---

---

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

|  |                                                                                                                                 
|- | --------------------------------------------------------------------------------------------------------------------------------
|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the fiscal year ended
December 31, 2007

|                               
|-------------------------------
|Commission file number: 0-29344

|                                                    |  | 
|--------------------------------------------------- |  | 
|AUSTRAL
PACIFIC ENERGY LTD.                        
|                                                    |  | 
|(Exact name of Registrant specified in its charter)

|                                                |  | 
|----------------------------------------------- |  | 
|BRITISH
COLUMBIA, CANADA                       
|                                                |  | 
|(Jurisdiction of incorporation or organization)

|                                                             |  | 
|------------------------------------------------------------ |  | 
|Level 3, 40 Johnston Street, Wellington,
  New Zealand, 6011
|                                                             |  | 
|(Address of principal executive offices)                    

Securities
registered or to be registered pursuant to Section 12(b) of the Act:

| |                       |  |                                             | 
| | --------------------- |  | ------------------------------------------- | 
| | Title of
  each class |  | Name of each
  exchange on which registered | 
| |                       |  |                                             | 
|
| | Common shares         |  | American Stock Exchange                     | 

Securities
registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for
which there is a reporting obligation pursuant to Section 15(d) of the Act:
None

Indicate the
number of outstanding shares of each of the issuers classes of capital or common
stock as of the close of the period covered by the annual report: 32,416,142 common shares as of December 31,
2007

Indicate by
check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


|     |         
|---- | --------
|Yeso | No     x

If this report
is an annual or transition report, indicate by check mark if the registrant is
not required to file reports pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.


|          |         
|--------- | --------
|Yes     o | No     x

Indicate by
check mark whether registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.


|          |         
|--------- | --------
|Yes     x | No     o

Indicate by
check mark whether the registrant is a large accelerated filer, an accelerated
filer, or non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.

|                           |                      |                         
|-------------------------- | -------------------- | ------------------------
|oLarge
  Accelerated Filer | oAccelerated
  Filer | xNon-Accelerated
  Filer

Indicate by
check mark which financial statement item the registrant has elected to follow:


|                |                
|--------------- | ---------------
|Item
  17     x | Item
  18     o

If this is an annual
report, indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act):


|          |         
|--------- | --------
|Yes     o | No     x

- 1 -

---

---



TABLE OF CONTENTS

|         |  |          |  |                                                                               |  |     
|-------- |  | -------- |  | ----------------------------------------------------------------------------- |  | ----
|         |  |          |  |                                                                               |  | Page
|        
|         |  |          |  | Glossary of Terms                                                             |  | 3   
|Part I   |  |          |  |                                                                               |  |     
|         |  | Item 1   |  | Identity of Directors, Senior Management and Advisers                         |  | 7   
|         |  | Item 2   |  | Offer Statistics and Expected Timetable                                       |  | 7   
|         |  | Item 3   |  | Key Information                                                               |  | 7   
|         |  | Item 4   |  | Information on the Company                                                    |  | 16  
|         |  | Item 4A  |  | Unresolved Staff Comments                                                     |  | 37  
|         |  | Item 5   |  | Operating and Financial Review and Prospects                                  |  | 37  
|         |  | Item 6   |  | Directors, Senior Management and Employees                                    |  | 48  
|         |  | Item 7   |  | Major Shareholders and Related Party Transactions                             |  | 58  
|         |  | Item 8   |  | Financial Information                                                         |  | 60  
|         |  | Item 9   |  | The Offer and Listing                                                         |  | 62  
|         |  | Item 10  |  | Additional Information                                                        |  | 63  
|         |  | Item 11  |  | Quantitative and Qualitative Disclosures About Market Risk                    |  | 74  
|         |  | Item 12  |  | Description of Securities other than Equity Securities                        |  | 76  
|Part II  |  |          |  |                                                                               |  |     
|         |  | Item 13  |  | Defaults, Dividend Arrearages and Delinquencies                               |  | 76  
|         |  | Item 14  |  | Material Modification to the Rights of Security Holders and Use of
  Proceeds |  | 76  
|         |  | Item 15  |  | Controls and Procedures                                                       |  | 77  
|         |  | Item 15T |  | Controls and Procedures                                                       |  | 77  
|         |  | Item 16  |  | [Reserved]                                                                    |  | 78  
|         |  | Item 16A |  | Audit Committee Financial Expert                                              |  | 78  
|         |  | Item 16B |  | Code of Ethics                                                                |  | 79  
|         |  | Item 16C |  | Principal Accountant Fees and Services                                        |  | 79  
|         |  | Item 16D |  | Exemptions from the Listing Standards for Audit Committee                     |  | 79  
|         |  | Item 16E |  | Purchases of Equity Securities by the Issuer and Affiliated
  Purchasers      |  | 79  
|Part III |  |          |  |                                                                               |  |     
|         |  | Item 17  |  | Financial Statements                                                          |  | 80  
|         |  | Item 18  |  | Financial Statements                                                          |  | 80  
|         |  | Item 19  |  | Exhibits                                                                      |  | 80  
|         |  |          |  |                                                                               |  |     
|         |  |          |  | Signatures                                                                    |  | 82  
|         |  |          |  | Financial Statements                                                          |  | 83  
|         |  |          |  | Index to Exhibits                                                             |  | 130 

- 2 -

---



GLOSSARY OF
TERMS

The following
terms as defined here are used throughout this Report:

Austral or Company refers to Austral Pacific Energy
Ltd., a corporation continued into and subsisting under the laws of the
province of British Columbia, Canada, and unless the context otherwise clearly
requires, includes all its consolidated subsidiaries.

$ or dollar refers to the currency of the United
States of America, unless otherwise noted in relation to a particular
reference.

AMEX refers to the
American Stock Exchange, and is one of three stock exchanges on which the
Companys common shares are traded.

Basin is a segment
of the crust of the Earth in which thick layers of sediments have accumulated
over a long period of time.

Bbl or Barrel is one stock tank barrel, of 42 U.S.
gallons liquid volume, used herein in reference to crude oil or other liquid
hydrocarbons.

BOE means barrel of
oil equivalent and is an equivalency measure for gas against barrels of oil,
based on an energy equivalency conversion ratio of 6 Mcf of gas to 1 Bbl of
oil. See cautionary statement on page 5. mboe is thousand BOEs and mmboe is
million BOEs.

Condensate refers to
hydrocarbons associated with natural gas which are liquid under surface
conditions but gaseous in the reservoir before extraction.

Depletion is the
reduction in petroleum reserves due to production.

Development refers
to the phase in which an oil or gas field is brought into production, usually
by drilling and completing production wells, and the wells, in most cases, are
connected to the petroleum gathering system.

Discovery is the
location by drilling of a well of an accumulation of gas, condensate or oil
reserves, the size of which may be estimated but not precisely quantified and
which may or may not be commercially economic, depending on a number of
factors.

Exploration Well is
a well drilled in a prospect, without precise knowledge of the underlying
sedimentary rock or the contents of the underlying rock.

Farm-In or Farm-Out refers to a common form of
agreement between or among petroleum companies where the holder of the
petroleum interest agrees to assign all or part of its participating interest
in the permit to another party that is willing to fund agreed exploration
activities, which is usually equivalent to more than the proportionate interest
assigned to such other party.

Fault is a fracture
in a rock or rock formation along which there has been an observable amount of
displacement.

Field is a
geologically connected area of the subsurface that is producing, or has been
proven to be capable of producing, hydrocarbons.

Formation is a
reference to a group of rocks of the same age extending over a substantial area
of a basin.

GAAP refers to
generally accepted accounting principles.

Geology is the
science relating to the history and development of the Earth, and is also used
to refer to the make-up of the rocks in a particular area.

Hydrocarbon is the
general term for oil, gas, condensate and other petroleum products.

Joint Venture or JV refers to a standard form of
participation in petroleum exploration, via unincorporated joint arrangements
between a number of industry participants (which joint arrangements do not
constitute

- 3 -

---



legal
partnerships in the jurisdictions in which the Company operates), with one
party operating the permit (i.e. managing the operations) on behalf of all the
participants, and Joint Venturers has a corresponding meaning.

Mcf is one thousand
cubic feet and Mscf means one
thousand cubic feet at standard temperature and pressure, used herein in
reference to natural gas or other gaseous hydrocarbons.

NZSX refers to the
New Zealand Stock Exchange, operated by NZX Limited from Wellington, New
Zealand, and is one of three stock exchanges on which the Companys common
shares are traded.

Participating Interestor
Working Interest means an equity
interest, as compared to a royalty interest, in an oil and gas property,
whereby the participating interest holder pays its proportionate or agreed
percentage share of exploration, development and operating costs and receives
its proportionate share of the proceeds of hydrocarbon sales after deduction of
royalties due on gross income.

Pay means moveable
hydrocarbons, as interpreted from drilling results.

PEP is a Petroleum
Exploration Permit as issued by the New Zealand government, each such permit
being identified by number.

PMP is a Petroleum
Mining Permit as issued by the New Zealand government, each such permit being
identified by number.

Permit or Licenceis an instrument granted by a
sovereign government, allowing the holder the right in an area for a prescribed
period of time to explore for, develop or produce hydrocarbons under specific
contractual or legislative conditions.

Petrophysical refers
to studies and interpretation based upon the theory and practice of measuring
reservoir rock and fluid transport properties.

PPL is a Petroleum
Prospecting Licence as issued by the Papua New Guinea government, each such
licence being identified by number.

PRL is a Petroleum
Retention Licence as issued by the Papua New Guinea government, each such
licence being identified by number.

Productionrefers to
the stage of exploitation at which hydrocarbons are produced from a discovery
on an on-going basis, intended to be continuous until the reservoir is fully
exploited; pre-production being the stage before full production, during which
hydrocarbons are produced intermittently to test reservoir characteristics and
optimal production methods.

