned exploration and development 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, particularly given
recent market volatility.



We will also be required to obtain substantial
amounts of financing for the development of the Elk and Antelope 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, it will, if successful, 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.



Management Discussion and Analysis   INTEROIL CORPORATION     28







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
2012. 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 a 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.



Midstream - Liquefaction



On September 28, 2010, we and LNGL (a wholly
owned subsidiary of PNG LNG) signed a heads of agreement with EWC to construct a three mtpa land based liquefaction facility in
the Gulf Province of Papua New Guinea. Following this agreement, on February 2, 2011, the parties signed certain conditional framework
agreements defining certain parameters for the aforementioned development, construction, financing and the operation of the planned
land-based liquefaction facilities. These facilities are intended to be developed in phases and further definitive agreements are
contemplated.



The LNG facilities are intended to be developed
in two phases, an initial two mtpa followed by a one mtpa expansion. In return for its commitment to fully fund the construction
of the facilities, EWC is to be entitled to a fee of 14.5% of the proceeds from LNG revenue from these facilities, less agreed
deductions, and subject to adjustments based on timing and execution.



On April 11, 2011, we and Pac LNG entered
into certain conditional framework agreements with FLEX LNG and Samsung Heavy Industries for the proposed construction of a 1.8
mtpa or 2 mtpa fixed-floating liquefied natural gas vessel. Such a vessel is expected to integrate with and augment the land-based
modules to be developed with EWC. The framework agreements provided that the parties were to undertake project specific FEED work
and negotiate final binding agreements in time for a FID decision in mid-December 2011. Project specific FEED work was carried
out. However, as FID was not reached by mid-December 2011, these framework agreements with FLEX LNG and Samsung lapsed and were
not extended. We are continuing to negotiate with FLEX LNG.



The fixed-floating project is intended
to integrate with and augment proposed on-shore infrastructure to transport LNG from the onshore Elk and Antelope fields in the
Gulf Province of Papua New Guinea pursuant to arrangements with EWC and Mitsui.



In September 2011, we retained financial
advisors 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. No assurances can be given that we will be able to attract strategic
partners on terms acceptable to us, how such an agreement will affect our current LNG Project plans or whether such a partner will
be acceptable to the PNG government.



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.



Management Discussion and Analysis   INTEROIL CORPORATION     29







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 2012.



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 financial statements for the year ended December 31, 2011 and the notes thereto:







|                                                 |  | Payments Due by Period |        
|------------------------------------------------ |  | ---------------------- | -------
|Contractual obligations  ($ thousands)           |  | Total                  |        
|Petroleum prospecting and retention licenses (a) |  |                        | 134,900
|Secured and unsecured loans (b)                  |  |                        | 51,586 
|2.75% Convertible notes obligations              |  |                        | 77,540 
|Indirect participation interest - PNGDV          |  |                        | 1,384  
|Total                                            |  |                        | 265,410











| | (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 $61.9 million as a condition
of renewal of our petroleum prospecting licenses through 2014 under our exploration licenses. As at December 31, 2011, management
estimates that satisfying this license commitment with the expenditure of $61.9 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 PRL15, requires us to spend a further $73.0 million on the development of the Elk and Antelope fields by
the end of 2014.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (b) | The effective interest rate on these loans for the year ended December 31, 2011 was 6.93%.
| | --- | ------------------------------------------------------------------------------------------



The following table contains information
on payments required to meet our operating lease commitments. It should be read in conjunction with our financial statements for
the year ended December 31, 2011 and the notes thereto:





|                                             |  | Year ended December 31, |       
|-------------------------------------------- |  | ----------------------- | ------
|($ thousands)                                |  | 2011                    |       
|Not later than 1 year                        |  |                         | 6,983 
|Later than 1 year and not later than 5 years |  |                         | 6,560 
|Later than 5 years                           |  |                         | 2,958 
|Total                                        |  |                         | 16,501





Off Balance Sheet Arrangements



Neither during the year ended, nor as at
December 31, 2011, did we have any off balance sheet arrangements or any relationships with unconsolidated entities or financial
partnerships.



Management Discussion and Analysis   INTEROIL CORPORATION     30







Transactions with Related Parties



Petroleum Independent and Exploration Corporation,
is owned by Mr. Mulacek, our Chairman and Chief Executive Officer. Prior to 2011, Petroleum Independent and Exploration Corporation
received a management fee in its capacity as the General Manager of one of our subsidiaries, S.P. InterOil LDC, in compliance with
OPIC loan requirements. During the year ended December 31, 2010, Petroleum Independent and Exploration Corporation received $150,000.
On June 20, 2011, OPIC signed agreements agreeing to release all of the sponsor support collateral and requirements for the loan
granted to us in 2001 in recognition of our financial and operational maturity. As a result, no fees were paid to Petroleum Independent
and Exploration Corporation in the year ended December 31, 2011. In November of 2011, we elected to exchange the 5,000 shares held
in S.P. InterOil LDC by Petroleum Independent and Exploration Corporation for 5,000 shares in InterOil Corporation. The sponsor
agreements were terminated with Petroleum Independent and Exploration Corporation on exchange of the share holding interest in
S.P. InterOil LDC. Subsequent to year end, S.P. InterOil LDC has been renamed South Pacific Refining Limited.



