##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 20-F
  o

    REGISTRATION STATEMENT PURSUANT TO SECTION
12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934ORþ

    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2005ORo

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF SECURITIES EXCHANGE ACT OF 1934For the transition period from                      toORo

    SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
OF SECURITIES EXCHANGE ACT OF 1934
 Commission file number 0-28608
 PETSEC ENERGY LTD
 (Exact name of Registrant as specified in its charter)
 (Jurisdiction of incorporation or organization)
 (Address of principal executive offices)
  Title of each class
    
    Name of each exchange on which registeredNone
    
    None
 
 
 
  o þ
 
 o þ
 
 þ o
 
 o o þ
  o þ
  þ o
  o þ




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##### 



TABLE OF CONTENTS
 PageIntroduction
    
    
    3Glossary of Certain Industry Terms
    
    
    45PART IItem 1.
    
    Identity of Directors, Senior Management and Advisers
    
    
    5Item 2.
    
    Offer Statistics and Expected Timetable
    
    
    5Item 3.
    
    Key Information
    
    
    612Item 4.
    
    Information on the Company
    
    
    1321Item 4A.
    
    Unresolved Staff Comments
    
    
    21Item 5.
    
    Operating and Financial Review and Prospects
    
    
    2232Item 6.
    
    Directors, Senior Management and Employees
    
    
    3337Item 7.
    
    Major Shareholders and Related Party Transactions
    
    
    3839Item 8.
    
    Financial Information
    
    
    39Item 9.
    
    The Offer and Listing
    
    
    4041Item 10.
    
    Additional Information
    
    
    4250Item 11.
    
    Quantitative and Qualitative Disclosure about Market Risk
    
    
    51Item 12.
    
    Description of Securities Other Than Equity Securities
    
    
    51PART IIItem 13.
    
    Defaults, Dividend Arrearages and Delinquencies
    
    
    51Item 14.
    
    Material Modifications to the Rights of Security Holders and
Use of Proceeds
    
    
    51Item 15.
    
    Controls and Procedures
    
    
    52Item 16A.
    
    Audit Committee Financial Expert
    
    
    52Item 16B.
    
    Code of Ethics
    
    
    52Item 16C.
    
    Principal Accountant Fees and Services
    
    
    52Item 16D.
    
    Exemptions from the Listing Standards
For Audit Committee
    
    
    52Item 16E.
    
    Purchases of Equity Securities by the
Issuer and Affiliated Purchasers
    
    
    52PART IIIItem 17.
    
    Financial Statements
    
    
    52Item 18.
    
    Financial Statements
    
    
    52Item 19.
    
    Exhibits
    
    
    53Signatures
    
    
    54Exhibit Index
    
    
    84Subsidiaries of the CompanyCertification of CFO pursuant to Section 302Certification of CEO pursuant to Section 302Certification of CEO pursuant to Section 906Certification of CFO pursuant to Section 906Consent of Independent Registered Public Accounting FirmConsent of Independent Petroleum Engineers
  2




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INTRODUCTION
    3




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GLOSSARY OF CERTAIN INDUSTRY TERMS
  Bbl
 Bcf
 Bcfe.
 Btu
 Completion
 Developed acreage
 Development well
 Dry hole or well
 Exploratory well.
 Field.
 Gross acreage or gross wells
 Liquids
 Mbbls
 Mcf.
 Mcf/d
 Mcfe
 MMS
 MMBtu
 MMcf
 MMcfe.
 Net acres or net wells
 OCS
 Oil.
 Pay.
 Present value or PV10
 4




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Productive well
 Proved developed nonproducing reserves
 Proved developed producing reserves
 Proved reserves
 Proved undeveloped location
 Proved undeveloped reserves
 Recompletion
 Reservoir
 Royalty interest
 Undeveloped acreage
 Working interest or W.I
 
 PART I
 
 ITEM
1  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
  
 ITEM
2  OFFER STATISTICS AND EXPECTED TIMETABLE
  5




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ITEM
3  KEY INFORMATION
 A. Selected Financial Data
  Year ended December 312001(1)
    
    2002
    
    2003
    
    2004
    
    2005(In thousands, except per share and per ADR data)INCOME STATEMENT DATAOil and gas sales (net of royalties incurred)
    
    $
    
    
    
    $
    
    
    
    $
    23,270
    
    
    $
    32,575
    
    
    $
    45,130Oil and gas royalties earned
    
    
    
    
    
    
    201
    
    
    
    1,949
    
    
    
    223
    
    
    
    332Total revenues
    
    $
    
    
    
    $
    201
    
    
    $
    25,219
    
    
    $
    32,798
    
    
    $
    45,462Lease operating expenses
    
    
    
    
    
    
    
    
    
    
    1,557
    
    
    
    1,776
    
    
    
    2,465Depletion, depreciation, amortization and rehabilitation
    
    
    28
    
    
    
    34
    
    
    
    6,574
    
    
    
    12,361
    
    
    
    15,597Exploration expenditure
    
    
    422
    
    
    
    1,176
    
    
    
    1,329
    
    
    
    1,452
    
    
    
    5,844Dry hole and abandonment costs
    
    
    877
    
    
    
    1,066
    
    
    
    
    
    
    
    4,119
    
    
    
    5,290Major maintenance expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    592
    
    
    
    Impairment expense
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    201
    
    
    
    General, administrative and other expenses
    
    
    1,264
    
    
    
    1,691
    
    
    
    3,519
    
    
    
    4,657
    
    
    
    5,814Hurricane-related business interruption insurance proceeds
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (867
    )Stock compensation expense
    
    
    11
    
    
    
    40
    
    
    
    90
    
    
    
    83
    
    
    
    88Total operating expenses
    
    
    2,602
    
    
    
    4,007
    
    
    
    13,107
    
    
    
    25,241
    
    
    
    34,231Income (loss) from operations
    
    
    (2,602
    )
    
    
    (3,806
    )
    
    
    12,112
    
    
    
    7,557
    
    
    
    11,231Other income and expenseInterest expense
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (32
    )
    
    
    (23
    )Interest income
    
    
    447
    
    
    
    136
    
    
    
    142
    
    
    
    311
    
    
    
    393Other income, net
    
    
    209
    
    
    
    129
    
    
    
    364
    
    
    
    91
    
    
    
    403Derivative losses from discontinued hedges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,615
    )Total other income (expense)
    
    
    656
    
    
    
    265
    
    
    
    496
    
    
    
    370
    
    
    
    (3,842
    )Income (loss) before income tax and extraordinary items
    
    
    (1,946
    )
    
    
    (3,541
    )
    
    
    12,608
    
    
    
    7,927
    
    
    
    7,389Income tax benefit
    
    
    8
    
    
    
    254
    
    
    
    492
    
    
    
    9,807
    
    
    
    598Net income (loss) before extraordinary items
    
    $
    (1,938
    )
    
    $
    (3,287
    )
    
    $
    13,100
    
    
    $
    17,734
    
    
    $
    7,987Extraordinary items (net of nil tax)Recognition of deferred gain on subsidiary emergence
from bankruptcy
    
    
    37,147
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Distribution from bankruptcy trustee
    
    
    1,103
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    36,312
    
    
    $
    (3,287
    )
    
    $
    13,100
    
    
    $
    17,734
    
    
    $
    7,987BASIC AND DILUTED EARNINGS PER SHAREEarnings (loss) before extraordinary items per share
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    0.12
    
    
    $
    0.15
    
    
    $
    0.07Extraordinary items per share
    
    
    0.36
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings (loss) per share
    
    $
    0.34
    
    
    $
    (0.03
    )
    
    $
    0.12
    
    
    $
    0.15
    
    
    $
    0.07Earnings (loss) before extraordinary items per
ADR(2)
    
    $
    (0.10
    )
    
    $
    (0.17
    )
    
    $
    0.62
    
    
    $
    0.74
    
    
    $
    0.33Extraordinary items per ADR
    
    
    1.82
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Earnings (loss) per ADR
    
    $
    1.72
    
    
    $
    (0.17
    )
    
    $
    0.62
    
    
    $
    0.74
    
    
    $
    0.33Weighted average number of ordinary shares outstanding
    
    
    105,752
    
    
    
    105,736
    
    
    
    105,736
    
    
    
    118,830
    
    
    
    120,112CASH FLOW DATANet cash from operating activities
    
    $
    (1,166
    )
    
    $
    (2,728
    )
    
    $
    18,589
    
    
    $
    22,032
    
    
    $
    34,915Net cash from investing activities
    
    
    104
    
    
    
    (8,170
    )
    
    
    (13,574
    )
    
    
    (26,046
    )
    
    
    (33,651
    )Net cash from financing activities
    
    
    
    
    
    
    
    
    
    
    6,851
    
    
    
    1,070
    
    
    
    (644
    )
 6




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Year ended December 312001(1)
    
    2002
    
    2003
    
    2004
    
    2005(In thousands, except per share and per ADR data)BALANCE SHEET DATA (at period-end)Total assets
    
    $
    15,096
    
    
    $
    14,206
    
    
    $
    38,444
    
    
    $
    63,527
    
    
    $
    87,294Total current assets
    
    
    12,006
    
    
    
    3,100
    
    
    
    16,977
    
    
    
    27,909
    
    
    
    35,184Total current liabilities
    
    
    390
    
    
    
    2,989
    
    
    
    14,674
    
    
    
    11,512
    
    
    
    31,465Total shareholders equity
    
    
    13,584
    
    
    
    10,248
    
    
    
    23,203
    
    
    
    50,899
    
    
    
    54,263Share capital
    
    
    120,661
    
    
    
    120,701
    
    
    
    120,791
    
    
    
    130,106
    
    
    
    130,725Number of ordinary shares outstanding
    
    
    105,736
    
    
    
    105,736
    
    
    
    105,736
    
    
    
    119,223
    
    
    
    121,389
 
 (1)
    
    On April 13, 2000, PEI filed a voluntary petition under Chapter 11 of the
U.S. Bankruptcy Code (the Bankruptcy Code). As a result of that filing, the Company no longer had
effective control over PEI and consequently PEI was deconsolidated for financial accounting
reporting purposes as of that date. On January 16, 2001, PEI emerged as a reorganized entity under
the Bankruptcy Code and the Company regained control over PEI. The results of PEI have been
consolidated into the Company from that date forward.(2)
    
    American Depository Receipt. See Item 9.C. Exchange Rates
   U.S. Dollar per Australian DollarPeriod
    
    Average *
    
    High
    
    Low
    
    End of PeriodYear ended December 31, 2000
    
    
    0.5746
    
    
    
    0.6386
    
    
    
    0.5162
    
    
    
    0.5489Year ended December 31, 2001
    
    
    0.5075
    
    
    
    0.5714
    
    
    
    0.4812
    
    
    
    0.5062Year ended December 31, 2002
    
    
    0.5391
    
    
    
    0.5772
    
    
    
    0.5075
    
    
    
    0.5598Year ended December 31, 2003
    
    
    0.6515
    
    
    
    0.7442
    
    
    
    0.5617
    
    
    
    0.7431Year ended December 31, 2004
    
    
    0.7341
    
    
    
    0.7992
    
    
    
    0.6813
    
    
    
    0.7784Year ended December 31, 2005
    
    
    0.7614
    
    
    
    0.7985
    
    
    
    0.7308
    
    
    
    0.7336November 2005
    
    
    0.7352
    
    
    
    0.7473
    
    
    
    0.7312
    
    
    
    0.7378December 2005
    
    
    0.7418
    
    
    