Prospect is a
potential hydrocarbon trap which has been confirmed by geological and
geophysical studies sufficient to warrant the drilling of an exploration well.

Proved Developed Reserves
are Proved Reserves that can be expected to be recovered through existing wells
with existing equipment and operating methods.

Proved Reserves are
the estimated quantities of crude oil, natural gas and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic
and operating conditions.

Proved Undeveloped Reserves
are Proved Reserves that are expected to be recovered from new wells on
undrilled acreage or from existing wells where expenditure is required for
recompletion.

Reservoir is a
porous and permeable sedimentary rock formation containing adequate pore space
in the rock to provide storage space for oil, gas or water.

Royalty is the
entitlement to a stated or determinable percentage of the proceeds received
from the sale of hydrocarbons calculated as prescribed in applicable
legislation or in the agreement reserving the royalty to the royalty owner.

Seismic Survey
refers to a geophysical technique using low frequency sound waves to determine
the

- 4 -

---



subsurface
structure of sedimentary rocks.

Shut-inrefers to a
well which is suspended from production, usually for operational reasons, such
as in order to build up pressure in the reservoir.

TSX-V is the TSX
Venture Exchange, part of the Toronto-based TSX Group, which includes the
Toronto Stock Exchange, and is one of three stock exchanges on which the
Companys common shares are traded.

CONVERSION

The following table sets forth
certain standard conversions from Standard Imperial Units to the International
System of Units (or metric units):

|                        |  |                   |  |            
|----------------------- |  | ----------------- |  | -----------
|To Convert From         |  | To                |  | Multiply By
|                       
|Mcf                     |  | Cubic metres      |  | 28.174     
|Cubic metres (m3)       |  | Cubic feet        |  | 35.494     
|Bbls                    |  | Cubic metres      |  | 0.159      
|Cubic metres            |  | Bbls oil          |  | 6.290      
|Feet                    |  | Metres            |  | 0.305      
|Metres (m)              |  | Feet              |  | 3.281      
|Miles                   |  | Kilometres        |  | 1.609      
|Kilometres (km)         |  | Miles             |  | 0.621      
|Square kilometres (km2) |  | Acres             |  | 247.105    
|Acres                   |  | Hectares          |  | 0.405      
|Acres                   |  | Square kilometres |  | 0.004      
|Hectares                |  | Acres             |  | 2.471      

- 5 -

---



PRESENTATION OF INFORMATION

Austral
Pacific Energy Ltd. conducts its operations directly and through subsidiaries.
The term Austral or Company as used herein refers, unless the context
otherwise clearly requires, to Austral Pacific Energy Ltd. and all its
consolidated subsidiaries.

Unless otherwise specified, all dollar
amounts described herein are in United States currency.


Where currency conversions are
required the following rates have been used:


|                                  |  |                             |  |                                                 
|--------------------------------- |  | --------------------------- |  | ------------------------------------------------
|                                  |  | As at
  December 31,
  2007 |  | Average
  for the year ended
  December 31, 2007
|US dollars to Canadian dollars    |  | 0.9810                      |  | 1.0659                                          
|US dollars to New Zealand dollars |  | 1.2900                      |  | 1.3483                                          

All references to daily production are before
royalty (as discussed in Item 4.D  Property, Plants and Equipment), unless stated
otherwise.

All oil and natural gas reserve
information contained in this Report has been prepared and presented in
accordance with National Instrument 51-101 Standard of Disclosure for Oil and
Gas Activities (Canada). The actual oil and natural gas reserves and future
production may be greater than or less than the estimates provided in this
Report. The estimated future net revenue from the production of the disclosed
oil and natural gas reserves does not represent the fair market value of these
reserves.

BOEs may be
misleading, particularly if used in isolation. A BOE conversion ratio of 6
Mcf:1bbl is based on an energy equivalency conversion method primarily
applicable at the burner tip and does not represent a value equivalency at the
wellhead.

FORWARD LOOKING STATEMENTS

This Report
includes statements that may be deemed to be
forward-looking statements within the meaning of applicable legislation.
Other than statements of historical fact, all statements in this Report
addressing future production, reserve potential, exploration and development
activities and other contingencies are forward-looking statements. Although management believes that the expectations
expressed in such forward-looking statements are based on reasonable
assumptions, such statements are not guarantees of future performance, and
actual results or developments may differ materially from those in the
forward-looking statements, due to factors such as market prices, exploration
and development successes, continued availability of capital and financing, and
general economic, market, political or business conditions, and
including, but not limited to, the other risks and uncertainties identified
under Item 3.D - Risk Factors of this Report.

- 6 -

---



PART I

|        |                                                      
|------- | -----------------------------------------------------
|ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable

|        |                                        
|------- | ---------------------------------------
|ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable

|        |                         | 
|------- | ----------------------- | 
|ITEM 3. | KEY INFORMATION        
|        |                         | 
|A.      | Selected financial data

The selected historical
financial data presented in the table below for each of the years ended
December 31, 2007, 2006, 2005, 2004 and 2003 is derived from the audited
consolidated financial statements of Austral. The audited consolidated
financial statements of Austral for the years ended December 31, 2007 2006 and
2005 are included in this Report. The selected historical financial data for
the years ended December 31, 2005, 2004 and 2003 is derived from audited
financial statements of Austral that are not included in this Report.

All the selected financial
data presented below should be read in conjunction with Australs consolidated
financial statements and the notes thereto (Item 17) and the Operating and
Financial Review and Prospects (Item 5) of this Report.

The selected consolidated
financial data has been prepared in accordance with Canadian Generally Accepted
Accounting Principles (Canadian GAAP). Selected financial data has also been
provided under Generally Accepted Accounting Principles in the United States of
America (US GAAP) to the extent that amounts are significantly different. The
consolidated financial statements included in Item 17 in this Report are
prepared under Canadian GAAP. Included within these consolidated financial
statements in Note 26 is information about the significant differences between
Canadian and US GAAP.

- 7 -

---



AUSTRAL PACIFIC ENERGY LTD. AND SUBSIDIARY COMPANIES 
SELECTED FINANCIAL DATA AS OF AND FOR THE YEARS ENDED AS SHOWN($000s except for
share data)

|                                                                                              |  |                                   |         |                                   |  |                                   |   |                                   |        |                                   |  |        |   |  |        |  
|--------------------------------------------------------------------------------------------- |  | --------------------------------- | ------- | --------------------------------- |  | --------------------------------- | - | --------------------------------- | ------ | --------------------------------- |  | ------ | - |  | ------ | -
|                                                                                             
|Selected Consolidated Statement of Operations Data
  Amounts in accordance with Canadian GAAP
|                                                                                             
|                                                                                              |  | Year
  Ended
  December 31
  2007 |         | Year
  Ended
  December 31
  2006 |  | Year
  Ended
  December 31
  2005 |   | Year
  Ended
  December 31
  2004 |        | Year
  Ended
  December 31
  2003 | 
|Sales                                                                                         |  |                                   | 9,349   |                                   |  | 2,393                             |   |                                   | 3,417  |                                   |  | 1,469  |   |  | 708    |  
|Loss for the year                                                                             |  |                                   | (22,030 | )                                 |  | (13,407                           | ) |                                   | (5,768 | )                                 |  | (4,628 | ) |  | (1,758 | )
|                                                                                              |  |                                   |         |                                   |  |                                   |   |                                   |        |                                   |  |        |   |  |        |  
|Loss per share basic and diluted                                                              |  |                                   | (0.74   | )                                 |  | (0.57                             | ) |                                   | (0.30  | )                                 |  | (0.34  | ) |  | (0.23  | )
|                                                                                              |  |                                   |         |                                   |  |                                   |   |                                   |        |                                   |  |        |   |  |        |  
|Dividends declared per share                                                                  |  |                                   |        |                                   |  |                                  |   |                                   |       |                                   |  |       |   |  |       |  
|                                                                                              |  |                                   |         |                                   |  |                                   |   |                                   |        |                                   |  |        |   |  |        |  
|                                                                                              |  |                                   |         |                                   |  |                                   |   |                                   |        |                                   |  |        |   |  |        |  
|                                                                                              |  |                                   |         |                                   |  |                                   |   |                                   |        |                                   |  |        |   |  |        |  
|Amounts in accordance with US GAAP                                                           
|                                                                                              |  |                                   |         |                                   |  |                                   |   |                                   |        |                                   |  |        |   |  |        |  
|Net loss for the year before other income                                                     |  |                                   | (19,201 | )                                 |  | (13,611                           | ) |                                   | (6,147 | )                                 |  | (8,670 | ) |  | (2,135 | )
|Loss attributable to common shareholders                                                      |  |                                   | (19,838 | )                                 |  | (13,174                           | ) |                                   | (5,603 | )                                 |  | (8,344 | ) |  | (2,124 | )
|Loss for the year                                                                             |  |                                   | (19,576 | )                                 |  | (13,174                           | ) |                                   | (5,603 | )                                 |  | (8,344 | ) |  | (2,124 | )
|                                                                                              |  |                                   |         |                                   |  |                                   |   |                                   |        |                                   |  |        |   |  |        |  
|Comprehensive income / (loss)                                                                 |  |                                   | (19,576 | )                                 |  | (13,174                           | ) |                                   | (5,603 | )                                 |  | (8,344 | ) |  | (318   | )
|                                                                                              |  |                                   |         |                                   |  |                                   |   |                                   |        |                                   |  |        |   |  |        |  
|Loss per share basic and diluted                                                              |  |                                   | (0.66   | )                                 |  | (0.56                             | ) |                                   | (0.29  | )                                 |  | (0.61  | ) |  | (0.27  | )
|                                                                                              |  |                                   |         |                                   |  |                                   |   |                                   |        |                                   |  |        |   |  |        |  