Breckland Limited, a company controlled
by Mr. Roger Grundy, one of our directors, previously provided technical and advisory services to us on normal commercial terms.
Amounts paid or payable to Breckland for technical services during the year ended December 31, 2011 amounted to $nil (December
2010 - $21,923).



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, 2011, we had 48,121,071 common shares (50,833,593 common shares
on a fully diluted basis) and no preferred shares outstanding. The potential dilutive instruments outstanding as at December 31,
2011 included employee stock options and restricted stock in respect of 1,640,017 common shares, IPI conversion rights to 340,480
common shares and 732,025 common shares relating to the $70.0 million principal amount 2.75% convertible senior notes due November
15, 2015. The 5,000 common shares previously recorded as potentially dilutive instruments were issued to Petroleum Independent
and Exploration Corporation in the quarter ended December 31, 2011 in exchange for the 5,000 shares it held in our subsidiary,
S.P. InterOil LDC.



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 short 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 International Petroleum 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 IPE to hedge our crude costs.



Management Discussion and Analysis   INTEROIL CORPORATION     31







At December 31, 2011, we had a net receivable
of $0.6 million (December 2010 – payable of $0.2 million) relating to open contracts to sell gasoil crack swaps and sell
dated Brent swaps for which hedge accounting has not been applied, and Brent swaps that have been priced out and will be settled
in January and February 2012.



A gain of $2.0 million was recognized on
the non-hedge accounted derivative contracts for the year ended December 31, 2011 (December 2010 – $1.6 million loss).



In addition to the commodity derivative
contracts, we have also entered into foreign exchange derivative contracts to manage our foreign exchange risk in relation to AUD.
As at December 31, 2011, we had $11,457 payable (December 2010 - nil) relating to our foreign currency derivatives. An $11,457
loss has been recognized on foreign exchange derivative contracts for the year ended December 31, 2011 (December 2011 - $0.5 million
gain).



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 Mean of Platts Singapore (“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 2010 and will be further reviewed in 2014. 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     32







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/(shareholders’ equity + debt)) at 50% or less. This was achieved throughout 2011 and 2010. Gearing levels were
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.



No financing arrangements were entered
into in 2011.



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 $108.1 million as at December 31, 2011, of which $39.3 million was restricted (as
governed by BNP working capital facility utilization requirements and OPIC secured loan facility). In addition, we also had $11.8
million equivalent of PGK in short term treasury bills issued by the Bank of Papua New Guinea. 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 $85.1 million of the combined BNP working capital facility available for use in our Midstream –
Refining operations, and $54.2 million of the Westpac/BSP combined working capital facility available for use in our Downstream
operations.



Crude Prices



Crude prices increased steadily throughout
2011, with the price of Dated Brent crude oil (as quoted by Platts) starting the year at $97 per bbl and closing the year at $108
per bbl. The average price for Dated Brent for 2011 was $111 per bbl compared with $79 per bbl for Dated Brent for 2010.



At year end we had $85.1 million of the
combined BNP working capital facility available for use in our Midstream – Refining operations, and approximately $54.2 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 $0.6 million relating to open contracts to sell gasoil
crack swaps and sell Dated Brent swaps for which hedge accounting has not been applied, and Brent swaps that have been priced out
and were settled in January and February of 2012.



Management Discussion and Analysis   INTEROIL CORPORATION     33













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.



Distillate margins to Dated Brent
strengthened during 2011 compared with historical levels due to increasing demand. Naphtha crack spreads were negative for all
of 2011, which has negatively affected our gross margin for the period.



Domestic
Demand



Sales results
for our refinery for 2011 indicate that Papua New Guinea’s domestic demand for middle distillates (which includes diesel
and jet fuels) from the refinery has increased by approximately 6.4% compared with 2010.  However, the total volume of all
products sold by us was 7.4 million barrels for fiscal year 2011 compared with 7.5 million barrels in 2010.  Total volume
of PNG domestic sales only for 2011 was 4.9 million barrels as compared with 4.6 million barrels in 2010.



The refinery
on average sold 12,649 bbls per day of refined petroleum products to the domestic market during fiscal year 2011 compared with
11,780 bbls 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 at between 0.2% and 0.3% for 2010 and
then reduced to between 0.15% and 0.2% for the majority of 2011. 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 strengthened against the USD every month during
the year ended December 31, 2011 (from 0.3785 to 0.4665).



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 2011 Annual Information Form available at www.sedar.com.



Management Discussion and Analysis   INTEROIL CORPORATION     34







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, 2011, 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.
As a result of this assessment, Management has recognized an asset retirement obligation at December 31, 2011 of $4,562,269. If
we adjust the estimates in future periods, it may result in increased capital expenditures and a corresponding increase in liabilities.



Environmental
Remediation



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



Management Discussion and Analysis   INTEROIL CORPORATION     35







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 undiscounted cash flows. If impairment is indicated, the amount by which
the carrying value exceeds the estimated fair value of the long-lived asset is charged to earnings. In order to determine fair
value, our management must make certain estimates and assumptions including, among other things, an assessment of market conditions
(including estimation of gross refining margins, crude price environments and its impact on IPP, etc), projected cash flows, investment
rates, interest/equity rates and growth rates, that could significantly impact the fair value of the asset being tested for impairment.
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.