    0.7564
    
    
    
    0.7308
    
    
    
    0.7336January 2006
    
    
    0.7494
    
    
    
    0.7587
    
    
    
    0.7325
    
    
    
    0.7587February 2006
    
    
    0.7414
    
    
    
    0.7537
    
    
    
    0.7356
    
    
    
    0.7380March 2006
    
    
    0.7264
    
    
    
    0.7454
    
    
    
    0.7049
    
    
    
    0.7155April 2006
    
    
    0.7351
    
    
    
    0.7558
    
    
    
    0.7139
    
    
    
    0.7558
 
 *
    
    Average of Noon Buying Rates for the period based on month end rates    B. Capitalization and Indebtedness
  7




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C. Reasons for the Offer and Use of Proceeds
  D. Risk Factors
 Our growth prospects may be limited because we have limited operations and properties with
proved reserves or production.
  We may not be able to find or acquire significant proved reserves.
  We may not be able to fund our planned capital expenditures.
  The loss of key personnel could adversely affect our ability to operate
  Competition within our industry may adversely affect our operations.
  8




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Substantially all of our outstanding accounts receivable may be from a small number of purchasers
and third-party participants in our joint operating arrangements.
    Oil and natural gas price declines and their volatility could adversely affect our revenues, cash
flows and profitability.
   
    
    relatively minor changes in the supply of and demand for oil and natural gas;
    
    market uncertainty;
    
    the level of consumer product demand;
    
    weather conditions;
    
    domestic and foreign governmental regulations;
    
    the price and availability of alternative fuels;
    
    technological advances affecting oil and gas consumption;
    
    political and economic conditions in oil producing countries, particularly those in the Middle East;
    
    the foreign supply of oil and natural gas;
    
    the price of oil and natural gas imports; and
    
    general economic conditions.
  Our hedging activities may limit our potential income and liquidity.
   9




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Our operations are subject to numerous risks of oil and natural gas drilling and production
activities.
  
    
    unexpected drilling conditions;
    
    geological pressure or irregularities in formations;
    
    equipment failures or accidents;
    
    weather conditions;
    
    shortages in experienced labor;
    
    shortages, delays in the delivery, or high cost of equipment; and
    
    constraints on access to transportation systems (pipelines) delaying sale of oil and or natural gas.
    Our industry experiences numerous operating risks.
  Our insurance may not protect us against our operating and business risks.
  Our operations are exposed to the additional risk of hurricanes and other tropical weather
disturbances.
   10




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Terrorist attacks aimed at our facilities could adversely affect our business.
 th th
 A significant portion of our production, revenues and cash flow from operating activities are
derived from assets that are concentrated in a geographic area.
  Our cash balances held in Australian dollars are exposed to currency exchange rate fluctuations
between the U.S. dollar and the Australian dollar.
   Our oil and natural gas operations are subject to various governmental regulations that materially
affect our operations.
   11




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Our shareholders may not be able to sell shares of the Company at the time, in the quantity or at
the price desired because of our low trading volume.
  12




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ITEM
4  INFORMATION ON THE COMPANY
 A. History and development of the Company
   
  
 Capital Expenditures
 United States.
     13




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China
   14




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B. Business overview
     Likely Developments
  -
    
    2-3 wells at Vermilion 257//258 (expected to commence in June 2006);-
    
    1-3 wells at Main Pass 18/103 (expected to be drilled during the third quarter of 2006);-
    
    2-3 wells at Moonshine (expected to be drilled late 2006).
    15




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Oil and Natural Gas Reserves
  As of December 31,2003
    
    2004
    
    2005TOTAL NET PROVED:Oil (Mbbls)
    
    
    39
    
    
    
    63
    
    
    
    148Gas (MMcf)
    
    
    10,737
    
    
    
    12,269
    
    
    
    17,919Total (MMcfe)
    
    
    10,971
    
    
    
    12,647
    
    
    
    18,807NET PROVED DEVELOPED:Oil (Mbbls)
    
    
    32
    
    
    
    63
    
    
    
    108Gas (MMcf)
    
    
    3,725
    
    
    
    12,269
    
    
    
    15,901Total (MMcfe)
    
    
    3,916
    
    
    
    12,647
    
    
    
    16,549Estimated future net revenues before income taxes
(in thousands)
    
    $
    44,527
    
    
    $
    64,132
    
    
    $
    145,645Present value of estimated future net revenues
before income taxes (in thousands) (1)
    
    $
    35,495
    
    
    $
    57,892
    
    
    $
    122,100Standardized measure of discounted future net
cash flows (in thousands) (2)
    
    $
    35,495
    
    
    $
    57,892
    
    
    $
    99,477Average prices used in calculating the net
present values:Oil ($  per Bbl)
    
    $
    32.41
    
    
    $
    43.13
    
    
    $
    61.47Gas ($  per Mcf)
    
    $
    5.99
    
    
    $
    6.18
    
    
    $
    9.72
 
 (1)
    
    The present value of estimated future net revenues before income taxes attributable to the
Companys reserves was prepared using constant prices, including the effects of hedging as of
the calculation date, discounted at 10% per annum on a pre-tax basis. These prices have varied
significantly from year to year affecting the net present values, and are not necessarily
representative of current prices.(2)
    
    The standardized measure of discounted future net cash flows represents the present value of
estimated future net revenues after income tax discounted at 10% per annum. The available use
of net operating loss carryforwards is considered in the discounted future net cash flows.  16




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Acquisition, Production and Drilling Activity
 Acquisition and development costs
 Years ended December 31,2003
    
    2004
    
    2005(In Thousands)Acquisition costs
    
    $
    519
    
    
    $
    3,973
    
    
    $
    2,191Exploration costs
    
    
    6,586
    
    
    
    11,943
    
    
    
    19,710Development costs
    
    
    8,987
    
    
    
    15,898
    
    
    
    20,117Total costs incurred
    
    $
    16,092
    
    
    $
    31,814
    
    
    $
    42,018
 Productive well and acreage data
 Gross
    
    NetProductive wells(1):Oil
    
    
    
    
    
    
    Gas
    
    
    9
    
    
    
    7.2Total
    
    
    9
    
    
    
    7.2Developed Acreage(1)
    
    
    25,151
    
    
    
    21,164Undeveloped Acreage(1)(2)
    
    
    134,488
    
    
    
    47,191Total
    
    
    159,639
    
    
    
    68,355
 
 (1)
    
    Productive wells consist of producing wells and wells capable of production, including
natural gas wells awaiting pipeline connections. Wells that are completed in more than one
producing horizon are counted as one well. Eight (6.2 net) of our productive wells have
multiple producing horizons remaining. Undeveloped acreage includes leased acres on which
wells have not been drilled or completed to a point that would permit the production of
commercial quantities of oil and natural gas, regardless of whether or not such acreage
contains proved reserves. A gross acre is an acre in which a working interest is owned.
Leases in which the Company only holds an overriding royalty interest are excluded. A net
acre is deemed to exist when the sum of fractional ownership interests in gross acres equals
one. The number of net acres is the sum of the fractional interests owned in gross acres
expressed as whole numbers and fractions thereof.(2)
    
    Leases covering 4% of the Companys undeveloped acreage will expire in 2006, 21% will expire
in 2008, 16% will expire in 2009, and 59% are held by production or exploration activities. Drilling activity
 Years ended December 31,2003
    
    2004
    
    2005Gross
    
    Net
    
    Gross
    
    Net
    
    Gross
    
    NetGulf of MexicoExploratory wells
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    2
    
    
    
    3
    
    
    
    1.65Development wells
    
    
    2
    
    
    
    1.75
    
    
    
    1
    
    
    
    1
    
    
    
    1
    
    
    
    1Dry holes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    0.50Beibu Gulf, ChinaExploratory wells
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    0.25
    
    
    
    
    
    
    
    Dry holes
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    0.50
    
    
    
    
    
    
    
    Total
    
    
    2
    
    
    
    1.75
    
    
    
    6
    
    
    
    3.75
    
    
    
    6
    
    
    
    3.15
 Present activity
 17




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Production
 Oil and Natural Gas Marketing
  Competition
  Regulation
  Regulation of Natural Gas and Oil Exploration and Production
 Federal Leases.
 18




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Natural Gas and Oil Marketing and Transportation
    Environmental regulation
 19




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China
   20




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C. Organizational structure
  D. Property, plant and equipment
    
 ITEM 4A. UNRESOLVED STAFF COMMENTS
  21




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ITEM
5  OPERATING AND FINANCIAL REVIEW AND PROSPECTS
 A. Operating results
 Introduction
  Overview
         22




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Year ended December 312003(1)
    
    2004(2)
    
    2005(3)Net productionOil (Mbbls)
    
    
    19
    
    
    
    15
    
    
    
    20Gas (MMcf)
    
    
    4,403
    
    
    
    5,595
    
    
    
    6,335Total (MMcfe)
    
    
    4,517
    
    
    
    5,685
    
    
    
    6,454Net sales data (in thousands)(4):Oil
    
    $
    582
    
    
    $
    669
    
    
    $
    1,050Gas
    
    
    24,637
    
    
    
    32,129
    
    
    
    44,412Total
    
    $
    25,219
    
    
    $
    32,798
    
    
    $
    45,462Average sales price (4):Oil (per Bbl)
    
    $
    30.84
    
    
    $
    44.79
    
    
    $
    53.11Gas (per Mcf)
    
    
    5.60
    
    
    
    5.74
    
    
    
    7.01Total (per Mcfe)
    
    $
    5.58
    
    
    $
    5.77
    
    
    $
    7.04Average costs (per Mcfe):Lease operating expenses(5)
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    0.38Depletion, depreciation, amortisation and
rehabilitation
    
    
    1.46
    
    
    
    2.17
    
    
    
    2.42General, administrative and other expenses
    
    
    0.81
    
    
    
    0.82
    
    
    
    0.91
 
 (1)
    
    Production from three wells at West Cameron 343/352 commenced in January 2003
and production from two additional wells at West Cameron 343/352 commenced in October 2003.(2)
    
    Production commenced at Vermilion 258 from two wells in July 2004 and one well in November
2004.(3)
    
    Production commenced from a fourth well at Vermilion 258 in May 2005.(4)
    
    Includes derivative gains/(losses) on effective hedges.(5)
    
    Excludes major maintenance expense. 23




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##### Table of Contents



Results of Operations
  Year ended December 312003
    
    2004
    
    2005(In thousands)INCOME STATEMENT DATAOil and gas sales (net of royalties incurred)
    
    $
    23,270
    
    
    $
    32,575
    
    
    $
    45,130Oil and gas royalties earned
    
    
    1,949
    
    
    
    223
    
    
    
    332Total revenues
    
    $
    25,219
    
    
    $
    32,798
    
    
    $
    45,462Lease operating expenses
    
    
    1,557
    
    
    
    1,776
    
    
    
    2,465Depletion, depreciation, amortization and rehabilitation
    
    
    6,574
    
    
    
    12,361
    
    
    
    15,597Exploration expenditure
    
    
    1,329
    
    
    
    1,452
    
    
    
    5,844Dry hole and abandonment costs
    
    
    
    
    
    
    4,119
    
    
    
    5,290Major maintenance expense
    
    
    
    
    
    
    592
    
    
    
    Impairment expense
    
    
    38
    
    
    
    201
    
    
    
    General, administrative and other expenses
    
    
    3,519
    
    
    
    4,657
    
    
    
    5,814Hurricane-related business interruption insurance proceeds
    
    
    