|                                                                                    |  |                            |         |                            |  |                            |   |                            |         |                            |  |         |   |  |         |  
|----------------------------------------------------------------------------------- |  | -------------------------- | ------- | -------------------------- |  | -------------------------- | - | -------------------------- | ------- | -------------------------- |  | ------- | - |  | ------- | -
|                                                                                   
|Selected Consolidated Balance Sheet Data
  Amounts in accordance with Canadian GAAP
|                                                                                   
|                                                                                    |  | As at
  December 31
  2007 |         | As at
  December 31
  2006 |  | As at
  December 31
  2005 |   | As at
  December 31
  2004 |         | As at
  December 31
  2003 | 
|Current Assets                                                                      |  |                            | 19,003  |                            |  | 9,749                      |   |                            | 16,779  |                            |  | 12,234  |   |  | 3,381   |  
|Current liabilities                                                                 |  |                            | 48,986  |                            |  | 11,230                     |   |                            | 1,942   |                            |  | 402     |   |  | 1,457   |  
|Long-term liabilities                                                               |  |                            | 17,036  |                            |  | 12,668                     |   |                            | 1,593   |                            |  | 1,481   |   |  | 1,099   |  
|Share Capital                                                                       |  |                            | 55,914  |                            |  | 50,046                     |   |                            | 43,499  |                            |  | 32,683  |   |  | 20,478  |  
|Accumulated deficit                                                                 |  |                            | (63,119 | )                          |  | (41,089                    | ) |                            | (27,682 | )                          |  | (21,914 | ) |  | (17,285 | )
|                                                                                    |  |                            |         |                            |  |                            |   |                            |         |                            |  |         |   |  |         |  
|Shareholders equity                                                                |  |                            | (3,290  | )                          |  | 12,096                     |   |                            | 16,841  |                            |  | 11,131  |   |  | 3,610   |  
|                                                                                    |  |                            |         |                            |  |                            |   |                            |         |                            |  |         |   |  |         |  
|                                                                                    |  |                            |         |                            |  |                            |   |                            |         |                            |  |         |   |  |         |  
|Amounts in accordance with US GAAP                                                 
|Current Assets                                                                      |  |                            | 19,003  |                            |  | 9,749                      |   |                            | 16,779  |                            |  | 12,234  |   |  | 3,381   |  
|Total assets                                                                        |  |                            | 62,732  |                            |  | 35,994                     |   |                            | 20,375  |                            |  | 13,014  |   |  | 6,166   |  
|Current liabilities                                                                 |  |                            | 48,764  |                            |  | 11,230                     |   |                            | 1,989   |                            |  | 449     |   |  | 1,504   |  
|Long-term liabilities                                                               |  |                            | 5,533   |                            |  | 12,668                     |   |                            | 1,593   |                            |  | 2,442   |   |  | 1,105   |  
|Preferred Shares                                                                    |  |                            | 9,945   |                            |  |                           |   |                            |        |                            |  |        |   |  |        |  
|Paid in capital                                                                     |  |                            | 65,593  |                            |  | 59,365                     |   |                            | 50,942  |                            |  | 38,669  |   |  | 23,758  |  
|Accumulated deficit                                                                 |  |                            | (67,120 | )                          |  | (47,322                    | ) |                            | (34,148 | )                          |  | (28,546 | ) |  | (20,201 | )
|                                                                                    |  |                            |         |                            |  |                            |   |                            |         |                            |  |         |   |  |         |  
|Shareholders equity                                                                |  |                            | (1,510  | )                          |  | 12,097                     |   |                            | 16,794  |                            |  | 10,123  |   |  | 3,557   |  
|                                                                                    |  |                            |         |                            |  |                            |   |                            |         |                            |  |         |   |  |         |  

- 8 -

---



|               |                                          
|-------------- | -----------------------------------------
|B.             | Capitalization and indebtedness          
|               |                                          
|Not applicable
|              
|C.             | Reasons for the offer and use of proceeds
|               |                                          
|Not applicable
|              
|D.             | Risk factors                             

The common shares of the
Company must be considered to be a speculative investment due to a number of
factors primarily related to the Companys involvement in the exploration,
development and production of oil and natural gas, and its present stage of
development. There can be no assurance that the Companys shares will increase
or even maintain their value. Prospective purchasers of the Companys shares
should consider the following:

Exploration, Development and Production Risks

The Companys future oil and
natural gas reserves, and production and cash flows to be derived therefrom,
are highly dependent on the Companys success in exploiting its current
reserves base and acquiring or discovering additional reserves. Without the
addition of reserves through exploration, acquisition or development
activities, the Companys reserves and production will decline over time as
reserves are depleted.

There is no assurance that
the Companys future exploration and development efforts will result in the
discovery or development of additional commercial accumulations of oil and
natural gas. There is also no assurance that the Company will be able to locate
satisfactory properties for acquisition or participation. Moreover, if such
acquisitions or participations are identified, the Company may determine that
current markets, terms of acquisition and participation or pricing conditions
make such acquisitions or participations uneconomic.

Future oil and gas
exploration may involve unprofitable efforts, not only from dry wells, but from
wells that are productive but do not produce sufficient net revenues to return
a profit after drilling, operating and other costs. Completion of a well does
not assure a profit on the investment, or recovery of drilling, completion and
operating costs. Geological conditions are variable and of limited
predictability. Even if production is commenced from a well or field,
production will inevitably decline over the course of time, reducing the
operating profitability of the Company. The amounts attributed to properties in
the Companys financial statements represent acquisition and exploration
expenditures only, and may well not reflect realizable value.

Development of oil and gas
production facilities is subject to risks which may adversely impact on the
commercial viability of a project, as the realized revenues from the project
may be less than anticipated, and the capital and operating costs may be
greater than anticipated. The risks to revenue include the development wells
not producing predicted rates of oil and gas production, decreases in the
market prices of oil and gas, and increased processing, storage and transportation
costs.

Operating Hazards and Environmental Liabilities

All phases of the oil and
natural gas business present environmental risks and hazards and are subject to
environmental regulation pursuant to a variety of local and international conventions,
laws and regulations, as set out in more detail in Item 4.D  Property, Plants
and Equipment under the heading Environmental
Risks & Hazards.

Drilling hazards or
environmental damage can greatly increase the cost of operations, and various
field operating conditions may adversely affect the production from successful
wells. These conditions include, but are not limited to, delays in obtaining
governmental approvals or consents, shut-ins of connected wells resulting from
extreme weather conditions, encountering unexpected formations or pressures,
premature decline of or invasion of water into reservoirs, blow-outs,
cratering, sour gas releases, fires and spills, insufficient storage or
transportation capacity, or other geological, infrastructure and mechanical
conditions.

- 9 -

---



While close well supervision
and effective maintenance operations can contribute to maximizing production
rates and recoveries over time, and cash flow and revenue forecasts attempt to
realistically estimate production declines, production declines from normal
field operating conditions cannot be eliminated and can be expected to
adversely affect the long term continuity of revenue and cash flow levels to
varying degrees.

Environmental legislation is
evolving in a manner expected to result in stricter standards and enforcement,
larger fines and liability and potentially increased capital expenditures and
operating costs. No assurance can be given that environmental laws will not
result in a curtailment of production or a material increase in the costs of
production, development or exploration activities or otherwise adversely affect
the Companys financial condition, results of operations or prospects.

Management is not aware of
any present material liability related to environmental matters. However, the
Company may, in the future, be subject to liability for environmental offences
of which it is presently unaware.

Carbon Emissions Regime

The New Zealand government is
a signatory to the Kyoto protocol and in order to meet the
requirements of this protocol it is in the process of implementingClimate
Change initiatives. A proposed bill is now before the NZ Parliament and
under going the consultation process
to introducea cap and tradeemissions trading
scheme.Austral, along with other members of the oil
and gas exploration and production community is involved in the government
consultation process. Austral is also assessing the potential effect on its
business of the proposed government initiatives. More detail on the likely
risks to the Companys business and the Companys assessment and strategies in
relation thereto, are set out in Item 4.D  Property, Plants and Equipment
under the heading Carbon Emissions Regime.

Oil and Natural Gas Markets

The operations and earnings
of the Company are affected by local, regional and global events or conditions
that affect supply and demand for oil and natural gas. These events or
conditions are generally not predictable and include, among other things, the
development of new supply sources, supply disruptions, weather, international
political events, technological advances, restricted access to infrastructure
(pipelines, storage, shipping or load-out facilities, etc) and the
competitiveness of alternative energy sources or product substitutes.

Both oil and natural gas
prices are subject to fluctuation. The economics of producing from some wells
may change as a result of lower prices. Management might also elect not to
produce from certain wells at lower prices, thereby reducing the volumes
produced by the Company. These factors could result in a material decrease in
the Companys net production revenue, which in turn may cause a reduction in
its oil and gas acquisition and development activities.

Management has established a
policy to partially hedge the effect of fluctuating oil and natural gas prices,
in order to fix the price that the Company will receive on a portion of its
production for a specified period of time.

Competitive Conditions

The oil and gas industry is
highly competitive. The Company actively competes for prospect acquisitions,
exploration permits and licences, drilling equipment and services, access to
production infrastructure, and employment of skilled industry personnel, and
for capital to finance such activities, with a substantial number of other oil
and gas companies, many of which have significantly greater financial and
personnel resources than the Company. The Companys competitors include major
integrated oil and natural gas companies and numerous other independent oil and
natural gas companies and individual producers and operators.

Certain of the Companys
customers and potential customers are themselves exploring for oil and natural
gas, and the results of such exploration efforts could affect the Companys
ability to sell or supply oil or gas to these customers in the future.

The Companys ability to
successfully bid on and acquire additional property rights, to discover
reserves, to participate in drilling opportunities and to identify and enter
into commercial arrangements with customers will be dependent upon developing
and maintaining close working relationships with industry participants and
joint venture parties and its ability to select and evaluate suitable
properties and to consummate transactions in a highly competitive environment.