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



NEW
ACCOUNTING STANDARDS



New
accounting standards not yet applicable as at December 31, 2011



The
following new standards have been issued but are not yet effective for the financial year beginning January 1, 2011 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,
                                                                                                                                       2013
                                                                                                                                       but
                                                                                                                                       is
                                                                                                                                       available
                                                                                                                                       for
                                                                                                                                       early
                                                                                                                                       adoption.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       yet
                                                                                                                                       to
                                                                                                                                       assess
                                                                                                                                       IFRS
                                                                                                                                       9’s
                                                                                                                                       full
                                                                                                                                       impact.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       not
                                                                                                                                       yet
                                                                                                                                       decided
                                                                                                                                       to
                                                                                                                                       adopt
                                                                                                                                       IFRS
                                                                                                                                       9
                                                                                                                                       early.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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
                                                                                                                                       might
                                                                                                                                       impact
                                                                                                                                       the
                                                                                                                                       entities
                                                                                                                                       that
                                                                                                                                       a
                                                                                                                                       group
                                                                                                                                       consolidates
                                                                                                                                       as
                                                                                                                                       its
                                                                                                                                       subsidiaries.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       yet
                                                                                                                                       to
                                                                                                                                       assess
                                                                                                                                       IFRS
                                                                                                                                       10’s
                                                                                                                                       full
                                                                                                                                       impact.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Management Discussion and Analysis   INTEROIL CORPORATION     36







| | - | 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.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       yet
                                                                                                                                       to
                                                                                                                                       assess
                                                                                                                                       IFRS
                                                                                                                                       11’s
                                                                                                                                       full
                                                                                                                                       impact.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | IFRS
                                                                                                                                       12
                                                                                                                                       'Disclosure
                                                                                                                                       of
                                                                                                                                       Interests
                                                                                                                                       in
                                                                                                                                       Other
                                                                                                                                       Entities'(effective
                                                                                                                                       from
                                                                                                                                       January
                                                                                                                                       1,
                                                                                                                                       2013):
                                                                                                                                       This
                                                                                                                                       standard
                                                                                                                                       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.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       yet
                                                                                                                                       to
                                                                                                                                       assess
                                                                                                                                       IFRS
                                                                                                                                       12’s
                                                                                                                                       full
                                                                                                                                       impact.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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
                                                                                                                                       IFRS.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       yet
                                                                                                                                       to
                                                                                                                                       assess
                                                                                                                                       IFRS
                                                                                                                                       13’s
                                                                                                                                       full
                                                                                                                                       impact.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       yet
                                                                                                                                       to
                                                                                                                                       assess
                                                                                                                                       IAS
                                                                                                                                       27’s
                                                                                                                                       full
                                                                                                                                       impact.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | 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.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       yet
                                                                                                                                       to
                                                                                                                                       assess
                                                                                                                                       IAS
                                                                                                                                       28’s
                                                                                                                                       full
                                                                                                                                       impact.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | IAS
                                                                                                                                       1
                                                                                                                                       ‘Presentation
                                                                                                                                       of
                                                                                                                                       financial
                                                                                                                                       statements’(amendment):
                                                                                                                                       The
                                                                                                                                       IASB
                                                                                                                                       has
                                                                                                                                       issued
                                                                                                                                       an
                                                                                                                                       amendment
                                                                                                                                       to
                                                                                                                                       IAS
                                                                                                                                       1,
                                                                                                                                       which
                                                                                                                                       changes
                                                                                                                                       the
                                                                                                                                       disclosure
                                                                                                                                       of
                                                                                                                                       items
                                                                                                                                       presented
                                                                                                                                       in
                                                                                                                                       other
                                                                                                                                       comprehensive
                                                                                                                                       income
                                                                                                                                       (OCI)
                                                                                                                                       in
                                                                                                                                       the
                                                                                                                                       statement
                                                                                                                                       of
                                                                                                                                       comprehensive
                                                                                                                                       income.
                                                                                                                                       The
                                                                                                                                       IASB
                                                                                                                                       originally
                                                                                                                                       proposed
                                                                                                                                       that
                                                                                                                                       all
                                                                                                                                       entities
                                                                                                                                       should
                                                                                                                                       present
                                                                                                                                       profit
                                                                                                                                       or
                                                                                                                                       loss
                                                                                                                                       and
                                                                                                                                       OCI
                                                                                                                                       together
                                                                                                                                       in
                                                                                                                                       a
                                                                                                                                       single
                                                                                                                                       statement
                                                                                                                                       of
                                                                                                                                       comprehensive
                                                                                                                                       income.
                                                                                                                                       The
                                                                                                                                       proposal
                                                                                                                                       has
                                                                                                                                       been
                                                                                                                                       withdrawn
                                                                                                                                       and
                                                                                                                                       IAS
                                                                                                                                       1
                                                                                                                                       will
                                                                                                                                       still
                                                                                                                                       permit
                                                                                                                                       profit
                                                                                                                                       or
                                                                                                                                       loss
                                                                                                                                       and
                                                                                                                                       OCI
                                                                                                                                       to
                                                                                                                                       be
                                                                                                                                       presented
                                                                                                                                       in
                                                                                                                                       either
                                                                                                                                       a
                                                                                                                                       single
                                                                                                                                       statement
                                                                                                                                       or
                                                                                                                                       in
                                                                                                                                       two
                                                                                                                                       consecutive
                                                                                                                                       statements.
                                                                                                                                       The
                                                                                                                                       amendment
                                                                                                                                       was
                                                                                                                                       developed
                                                                                                                                       jointly
                                                                                                                                       with
                                                                                                                                       the
                                                                                                                                       FASB,
                                                                                                                                       which
                                                                                                                                       has
                                                                                                                                       removed
                                                                                                                                       the
                                                                                                                                       option
                                                                                                                                       in
                                                                                                                                       US
                                                                                                                                       generally
                                                                                                                                       accepted
                                                                                                                                       accounting
                                                                                                                                       principles
                                                                                                                                       to
                                                                                                                                       present
                                                                                                                                       OCI
                                                                                                                                       in
                                                                                                                                       the
                                                                                                                                       statement
                                                                                                                                       of
                                                                                                                                       changes
                                                                                                                                       in
                                                                                                                                       equity.
                                                                                                                                       The
                                                                                                                                       amendment
                                                                                                                                       is
                                                                                                                                       effective
                                                                                                                                       for
                                                                                                                                       annual
                                                                                                                                       periods
                                                                                                                                       starting
                                                                                                                                       on
                                                                                                                                       or
                                                                                                                                       after
                                                                                                                                       July
                                                                                                                                       1,
                                                                                                                                       2012,
                                                                                                                                       subject
                                                                                                                                       to
                                                                                                                                       EU
                                                                                                                                       endorsement.
                                                                                                                                       This
                                                                                                                                       amendment
                                                                                                                                       will
                                                                                                                                       not
                                                                                                                                       have
                                                                                                                                       any
                                                                                                                                       material
                                                                                                                                       impact
                                                                                                                                       on
                                                                                                                                       our
                                                                                                                                       financial
                                                                                                                                       statements.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Changeover
to International Financial Reporting Standards