    
    
    
    
    
    
    
    (867
    )Stock compensation expense
    
    
    90
    
    
    
    83
    
    
    
    88Total operating expenses
    
    
    13,107
    
    
    
    25,241
    
    
    
    34,231Income from operations
    
    
    12,112
    
    
    
    7,557
    
    
    
    11,231Interest expense
    
    
    (10
    )
    
    
    (32
    )
    
    
    (23
    )Interest income
    
    
    142
    
    
    
    311
    
    
    
    393Other income, net
    
    
    364
    
    
    
    91
    
    
    
    403Derivative losses from discontinued hedges
    
    
    
    
    
    
    
    
    
    
    (4,615
    )Total other income (expense)
    
    
    496
    
    
    
    370
    
    
    
    (3,842
    )Income before income tax
    
    
    12,608
    
    
    
    7,927
    
    
    
    7,389Income tax benefit
    
    
    492
    
    
    
    9,807
    
    
    
    598Net income
    
    $
    13,100
    
    
    $
    17,734
    
    
    $
    7,987
  Year Ended December 31, 2005 compared to Year Ended December 31, 2004
 General.
  Exploration Expenditures, Dry Hole and Abandonment Cost, Impairment Expense and Major
Maintenance Expense,
 General and Administrative Expense.
 24




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##### Table of Contents



Depreciation, Depletion, Amortization and Rehabilitation.
 Income Tax Benefit.
 Net Income.
 Year Ended December 31, 2004 compared to Year Ended December 31, 2003
 General.
  Exploration Expenditures, Dry Hole and Abandonment Cost, Impairment Expense and Major
Maintenance Expense,
 General and Administrative Expense.
 Depreciation, Depletion, Amortization and Rehabilitation.
 Income Tax Benefit.
 Net Income.
 25




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##### Table of Contents



Hedging Transactions
    Weighted averageProduction period
    
    Hedge type
    
    Daily volume
    
    USD Price/MMBtuFirst quarter 2006
    
    Swap
    
    10,000 MMBtu
    
    
    8.58Second quarter 2006
    
    Swap
    
    6,000 MMBtu
    
    
    7.82Third quarter 2006
    
    Swap
    
    6,000 MMBtu
    
    
    7.85Fourth quarter 2006
    
    Swap
    
    6,000 MMBtu
    
    
    8.21
  New Accounting Pronouncements Not Yet Adopted
 Share-Based Payment Accounting for Stock
Issued to Employees
 Exchanges of Nonmonetary Assets
 Accounting for Suspended Well
Costs Financial Accounting and Reporting by Oil and Gas
Producing Companies
 26




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##### Table of Contents



Accounting Changes and Error Corrections
 Other Matters
   Forward-Looking Statements
   
    
    any expected results or benefits associated with our acquisitions;
    
    planned capital expenditures and availability of capital resources to fund capital expenditures;
    
    estimates of our future oil and natural gas production, including estimates of any
increases in oil and natural gas production;
    
    our outlook on oil and natural gas prices;
    
    our outlook on operating, exploration, and development costs;
    
    estimates of our oil and natural gas reserves;
    
    replacement of our oil and natural gas reserves;
    
    any estimates of future earnings growth;
    
    the impact of political and regulatory developments;
    
    our future financial condition or results of operations and our future revenues and expenses; and
    
    our business strategy and other plans and objectives for future operations.
   27




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##### Table of Contents



B. Liquidity and Capital Resources
   Cash Flow
  Years Ended December 31,2003
    
    2004
    
    2005(in thousands)Net cash provided by (used in):Operating activities
    
    $
    18,589
    
    
    $
    22,032
    
    
    $
    34,915Investing activities
    
    
    (13,574
    )
    
    
    (26,046
    )
    
    
    (33,651
    )Financing activities
    
    
    6,851
    
    
    
    1,070
    
    
    
    (644
    )
     Credit Facilities
  28




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##### Table of Contents



3 4 1 2 1 2 1 2
  (i)
    
    maintain its tangible net worth to be not less than 90% of the tangible net worth at
the closing date plus 50% of any advances to PEI from PEL, and
 (ii)
    
    a ratio of current assets to current liabilities of at least one to one.
  Future Capital Expenditures and Commitments
   C. Research and Development
  D. Trend Information
    E. Off-balance sheet arrangements
  29




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##### Table of Contents



F. Contractual Obligations
  US$000
    
    
    
    
    
    Payments due by periods as of December 31, 2005Less than 1Contractual obligations
    
    Total
    
    year
    
    1  3 years
    
    3  5 years
    
    After 5 yearsOperating leases
    
    $
    
    815
    
    $
    
    267
    
    $
    
    548
    
    $
    
    

    
    $
    
    Exploration lease rental
    
    
    
    1,463
    
    
    
    357
    
    
    
    944
    
    
    
    162
    
    
    
    Total contractual cash obligations
    
    $
    
    2,278
    
    $
    
    624
    
    $
    
    1,492
    
    $
    
    162
    
    $
    
   
  G. Critical Accounting Policies
  (1)
    
    Successful efforts method of accounting
   (2)
    
    Impairment of oil and natural gas properties
   30




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##### Table of Contents



(3)
    
    Depreciation, Depletion, and Amortization
  (4)
    
    Realization of Deferred Tax Assets
      (5)
    
    Asset retirement obligations
   (6)
    
    Derivative financial instruments
  31




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##### Table of Contents



H. Safe Harbor
  32




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##### Table of Contents



ITEM 6  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
 A. Directors and Senior Management
  Name
    
    Age
    
    PositionDirectors:Terrence N. Fern (1)
    
    
    58
    
    
    Chairman, Managing Director and Chief Executive OfficerDavid A. Mortimer
    
    
    61
    
    
    Director, Chairman of Audit and Remuneration and
Nomination CommitteesPeter E. Power
    
    
    72
    
    
    DirectorExecutive officers:Ross A. Keogh
    
    
    47
    
    
    President of Petsec Energy Inc.Fiona A. Robertson (1)
    
    
    50
    
    
    Chief Financial OfficerCraig H. Jones (1)
    
    
    47
    
    
    General Manager  Corporate and Company Secretary
 
 (1)
    
    Mr. Fern, Mrs. Robertson and Mr. Jones provide services to the Company through contractual
arrangements between the Company and corporate affiliates.        33




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##### Table of Contents



B. Compensation
  Fiscal year ended
    
    Base
    
    
    
    
    
    Other
    
    Retirement
    
    OtherDecember 31, 2005
    
    emoluments
    
    Bonuses
    
    benefits(6)
    
    benefit plans
    
    compensation
    
    TotalDirectorsT.N. Fern (1)
    
    $
    
    
    
    $
    
    
    
    $
    23,412
    
    
    $
    
    
    
    $
    350,250
    
    
    $
    373,662D.A. Mortimer
    
    
    38,070
    
    
    
    
    
    
    
    
    
    
    
    3,426
    
    
    
    
    
    
    
    41,496P.E. Power
    
    
    38,070
    
    
    
    
    
    
    
    
    
    
    
    3,426
    
    
    
    
    
    
    
    41,496Executive OfficersR.A. Keogh (2)
    
    
    175,663
    
    
    
    89,000
    
    
    
    23,813
    
    
    
    8,734
    
    
    
    
    
    
    
    297,210P. Kallenberger
(2) (8)
    
    
    162,900
    
    
    
    78,000
    
    
    
    23,032
    
    
    
    8,385
    
    
    
    
    
    
    
    272,317N. Fakier (2) (7)
    
    
    145,649
    
    
    
    67,000
    
    
    
    18,888
    
    
    
    7,224
    
    
    
    
    
    
    
    238,761F.A. Robertson (3)
    
    
    
    
    
    
    
    
    
    
    4,603
    
    
    
    
    
    
    
    108,206
    
    
    
    112,809C. H. Jones (4)
    
    
    
    
    
    
    
    
    
    
    1,808
    
    
    
    
    
    
    
    144,971
    
    
    
    146,779G. H. Fulcher (5)
    
    
    43,847
    
    
    
    
    
    
    
    1,096
    
    
    
    79,944
    
    
    
    
    
    
    
    124,887
 
 (1)
    
    Included in other compensation above is an amount of $350,250 which was paid or is payable to
Geofin Consulting Services Pty Ltd (Geofin), a company which Mr. Fern is a director. During
the year, Geofin provided management services to the Company and its controlled entities. The
dealings were in the ordinary course of business and on normal terms and conditions.(2)
    
    Bonuses were granted pursuant to an employee incentive plan that PEI established for its
employees during 2003. Under the plan, the Company will pay up to 6 1/2 percent of PEIs
operating profit before interest, taxes and incentive compensation for payment to PEI
employees. The allocation of the bonus to PEIs employees is made at the discretion of the
Companys management. For 2005, the Company recorded $0.4 million of compensation expense
under the plan.(3)
    
    Included in other compensation above is an amount of $108,206 which was paid or is payable to
Geofin, a company through which Mrs. Robertson provided services.(4)
    
    Included in other compensation above is an amount of $144,971 which was paid or is payable to
Geofin, a company through which Mr. Jones provided services.(5)
    
    Mr. Fulcher resigned from his position of Company Secretary on February 28, 2005. The
retirement benefit plans amount of $79,944 includes an amount paid to him as a discretionary
termination benefit.(6)
    
    Other benefits includes amounts accrued or incurred by the Company on behalf of the employee
in relation to health, dental, life and salary continuance insurance, leave entitlements and
parking benefits.(7)
    
    Mr. Fakier retired from his position of Vice President, Operations of Petsec Energy Inc. on
March 20, 2006.(8)
    
    Mr. Kallenberger resigned from his position of Vice President, Exploration of Petsec Energy
Inc. on April 21, 2006.  34




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##### Table of Contents



Share and Option Plans
    C. Board practices
  Nomination andRegular
    
    
    Additional
    
    
    Audit
    
    
    Remuneration
    
    
    DateBoard
    
    
    Board
    
    
    Committee
    
    
    Committee
    
    
    Director FirstMeetings
    
    
    Meetings
    
    
    Meetings
    
    
    Meetings
    
    
    AppointedTotal number held
during the year
    
    
    11
    
    
    
    
    
    
    
    3
    
    
    
    3T.N. Fern
    
    
    10
    
    
    
    
    
    
    
    1
    
    
    
    3
    
    
    May 21, 1987D.A. Mortimer
    
    
    11
    
    
    
    
    
    
    
    3
    
    
    
    3
    
    
    July 1, 1985P.E. Power
    
    
    10
    
    
    
    
    
    
    
    3
    
    
    
    2
    
    
    July 21, 1999
    35




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##### Table of Contents



D. Employees
  E. Share ownership
  Number of
    
    
    
    
    
    Optionsordinary shares
    
    Percentage
    
    over ordinaryName
    
    beneficially owned
    
    beneficially owned
    
    sharesAll Directors and executives as a group
(6 persons) (1) (2) (3)
    
    
    30,791,389
    
    
    
    22.5
    %
    
    
    Terrence N. Fern (2) (3)
    
    
    26,882,498
    
    
    
    19.6
    %
    
    
    D.A Mortimer
    
    
    610,068
    
    
    
    *
    
    
    
    P.E. Power
    
    
    225,323
    
    
    
    *
    
    
    
    R. A. Keogh (4)
    
    
    925,000
    
    
    
    *
    
    
    
    325,000P. Kallenberger (4)
    
    
    925,000
    
    
    
    *
    
    
    