- 10 -

---



Uncertainty of Reserves Figures

Actual production
expenditures, revenues and reserves will likely vary from those estimated, and
these variances may be material. Estimates of oil and gas reserves are interpreted
from geological, petrophysical and reservoir engineering data. Reservoir
engineering is a subjective process of estimating underground accumulations
that cannot be measured precisely, and the accuracy of any estimate is a
function of the quality of available data and of engineering and geological
interpretation and judgment. Such interpretations are inherently uncertain, as
are the projections of future rates of production and timing and level of
development expenditures. Factors such as historical production from the area
compared with production from other producing areas, assumed effects of
governmental regulations, assumptions of future oil and gas prices, future
operating costs, development costs and remedial and work-over costs, will
affect the estimates of economically recoverable quantities and of future net
cash flow. Any significant variance in the assumptions could materially affect
the estimated quantity and value of reserves. The Companys reserves are
evaluated by an independent reservoir engineering firm each year.

Funding Requirements

Oil exploration involves a
high degree of technical and commercial risk and is characterized by a
continuous need for fresh capital. Management seeks to minimise and spread this
risk by entering into joint ventures for oil exploration projects with other
companies, and by participating in properties exhibiting a range of risk
profiles, thereby reducing its cost exposure to any one project. The
development of any reserves found on the Companys exploration properties may
depend upon the Companys ability to obtain further financing through
farming-out part of its interest in a particular project, debt financing or
equity financing.

There is no assurance that
market conditions will continue to permit the Company to raise funds if
required, or that the Company will be able to enter into agreements with third
parties to fund permit obligations or be able to renegotiate such obligations
with the relevant government agency. The Company faces competition from other
oil companies for oil and gas properties, and investor dollars.

If the Companys cash flow
from operations is not sufficient to satisfy its capital expenditure
requirements and existing debt obligations, there can be no assurance that
additional debt or equity financing will be available to meet these
requirements. If the Company is unable to fund its permit obligations by
additional debt or equity financing, or by farm-out agreements or renegotiating
such obligations, the Company may be unable to carry out its plan of operations
and may be forced to abandon or forfeit some of its permit interests, or reduce
or terminate its operations.

Sources of Liquidity and Ability to Continue as a Going
Concern

For the year ended December
31, 2007, the Company had a net loss of $22,030,249 and accumulated deficit of
$63,118,912. The Company also had a working capital deficit of $29,982,748 and
a shareholders deficit of $3,290,102 as at December 31, 2007. In addition the
Company has also been unable to generate net cash from operating activities for
each of the years in the three year period ended December 31, 2007. For the
five months ending May 31, 2008, the Company had a net loss of $8,212,599 and
accumulated deficit of $71,331,511. The Company also had a working capital
deficit of $20,625,713 and a shareholders equity of $4,361,755 as at May 31,
2008. The Companys cash balances and working capital are not sufficient to
fund all of its obligations with respect to its ongoing work program
requirements related to the exploration permits (see Item 5B Material
Commitments for Capital Expenditure). In addition, the Company is in breach of
several covenants relating to its Investec Bank (Australia) Ltd (Investec)
loan facility, following delays in completing the project in accordance with
established timelines. Accordingly, the loan facility and hedging arrangements
have been disclosed as current liabilities in Item 17  2007 Consolidated
Financial Statements. The factors raise substantial doubt about the Companys ability
to continue as a going concern for a reasonable period of time.

Managements plans for
securing sufficient sources of liquidity include the following:

|  |                                                                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Issuance of additional
  common shares in a private placement in order to raise $15,000,000. As
  further described in Item 17, Note 25(c) of the 2007 Consolidated Financial
  Statements, the Company completed this private placement on February 28,
  2008;           
|  |                                                                                                                                                                                                                                                                            
| | Sale of its interests in
  Stanley (PRL 4) and in PRL 5 to a subsidiary of Horizon Oil Limited (ASX:
  HZN) for $3.5 million, which transaction completed on May 30, 2008, although
  legal transfer of the licences remains subject to receipt of governmental
  approval;
|  |                                                                                                                                                                                                                                                                            
| | Sale of its
  interests in Douglas (PPL 235) and in PPL 261 to a subsidiary of Rift Oil plc
  (AIM: RIFT) for $5                                                                                                                                                           

- 11 -

---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  | million,
  initial completion of such transaction occurring on May 29, 2008, with
  further payments due within 3 months, and within 12 months or earlier upon
  receipt of governmental approval of the legal transfers of the licences;                                                                                                                                                                                                                                                                                  
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Farm-out of an 80% interest in PEP 38524 to Australian
  Worldwide Exploration Ltd. (ASX: AWE) with effect from May 20, 2008. In
  return, AWE has undertaken to fully fund acquisition of some 350km of 2D
  seismic within the permit. The farm-out is subject to approval of a revised
  work programme by the Ministry of Economic Development                                                                                                                                                                         
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Rectifying
  the covenant breaches relating to its loan facility with Investec. A key to
  rectifying the breach is the drilling of at least two further wells to
  satisfy the completion test under the facility. The completion test
  requires certain proven and probable reserves and associated production rates
  to be achieved, together with certain related forward looking financial
  ratios. The Cheal A6 well spudded on June 10, 2008, with Cheal A7 well due to
  commence approximately July 3, 2008
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | A mix of
  further capital raising and/or sales of joint venture interests.                                                                                                                                                                                                                                                                                                                                                                                                                                                

The cash flow
forecast prepared by management leads it to conclude that the Company can
continue to meet its ongoing obligations beyond its 2008 fiscal year. This
forecast assumes the Companys on-going production is sustained; its two well
Cheal drilling programme is successful as to reserves and production rates;
sustained oil prices at or about $90 per barrel; normal expenditure; a mix of
further capital raising and/or asset sales, and the Investec loan facility
being restructured with full repayment by year end from revenue generation and
further equity injection. The Company and Investec have agreed, in the interim,
to restructure the facility, with the key financial terms requiring a principal
payment of US$4.2 million on March 31, 2008 (reflecting the scheduled US$2.2
million due; and the further US$2 million paid from the restricted cash held in
respect of the loan facility and applied in inverse order of maturity), since
paid. In addition, a further US$3.5 million was to be paid on completion of the
announced sale of the PNG Stanley (PRL 4) and PRL 5 assets (to be applied as
$2.05 million against the June 30 scheduled principal due; and the balance of
US$1.45 million applied in inverse order of maturity), since paid on May 30,
2008. The crude oil forward sales contracts were closed out on May 27, 2008
funded by a short term loan of $17,847,000 from Investec (repayable on December
15, 2008). It has been further agreed with Investec that any cash in excess of
operating requirements will be used to reduce principal outstanding. The
interest rate margin has been increased by an additional 2% on the total
principal outstanding for the period January 31 to December 15, 2008 inclusive.
In addition, the Company issued to Investec 1,056,338 shares to the value of
US$750,000 (based on the Austral share price at March 19, 2008), on May 23,
2008. There are several commercial and administrative conditions which must
also be complied with.

The risk to
the Company of not meeting the restructuring plan is that Investec could call
for the loan to be repaid immediately and potentially being unable to continue
as a going concern.

Currency Fluctuations and Foreign Exchange

The Companys
practice is to raise its equity in United States dollars. However, when the
Company listed on the New Zealand Stock Exchange, equity was also raised in New
Zealand dollars. The Company holds cash denominated in both United States and
New Zealand currency. The Company has established a policy to hedge its
exposure to foreign currency exchange rate risk. See discussion at Item 5.A
under the heading Foreign Currency Fluctuations.

Insurance

The Companys
involvement in the exploration for and development of oil and gas properties
may result in the Company becoming subject to liability for pollution, blow
outs, property damage, personal injury or other hazards. Although the Company
has obtained insurance in accordance with industry standards to address such
risks, such insurance has limitations on liability that may not be sufficient
to cover the full extent of such liabilities. In addition, such risks may not
be insurable in all circumstances, or management may elect, in certain
circumstances, not to obtain insurance to deal with specific risks due to the
high premiums associated with such insurance, or for other reasons. The payment
of such uninsured liabilities would reduce the funds available to the Company.
The occurrence of a significant event that the Company is not fully insured
against, or the insolvency of the insurer of such event, could have a material
adverse effect on the Companys financial position, results of operations or
prospects.

No Assurance of Earnings

The Company
currently has one oil and gas property in production. The Company has an
accumulated deficit

- 12 -

---



from its
historical operating results and there is no assurance that the business of the
Company will be profitable in the future. Management cannot guarantee that the
Company will continue generating revenues in the future. A failure to generate
revenues may cause the Company to eventually go out of business. The Company
has not paid dividends at any time in its history to date and there is no
assurance that the Company will pay a dividend at any time in the future.

Reliance on Operators and Key Employees

To the extent
that the Company is not the operator of its oil and gas properties, the Company
depends on third party operators for the timing of activities related to such
properties and may be largely unable to direct or control the activities of the
operators, except through joint venture participation and voting.

In addition,
the success of the Company largely depends upon the performance of its key
employees and on the advice and project management skills of various consulting
geologists, geophysicists and engineers retained by the Company from time to
time. Although there are other personnel available in the sector who could replace
Company exploration experts, there is likely to be some difficulty in finding
immediate replacements of suitable calibre.

Political and Country Risk

The Companys
oil and gas interests are located in New Zealand and, until May 30, 2008, in
Papua New Guinea. Papua New Guinea may be considered to be a developing country
and hence has a higher risk than New Zealand of becoming politically and/or
economically unstable in the future. Such instability, and any changes in
regulations or shifts in political condition, are beyond the Companys control
and may adversely affect its business.

Exploration
and development activities in politically or economically unstable countries
may require protracted negotiations with host governments, national oil
companies and third parties and are frequently subject to economic and
political considerations, such as taxation, nationalisation, expropriation,
inflation, currency fluctuations, increased regulation and approval
requirements or timelines, governmental regulation and the risk of actions by
lawless factions, any of which could adversely affect the economics of
exploration or development projects.