The AcSB adopted
IFRS as issued by IASB as GAAP, effective January 1, 2011, with a transition date of January 1, 2010. We have adopted IFRS and
have prepared our financial statements for the year ended December 31, 2011 in accordance with IFRS and restated our financial
statements for the year ended December 31, 2010 to comply with IFRS. The financial information contained in this MD&A that
relates to periods prior to January 1, 2010 has been prepared under our previous GAAP and has not been restated.



(i) Application
of IFRS 1:



Our financial
statements for the year ended December 31, 2011, are the first annual financial statements prepared in compliance with IFRS. We
have applied IFRS 1 in preparing the consolidated financial statements for the year ended December 31, 2011.



Our transition
date to IFRS was January 1, 2010 and we have prepared our opening IFRS balance sheet at that date. In preparing the consolidated
financial statements for the year ended December 31, 2011 in accordance with IFRS 1, we have applied the relevant mandatory exceptions
and certain optional exemptions from full retrospective application of IFRS.



Management Discussion and Analysis   INTEROIL CORPORATION     37







(ii) Exemptions
from full retrospective application – elected by the Company



We have elected
to apply the following optional exemptions from full retrospective application.



| | - | Business
                                                                                                                                       combinations
                                                                                                                                       exemption:A
                                                                                                                                       first-time
                                                                                                                                       adopter
                                                                                                                                       may
                                                                                                                                       elect
                                                                                                                                       not
                                                                                                                                       to
                                                                                                                                       apply
                                                                                                                                       IFRS
                                                                                                                                       3
                                                                                                                                       -
                                                                                                                                       ‘Business
                                                                                                                                       Combinations’
                                                                                                                                       (as
                                                                                                                                       revised
                                                                                                                                       in
                                                                                                                                       2008)
                                                                                                                                       retrospectively
                                                                                                                                       to
                                                                                                                                       past
                                                                                                                                       business
                                                                                                                                       combinations
                                                                                                                                       (business
                                                                                                                                       combinations
                                                                                                                                       that
                                                                                                                                       occurred
                                                                                                                                       before
                                                                                                                                       the
                                                                                                                                       date
                                                                                                                                       of
                                                                                                                                       transition
                                                                                                                                       to
                                                                                                                                       IFRS).
                                                                                                                                       However,
                                                                                                                                       if
                                                                                                                                       a
                                                                                                                                       first-time
                                                                                                                                       adopter
                                                                                                                                       restates
                                                                                                                                       any
                                                                                                                                       business
                                                                                                                                       combination
                                                                                                                                       to
                                                                                                                                       comply
                                                                                                                                       with
                                                                                                                                       IFRS
                                                                                                                                       3
                                                                                                                                       (as
                                                                                                                                       revised
                                                                                                                                       in
                                                                                                                                       2008),
                                                                                                                                       it
                                                                                                                                       shall
                                                                                                                                       restate
                                                                                                                                       all
                                                                                                                                       later
                                                                                                                                       business
                                                                                                                                       combinations
                                                                                                                                       and
                                                                                                                                       shall
                                                                                                                                       also
                                                                                                                                       apply
                                                                                                                                       IAS
                                                                                                                                       27
                                                                                                                                       (as
                                                                                                                                       amended
                                                                                                                                       in
                                                                                                                                       2008)
                                                                                                                                       from
                                                                                                                                       that
                                                                                                                                       same
                                                                                                                                       date.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       made
                                                                                                                                       the
                                                                                                                                       election
                                                                                                                                       not
                                                                                                                                       to
                                                                                                                                       apply
                                                                                                                                       IFRS
                                                                                                                                       3
                                                                                                                                       retrospectively
                                                                                                                                       to
                                                                                                                                       past
                                                                                                                                       business
                                                                                                                                       combinations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Fair
                                                                                                                                       value
                                                                                                                                       as
                                                                                                                                       deemed
                                                                                                                                       cost
                                                                                                                                       exemption:An
                                                                                                                                       entity
                                                                                                                                       may
                                                                                                                                       elect
                                                                                                                                       to
                                                                                                                                       measure
                                                                                                                                       an
                                                                                                                                       item
                                                                                                                                       of
                                                                                                                                       property,
                                                                                                                                       plant
                                                                                                                                       and
                                                                                                                                       equipment
                                                                                                                                       at
                                                                                                                                       the
                                                                                                                                       date
                                                                                                                                       of
                                                                                                                                       transition
                                                                                                                                       to
                                                                                                                                       IFRS
                                                                                                                                       at
                                                                                                                                       its
                                                                                                                                       fair
                                                                                                                                       value
                                                                                                                                       and
                                                                                                                                       use
                                                                                                                                       that
                                                                                                                                       fair
                                                                                                                                       value
                                                                                                                                       as
                                                                                                                                       its
                                                                                                                                       deemed
                                                                                                                                       cost
                                                                                                                                       at
                                                                                                                                       that
                                                                                                                                       date.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       made
                                                                                                                                       the
                                                                                                                                       election
                                                                                                                                       not
                                                                                                                                       to
                                                                                                                                       revalue
                                                                                                                                       our
                                                                                                                                       property,
                                                                                                                                       plant
                                                                                                                                       and
                                                                                                                                       equipment
                                                                                                                                       to
                                                                                                                                       fair
                                                                                                                                       value
                                                                                                                                       or
                                                                                                                                       deemed
                                                                                                                                       cost.
                                                                                                                                       Historical
                                                                                                                                       cost
                                                                                                                                       will
                                                                                                                                       be
                                                                                                                                       maintained
                                                                                                                                       as
                                                                                                                                       plant
                                                                                                                                       and
                                                                                                                                       equipment
                                                                                                                                       cost
                                                                                                                                       base
                                                                                                                                       on
                                                                                                                                       transition.
| | - | 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------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Cumulative
                                                                                                                                       translation
                                                                                                                                       differences
                                                                                                                                       exemption:Consistent
                                                                                                                                       with