    N. Fakier (4)
    
    
    998,500
    
    
    
    *
    
    
    
    F.A. Robertson (5)
    
    
    75,000
    
    
    
    *
    
    
    
    225,000C. H. Jones (5)
    
    
    150,000
    
    
    
    *
    
    
    
    225,000Den Duyts Corporation Pty Limited (3)
    
    
    18,344,639
    
    
    
    13.4
    %
    
    
    
 
 *
    
    These persons individually have less than 1% beneficial ownership of the Companys outstanding
ordinary shares.(1)
    
    Includes Ordinary Shares held by family-controlled entities or companies associated with such
individuals. Also includes Ordinary Shares reflected for Terrence N. Fern, Chairman and
Managing Director of the Company. See notes (2) and (3) below.(2)
    
    Includes 4,000 Ordinary Shares held by Mr. Fern directly; 96,509 Ordinary Shares held by a
trust of which Mr. Fern is a shareholder of the corporate trustee; 6,470,661 Ordinary Shares
held by a trust of which Den Duyts Corporation Pty Limited (Den Duyts) is a shareholder and
Mr. Fern is a director of the corporate trustee; 1,966,689 Ordinary Shares held by a
corporation of which Mr. Fern is a shareholder; and 18,344,639 Ordinary Shares held by a
trust, Den Duyts. Excludes 4,000 Ordinary Shares held by Mr. Ferns wife of which he disclaims
that he is the beneficial owner and 42,000 Ordinary Shares held by Mr. Ferns adult children
of which he disclaims that he is the beneficial owner (as defined under Rule 13D-3 of the
Securities Exchange Act of 1934 (the Exchange Act) (Beneficial Owner)). See note (3)
below. 36




---



##### Table of Contents



(3)
    
    Den Duyts is a company, which acts as the trustee of a trust, the beneficiaries of which
include members of Mr. Ferns family. Mr. Fern is deemed to be the Beneficial Owner of such
shares.Under Australian law a shareholder is required to disclose to the Company if the shareholder
is entitled to 5% or more of the Companys Ordinary Shares. A shareholder making such
disclosure is required to aggregate with the shares held personally and beneficially by such
shareholder any other shares in which the shareholder or an associate of the shareholder has
a relevant interest. Under Australian law, a person has a relevant interest in a share
held by another person if the first person or a corporate entity controlled by the first
person has the right to exercise or control the exercise of the voting rights in respect of
that share or has the power to dispose of or control the disposal of that share. An
associate is defined broadly and includes any person with whom the first person has an
agreement, arrangement or understanding relating to control over shares, or with whom the
first person proposes to act in concert. The relevant interests of Den Duyts including its
associates at May 1, 2006, were 26,882,498 Ordinary Shares and the relevant interests of Mr.
Fern were 26,882,498 Ordinary Shares.(4)
    
    Options expire on June 1, 2007 and are exercisable at a price of A$0.30.(5)
    
    Options granted on February 24, 2006, expiring on February 24, 2011 and exercisable at a price
of A$2.13.  37




---



##### Table of Contents



ITEM 7  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
 A. Major shareholders
  Name of Holder
    
    Number of Shares
    
    %Terrence N. Fern (1)
    
    
    26,882,498
    
    
    
    19.62Den Duyts Corporation Pty Limited
    
    
    18,344,639
    
    
    
    13.39National Nominees Ltd
    
    
    12,025,858
    
    
    
    8.78ANZ Nominees Limited
    
    
    9,536,796
    
    
    
    6.96Citicorp Nominees Pty Limited
    
    
    7,261,013
    
    
    
    5.30
 
 (1)
    
    Includes shares held by Den Duyts Corporation Pty Limited.   Shareholder
    
    May 3, 2004
    
    May 31, 2005
    
    May 1, 2006No. of
    
    %
    
    No. of
    
    %
    
    No. of
    
    %Shares
    
    oship
    
    Shares
    
    oship
    
    Shares
    
    oshipCiticorp Nominees Pty Limited
    
    
    10,534,574
    
    
    
    8.84
    
    
    
    11,628,544
    
    
    
    9.73
    
    
    
    7,261,013
    
    
    
    5.30ANZ Nominees Limited
    
    
    11,745,244
    
    
    
    9.85
    
    
    
    9,869,265
    
    
    
    8.26
    
    
    
    9,536,796
    
    
    
    6.96National Nominees Ltd
    
    
    13,046,782
    
    
    
    10.95
    
    
    
    12,703,062
    
    
    
    10.63
    
    
    
    12,025,858
    
    
    
    8.78
  B. Related party transactions
   
         38




---



##### Table of Contents



December 31, 2003
    
    December 31, 2004
    
    December 31, 2005$000
    
    $000
    
    $000Receivables  non-current
    
    
    14,902
    
    
    
    21,734
    
    
    
    21,196Payables  non-current
    
    
    5,661
    
    
    
    11,644
    
    
    
    11,156
  C. Interest of experts and counsel
  
 ITEM 8  FINANCIAL INFORMATION
 A. Consolidated Financial Statements and Other Financial Information
  B. Significant Changes
  39




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##### Table of Contents



ITEM 9  THE OFFER AND LISTING
 A. Offer and Listing Details  Price history of Ordinary Shares and ADRs
  A$
    
    US$High
    
    Low
    
    High
    
    LowYear ended December 31, 2000:
    
    
    0.25
    
    
    
    0.08
    
    
    
    0.16
    
    
    
    0.05Year ended December 31, 2001:
    
    
    0.19
    
    
    
    0.11
    
    
    
    0.10
    
    
    
    0.06Year ended December 31, 2002:
    
    
    0.30
    
    
    
    0.14
    
    
    
    0.16
    
    
    
    0.07Year ended December 31, 2003:
    
    
    1.13
    
    
    
    0.25
    
    
    
    0.84
    
    
    
    0.19Year ended December 31, 2004:First Quarter 2004
    
    
    1.56
    
    
    
    1.04
    
    
    
    1.17
    
    
    
    0.77Second Quarter 2004
    
    
    1.67
    
    
    
    1.08
    
    
    
    1.15
    
    
    
    0.74Third Quarter 2004
    
    
    1.40
    
    
    
    0.98
    
    
    
    1.00
    
    
    
    0.70Fourth Quarter 2004
    
    
    1.43
    
    
    
    1.15
    
    
    
    1.11
    
    
    
    0.90Year ended December 31, 2005:First Quarter 2005
    
    
    1.29
    
    
    
    1.07
    
    
    
    1.00
    
    
    
    0.83Second Quarter 2005
    
    
    1.20
    
    
    
    0.88
    
    
    
    0.92
    
    
    
    0.68Third Quarter 2005
    
    
    1.71
    
    
    
    0.98
    
    
    
    1.30
    
    
    
    0.74Fourth Quarter 2005
    
    
    1.97
    
    
    
    1.34
    
    
    
    1.47
    
    
    
    1.00November 2005
    
    
    1.68
    
    
    
    1.44
    
    
    
    1.24
    
    
    
    1.06December 2005
    
    
    1.97
    
    
    
    1.69
    
    
    
    1.46
    
    
    
    1.25January 2006
    
    
    1.95
    
    
    
    1.83
    
    
    
    1.48
    
    
    
    1.39February 2006
    
    
    2.25
    
    
    
    2.09
    
    
    
    1.66
    
    
    
    1.54March 2006
    
    
    2.41
    
    
    
    2.10
    
    
    
    1.72
    
    
    
    1.50April 2006
    
    
    2.61
    
    
    
    2.28
    
    
    
    1.97
    
    
    
    1.72
 40




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##### Table of Contents



US$High
    
    LowYear ended December 31, 2001
    
    
    0.47
    
    
    
    0.20Year ended December 31, 2002
    
    
    0.81
    
    
    
    0.32Year ended December 31, 2003
    
    
    4.15
    
    
    
    0.70Year ended December 31, 2004First Quarter 2004
    
    
    5.90
    
    
    
    3.98Second Quarter
    
    
    6.15
    
    
    
    3.71Third Quarter
    
    
    4.95
    
    
    
    3.43Fourth Quarter
    
    
    5.40
    
    
    
    4.23Year ended December 31, 2005First Quarter 2005
    
    
    5.00
    
    
    
    4.05Second Quarter
    
    
    4.60
    
    
    
    3.40Third Quarter
    
    
    6.30
    
    
    
    3.60Fourth Quarter
    
    
    6.35
    
    
    
    5.14November 2005
    
    
    6.10
    
    
    
    5.20December 2005
    
    
    6.10
    
    
    
    6.10January 2006
    
    
    7.21
    
    
    
    6.65February 2006
    
    
    8.25
    
    
    
    7.60March 2006
    
    
    8.75
    
    
    
    7.55April 2006
    
    
    9.90
    
    
    
    8.32
 B. Plan of Distribution
  C. Markets
    D. Selling Shareholders
  E. Dilution
  F. Expenses of the Issue
  41




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##### Table of Contents



ITEM 10  ADDITIONAL INFORMATION
 A. Share Capital
  B. Constitution
 Corporations
Act Corporations Act ASX
   
    
    certain powers of the directors;
    
    the rights, preferences and restrictions attaching to the ordinary shares on issue in
the capital of the Company; and
    
    certain other matters.
  1. DIRECTORS
  Power to Vote where Materially Interested
  
    
    arises because the director is a shareholder of the Company and is held in common with
the other shareholders of the Company;
    
    arises in relation to the directors remuneration as a director of the Company;
    
    relates to a contract the Company is proposing to enter into that is subject to approval
by the shareholders and will not impose any obligation on the Company if it is not approved
by the shareholders;
    
    arises merely because the director is a guarantor or has given an indemnity or security
for all or part of a loan, or proposed loan, to the Company;
    
    arises merely because the director has a right of subrogation in relation to a guarantee
or indemnity referred to above;
    
    relates to a contract that insures, or would insure, the director against liabilities
the director incurs as an officer of the Company (but only if the contract does not make
the Company or a related body corporate the insurer);
    
    relates to any payment by the Company or a related body corporate in respect of a
permitted indemnity (as defined under the Corporations Act) or any contract relating to
such an indemnity; or
    
    is in a contract, or proposed contract with, or for the benefit of, or on behalf of, a
related body corporate and arises merely because the director is a director of a related
body corporate.
 Power to vote in Compensation/Remuneration
  42




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##### Table of Contents



Borrowing Powers
  Retirement of Directors
    Share Qualification
  2. RIGHTS ATTACHED TO SHARES
 Dividend Rights
    Voting Rights
  
    
    on a show of hands, every shareholder has one vote; and
    
    on a poll, every shareholder has, for each fully paid share held by the shareholder, one
vote; and for each partly paid share a fraction of a vote equivalent to the proportion
which the amount paid (not credited) represents to the total amounts paid and payable,
whether or not called (excluding amounts credited), on the share.
   
    
    the chairman;
    
    not less than 5 members entitled to vote on the resolution; or
    
    members with at least 5% of the total votes that may be cast on the resolution on a poll.
 Liquidation Rights
 43
    Table of Contents    Capital Calls
  Redemption and Alteration of Share Capital
 Corporations
Act
 3. VARIATION OF RIGHTS
  4. CONDITIONS GOVERNING GENERAL MEETINGS
   5. LIMITATIONS ON RIGHTS TO OWN SECURITIES
 Foreign Acquisition and
Takeovers Act
 6. CHANGE OF CONTROL, ETC.
  7. DISCLOSURE OF OWNERSHIP THRESHOLD
  C. Material contracts
  D. Exchange controls
  44