Infrastructure
development in Papua New Guinea is limited. In addition, the Companys
properties were located in remote areas, which may prove difficult or
time-consuming to access. These factors may affect the Companys ability to
explore and develop its properties, and to store and transport its oil and gas
production.

Labour Requirements

The Company
may be required to hire and train local workers in its petroleum and natural
gas operations. Some of these workers may be organised into labour unions. Any
strike activity or labour unrest could adversely affect the Companys ongoing
operations and its ability to explore for, produce and market its oil and gas
production.

Regulatory Requirements

The current
and future operations of the Company, including development activities and
commencement of production on its properties, require permits, licences and
renewals of these from various foreign and local governmental authorities, and
are governed by laws and regulations relating to oil and gas exploration and
development, prices, royalties, allowable production, import and export of
hydrocarbons, occupational health, waste disposal, toxic substances, land
access and use, permit conditions, environmental protection (including carbon
emissions restrictions) as well as those regulations which relate to all
companies operating in the relevant jurisdictions such as relating to corporate
governance, withdrawal of capital from a country in which the Company is
operating, taxation, and employment laws.

Management
believes that the Company currently holds or has applied for all necessary
licences and permits to carry on the activities which it is currently
conducting under applicable laws and regulations in respect of its properties,
and also believes that the Company is complying in all material respects with
the terms of such licences and permits. However, the Companys ability to obtain,
sustain or renew such licences and permits on acceptable terms is subject to
changes in regulations and policies and the discretion of the applicable
governments.

- 13 -

---



Failure to
comply with all applicable laws, regulations and licensing and permitting
requirements may result in enforcement actions, including orders to cease or
curtail operations, and may include corrective measures requiring capital
expenditures, installation of additional equipment, or remedial actions.
Violations of applicable laws or regulations may result in imposition of civil
or criminal fines or penalties. Third parties who suffer loss or damage due to
oil and gas operations may be entitled to claim compensation. Amendments to
current laws, regulations, licences and permits governing operations and
activities of oil and gas companies, or more stringent implementation of these,
could have a material adverse impact on the Company and could cause increases
in capital expenditures or production costs, reduction in levels of production
at producing properties, require abandonment of properties, or delay
development of new properties.

Management
believes that the Companys operations comply with all applicable legislation
and regulations and that the existence of such legislation and regulations have
no more restrictive effect on the Companys method of operations than on
similar companies in the industry.

Title Matters

Management has
investigated the rights to explore the various oil and gas properties the
Company holds or proposes to acquire or participate in and, to the best of its
knowledge, those rights are in good standing.

No assurance
can be given that applicable governments will not revoke, or significantly
alter the conditions of, any particular exploration and development
authorisation or that such exploration and development authorisation will not
be challenged.

In all cases,
the terms and conditions of the permit or licence granting the right to the
Company to explore for, and develop, hydrocarbons, prescribe a work programme
and the date or dates by which such work programme must be done. Varying
circumstances, including the financial resources available to the Company, the
inability to secure equipment when required, and reliance on third party
operators in respect of its permits and licences, may result in the failure to
satisfy the terms and conditions of a permit or licence and result in the
complete loss of the interest in the permit or licence without compensation to
the Company. Such terms and conditions may be renegotiated with applicable
regulatory authorities, but there is no assurance that the applicable authority
will agree to the renegotiation offer.

The Company
does not have sole control over the future course of development in most of its
properties. Such property interests are subject to joint venture agreements
which can give rise to disputes as to geological interpretation or commercial
imperatives with other parties who are financially interested in the property.

The Company
participates in its permits or licences with other industry participants, some
of whom have access to greater or lesser resources from which to meet their
joint venture capital commitments. If the Company is unable to meet its
commitments, the other joint venture participants may assume some or all of the
Companys deficiency and thereby assume a pro-rata portion of the Companys
interest in any production from the joint venture area. If another participant
in a joint venture, which participant has fewer resources than the Company, is
unable to meet its commitments, it may delay or veto exploration or development
plans which it cannot afford, or it might default on its commitments. This may
delay the Companys desired exploration or development programme and/or lead to
the Company and other participants assuming all or some of that entitys
interest, and therefore meeting a pro-rata share of its required contributions
(as well as receiving a pro-rata share of any production).

General claims
by native peoples in New Zealand and Papua New Guinea may adversely affect the
rights or operations of the Company, although the Company has not received any
notice of any direct challenge to any of the Companys titles or tenures.

Non-US Assets and Management

The Company is
incorporated under the laws of British Columbia, Canada, and the majority of
the Companys directors and officers are residents of countries other than the
United States. Substantially all of the assets of the Company are located
outside North America. Consequently, it may be difficult for United States
investors to enforce in the United States judgments of United States courts
against assets of the Company. Furthermore, it may be difficult for investors
to enforce judgments of the U.S. courts based on civil liability against the
Companys non-U.S. resident officers or directors.

- 14 -

---



Public Market Risks

The Companys
shares are relatively illiquid in that they do not trade large volumes relative
to other public companies. There can be no assurance that a stable market for
the Companys common shares will be maintained. If the Company fails to remain
current in its filings with the SEC, Canadian and New Zealand regulatory
authorities, the Company may lose any one or more of its AMEX, Canadian and New
Zealand listings, which would adversely affect the liquidity of an investment
in the Company.

Dilution, Change of Control

The Companys
Articles authorise the issuance of an unlimited number of shares of common and
preferred stock. The Companys Board of Directors has the legal power to issue
any number of further shares without stockholder approval (although the
policies of the TSX-V and AMEX require shareholders approval in certain
situations). The Companys Board of Directors may issue shares to acquire
further capital, in order to carry out its intended operations, to expand its
current operations, or to provide additional financing for future activities.
The issuance of any such shares may result in a reduction of the book value or
market price of the outstanding shares of the Companys common shares. If the
Company does issue any such additional shares, such issuance will also cause a
reduction in the proportionate ownership and voting power of all existing
shareholders.

Further, any
such issuance may result in a change of control of the Company. TSX-V policies
require the Company to obtain shareholder approval of any transaction which
will result in the creation of a new control person (as defined).

Conflicts of Interest

Interests in
some petroleum properties have been acquired from or in conjunction with, or
interests sold to, TAG Oil Ltd. with which the Company had a common director
until end January 2006 and has certain common principal shareholders. In
addition, the Company owns shares in Rift Oil plc (approximately 0.21% of
issued share capital) to whom it transferred an interest in a Papua New Guinea
exploration licence under a farm-out arrangement in 2005. The Chief Executive
Officer of Rift Oil plc is the spouse of the Companys former Chief Executive
Officer, Dr. David Bennett, who is now a director of TAG and of Rift.

The Companys
former chairman and a current director of the Company, Mr. David Newman, serves
as a director and Chairman of Infratil Limited, the parent company of Infratil
Gas Limited, a greater than 10% shareholder of the Company. He is not employed
by Infratil or the Company, is remunerated only in his capacity as a director
of each company, and serves as chairman in a part-time capacity of Infratil.
The Board has determined that he does not have any material relationship with
the Company which might interfere with the exercise of his independent
judgement. He does not take part in discussions nor vote in relation to matters
involving Infratils equity participation in the Company.

One of the Companys
directors, Mr. Bernhard Zinkhofer, provides legal advice to the Company in his
capacity as a partner of the Companys Canadian legal advisors, Lang Michener
LLP.

Certain of the
directors of the Company are or were directors and/or officers of other
corporations engaged in the petroleum exploration and development or related
industries. It is possible that conflicts of interest may arise between their
duties as director and/or officer of the other companies, and as director or
officer of the Company. The percentage participation of the Company and any
other company in a property is determined by the Board of Directors of each
such company independently, using the best business judgment of the Board.

Under the
Companys Articles and the relevant legislation, any such conflict of interest
is required to be disclosed and any contract in which a director or officer has
a material interest must be referred to the Board of Directors for approval,
and the interested director will not vote on any resolution giving such
approval. The Company requires confidentiality obligations from all officers,
employees and consultants.

Passive Foreign Investment Company
Considerations

Management
believes that in past fiscal years the Company was a Passive Foreign Investment
Company (PFIC), as that term is defined in Section 1297 of the Internal
Revenue Code of 1986, as amended. Consequently, this classification may result
in adverse tax consequences for U.S. holders of the Companys shares during
those fiscal years.

- 15 -

---



U.S.
shareholders are urged to consult their own tax advisors concerning the
potential application of the PFIC rules to your ownership and disposition of
the Companys shares.

|        |                             
|------- | ----------------------------
|ITEM 4. | INFORMATION
  ON THE COMPANY

A. History and Development of the Company

The Companys
legal and commercial name is Austral Pacific Energy Ltd.

The Company
was incorporated on July 31, 1979 as Pryme Energy Resources Ltd. in British
Columbia, Canada under the Company Act (British Columbia, Canada), and has
operated continuously since that time. Initially, varied businesses were not
successful and the Company was reorganized twice. In April 1995, control of the
Company was acquired by Mr. Alex Guidi, who was a member of the board of
directors until 2001 and the principal shareholder of the Company from that
time until December 2003.

In May 1995,
the name of the Company was changed to Indo-Pacific Energy Ltd. The Company
began to acquire its current petroleum properties in 1996. The Company was
continued out of British Columbia into the jurisdiction of the Yukon in Canada
on September 25, 1997, and operated under the Business Corporations Act (Yukon)
until October 16, 2006 when it was continued back into British Columbia. The
Company is now legally domiciled in British Columbia, Canada, and operates as a
corporation under the Business Corporations Act (British Columbia) of 2004.

From 1996 to
2000, the Company acquired interests in petroleum exploration licences and
permits in New Zealand, Australia and Papua New Guinea. The Company also
acquired the outstanding shares of Ngatoro Energy Limited (formerly, Minora
Energy (New Zealand) Limited). In 2000, the Company acquired all the
exploration permit interests of Trans-Orient Petroleum Ltd (Trans-Orient),
another Canadian junior explorer. The Company had, prior to the acquisition,
already owned a partial interest in a majority of the permits acquired.