                                                                                                                                       the
                                                                                                                                       previous
                                                                                                                                       GAAP
                                                                                                                                       treatment
                                                                                                                                       in
                                                                                                                                       prior
                                                                                                                                       periods,
                                                                                                                                       IAS
                                                                                                                                       21
                                                                                                                                       requires
                                                                                                                                       an
                                                                                                                                       entity:
                                                                                                                                       (a)
                                                                                                                                       to
                                                                                                                                       recognize
                                                                                                                                       some
                                                                                                                                       translation
                                                                                                                                       differences
                                                                                                                                       in
                                                                                                                                       other
                                                                                                                                       comprehensive
                                                                                                                                       income
                                                                                                                                       and
                                                                                                                                       accumulate
                                                                                                                                       these
                                                                                                                                       in
                                                                                                                                       a
                                                                                                                                       separate
                                                                                                                                       component
                                                                                                                                       of
                                                                                                                                       equity;
                                                                                                                                       and
                                                                                                                                       (b)
                                                                                                                                       on
                                                                                                                                       disposal
                                                                                                                                       of
                                                                                                                                       a
                                                                                                                                       foreign
                                                                                                                                       operation,
                                                                                                                                       to
                                                                                                                                       reclassify
                                                                                                                                       the
                                                                                                                                       cumulative
                                                                                                                                       translation
                                                                                                                                       difference
                                                                                                                                       for
                                                                                                                                       that
                                                                                                                                       foreign
                                                                                                                                       operation
                                                                                                                                       (including,
                                                                                                                                       if
                                                                                                                                       applicable,
                                                                                                                                       gains
                                                                                                                                       and
                                                                                                                                       losses
                                                                                                                                       on
                                                                                                                                       related
                                                                                                                                       hedges)
                                                                                                                                       from
                                                                                                                                       equity
                                                                                                                                       to
                                                                                                                                       profit
                                                                                                                                       or
                                                                                                                                       loss
                                                                                                                                       as
                                                                                                                                       part
                                                                                                                                       of
                                                                                                                                       the
                                                                                                                                       gain
                                                                                                                                       or
                                                                                                                                       loss
                                                                                                                                       on
                                                                                                                                       disposal.
                                                                                                                                       An
                                                                                                                                       election
                                                                                                                                       can
                                                                                                                                       be
                                                                                                                                       made
                                                                                                                                       to
                                                                                                                                       be
                                                                                                                                       exempted
                                                                                                                                       from
                                                                                                                                       this
                                                                                                                                       requirement
                                                                                                                                       on
                                                                                                                                       transition
                                                                                                                                       and
                                                                                                                                       start
                                                                                                                                       with
                                                                                                                                       'zero'
                                                                                                                                       translation
                                                                                                                                       differences.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       not
                                                                                                                                       made
                                                                                                                                       the
                                                                                                                                       election
                                                                                                                                       to
                                                                                                                                       restate
                                                                                                                                       our
                                                                                                                                       cumulative
                                                                                                                                       translation
                                                                                                                                       differences
                                                                                                                                       balance
                                                                                                                                       to
                                                                                                                                       zero,
                                                                                                                                       and
                                                                                                                                       have
                                                                                                                                       elected
                                                                                                                                       to
                                                                                                                                       continue
                                                                                                                                       with
                                                                                                                                       the
                                                                                                                                       current
                                                                                                                                       translation
                                                                                                                                       differences
                                                                                                                                       in
                                                                                                                                       comprehensive
                                                                                                                                       income
                                                                                                                                       as
                                                                                                                                       these
                                                                                                                                       are
                                                                                                                                       already
                                                                                                                                       in
                                                                                                                                       compliance
                                                                                                                                       with
                                                                                                                                       IAS
                                                                                                                                       21.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Oil
                                                                                                                                       and
                                                                                                                                       Gas
                                                                                                                                       assets
                                                                                                                                       exemption:Oil
                                                                                                                                       and
                                                                                                                                       Gas
                                                                                                                                       industry
                                                                                                                                       specific
                                                                                                                                       accounting
                                                                                                                                       under
                                                                                                                                       IFRS
                                                                                                                                       or
                                                                                                                                       previous
                                                                                                                                       GAAP
                                                                                                                                       is
                                                                                                                                       currently
                                                                                                                                       not
                                                                                                                                       as
                                                                                                                                       comprehensive
                                                                                                                                       as
                                                                                                                                       the
                                                                                                                                       guidance
                                                                                                                                       provided
                                                                                                                                       under
                                                                                                                                       U.S.
                                                                                                                                       generally
                                                                                                                                       accepted
                                                                                                                                       accounting
                                                                                                                                       principles
                                                                                                                                       accounting
                                                                                                                                       for
                                                                                                                                       industry
                                                                                                                                       specific
                                                                                                                                       oil
                                                                                                                                       and
                                                                                                                                       gas
                                                                                                                                       transactions.
                                                                                                                                       Paragraph
                                                                                                                                       D8A
                                                                                                                                       of
                                                                                                                                       IFRS
                                                                                                                                       1
                                                                                                                                       provides