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##### Table of Contents



E. Taxation
 Australian Taxation
 Dividends. Changes to
the Treaty
  45




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##### Table of Contents



Sales of ADSs or Ordinary Shares.
   Changes to the Treaty,
   Changes to the Treaty
 1
    
    For withholding taxes, the protocol will have effect in relation to payments made
on or after July 1, 2003.2
    
    For other taxes covered, the protocol will have effect in respect of income,
profits or gains of years of income beginning on or after July 1, 2004.
  (a)
    
    no withholding tax will be imposed on unfranked dividends paid to a
U.S. resident company which is beneficially entitled to 80% of the
voting power (for a 12 month period prior to the date the dividend is
declared) of the Company and the U.S. resident company satisfies a
public listing requirement; and(b)
    
    a withholding tax limit of 5% will apply to unfranked dividends paid
to a U.S. resident company that holds at least 10% of voting power in
the Company but does not meet the 80% test mentioned above.
 46




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##### Table of Contents



United States Federal Income Taxation
    The summary of U.S. federal income tax consequences set forth below is for general information
purposes only. U.S. Holders or prospective U.S. Holders of ADRs therefore should consult their own
tax advisors regarding the application of the U.S. federal income tax laws to their particular
situations, including the applicability and effect of state, local or foreign tax laws and tax
treaties and possible changes in law.
 Taxation of Dividends
   47
    Table of Contents     Foreign Tax Credit
  Taxation of Withdrawals
  Taxation of Capital Gains
  Information Reporting and Backup Withholding
  Other U.S. Tax Considerations
  Foreign Personal Holding Company
 48
    Table of Contents     Foreign Investment Company
  Controlled Foreign Corporation
    Passive Foreign Investment Company
  49
    Table of Contents       F. Dividends and Paying Agents
  G. Statement by Experts
  H. Documents on Display
   I. Subsidiary Information
  50




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##### Table of Contents



ITEM 11  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Commodity Price Risk.
  Average Price
    
    Approximate FairType of
    
    Remaining
    
    Notional Quantity
    
    Received per
    
    Value at DecemberAgreement
    
    Term
    
    (MMBtu per day)
    
    MMBtu
    
    31, 2005Swaps
    
    Jan-Mar 2006
    
    
    2,000
    
    
    $
    7.58
    
    
    ($   673,000)Swaps
    
    Jan-Mar 2006
    
    
    2,000
    
    
    $
    7.92
    
    
    ($   613,000)Swaps
    
    Jan-Dec 2006
    
    
    2,000
    
    
    $
    7.65
    
    
    ($2,226,000)Swaps
    
    Jan-Dec 2006
    
    
    2,000
    
    
    $
    8.20
    
    
    ($1,835,000)Swaps
    
    Jan-Dec 2006
    
    
    2,000
    
    
    $
    8.89
    
    
    ($1,334,000)
  Interest Rate Risk.
 Currency Exchange Rate Risk.
 
 ITEM 12  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
  
 PART II
 
 ITEM 13  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
  
 ITEM 14  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
  51




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##### Table of Contents



ITEM 15  CONTROLS AND PROCEDURES
   
 ITEM 16A  AUDIT COMMITTEE FINANCIAL EXPERT
  
 ITEM 16B  CODE OF ETHICS
  
 ITEM 16C  PRINCIPAL ACCOUNTANT FEES AND SERVICES
  2004
    
    2005Audit fees
    
    $
    128,940
    
    
    $
    226,308All other fees
    
    
    
    
    
    
    Total fees (1)
    
    $
    128,940
    
    
    $
    226,308
 
 (1)
    
    Total fees include amounts billed in foreign currencies, and are translated to U.S.
Dollars as of the date of approval of the fees. 
 ITEM 16D  EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
  
 ITEM 16E  PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
 
 PART III
 
 ITEM 17  FINANCIAL STATEMENTS
  
 ITEM 18  FINANCIAL STATEMENTS
  52




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##### Table of Contents



ITEM 19  EXHIBITS
 Exhibits
 1.1
    
    Constitution of the Company, incorporated herein by reference to Exhibit 1.1
to Form 20-F for the Company for the year ended December 31, 2004..4.1
    
    Form of employment contract agreement for Australian-based executives,
incorporated herein by reference to Exhibit 4.1 to Form 20-F for the Company for the
year ended December 31, 20044.2
    
    Form of employment contract agreement for U.S.-based executives, incorporated
herein by reference to Exhibit 4.2 to Form 20-F for the Company for the year ended
December 31, 20048.1
    
    Subsidiaries of the Company.11.1
    
    Code of Ethics incorporated herein by reference to Exhibit 99.3 to Form 20-F
for the Company for the year ended December 31, 2003.12.1
    
    Certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.12.2
    
    Certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.13.1
    
    Certification of CEO pursuant to section 906 of the Sarbanes-Oxley Act of 2002.13.2
    
    Certification of CFO pursuant to section 906 of the Sarbanes-Oxley Act of 2002.15.1
    
    Consent of Registered Independent Public Accounting Firm.15.2
    
    Consent of Independent Petroleum Engineers
 53




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##### Table of Contents



SIGNATURES
  
 
 54




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##### Table of Contents



Consolidated Balance Sheets
    
    F2Consolidated Statements of Income
    
    F3Consolidated Statements of Comprehensive Income
    
    F4Consolidated Statements of Cash Flows
    
    F5Notes to the Consolidated Financial Statements
    
    F6Report of Independent Registered Public Accounting Firm
    
    F29
 F1




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##### Table of Contents



CONSOLIDATED BALANCE SHEETS
 December 31
    
    
    December 31(U.S. dollars, in thousands except share data)
    
    2004
    
    
    2005AssetsCurrent assetsCash
    
    $
    9,518
    
    
    $
    10,138Margin deposits (note 13)
    
    
    
    
    
    
    2,059Trade receivables
    
    
    6,930
    
    
    
    11,250Other receivables
    
    
    64
    
    
    
    57Fair value of derivative financial instruments (note 10(c))
    
    
    1,406
    
    
    
    Deferred tax assets (note 2)
    
    
    7,975
    
    
    
    10,220Prepayments
    
    
    2,016
    
    
    
    1,460Total current assets
    
    
    27,909
    
    
    
    35,184Non-current assetsProved and unproved oil and gas properties
    
    
    33,542
    
    
    
    48,814Investment securities (note 6)
    
    
    543
    
    
    
    417Property, plant and equipment (note 7)
    
    
    245
    
    
    
    176Deferred tax assets (note 2)
    
    
    1,288
    
    
    
    2,703Total non-current assets
    
    
    35,618
    
    
    
    52,110Total assets
    
    $
    63,527
    
    
    $
    87,294Liabilities and shareholders equityCurrent liabilitiesAccounts payable and accrued liabilities (note 8)
    
    $
    10,337
    
    
    $
    24,784Fair value of derivative financial instruments (note 10(c))
    
    
    
    
    
    
    6,681Short-term loans (note 10(a))
    
    
    1,175
    
    
    
    Total current liabilities
    
    
    11,512
    
    
    
    31,465Long-term liabilitiesOther accrued liabilities  non-current (note 9)
    
    
    1,116
    
    
    
    1,566Total long-term liabilities
    
    
    1,116
    
    
    
    1,566Shareholders equityShare capital  250,000,000 authorized;
ordinary shares of issued and outstanding
121,389,341 (2004: 119,222,841). (notes 11 and 12)
    
    
    130,106
    
    
    
    130,725Accumulated other comprehensive loss (note 12)
    
    
    (1,964
    )
    
    
    (7,206
    )Accumulated deficit
    
    
    (77,243
    )
    
    
    (69,256
    )Total shareholders equity
    
    
    50,899
    
    
    
    54,263Total liabilities and shareholders equity
    
    $
    63,527
    
    
    $
    87,294
  F2




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##### Table of Contents



CONSOLIDATED STATEMENTS OF INCOME
 Year endedDecember 31
    
    
    December 31
    
    
    December 31(U.S. dollars, in thousands except earnings per share)
    
    2003
    
    
    2004
    
    
    2005RevenuesOil and gas sales (net of royalties incurred)
    
    $
    23,270
    
    
    $
    32,575
    
    
    $
    45,130Oil and gas royalties earned
    
    
    1,949
    
    
    
    223
    
    
    
    332Total revenues
    
    $
    25,219
    
    
    $
    32,798
    
    
    $
    45,462Operating expensesLease operating expenses
    
    
    1,557
    
    
    
    1,776
    
    
    
    2,465Depletion, depreciation, amortization, and rehabilitation
    
    
    6,574
    
    
    
    12,361
    
    
    
    15,597Exploration expenditure
    
    
    1,329
    
    
    
    1,452
    
    
    
    5,844Dry hole and abandonment costs
    
    
    
    
    
    
    4,119
    
    
    
    5,290Major maintenance expense
    
    
    
    
    
    
    592
    
    
    
    Impairment expense
    
    
    38
    
    
    
    201
    
    
    
    General, administrative and other expenses
    
    
    3,519
    
    
    
    4,657
    
    
    
    5,814Hurricane-related business interruption insurance proceeds
    
    
    
    
    
    
    
    
    
    
    (867
    )Stock compensation expense
    
    
    90
    
    
    
    83
    
    
    
    88Total operating expenses
    
    
    13,107
    
    
    
    25,241
    
    
    
    34,231Income from operations
    
    $
    12,112
    
    
    $
    7,557
    
    
    $
    11,231Other income and expenseInterest expense
    
    
    (10
    )
    
    
    (32
    )
    
    
    (23
    )Interest income
    
    
    142
    
    
    
    311
    
    
    
    393Other income, net
    
    
    364
    
    
    
    91
    
    
    
    403Derivative losses from discontinued hedges (note 1(h) and
10(c))
    
    
    
    
    
    
    
    
    
    
    (4,615
    )Total other income and expense
    
    $
    496
    
    
    $
    370
    
    
    $
    (3,842
    )Income before income tax
    
    
    12,608
    
    
    
    7,927
    
    
    
    7,389Income tax benefit (note 2)
    
    
    492
    
    
    
    9,807
    
    
    
    598Net income
    
    $
    13,100
    
    
    $
    17,734
    
    
    $
    7,987Earnings per share (note 3)- basic
    
    $
    0.12
    
    
    $
    0.15
    
    
    $
    0.07- diluted
    
    $
    0.12
    
    
    $
    0.15
    
    
    $
    0.07
  F3




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##### Table of Contents



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 Year endedDecember 31
    
    
    December 31
    
    
    December 31(U.S. dollars, in thousands)
    
    2003
    
    
    2004
    
    
    2005Net income
    
    $
    13,100
    
    
    $
    17,734
    
    
    $
    7,987Other comprehensive income (loss)Loss on available-for-sale securities reclassified to earnings
    
    
    
    
    
    
    
    
    
    
    16Foreign currency translation adjustments
    
    
    (26
    )
    
    
    (413
    )
    
    
    (123
    )Unrealized gain (loss) on cash flow hedges
    
    
    (346
    )
    
    
    1,752
    
    
    
    (8,087
    )Aggregate income tax benefit (expense) related to other
comprehensive income (loss)
    
    
    137
    
    
    
    (692
    )
    
    
    2,952Comprehensive income
    
    $
    12,865
    
    
    $
    18,381
    
    
    $
    2,745
  F4




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##### Table of Contents



CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year endedDecember 31
    
    
    December 31
    
    
    December 31(U.S. dollars, in thousands)
    