On December
31, 2003, to enable a TSX-V listing, a special meeting of shareholders was held
to change the Companys name to Austral Pacific Energy Ltd. The Company is now
listed on the TSX-V, NZSX and AMEX.

|                                                                                                                   |                                              
|------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------
|The
  Companys registered office in the province of British Columbia is care of
  its British Columbia attorneys:
|                                                                                                                  
|                                                                                                                   | Lang
  Michener LLP                          
|                                                                                                                   | 1500 Royal
  Centre, 1055 West Georgia Street
|                                                                                                                   | Vancouver,
  B.C., V6E 4N7                   
|                                                                                                                   | CANADA                                       
|                                                                                                                   |                                              
|The
  Companys principal business offices are at:                                                                
|                                                                                                                  
|                                                                                                                   | Level 3, 40
  Johnston Street                
|                                                                                                                   | Wellington
  6011                            
|                                                                                                                   | NEW ZEALAND                                  
|                                                                                                                   |                                              
|                                                                                                                   | Telephone
  Number: +644 4950888             
|                                                                                                                  
|The Company
  has no agent in the United States.                                                                  

Important Events since January 1, 2007

During fiscal
2007 and up to May 31, 2008, the Companys business has changed by the
occurrence of the following important events:

On June 19,
2008, the Company announced the placement of 11.22 million units at $0.50 each,
for total proceeds of $5.61 million. Each unit comprised one common share and
one-half share purchase warrant, each full warrant exercisable at $1.00 within
15 months after issue. The placement remains subject to regulatory approval due
in the ordinary course. The principal purpose of the placement was to provide
funds for the Companys 2008 drilling program.

On May 27,
2008, the Company announced agreement to issue 2,273,000 million shares to TAG
Oil Ltd. as part consideration in a settlement of certain disputes (see Item
8.A  Consolidated Financial Statements and Other Financial Information under
the heading Legal Proceedings).
The shares were valued at $0.69 and

- 16 -

---



were issued on
June 9, 2008.

On December
19, 2007, the Company announced the placement of 12.5 million units at $1.20
each, for total proceeds of $15 million. Each unit comprised one common share
and one share purchase warrant, exercisable at $2.25 within 12 months after
issue. The placement closed, and the shares and warrants were issued, on
February 28, 2008. The principal purpose of the placement was to provide funds
to accelerate the Cheal field development, other appraisal and development
projects and to complete the final payment for the purchase of all the shares
in International Resource Management Corporation Limited. A significant
proportion of this financing was placed with new investors. As at May 31, 2008,
none of the warrants had been exercised.

On July 6,
2007, the Company announced the placement with two accredited investors of just
under 7.7 million preferred shares at $1.30 each, for total proceeds of $10
million. The preferred shares were convertible one-for-one into Australs
common shares for a three year period and had a fixed dividend of 8% per annum.
The holders were to have voting rights on an as-if converted basis after
December 31, 2007. If not earlier converted by the holders, the preferred
shares were redeemable by the Company and retractable by the holders at par
after 3 years. The placement closed, and the shares were issued, on September
14, 2007. The principal purpose of the placement was to provide further funds
for the development of the Cheal field and for working capital purposes. The
Company has reached an agreement in principle with the holders of the preferred
shares for the exchange of the preferred shares into convertible debentures,
with effect from June 30, 2008. The convertible debentures would have similar
commercial terms, but would not be entitled to any voting rights. The exchange
will be subject to a number of conditions precedent, including the approval of
the TSX-V.

As part
consideration to the broker of the preferred share placement (Morgan Keegan),
the Company agreed to issue 150,000 two-year share purchase warrants for an
exercise price of $1.30 (with the term increasing to three years, if the
Company attains Tier 1 status on the TSX-V or moves to the Toronto Stock
Exchange during the two year term). These warrants were granted as at September
30, 2007. As at May 31, 2008, none of the warrants had been exercised.

On March 30,
2007, the Company raised $3.2 million by the issue of 2,500,000 shares at $1.30
each in a share placement. The placement closed, and the shares were issued, on
May 16, 2007. The purpose of the placement was to fund development costs of the
Cheal field, and to provide working capital. A significant proportion of this
financing was placed with existing shareholders.

In December
2006, the Company secured a $23 million loan facility for a term of 4 years at
commercial lending rates. The loan was arranged and underwritten by Investec
Bank (Australia) Limited. The principal purposes of the loan facility were to
fund the acquisition of Arrowhead Energy Limited (a privately held New
Zealand-incorporated company with interests in the permits over the Cheal and
Kahili fields and surrounding exploration acreage, in which the Company also
holds interests) and to meet ongoing costs associated with the development of
the Cheal field. $15,738,000 was drawn down as at 31 December 2006 (including
$3,000,000 which remains held in a restricted bank account as part of the
security arrangements supporting the facility). The remaining $7,262,000 was
drawn down in three instalments during 2007. Repayments during 2007 totaled
$4,350,000. The balance outstanding under the facility at December 31, 2007 was
$18,650,000. At May 31, 2008 the balance outstanding was $10,950,000.

On March 26,
2008, the Company announced that it had reached agreement with Investec to
restructure the facility, with the key financial terms being a principal
repayment of US$4.2 million on March 31, 2008 (reflecting the scheduled US$2.2
million due; with the further US$2 million paid from the restricted cash held
in respect of the loan facility and applied in inverse order of maturity),
since paid. In addition, a further US$3.5 million was to be paid after
completion of the announced sale of the PNG PRL assets (to be applied as to
$2.05 million against the June 30, 2008 scheduled principal due; and the
balance of US$1.45 million applied in inverse order of maturity), since paid.
The interest rate margin was increased by an additional 2% on the total
principal outstanding for the period January 31 to December 15, 2008 inclusive.
In addition, the Company issued to Investec 1,056,338 shares to the value of
US$750,000 (based on the Austral share price at March 19, 2008), completed May
23, 2008. There are several commercial and administrative conditions which must
also be complied with. Subsequently the Company has closed out the crude oil
forward sales contracts on May 27, 2008 realising a loss of $9.7 million in
2008, in addition to unrealized losses of $7.3 million previously recognized in
2007. This is funded by an additional short term loan from Investec
($17,847,000 repayable on December 15, 2008). It has been further agreed that
any cash in excess of operating requirements will be used to reduce principal
outstanding. The Company has also committed to full repayment of the Investec
facility by December 15, 2008, funded through ongoing revenue generation and a
planned capital raising in

- 17 -

---



Q4 2008.

Under the loan
facility agreement, in December 2006, the Company issued to Investec 2.5
million common share purchase warrants. The warrants are exercisable for 24
months at a price of $2.11 per common share. As at May 31, 2008, none of the
2.5 million warrants had been exercised.

Principal Capital Expenditures &
Divestitures

During the
last 3 fiscal years and up to May 31, 2008, the Company has made several
significant expenditures (including acquisitions) on, and some divestitures, of
its oil and gas properties in the normal course of operations, having
participated in the drilling of a number of wells, acquired a number of permit
interests by asset or share purchase or by application, and withdrawn from or
surrendered certain selected permit interests in that time, including during
2007 and early 2008:

|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                | Sale of its
  interests in Douglas (PPL 235) and in PPL 261 to a subsidiary of Rift Oil plc
  (AIM: RIFT) for $5 million, initial completion of such transaction occurring
  on May 29, 2008 ($2 million), with further payments due within 3 months ($1.5
  million), and within 12 months ($1.5 million) or earlier upon receipt of
  governmental approval of the legal transfers of the licences;             
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                | Farm-out of
  an 80% interest in PEP 38524 to Australian Worldwide Exploration Ltd. (ASX:
  AWE) with effect from May 20, 2008, although legal transfer of the 80%
  interest in the permit remains subject to receipt of governmental approval;                                                                                                                                                                  
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                | Sale of its
  interests in Stanley (PRL 4) and in PRL 5 to a subsidiary of Horizon Oil
  Limited (ASX: HZN) for $3.5 million, which transaction completed on May 30,
  2008, although legal transfer of the licences remains subject to receipt of
  governmental approval;                                                                                                                                       
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                | Agreeing to
  purchase from another joint venture participant an additional 5.1% of PEP
  38738-02 and PMP 38156-02 (Cardiff), contingent upon that partys completion
  of the purchase of an additional 15.1% interest in these permits and legal transfer
  of the permits, which transfers remain subject to receipt of governmental
  approval;                                                              
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                | Acquiring all the shares in International
  Resource Management Corporation Limited (now called Titoki Energy Limited),
  with its interests in PEP 38738-02 and PMP 38156-02 (Cardiff), in November
  2007 (total consideration of $5.5 million paid partially in cash and partly
  by the issue of 1,851,855 shares);                                                                                           
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                | Workover of the Cardiff 2A ST1 well (PMP
  38156-02; $4.7 million, 100% cost) commenced November 2007, completed January
  2008, in preparation for testing of the K3E zone, which commenced on February
  25, 2008 and continues as at report date. Costs to April 30, 2008 are $0.2
  million (100% cost);                                                                                                      
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                | Completion
  of construction and commissioning of production facilities and pipelines in
  August 2007 (as at December 31, 2007, $20.11 million, 100% cost) and further
  development in relation to the Cheal field (PMP 38156-01), including drilling
  of four additional production wells (Cheal B1, B2, B3 and B4) and completion
  of three of these wells (Cheal B1, B2 and B3) ($9.19 million, 100% cost);
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                | 2D infill seismic survey over the Stanley
  field in December 2007 (PRL 4; $1.95 million, 100% cost);                                                                                                                                                                                                                                                                                                             
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                | Drilling and
  subsequent plugging and abandonment of the Ratanui-1 well in Q1, 2007 (PEP
  38741; $1.8 million).                                                                                                                                                                                                                                                                                                 
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|During the
  remainder of 2008, material expenditures are expected to primarily be related
  to:
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                | reaching, as soon as practical, Cheal
  project completion as defined by the Loan Facility Agreement with Investec,
  including drilling at least 2 new wells within the Cheal field, in order to
  increase production to generate funds to meet our financing obligations and
  ongoing operational requirements;                                                                                               
|                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                | implementing further incremental
  production from the Cheal field and growing existing production capability;                                                                                                                                                                                                                                                                                                    