                                                                                                                                       an
                                                                                                                                       exemption
                                                                                                                                       in
                                                                                                                                       relation
                                                                                                                                       to
                                                                                                                                       Oil
                                                                                                                                       and
                                                                                                                                       Gas
                                                                                                                                       assets
                                                                                                                                       by
                                                                                                                                       allowing
                                                                                                                                       companies
                                                                                                                                       to
                                                                                                                                       continue
                                                                                                                                       using
                                                                                                                                       the
                                                                                                                                       same
                                                                                                                                       policies
                                                                                                                                       as
                                                                                                                                       used
                                                                                                                                       under
                                                                                                                                       the
                                                                                                                                       previous
                                                                                                                                       GAAP
                                                                                                                                       and
                                                                                                                                       carrying
                                                                                                                                       forward
                                                                                                                                       the
                                                                                                                                       carrying
                                                                                                                                       amounts
                                                                                                                                       of
                                                                                                                                       the
                                                                                                                                       Oil
                                                                                                                                       and
                                                                                                                                       Gas
                                                                                                                                       assets
                                                                                                                                       under
                                                                                                                                       GAAP
                                                                                                                                       into
                                                                                                                                       IFRS.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       availed
                                                                                                                                       this
                                                                                                                                       exemption
                                                                                                                                       and
                                                                                                                                       elected
                                                                                                                                       to
                                                                                                                                       maintain
                                                                                                                                       our
                                                                                                                                       Oil
                                                                                                                                       and
                                                                                                                                       Gas
                                                                                                                                       assets
                                                                                                                                       at
                                                                                                                                       carrying
                                                                                                                                       amount
                                                                                                                                       under
                                                                                                                                       GAAP
                                                                                                                                       treatment
                                                                                                                                       in
                                                                                                                                       prior
                                                                                                                                       periods,
                                                                                                                                       which
                                                                                                                                       will
                                                                                                                                       be
                                                                                                                                       the
                                                                                                                                       deemed
                                                                                                                                       cost
                                                                                                                                       under
                                                                                                                                       IFRS.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | - | Interests
                                                                                                                                       in
                                                                                                                                       joint
                                                                                                                                       ventures
                                                                                                                                       entities
                                                                                                                                       exemption:Superseded
                                                                                                                                       CICA
                                                                                                                                       Section
                                                                                                                                       3055
                                                                                                                                       differs
                                                                                                                                       from
                                                                                                                                       IAS
                                                                                                                                       31
                                                                                                                                       as
                                                                                                                                       IAS
                                                                                                                                       31
                                                                                                                                       permits
                                                                                                                                       the
                                                                                                                                       use
                                                                                                                                       of
                                                                                                                                       either
                                                                                                                                       the
                                                                                                                                       proportionate
                                                                                                                                       consolidation
                                                                                                                                       method
                                                                                                                                       or
                                                                                                                                       the
                                                                                                                                       equity
                                                                                                                                       method
                                                                                                                                       to
                                                                                                                                       account
                                                                                                                                       for
                                                                                                                                       joint
                                                                                                                                       venture
                                                                                                                                       entities.
                                                                                                                                       IAS
                                                                                                                                       31
                                                                                                                                       recommends
                                                                                                                                       the
                                                                                                                                       use
                                                                                                                                       of
                                                                                                                                       proportionate
                                                                                                                                       consolidation
                                                                                                                                       as
                                                                                                                                       it
                                                                                                                                       better
                                                                                                                                       reflects
                                                                                                                                       the
                                                                                                                                       substance
                                                                                                                                       and
                                                                                                                                       economic
                                                                                                                                       reality,
                                                                                                                                       however,
                                                                                                                                       it
                                                                                                                                       does
                                                                                                                                       permit
                                                                                                                                       the
                                                                                                                                       use
                                                                                                                                       of
                                                                                                                                       equity
                                                                                                                                       method.
                                                                                                                                       Superseded
                                                                                                                                       CICA
                                                                                                                                       Section
                                                                                                                                       3055
                                                                                                                                       only
                                                                                                                                       allows
                                                                                                                                       the
                                                                                                                                       use
                                                                                                                                       of
                                                                                                                                       proportionate
                                                                                                                                       consolidation
                                                                                                                                       method
                                                                                                                                       to
                                                                                                                                       account
                                                                                                                                       for
                                                                                                                                       joint
                                                                                                                                       venture
                                                                                                                                       entities.
                                                                                                                                       We
                                                                                                                                       have
                                                                                                                                       elected
                                                                                                                                       to
                                                                                                                                       maintain
                                                                                                                                       our
                                                                                                                                       joint
                                                                                                                                       venture
                                                                                                                                       accounting
                                                                                                                                       under
                                                                                                                                       the
                                                                                                                                       proportionate
                                                                                                                                       consolidation
                                                                                                                                       model
                                                                                                                                       for
                                                                                                                                       both
                                                                                                                                       our
                                                                                                                                       incorporated
                                                                                                                                       and
                                                                                                                                       unincorporated
                                                                                                                                       joint
                                                                                                                                       venture
                                                                                                                                       interests.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The remaining
optional exemptions are not applicable to us.