    2003
    
    
    2004
    
    
    2005Cash flows from operating activitiesNet income
    
    $
    13,100
    
    
    $
    17,734
    
    
    $
    7,987Adjustment to reconcile net income to net cash from
operating activities:- depletion, depreciation, amortization, and rehabilitation
    
    
    6,574
    
    
    
    12,361
    
    
    
    15,597- dry holes and abandonments
    
    
    
    
    
    
    4,119
    
    
    
    5,290- impairment expense
    
    
    38
    
    
    
    201
    
    
    
    - employee stock compensation expense
    
    
    90
    
    
    
    83
    
    
    
    88- deferred income tax benefits
    
    
    (492
    )
    
    
    (9,807
    )
    
    
    (708
    )Changes in operating assets and liabilities:- accounts receivable and prepayments
    
    
    (3,445
    )
    
    
    (6,284
    )
    
    
    (3,757
    )- accounts payable and accrued liabilities
    
    
    2,724
    
    
    
    3,625
    
    
    
    10,418Net cash from operating activities
    
    
    18,589
    
    
    
    22,032
    
    
    
    34,915Cash flows from investing activitiesAdditions to oil and gas properties and property, plant
and equipment
    
    
    (13,372
    )
    
    
    (27,957
    )
    
    
    (31,736
    )Purchases of investment securities and margin deposits
    
    
    (1,453
    )
    
    
    (209
    )
    
    
    (2,059
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    5
    
    
    
    Distribution proceeds from bankruptcy trustee
    
    
    82
    
    
    
    
    
    
    
    Proceeds from sale of investment securities
    
    
    1,169
    
    
    
    2,115
    
    
    
    144Net cash from investing activities
    
    
    (13,574
    )
    
    
    (26,046
    )
    
    
    (33,651
    )Cash flows from financing activitiesRepayment of short-term loans
    
    
    (402
    )
    
    
    (908
    )
    
    
    (1,175
    )Proceeds from issuance of shares
    
    
    7,253
    
    
    
    1,978
    
    
    
    531Net cash from financing activities
    
    
    6,851
    
    
    
    1,070
    
    
    
    (644
    )Net increase (decrease) in cash
    
    
    11,866
    
    
    
    (2,944
    )
    
    
    620Cash at beginning of the period
    
    
    596
    
    
    
    12,462
    
    
    
    9,518Cash at the end of the period
    
    $
    12,462
    
    
    $
    9,518
    
    
    $
    10,138
  F5




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 1. Summary of Significant Accounting Policies and Practices
  (a) Description of business
  (b) Basis of presentation
  (c) Principles of consolidation
  (d) Oil and natural gas properties
 Successful efforts method of accounting
  Impairment of oil and natural gas properties
    F6




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 Depreciation, depletion, and amortization
  Asset retirement obligations
  (e) Depreciation  other property, plant and equipment
  Estimateduseful life inMethod
    
    yearsFurniture and fittings
    
    Straight line
    
    
    5 to 8Office machines and equipment
    
    Straight line
    
    
    3 to 5Leasehold improvements
    
    Straight line
    
    
    5 to 7
 (f) Investments
 (i) Joint operating arrangements
  
  (ii) Investment securities
    F7




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
   (g) Revenue recognition
   (h) Derivative financial instruments and hedging activities
     (i) Employee entitlements
  F8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 (j) Income taxes
  (k) Foreign currency
 Functional and presentation currency
    §
    
    assets and liabilities for each balance sheet are translated at the closing rate at the
date of that balance sheet;§
    
    income and expenses for each income statement are translated at average exchange rates
(unless this is not a reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, in which case income and expenses are translated at
the dates of the transactions);§
    
    components of equity are translated at the historical rates; and§
    
    all resulting exchange differences are recognised directly to the foreign currency
translation adjustment and form part of the accumulated other comprehensive income (loss).
 Foreign currency transactions and balances
   Twelve months endedDecember 31,2003
    
    2004
    
    2005Average exchange rate
    
    
    0.6515
    
    
    
    0.7341
    
    
    
    0.7614Exchange rate at period end
    
    
    0.7431
    
    
    
    0.7784
    
    
    
    0.7336
 F9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 (l) Stock compensation
  
  (m) Trade receivables
  (n) Use of estimates
  (o) Reclassifications
  (p) Recently Issued Accounting Standards Not Yet Adopted
 Share-Based Payment Accounting for Stock Issued to
Employees
 Exchanges of Nonmonetary Assets
 F10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 (p) Recently Issued Accounting Standards Not Yet Adopted (continued)
 Accounting for Suspended Well Costs Financial Accounting and Reporting by Oil and Gas Producing
Companies
 Accounting Changes and Error Corrections
 2 Income taxes
  Year endedDecember 31
    
    December 31
    
    December 31(U.S. Dollars, in thousands)
    
    2003
    
    2004
    
    2005Australia
    
    $
    (1,091
    )
    
    $
    (1,241
    )
    
    $
    (1,672
    )U.S.
    
    
    13,699
    
    
    
    9,168
    
    
    
    9,061$
    12,608
    
    
    $
    7,927
    
    
    $
    7,389
  Current:Australia
    
    $
    
    
    
    $
    
    
    
    $
    U.S.
    
    
    250
    
    
    
    
    
    
    
    200$
    250
    
    
    $
    
    
    
    $
    200Deferred:Australia
    
    $
    (742
    )
    
    $
    
    
    
    $
    U.S.
    
    
    
    
    
    
    (9,807
    )
    
    
    (798
    )$
    (742
    )
    
    $
    (9,807
    )
    
    $
    (798
    )Income tax benefit
    
    $
    (492
    )
    
    $
    (9,807
    )
    
    $
    (598
    )
  Year endedDecember 31
    
    December 31
    
    December 31(U.S. Dollars, in thousands)
    
    2003
    
    2004
    
    2005Computed expected tax expense
    
    $
    3,782
    
    
    $
    2,378
    
    
    $
    2,217Increase (reduction) in income taxes
resulting from:Adjustment of prior year net operating loss
    
    
    1,099
    
    
    
    (242
    )
    
    
    (58
    )U.S. income taxes at different rates
    
    
    822
    
    
    
    485
    
    
    
    438Reversal of contingencies
    
    
    (840
    )
    
    
    
    
    
    
    Change in valuation allowance
    
    
    (5,329
    )
    
    
    (12,422
    )
    
    
    (3,195
    )Other
    
    
    (26
    )
    
    
    (6
    )
    
    
    Actual tax benefit
    
    $
    (492
    )
    
    $
    (9,807
    )
    
    $
    (598
    )
 F11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 2 Income taxes (continued)
  Year endedDecember 31
    
    December 31
    
    December 31(U.S. Dollars, in thousands)
    
    2003
    
    2004
    
    2005Deferred tax expense
(benefit), exclusive of the
effects of other components
below
    
    $
    (742
    )
    
    $
    (35
    )
    
    $
    2,693Decrease in
beginning-of-the-year
balance of valuation
allowance for deferred tax
assets
    
    
    
    
    
    
    (9,772
    )
    
    
    (3,491
    )(742
    )
    
    
    (9,807
    )
    
    
    (798
    )
  December 31
    
    December 312004
    
    2005(U.S. Dollars, in thousands)Deferred tax assets:Employee entitlement provisions
    
    $
    91
    
    
    $
    Alternative minimum tax credit carryforward
    
    
    250
    
    
    
    450Unrealized loss on derivative financial instruments
    
    
    
    
    
    
    2,338U.S. sourced net operating loss carryforwards
    
    
    16,559
    
    
    
    13,590Australian sourced net operating loss carryforwards
    
    
    1,506
    
    
    
    1,802Total deferred tax assets
    
    $
    18,406
    
    
    $
    18,180Less valuation allowance
    
    
    (4,997
    )
    
    
    (1,802
    )Deferred tax assets, net of valuation allowance
    
    
    13,409
    
    
    
    16,378Deferred tax liabilities:Proved and unproved oil and gas properties
    
    
    (3,591
    )
    
    
    (3,455
    )Unrealized gain on derivative financial instruments
    
    
    (555
    )
    
    
    Total deferred tax liabilities
    
    
    (4,146
    )
    
    
    (3,455
    )Net deferred tax assets
    
    $
    9,263
    
    
    $
    12,923
    F12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 3. Earnings per share
  December 31
    
    December 31
    
    December 312003
    
    2004
    
    2005(in thousands)Weighted average number of ordinary shares used in the
calculation of the basic earnings per share
    
    
    105,736
    
    
    
    118,830
    
    
    
    120,112Incremental shares
    
    
    2,047
    
    
    
    2,673
    
    
    
    2,315Weighted average number of ordinary shares used in the
calculation of the diluted earnings per share
    
    
    107,783
    
    
    
    121,503
    
    
    
    122,427
   4. Interests in joint operating arrangements
 Investor Balance Sheet and Income Statement Display under
the Equity Method for Investments in Certain Partnerships and Other Ventures Consolidation of Variable Interest
Entities
  December 31
    
    December 312004
    
    2005(U.S. Dollars, in thousands)Lease permits and capital expenditure:Now in production  at cost- West Cameron 343
    
    $
    10,259
    
    
    $
    11,114- West Cameron 352
    
    
    8,124
    
    
    
    8,073Less: Accumulated amortisation
    
    
    (14,802
    )
    
    
    (17,281
    )$
    3,581
    
    
    $
    1,906Not in production  at cost- Main Pass 89
    
    
    121
    
    
    
    121- Main Pass 19(1)
    
    
    1,537
    
    
    
    21,200- Block 22/12 Beibu Gulf
    
    
    1,370
    
    
    
    2,064- Price Lake, Onshore Louisiana(2)
    
    
    
    
    
    
    - St James Parish, Onshore Louisiana
    
    
    2,519
    
    
    
    2,5185,547
    
    
    
    25,903Total lease permit and capital expenditure
    
    $
    9,128
    
    
    $
    27,809
 F13




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##### Table of Contents



NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS 

Petsec Energy Ltd and subsidiaries
 4. Interests in joint operating arrangements (continued)
 December 31
    
    December 312004
    
    2005(U.S. Dollars, in thousands)Asset retirement obligation liability:- West Cameron 343
    
    $
    217
    
    
    $
    238- West Cameron 352
    
    
    89
    
    
    
    86- Main Pass 19
    
    
    
    
    
    
    421$
    306
    
    
    $
    745
 December 31
    
    December 31
    
    December 312003
    
    2004
    
    2005(U.S. Dollars, in thousands)The contribution of the Companys joint operating
arrangements to income from operations- West Cameron 343
    
    $
    11,589
    
    
    $
    7,342
    
    
    $
    1,766- West Cameron 352
    
    
    3,630
    
    
    
    1,117
    
    
    
    1,786- Block 22/12 Beibu Gulf(3)
    
    
    (302
    )
    
    
    (1,373
    )
    
    
    (358
    )- Price Lake, Onshore Louisiana(2)
    
    
    
    
    
    
    (3,188
    )
    
    
    (5,283
    )- St James Parish, Onshore Louisiana
    
    
    
    
    
    
    
    
    
    
    (5,103
    )$
    14,917
    
    
    $
    3,898
    
    
    $
    (7,192
    )
 
 (1)
    
    Three wells were successfully drilling during the year and were brought into production in
January 2006. A further three wells were successfully drilled in December 2005 through January
2006 and are expected to be brought into production during second quarter 2006.(2)
    