- 18 -

---



|  |                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | developing a programme for the exploration
  and exploitation of the Mt Messenger formation in the greater Cheal area;                                                                                     
|  |                                                                                                                                                                                                            
| | seeking further capital injection to
  reduce existing debt and to ensure a stable financial platform for the
  Company to develop Cheal and fund its appraisal activities and exploration
  opportunities;
|  |                                                                                                                                                                                                            
| | securing a definitive test on the K3E zone
  in the Cardiff field, and if successful, prepare plans for the development of
  that field; and                                                               
|  |                                                                                                                                                                                                            
| | actively promoting monetisation of core assets
  through the likes of drilling and producing from Kahili-2.                                                                                                

These, and the
expenditures and divestitures currently in progress, and the Companys plans to
finance these expenditures, are further detailed in Item 4.D  Property, Plants
and Equipment, and Item 5.B under the heading Material Commitments for Capital
Expenditure. A number of the forward programmes have not yet received joint
venture or governmental approval and may not necessarily proceed. Also,
depending upon the outcomes of some of these programmes, different decisions
may be reached to vary work programmes, modify or abandon them.

Public Takeovers

Management is
not aware of any public takeover offer by third parties in respect of its
shares, nor by the Company of any other companys shares, either planned or
having occurred in the last financial year, nor up to May 31, 2008.

B. Business Overview

Company Strategy

Austral
Pacific Energy Ltd., through its subsidiaries, is actively involved in the
exploration for, and development and production of, oil and natural gas, and
the acquisition of further interests in licences or permits, in New Zealand
and, until May 30, 2008, in Papua New Guinea.

The Companys
strategy to achieve growth is to acquire and invest in oil and gas properties throughout
Australasia, with a particular emphasis on New Zealands onshore Taranaki
Basin, and merge with or acquire suitable targets if the opportunity arises.
Managements principal long term objective is to grow the Company into an oil
and gas exploration, development and production company, with internally
generated oil and gas sales revenues sufficient to maintain a selective grass
roots exploration program to augment and replace produced reserves. Management
seeks additional reserves and production growth through carefully considered
acquisitions of additional oil and gas properties. The long term commercial
success of the Company depends on its ability to find, acquire, develop and
commercially produce oil and natural gas reserves.

Company
management has industry experience in many international producing areas and
has the capability to expand the scope of the Companys activities as
opportunities arise. Management seeks to select exploration and acquisition
opportunities that will promote value creation within the Company. In reviewing
all potential acquisitions, management considers the qualitative aspects of the
subject properties including risk profile, technical upside, potential reserve
life and asset quality.

The Companys
exploration policy is to acquire suitable grass roots interests, focussing on
minimizing financial exposure of the Company through effective property
portfolio management techniques including farming-out to, or joint venturing
property interests with, other industry participants, and judicious use of
lower cost exploration and development techniques, and of permit relinquishment
where warranted.

Company
management recognises the importance of maintaining good relationships with
industry, political and institutional bodies. These relationships can assist
the Company with the process of obtaining new oil and gas business
opportunities and generating future growth for the Company.

Company Properties

The Companys
properties and the Companys interests in the joint ventures related to them,
as at May 31, 2008 are summarized as follows:

- 19 -

---



NEW ZEALAND

Developed

|                            |  |                 |  |                 |              |                          |  | c                        |     |                            |  |              |   |  |              |  
|--------------------------- |  | --------------- |  | --------------- | ------------ | ------------------------ |  | ------------------------ | --- | -------------------------- |  | ------------ | - |  | ------------ | -
|Field / 
  Prospect 
  Name |  | Permit
  Number |  | Permit
  Expiry |              | Ownership
  Interest (%) |  | Gross Area (km2 (acres)) |     | Net Area
  (km2
  (acres)) | 
|                            |  |                 |  |                 |              |                          |  |                          |     |                            |  |              |   |  |              |  
|Kahili                      |  | PMP 38153 *     |  |                 | Aug 31, 2019 |                          |  | 85.00                    |     |                            |  | 5.99 (1,480  | ) |  | 5.09 (1,258  | )
|Cheal (2)                   |  | PMP 38156-01 *  |  |                 | Jul 25, 2016 |                          |  | 69.50                    |     |                            |  | 30.3 (7,487  | ) |  | 17.33 (4,283 | )
|Cardiff (2)                 |  | PMP 38156-02 *  |  |                 |              |                          |  | 44.90                    | (1) |                            |  |              |   |  |              |  
|TOTAL NZ (Developed)        |  |                 |  |                 |              |                          |  |                          |     |                            |  | 36.29 (8,967 | ) |  | 22.42 (5,541 | )

Undeveloped

|                              |  |                 |                |                 |  |                          |  |                               |        |                            |  |  |                   |   |  |                   |  
|----------------------------- |  | --------------- | -------------- | --------------- |  | ------------------------ |  | ----------------------------- | ------ | -------------------------- |  |  | ----------------- | - |  | ----------------- | -
|Field / 
  Prospect
  Name    |  | Permit
  Number |                | Permit
  Expiry |  | Ownership
  Interest (%) |  | Gross Area
  
  (km2 (acres)) |        | Net Area
  (km2
  (acres)) | 
|                              |  |                 |                |                 |  |                          |  |                               |        |                            |  |  |                   |   |  |                   |  
|Greater
  Cheal (Shallow) (2) |  |                 | PEP 38738-01 * |                 |  | Jan 14, 2010             |  |                               | 69.50  |                            |  |  | 46.51 (11,493     | ) |  | 26.6 (6,574       | )
|Greater
  Cheal (Deep) (2)    |  |                 | PEP 38738-02 * |                 |  |                          |  |                               | 44.90  | (1)                        |  |  |                   |   |  |                   |  
|Heaphy                        |  |                 | PEP 38746 *    |                 |  | Aug 7, 2012              |  |                               | 83.33  |                            |  |  | 27.01 (6,674      | ) |  | 22.51 (5,562      | )
|Winchester                    |  |                 | PEP 38748 *    |                 |  | Aug 7, 2012              |  |                               | 66.66  |                            |  |  | 32.01 (7,910      | ) |  | 21.34 (5,273      | )
|DUrville Island              |  |                 | PEP 38524      |                 |  | Mar 31, 2012             |  |                               | 100.00 | (4)                        |  |  | 2,187 (540,419    | ) |  | 2,187 (540,419    | )
|TOTAL (NZ) (Undeveloped)      |  |                 |                |                 |  |                          |  |                               |        |                            |  |  | 2,292.53 (566,496 | ) |  | 2,257.45 (557,828 | )

PAPUA NEW GUINEA

By May 30,
2008, all PNG licences had been sold, although legal transfers to the
purchasers await receipt of governmental approval.

Undeveloped

|                            |  |                 |     |                 |              |                              |  |                            |  |                            |                  |   |  |                   |  
|--------------------------- |  | --------------- | --- | --------------- | ------------ | ---------------------------- |  | -------------------------- |  | -------------------------- | ---------------- | - |  | ----------------- | -
|Field / 
  Prospect 
  Name |  | Permit
  Number |     | Permit
  Expiry |              | Ownership 
  Interest 
  (%) |  | Gross Area
  (km2 (acres)) |  | Net Area
  (km2
  (acres)) |                 
|                            |  |                 |     |                 |              |                              |  |                            |  |                            |                 
|Douglas                     |  | PPL 235         | (5) |                 | Aug 29, 2009 |                              |  | 35.00                      |  |                            | 2910 (719,076    | ) |  | 1,018 (251,676    | )
|                            |  | PPL 261         | (5) |                 | Nov 23, 2012 |                              |  | 50.00                      |  |                            | 4200 (1,037,841  | ) |  | 2,100 (518,921    | )
|Stanley                     |  | PRL 4           | (3) |                 | Aug 31, 2010 |                              |  | 28.92                      |  |                            | 340 (84,016      | ) |  | 98.33 (24,297     | )
|Ketu,
  Elevala             |  | PRL 5           | (3) |                 | Feb 14, 2010 |                              |  | 10.712                     |  |                            | 770 (190,271     | ) |  | 82.48 (20,382     | )
|TOTAL (PNG) (Undeveloped)   |  |                 |     |                 |              |                              |  |                            |  |                            | 8,220 (2,031,204 | ) |  | 3,299.31 (815,276 | )

- 20 -

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   | The Company is the operator
  of these permits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(1) | Due to the acquisition of
  International Resource Management Corporation Ltd in November 2007, the
  Company increased its percentage interest from 25.1% to 44.9% effective
  November 2007. The Company has entered into an agreement to purchase from
  another joint venture participant an additional 5.1% interest, contingent
  upon completion by that party of the purchase of a further 15.1% interest in
  these permits and legal transfer of the permits. Completion of that purchase
  has occurred but the transfers remains subject to governmental approval.
  Accordingly the Companys interest is likely to increase by a further 5.1%,
  after report date.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(2) | The Company holds different
  percentage net interests in each of two joint ventures over the same permit
  area, which area is divided stratigraphically between the two permits. The
  Company uses an average net percentage of 57.2% to approximate net interest.
  Although Cardiff is not yet Developed, the permit area is Developed via the
  Cheal Field wells, and therefore the entire permit area is treated by the
  Company as Developed.                                                                                                                                                                                                                          
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) | The Company assigned
  operatorship of PRL 4 to InterOil, by agreement with the joint venture
  parties, with effect from March 3, 2008, and agreed to sell its interests in PRLs
  4 & 5 to another joint venture participant, which sale completed on May
  30, 2008, although legal transfer of the licences remains subject to final
  governmental approval.                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(4) | The
  Company has farmed-out an 80% interest in, and transferred operatorship of,
  this permit with effect from May 20, 2008, but legal transfer of the interest
  remains subject to receipt of governmental approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|(5) | On
  May 26, 2008, the Company announced it has agreed to sell PPLs 235 & 261
  to its joint venture participant in those permits, initial completion of
  which sale occurred on May 29, 2008. The sale is subject to further payments
  due and receipt of governmental approval of the transfer of the licences.                                                                                                                                                                                                                                                                                                                                                             

PEPs 38766 and
38258 (New Zealand) were surrendered during 2007, after an analysis of the Companys prospects
inventory and forward plans. PEP 38745 expired during 2007, at the end of its
second 5-year term. PEPs 38765 and 38741 (New Zealand) were surrendered in February 2008, after
further assessment of the prospects, exploration risks and financial
commitments required in each permit area.