(iii) Exceptions
from full retrospective application followed by the Company



All mandatory
exceptions in IFRS 1 were not applicable because there were no significant differences in management’s application of GAAP
in these areas.



Impact of adoption
of IFRS on financial reporting



Following a
review of the IFRS, there were two IFRS adjustments to the opening January 1, 2010 balance sheet:

a) In relation
to the deferred gain on contributions to the LNG Project recorded on our balance sheet, under IFRS, we were required to offset
these deferred gains against any underlying assets that are carried in relation to these deferred gains. Based on this guidance,
we have offset the deferred gains against deferred LNG project costs carried within the plant and equipment in the balance sheet
under the Midstream – Liquefaction segment. For further details, please refer to Note 3(b) in the Condensed Consolidated
Financial Statements for the year ended December 31, 2011.



Management Discussion and Analysis   INTEROIL CORPORATION     38







b) In accordance
with guidance under IFRS, deferred tax assets have been recognized for temporary differences that arise on translation of the
nonmonetary assets held by Midstream refining operations that are translated from the functional currency of the tax return (PGK)
to the reporting currency (USD) using period end rates. Previously under GAAP, these temporary differences in relation to functional
currency translation of nonmonetary assets were specifically disallowed from recognition.



Other than
the transition adjustments affecting the consolidated balance sheets, consolidated income statements, consolidated statements
of comprehensive income and consolidated statements of changes in equity as noted above, there were no transition differences
noted in relation to consolidated statement of cash flows.



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)                        |  | 2011                        |           
|Midstream – Refining                 |  |                             | 939,278   
|Downstream                           |  |                             | 743,860   
|Corporate                            |  |                             | 14,125    
|Consolidation Entries                |  |                             | (590,729  
|Sales and operating revenues         |  |                             | 1,106,534 
|Midstream – Refining                 |  |                             | (897,825  
|Downstream                           |  |                             | (704,213  
|Corporate (1)                        |  |                             | (11,421   
|Consolidation Entries                |  |                             | 592,527   
|Cost of sales and operating expenses |  |                             | (1,020,932
|Midstream – Refining                 |  |                             | 41,453    
|Downstream                           |  |                             | 39,647    
|Corporate (1)                        |  |                             | 2,704     
|Consolidation Entries                |  |                             | 1,798     
|Gross Margin                         |  |                             | 85,602    



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

(2) The 2009
financial information was prepared in accordance with the Company’s former GAAP, and has not been restated in accordance
with IFRS.



Management Discussion and Analysis   INTEROIL CORPORATION     39







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. For reconciliation of EBITDA to the net income (loss) under IFRS, refer to the following table.



The following
table reconciles net income (loss), a GAAP measure, to EBITDA, a non-GAAP measure for each of the last eight quarters. Our IFRS
transition date was January 1, 2010 and as such, the 2010 comparative information has been restated in accordance with IFRS.