    The Company determined subsequent to the year ending December 31, 2004 that the Price Lake
drilling targets were dry holes and, in accordance with FASB 19, Financial Accounting and
Reporting by Oil and Gas Producing Companiesand FIN 36, Accounting for Exploratory Wells in
progress at End of a Period,recorded $2,987,000 to dry hole and abandonment costs and
$201,000 to impairment expense in the year ended December 31, 2004. Additionally, capital
expenditure incurred subsequent to December 31, 2004 totalling $5,283,000 was expensed to dry
hole and abandonment costs by the Company in respect of this joint operating arrangement and
the Company subsequently relinquished its entire 25.0% working interest.(3)
    
    In 2004, the Company recorded $1,132,000 to dry hole and abandonment costs in relation to the
dry hole costs of two wells drilled in the Beibu Gulf, China.
  Working interest held2004
    
    
    2005Main Pass 89
    
    
    30.0
    %
    
    
    30.0
    %Main Pass 19
    
    
    55.0
    %
    
    
    55.0
    %West Cameron 343
    
    75.0% to 100%
    
    75.0% to 100%West Cameron 352
    
    
    56.3
    %
    
    
    56.3
    %Block 22/12 Beibu Gulf
    
    
    25.0
    %
    
    
    25.0
    %Price Lake, Onshore Louisiana
    
    
    25.0
    %
    
    
    St James Parish, Onshore Louisiana
    
    
    50.0
    %
    
    
    50.0
    %
 F14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 5. Wholly owned areas of interests
 December 31
    
    December 312004
    
    2005(U.S. Dollars, in thousands)Lease permits and capital expenditure:Now in production at cost- Vermilion 258(1)
    
    $
    27,602
    
    
    $
    34,000Less: Accumulated amortisation
    
    
    (3,895
    )
    
    
    (16,798
    )$
    23,707
    
    
    $
    17,202Not in production  at cost- Vermilion 246
    
    
    243
    
    
    
    243- Vermilion 257
    
    
    303
    
    
    
    359- Main Pass 18
    
    
    
    
    
    
    2,421- Main Pass 103
    
    
    
    
    
    
    530- Spare equipment
    
    
    161
    
    
    
    250$
    707
    
    
    $
    3,803Total lease permit and capital expenditure
    
    $
    24,414
    
    
    $
    21,005Asset retirement obligation liability:- Vermilion 258(1)
    
    $
    505
    
    
    $
    560Contribution of area of interest to income from operations:- Vermilion 258(1)
    
    $
    10,608
    
    
    $
    25,137
 
  6. Investments
 December 31
    
    December 312004
    
    2005(U.S. Dollars, in thousands)Non-currentListed shares at fair value
    
    $
    16
    
    
    $
    Unlisted shares at cost
    
    
    527
    
    
    
    417$
    543
    
    
    $
    417
 7. Property, plant and equipment
 December 31
    
    December 312004
    
    2005(U.S. Dollars, in thousands)- at cost
    
    $
    611
    
    
    $
    615- accumulated depreciation
    
    
    (366
    )
    
    
    (439
    )$
    245
    
    
    $
    176
 8. Accounts payable and accrued liabilities
 December 31
    
    December 312004
    
    2005(U.S. Dollars, in thousands)CurrentTrade creditors
    
    $
    1,984
    
    
    $
    7,063Employee related liabilities
    
    
    1,057
    
    
    
    489Exploration and development accruals
    
    
    5,515
    
    
    
    10,694Operational and administration accruals
    
    
    1,616
    
    
    
    1,349Joint operating arrangement accruals
    
    
    146
    
    
    
    5,163Related party payables
    
    
    19
    
    
    
    26$
    10,337
    
    
    $
    24,784
 F15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 9. Other accrued liabilities  non-current
 December 31
    

December 312004
    
    2005(U.S. Dollars, in thousands)Employee entitlements provision
    
    $
    305
    
    
    $
    261Asset retirement obligations
    
    
    811
    
    
    
    1,305$
    1,116
    
    
    $
    1,566
 Accounting for Asset Retirement Obligations
  December 31
    
    December 312004
    
    2005(U.S. Dollars, in thousands)Asset retirement obligations at beginning of year
    
    $
    281
    
    
    $
    811Liabilities incurred during the period
    
    
    480
    
    
    
    452Liabilities settled during the year
    
    
    
    
    
    
    (12
    )Liabilities reversed during the year
    
    
    
    
    
    
    (32
    )Accretion expense
    
    
    50
    
    
    
    86Asset retirement obligation at the end of the period
    
    $
    811
    
    
    $
    1,305
 10. Financing arrangements, liquidity, financial instruments disclosures and significant
concentrations
 (a) Financing arrangements
   
 F16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 10.
    
    Financing arrangements, liquidity, financial instruments disclosures and significant
concentrations (continued)
 (a) Financing arrangements (continued)
 3 4 1 2 1 2 1 2
  (i)
    
    maintain its tangible net worth to be not less than 90% of the tangible net worth at the
closing date plus 50% of any advances to PEI from PEL, and(ii)
    
    a ratio of current assets to current liabilities of at least one to one.
   (b) Foreign exchange exposures
    (c) Commodity price exposures and hedges
  Swaps and costless collars
   F17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 10.
    
    Financing arrangements, liquidity, financial instruments disclosures and significant
concentrations (continued)
  Weighted averageProduction period
    
    Hedge type
    
    Daily volume
    
    USD Price/MMBtuFirst quarter 2006
    
    Swap
    
    10,000 MMBtu
    
    
    8.58Second quarter 2006
    
    Swap
    
    6,000 MMBtu
    
    
    7.82Third quarter 2006
    
    Swap
    
    6,000 MMBtu
    
    
    7.85Fourth quarter 2006
    
    Swap
    
    6,000 MMBtu
    
    
    8.21
  Weighted averageProduction period
    
    Hedge type
    
    
    Daily volume
    
    
    USD Price/MMBtuFirst quarter 2005
    
    Costless collar
    
    4,000 MMBtu
    
    
    6.00/7.08
    (1)Swap
    
    6,000 MMBtu
    
    
    7.89Second quarter 2005
    
    Swap
    
    4,000 MMBtu
    
    
    6.61Third quarter 2005
    
    Swap
    
    4,000 MMBtu
    
    
    6.59Fourth quarter 2005
    
    Swap
    
    4,000 MMBtu
    
    
    6.87
 
 (1)
    
    Floor/ceiling
     (d) Concentrations and other credit risk exposures
  F18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 10.
    
    Financing arrangements, liquidity, financial instruments disclosures and significant
concentrations (continued)
 (d) Concentrations and other credit risk exposures (continued)
       (e) Fair values of financial assets and liabilities
  11. Share capital
 December 31
    
    December 312004
    
    2005(U.S. Dollars, in thousands)Issued capital
121,389,341 shares issued and outstanding (2004: 119,222,841 shares)
Ordinary shares fully paid
    
    $
    130,106
    
    
    $
    130,725
    F19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 11. Share capital (continued)
    WeightedaverageRemainingExercise
    
    Number
    
    contractual life
    
    Numberprices
    
    outstanding
    
    (years)
    
    exercisable
    
    Expiry datesA$0.30
    
    970,000
    
    1.4
    
    33,000
    
    June 1, 2007A$0.40
    
    209,000
    
    2.1
    
    133,000
    
    December 1, 2007 - April 1, 2008A$0.82
    
    100,000
    
    2.0
    
    
    
    December 31, 2007A$0.83
    
    15,000
    
    2.9
    
    8,000
    
    November 30, 2008A$1.00
    
    112,500
    
    3.5
    
    
    
    June 30, 2009A$1.25
    
    65,000
    
    3.4
    
    16,500
    
    March 1, 2009 - July 30, 2009A$1.15
    
    15,000
    
    4.0
    
    3,000
    
    December 31, 2009A$1.10
    
    15,000
    
    4.4
    
    
    
    June 1, 2010A$1.40
    
    250,000
    
    4.8
    
    
    
    October 20, 2010A$0.30 - A$1.40
    
    1,751,500
    
    2.3
    

193,500
  Outstanding options:
 Number of
    
    Weightedoutstanding
    
    averageoptions
    
    exercise priceAs at December 31, 2002
    
    
    3,628,000
    
    
    
    A$0.30Granted
    
    
    450,000
    
    
    
    A$0.58Forfeited
    
    
    (15,000
    )
    
    
    A$0.30As at December 31, 2003
    
    
    4,063,000
    
    
    
    A$0.33Granted
    
    
    230,000
    
    
    
    A$1.06Exercised
    
    
    (640,000
    )
    
    
    A$0.34Forfeited
    
    
    (15,000
    )
    
    
    A$0.40As at December 31, 2004
    
    
    3,638,000
    
    
    
    A$0.38Granted
    
    
    280,000
    
    
    
    A$1.37Exercised
    
    
    (2,166,500
    )
    
    
    A$0.33As at December 31, 2005
    
    
    1,751,500
    
    
    
    A$0.60Exercisable at December 31, 2005
    
    
    193,500
    
    
    
    A$0.48Exercisable at December 31, 2004
    
    
    1,333,000
    
    
    
    A$0.34
 F20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 12. Shareholders equity (deficiency)
 Year endedDecember 31
    
    
    December 31
    
    
    December 312003
    
    
    2004
    
    
    2005(Unless stated otherwise, U.S. dollars, in thousands)Issued capital
    
    $
    120,701
    
    
    $
    130,106
    
    
    $
    130,725Accumulated other comprehensive income (loss)
    
    
    (2,611
    )
    
    
    (1,964
    )
    
    
    (7,206
    )Accumulated deficit
    
    
    (94,977
    )
    
    
    (77,243
    )
    
    
    (69,256
    )Total shareholders equity
    
    $
    23,203
    
    
    $
    50,899
    
    
    $
    54,263Movements during the financial periodIssued capital (number of shares)Balance at the beginning of the financial period
    
    
    105,736,041
    
    
    
    105,736,041
    
    
    
    119,222,841Shares issued for cash pursuant to placement
    
    
    
    
    
    
    12,846,800
    
    
    
    Shares issued from exercise of options under
Employee Option Plan
    
    
    
    
    
    
    640,000
    
    
    
    2,166,500Balance at the end of the financial period
    
    
    105,736,041
    
    
    
    119,222,841
    
    
    
    121,389,341Issued capitalBalance at the beginning of the financial period
    
    $
    120,701
    
    
    $
    120,791
    
    
    $
    130,106Shares issued for cash pursuant to placement
    
    
    
    
    
    
    9,064
    
    
    
    Shares issued from exercise of options under
Employee Option Plan
    
    
    
    
    
    
    168
    
    
    
    531Employee stock compensation expense
    
    
    90
    
    
    
    83
    
    
    
    88Balance at the end of the financial period
    
    $
    120,791
    
    
    $
    130,106
    
    
    $
    130,725Accumulated deficitBalance at the beginning of the financial period
    
    $
    (108,077
    )
    
    $
    (94,977
    )
    
    $
    (77,243
    )Net income
    
    
    13,100
    
    
    
    17,734
    
    
    
    7,987Balance at the end of the financial period
    
    $
    (94,977
    )
    
    $
    (77,243
    )
    
    $
    (69,256
    )Accumulated other comprehensive income (loss)Unrealized loss on available-for-sale securities
Balance at the beginning of the financial period
    
    $
    (16
    )
    
    $
    (16
    )
    
    $
    (16
    )Loss on available-for-sale securities
reclassified to earnings
    
    
    
    
    
    
    
    
    
    
    16Balance at the end of the financial period
    
    $
    (16
    )
    
    $
    (16
    )
    
    $
    Foreign currency translation adjustment
Balance at the beginning of the financial period
    
    $
    (2,360
    )
    
    $
    (2,386
    )
    
    $
    (2,799
    )Current period change
    
    
    (26
    )
    
    
    (413
    )
    
    
    (123
    )Balance at the end of the financial period
    
    $
    (2,386
    )
    
    $
    (2,799
    )
    
    $
    (2,922
    )Unrealized gain (loss) on cash flow hedges
Balance at the beginning of the financial period
    
    $
    
    
    
    
    (209
    )
    
    
    851Net change in fair value of cash flow hedges
(net of tax)
    
    
    (209
    )
    
    
    1,060
    
    
    
    (5,135
    )Balance at the end of the financial period
    
    $
    (209
    )
    
    $
    851
    
    
    $
    (4,284
    )Balance at the end of the financial period
    
    $
    (2,611
    )
    
    $
    (1,964
    )
    
    $
    (7,206
    )
 F21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 13. Commitments and contingent liabilities
 (a) Contingent liabilities
       (b) Lease commitments
   F22




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 13. Commitments and contingent liabilities (continued)
  Year ended(U.S. dollars, in thousands)
    
    December 312006
    
    $
    6242007
    
    
    5882008
    
    
    4642009
    
    
    4402010
    
    
    162$
    2,278
 (c) Exploration commitments
  (d) Superannuation commitments, incentive compensation, and directors retirement obligation
   1 2
     F23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 14. Segment reporting
   China
    
    USA
    
    Reconciling items
    
    ConsolidatedU.S. dollars, thousands
    
    2003
    
    2004
    
    2005
    
    2003
    
    2004
    
    2005
    
    2003
    
    2004
    
    2005
    
    2003
    
    2004
    
    2005Oil & gas sales (net of royalties incurred)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,270
    
    
    
    32,575
    
    
    
    45,130
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,270
    
    
    
    32,575
    
    
    
    45,130Oil & gas royalties earned
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,949
    
    
    
    223
    
    
    
    332
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,949
    
    
    
    223
    
    
    
    332Revenue from customers
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,219
    
    
    
    32,798
    
    
    
    45,462
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25,219
    
    
    
    32,798
    
    
    
    45,462Depreciation, depletion, amortization and
rehabilitation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,553
    
    
    
    12,335
    
    
    
    15,571
    
    
    
    21
    
    
    
    26
    
    
    
    26
    
    
    
    6,574
    
    
    
    12,361
    
    
    
    15,597Dry hole and abandonment costs
    
    
    
    
    
    
    1,132
    
    
    
    
    
    
    
    
    
    
    
    2,987
    
    
    
    5,290
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,119
    
    
    
    5,290Impairment expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    201
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    201
    
    
    
    Interest income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    
    37
    
    
    
    295
    
    
    
    99
    
    
    
    274
    
    
    
    98
    
    
    
    142
    
    
    
    311
    
    
    
    393Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (32
    )
    
    
    (23
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10
    )
    
    
    (32
    )
    
    
    (23
    )Income before income tax
    
    
    (302
    )
    
    
    (1,373
    )
    
    
    (358
    )
    
    
    14,001
    
    
    
    10,541
    
    
    
    9,419
    
    
    
    (1,091
    )
    
    
    (1,241
    )
    
    
    (1,672
    )
    
    
    12,608
    
    
    
    7,927
    
    
    
    7,389Cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,983
    
    
    
    6,916
    
    
    
    8,372
    
    
    
    8,479
    
    
    
    2,602
    
    
    
    1,766
    
    
    
    12,462
    
    
    
    9,518
    
    
    
    10,138Proved and unproved oil and gas properties
    
    
    981
    
    
    
    1,370
    
    
    
    2,064
    
    
    
    18,176
    
    
    
    32,172
    
    
    
    46,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,157
    
    
    
    33,542
    
    
    
    48,814Expenditure for additions to long lived assets
    
    
    856
    
    
    
    1,715
    
    
    
    1,052
    
    
    
    12,515
    
    
    
    26,217
    
    
    
    30,681
    
    
    
    1
    
    
    
    25
    
    
    
    3
    
    
    
    13,372
    
    
    
    27,957
    
    
    
    31,736
 F24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 15. Related party disclosures
 Directors
      16. Supplemental disclosures of cash flow information
 Year endedDecember
    
    December
    
    December31
    
    31
    
    31(U.S. dollars, in thousands)
    
    2003
    
    2004
    
    2005Cash paid during the period for:Interest
    
    $
    10
    
    
    $
    32
    
    
    $
    23Income taxes paid
    
    
    250
    
    
    
    
    
    
    
    200Non-cash items:Insurance premiums financed with short-term debt
    
    $
    730
    
    
    $
    1,754
    
    
    $
    
 17. Events subsequent to balance sheet date
  18. Supplementary oil and gas disclosures  unaudited
     F25




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 18. Supplementary oil and gas disclosures  unaudited (continued)
  Estimated net quantities of oil and natural gas reserves
  CRUDEOIL
    
    GAS(Mbbl)
    
    (MMcf)Proved developed and undeveloped reserves:December 31, 2002
    
    
    23
    
    
    
    7,764Revisions of previous estimates
    
    
    23
    
    
    
    (1,305
    )Extensions, discoveries and other additions
    
    
    12
    
    
    
    8,681Production
    
    
    (19
    )
    
    
    (4,403
    )December 31, 2003
    
    
    39
    
    
    
    10,737Revisions of previous estimates
    
    
    39
    
    
    
    5,444Extensions, discoveries and other additions
    
    
    
    
    
    
    1,683Production
    
    
    (15
    )
    
    
    (5,595
    )December 31, 2004
    
    
    63
    
    
    
    12,269Revisions of previous estimates
    
    
    (25
    )
    
    
    4,769Extensions, discoveries and other additions
    
    
    130
    
    
    
    7,216Production
    
    
    (20
    )
    
    
    (6,335
    )December 31, 2005
    
    
    148
    
    
    
    17,919Proved developed reserves :December 31, 2003
    
    
    32
    
    
    
    3,725December 31, 2004
    
    
    63
    
    
    
    12,269December 31, 2005
    
    
    108
    
    
    
    15,901
 Capitalized costs of natural gas and oil properties
 December
    
    December
    
    December31,
    
    31,
    
    31,2003
    
    2004
    
    2005(U.S. dollars, in thousands)Capitalised costs for oil and gas
producing activities
consist of the following:Proved properties
    
    $
    24,036
    
    
    $
    45,827
    
    
    $
    74,373Unproved properties
    
    
    1,602
    
    
    
    6,412
    
    
    
    8,508Total capitalised costs
    
    
    25,638
    
    
    
    52,239
    
    
    
    82,881Accumulated depletion, depreciation and
amortization
    
    
    (6,481
    )
    
    
    (18,697
    )
    
    
    (34,067
    )Net capitalised costs
    
    $
    19,157
    
    
    $
    33,542
    
    
    $
    48,814
 F26




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 18. Supplementary oil and gas disclosures  unaudited (continued)
 Costs incurred for oil and natural gas property acquisition, exploration and development
activities
 Year endedDecember
    
    December
    
    December31,
    
    31,
    
    31,2003
    
    2004
    
    2005(U.S. dollars, in thousands)Costs incurred for oil and gas property acquisition,
exploration and development activities were as
follows:Lease acquisition
    
    $
    519
    
    
    $
    3,973
    
    
    $
    2,191Exploration
    
    
    6,586
    
    
    
    11,943
    
    
    
    19,710Development
    
    
    8,987
    
    
    
    15,898
    
    
    
    20,117Total costs incurred
    
    $
    16,092
    
    
    $
    31,814
    
    
    $
    42,018
 Standardized
measure of discounted future net cash flows relating to proved oil
and natural gas reserves
      F27




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Petsec Energy Ltd and subsidiaries
 18. Supplementary oil and gas disclosures  unaudited (continued)
  Year endedDecember
    
    December
    
    December31
    
    31
    
    312003
    
    2004
    
    2005(U.S. Dollars, in thousands)Future cash inflows
    
    $
    65,612
    
    
    $
    78,599
    
    
    $
    183,194Less: Future production and development costs
    
    
    (21,085
    )
    
    
    (14,467
    )
    
    
    (37,549
    )Future income tax expense
    
    
    
    
    
    
    
    
    
    
    (29,884
    )Future net cash flows after income taxes
    
    
    44,527
    
    
    
    64,132
    
    
    
    115,761Less: 10% annual discount for estimated timing of cash flows
    
    
    (9,032
    )
    
    
    (6,240
    )
    
    
    (16,284
    )Standardized measure of discounted future net cash flows
    
    $
    35,495
    
    
    $
    57,892
    
    
    $
    99,477Summary of the changes in standardized measure of discounted
future net cash flows applicable to proved oil and gas reservesBeginning of the period
    
    $
    26,156
    
    
    $
    35,495
    
    
    $
    57,892Sales and transfers of oil and gas produced, net of production
costs
    
    
    (23,662
    )
    
    
    (32,080
    )
    
    
    (44,559
    )Changes in prices and production costs
    
    
    7,982
    
    
    
    1,353
    
    
    
    13,488Extensions, discoveries and improved recoveries
net of future productions and development costs
    
    
    25,978
    
    
    
    19,625
    
    
    
    50,873Development costs incurred during the period
    
    
    3,293
    
    
    
    12,258
    
    
    
    7,202Changes in estimated development costs
    
    
    (1,906
    )
    
    
    (3,561
    )
    
    
    (5,967
    )Revisions of previous quantity estimates
    
    
    (5,207
    )
    
    
    14,982
    
    
    
    33,480Net change in income taxes
    
    
    
    
    
    
    
    
    
    
    (22,623
    )Accretion of discount
    
    
    1,780
    
    
    
    2,953
    
    
    
    3,730Changes in timing and other
    
    
    1,081
    
    
    
    6,867
    
    
    
    5,961Net increase
    
    
    9,339
    
    
    
    22,397
    
    
    
    41,585End of the period
    
    $
    35,495
    
    
    $
    57,892
    
    
    $
    99,477
  F28




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
      KPMG
 May 16, 2006
Sydney, Australia
 F29




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##### Table of Contents



EXHIBIT INDEX
 1.1
    
    Constitution of the Company, incorporated herein by reference to Exhibit 1.1 to
Form 20-F for the Company for the year ended December 31, 20044.1
    
    Form of employment contract agreement for Australian-based executives,
incorporated herein by reference to Exhibit 4.1 to Form 20-F for the Company for the
year ended December 31, 2004.4.2
    
    Form of employment contract agreement for U.S.-based executives, incorporated
herein by reference to Exhibit 4.2 to Form 20-F for the Company for the year ended
December 31, 2004.8.1
    
    Subsidiaries of the Company11.1
    
    Code of Ethics, incorporated herein by reference to Exhibit 99.3 to Form 20-F
for the Company for the year ended December 31, 2003.12.1
    
    Certification of the CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.12.2
    
    Certification of the CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.13.1
    
    Certification of CEO pursuant to section 906 of the Sarbanes-Oxley Act of 2002.13.2
    
    Certification of CFO pursuant to section 906 of the Sarbanes-Oxley Act of 2002.15.1
    
    Consent of Independent Registered Public Accounting Firm.15.2
    
    Consent of Independent Petroleum Engineers.