|Quarters ended                                                     |  | 2011   |         |   | 2010   | 
|------------------------------------------------------------------ |  | ------ | ------- | - | ------ | 
|($
    thousands)                                                  |  | Dec-31 |         |   | Sep-31 | 
|Upstream                                                           |  |        | 665     |   |        | 
|Midstream – Refining                                               |  |        | 2,604   |   |        | 
|Midstream – Liquefaction                                           |  |        | (4,123  | ) |        | 
|Downstream                                                         |  |        | 6,808   |   |        | 
|Corporate                                                          |  |        | 10,134  |   |        | 
|Consolidation
    Entries                                          |  |        | (11,280 | ) |        | 
|Earnings
    before interest, taxes, depreciation and amortization |  |        | 4,808   |   |        | 
|Subtract:                                                          |  |        |         |   |        | 
|Upstream                                                           |  |        | (8,712  | ) |        | 
|Midstream – Refining                                               |  |        | (3,285  | ) |        | 
|Midstream – Liquefaction                                           |  |        | (445    | ) |        | 
|Downstream                                                         |  |        | (1,170  | ) |        | 
|Corporate                                                          |  |        | (1,498  | ) |        | 
|Consolidation
    Entries                                          |  |        | 11,500  |   |        | 
|Interest
    expense                                               |  |        | (3,610  | ) |        | 
|Upstream                                                           |  |        | 0       |   |        | 
|Midstream – Refining                                               |  |        | 19,243  |   |        | 
|Midstream – Liquefaction                                           |  |        | 0       |   |        | 
|Downstream                                                         |  |        | (595    | ) |        | 
|Corporate                                                          |  |        | (493    | ) |        | 
|Consolidation
    Entries                                          |  |        | 0       |   |        | 
|Income
    taxes                                                   |  |        | 18,155  |   |        | 
|Upstream                                                           |  |        | (1,355  | ) |        | 
|Midstream – Refining                                               |  |        | (2,878  | ) |        | 
|Midstream – Liquefaction                                           |  |        | (6      | ) |        | 
|Downstream                                                         |  |        | (1,422  | ) |        | 
|Corporate                                                          |  |        | (527    | ) |        | 
|Consolidation
    Entries                                          |  |        | 32      |   |        | 
|Depreciation
    and amortisation                                  |  |        | (6,156  | ) |        | 
|Upstream                                                           |  |        | (9,402  | ) |        | 
|Midstream – Refining                                               |  |        | 15,684  |   |        | 
|Midstream – Liquefaction                                           |  |        | (4,574  | ) |        | 
|Downstream                                                         |  |        | 3,621   |   |        | 
|Corporate                                                          |  |        | 7,616   |   |        | 
|Consolidation
    Entries                                          |  |        | 252     |   |        | 
|Net profit/(loss)
    per segment                                  |  |        | 13,197  |   |        | 





Management Discussion and Analysis   INTEROIL CORPORATION     40







PUBLIC
SECURITIES FILINGS



You may access
additional information about us, including our 2011 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.



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 ("National Instrument 52-109"), or caused them to be designed
under their supervision. As of December 31, 2011, our Chief Executive Officer (“CEO") and our Chief Financial Officer
(“CFO”) carried out an internal evaluation of the effectiveness of our disclosure controls and procedures. Based on
that evaluation, our CEO and CFO concluded that the disclosure controls and procedures provide reasonable assurance that all material
information relating to us is made known to us by others and all information required to be disclosed in our annual and interim
filings is recorded, processed, summarized and reported within the time periods specified in applicable Canadian securities legislation.
Our CEO and CFO are responsible for establishing and maintaining internal control over financing reporting ("ICFR"),
as such term is defined in National Instrument 52-109. The control framework the CEO and CFO used to design the Company's ICFR
is the framework established by the Committee of Sponsoring Organizations entitled – Internals Controls – Integrated
Framework (the “COSO 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, 2011 based on
the COSO Framework. Based on this evaluation, they concluded that as of December 31, 2011, our ICFR provides reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with IFRS.



Effective April
26, 2011, we migrated our downstream segment to the new ERP system, Microsoft Dynamics AX, to complete the roll out of the system
implementation which started during 2010 financial year. In addition to the MS Dynamics AX, the downstream segment also implemented
MS Dynamics NAV, fuel distribution system to process sales orders and manages inventory and warehousing. This migration has effectively
completed the ERP system implementation resulting in all our business segments running on a single ERP platform.



Management
has reviewed the internal controls over financial reporting affected by the implementation of the new ERP System and made appropriate
changes to internal controls as part of the implementation. Following the implementation, these new controls were evaluated and
tested according to our established processes. Based on this evaluation, we believe that we have designed adequate and appropriate
internal control over financial reporting to ensure that the financial statements were materially accurate for the year ended
December 31, 2011.



During the
year ended December 31, 2011, there has been no other change in our internal control over financial reporting that has materially
affected, or is reasonably likely to affect, our internal control over financial reporting, other than as noted above.



GLOSSARY
OF TERMS



"2011
Annual Information Form"means the Annual Information Form for the year ended December 31, 2011.



"AUD"means Australian dollars.



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



Management Discussion and Analysis   INTEROIL CORPORATION     41







"BNP
Paribas" 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.



“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 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.



"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.



“DST”refers to a drill stem test and is a procedure for isolating and testing the surrounding geological formation through the
drill pipe.



“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”.



"ERP"means Enterprise Resource Planning System.



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



“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.



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“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.



“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.



“IPWI”means indirect participation working interest.



"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 formed 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.



“LSWR”means low sulfur waxy residue.



“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).



"Mtpa"means million tonnes per annum.



“Naphtha”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.



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



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“Pac
LNG” means Pacific LNG Operations Ltd., a company incorporated in 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 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 in 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.



“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.



"Samsung
Heavy Industries"means Samsung Heavy Industries Co., Ltd., a corporation incorporated and existing under the laws of
the Republic of Korea.



"SGD"means Singapore Dollars.



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



"USD"means United States Dollars.



"Westpac"means Westpac Bank PNG Limited.



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