Where its
ownership interest in a property is less than 100%, this is because the
Company holds its interests through a joint venture with one or more other
industry participants. Substantially all of the Companys exploration and
development activities are conducted jointly with third parties under joint
venture agreements. Joint venture agreements are considered ordinary course
contracts and hence are not attached hereto as exhibits. The terms of the joint
venture agreements generally provide that the Company must bear its pro rata
share of exploration and development costs and is entitled to that share of
production income or proceeds of sale of the property. If a participant in a
joint venture fails to pay its share of joint venture approved costs, it will
be subject to dilution of its interest in the joint venture, and hence in the
permit. In certain events the Company, like any other participant in the joint
venture, can lose its entire interests in the joint venture (and hence in the
property) for failure to pay its share of costs or for material breaches of the
joint venture agreement.

Companys History of Business and Operations

KAHILI FIELD

In the Companys New Zealand permit PEP 38736, the Kahili-1B sidetrack
well, drilled in November 2002, encountered a 115 feet gross hydrocarbon column
in the Tariki sandstone. Analysis of pressure data from flow testing carried
out on the uppermost 50 feet of this zone indicates sufficient gas-condensate
reserves to justify development. A review of the development options available
was completed during 2003.

In April 2003, a gas prepayment agreement was entered into with a New
Zealand company, NGC New Zealand Limited (NGC, now called Vector), whereby NGC
provided $1,550,400 towards the Companys ongoing exploration programs. In
return, NGC will receive the first $1,550,400 of gas supplied by the Company to
NGC without payment, under contracts to be negotiated at then prevailing market
rates. The Company must negotiate in the first instance with NGC, and if no
contract is entered into within a certain time period after notification, the
Company is free to seek other markets for the gas. If the amount is not
discharged through gas sales to NGC over a ten year period, it must either be
repaid by the Company or may be converted into share equity in one of the
Companys New Zealand subsidiaries.

In January 2004, a gas sales agreement was signed with NGC for the
Kahili gas-condensate field (PEP 38736, now covered by mining permit PMP 38153)
in the onshore Taranaki Basin, New Zealand. NGC

- 21 -

---



constructed, owned and operated a separation plant to process the raw
well stream. NGC also installed 12 km of pipelines to connect Kahili gas to the
existing NGC pipeline infrastructure. The Kahili field was
commissioned in August 2004. After initial flow, production declined rapidly,
and the well was shut-in during November 2004. A different well performance to
that recorded in the May 2003 production test (on which field development was
based) is still not understood; but it is unlikely this well will produce
again; and the field reserve estimate and financial statement value has been
written down to zero, following an independent assessment. However, a Kahili-2
well placed higher on the mapped structure is being considered by the joint
venture parties, and, subject to securing a farm-in participant or funding, is
planned to be drilled in 2008. This may re-establish production from the field.
See Item 17 Note 20 Prepaid Gas Agreement.

CHEAL FIELD

PEP38738 was
acquired by the Company in October 2002, in return for the grant of a 25% net
profit royalty. During
2003, the Company purchased the net profit royalties back, through its
acquisition of all the permit interests of an Australian company, Horizon Oil
NL, in several onshore Taranaki (New Zealand) permits and all of the shares in
Totara Energy Limited (formerly Bligh Oil & Minerals NZ Limited), which
company owned the royalty interests in PEP 38738. The permits acquired were
additional interests in permits already held by the Company, together with a
10% interest in PEP 38718 (since surrendered).

In May 2003,
the participants re-entered the Cheal-1 well, originally drilled in 1995, which
had tested oil and gas from a shallow secondary target. A test of the Cheal-1
well in July 2003 flowed gas at rates up to 4.5 mmscfd in a one day test
period. Suitable production test equipment was then installed and extended flow
testing commenced in October 2005, in order to establish developable reserves.
However, oil reserves could not be estimated conventionally, despite steady oil
production during the test.

Cheal-A3X was drilled in May 2004 to test the
Mt Messenger sands beneath the shallower Urenui oil/gas pay previously
discovered in Cheal-1 & -2. This well discovered oil pay sands over a gross
interval of ~60m (~200 feet) within the Mt Messenger formation. A
flow-test of both the Urenui and the deeper Mt Messenger sandstones test
program commenced in June 2004. Cheal-A4 was deviated from the Cheal-A site during October 2004 and Mt
Messenger oil pay was again intersected. Extended production testing of the
Cheal A3X and Cheal-A4 wells was undertaken in 2005. The extended testing
demonstrated that the wells were capable of stable flow rates.

An initial independent assessment of reserves
in the Cheal field by Sproule International Limited was completed
in April 2005, and was updated as at December 31, 2005, assigning 0.58 million
barrels (Company share) of Proven Undeveloped oil reserves to the Cheal Field.

In December 2005 the joint venture ceased
production testing of the Cheal wells in order to re-develop the field and
optimise field production and oil sales strategy during the course of 2006. Gas
was being flared to atmosphere (in compliance with consent conditions) but was then linked to electricity
generation equipment (used to generate electricity on-site). Power surplus to site requirements is sold into
the national electricity grid system.

A 3D seismic survey was conducted over the Cheal and Cardiff
discoveries during 2006. The results of the survey are being used to determine
bottom hole locations for the Cheal development wells and will be used to
optimize the drilling and testing plan at Cardiff.

Development of the field
commenced on grant of the mining permit (PMP 38156) in July 2006.

The production facilities have
an initial design capacity of 2,000 barrels of oil per day and 3 million cubic
feet of gas per day for up to ten development wells. They are located at the
Cheal A site, receiving, processing and handling raw production from both the
existing Cheal A site and from a second site, Cheal B, located a kilometre or
so to the north. Engineering optimisation and design of the facilities allow
capacity to be increased in the future should this be required.

In December 2006, the Company
acquired a further 19.8% interest in the Cheal mining and exploration permits,
by the purchase of all the shares in one of the other joint venture
participants, Arrowhead Energy Limited.

Development of the northern
portion of the field from the Cheal B site commenced in 2006, with four wells
having been drilled by end 2006, three of which were completed as producers in
early 2007.

- 22 -

---



The fourth well, Cheal B4, was
an exploration well targeting Moki, Mt Messenger and Urenui sandstones to the
north west of the fields bounding fault. The well confirmed the
presence of hydrocarbon charge outside the currently recognised limits of the
field at the two upper levels, increasing confidence in the resource potential
of the north western extension of the Cheal Oil Field. This well is
currently temporarily suspended, awaiting further testing.

The Cheal production station was
commissioned in August 2007, and officially
opened on October 8, 2007. Final commissioning of the pipelines and Cheal-B
site were completed ahead of schedule in December 2007. Most of the plant at the new production
station was designed specifically for
the production station, in order to deal effectively and efficiently with the
specific nature of the hydrocarbons being produced. The vessels, heat
exchangers and piping are specific to the Cheal process. The design of the
power fluid pump, the coalescing filter, and export compressor have been
patented by their respective suppliers, and all instrumentation is covered by
patents.

For Cheal
field production, the Company has developed two avenues for disposal of
associated gas  electricity generation on-site (including export of surplus
electricity to the national electricity grid system), and a gas sales contract
for sale of gas into the national domestic reticulation system. The first of
these can only account for a maximum of 240 Mcf per day. During current
production, associated gas produced is in the order of 500 Mcf per day,
necessitating export of gas for treatment and sale via the gas sales contract
as well.

Cheal oil is trucked to nearby Waihapa Production Station, or to the
Omata Tank Farm at New Plymouth for storage and on-sale, under agreed sales
contracts.

CARDIFF FIELD

In 2004, the Joint Venture participants in PEP 38738 applied for and
received approval from the New Zealand government to divide the permit into a
deep permit (PEP38738-02 - covering all pre-Miocene strata) and a shallow
permit (PEP38738-01  covering all strata from present to base of Miocene). The
Joint Venture parties agreed with Genesis Power, a New Zealand State Owned
Enterprise and the leading generator and retailer of electricity and gas in New
Zealand, to drill Cardiff-2, a deep gas well, funded by Genesis as to the first
NZ$15million (approx $11million) of drilling and testing costs of this well. In
consideration for this, Genesis acquired a 40% equity interest in the petroleum
rights in PEP38738-02, and associated rights to purchase all gas for certain
specified prices. The transaction included a gas sales agreement requiring the
JV to offer available gas from PEP38738-02 to Genesis for sale in priority to
other purchasers, at an indexed price. The Company and the JV participants
retained all rights to shallow petroleum in PEP38738-01, including the Cheal
field and similar prospects.

In August 2007, the Company
agreed to acquire all of the shares of International Resource Management
Corporation Limited (now called Titoki Energy Limited), a privately held New
Zealand-incorporated company with interests in the permits over the Cardiff
field and surrounding exploration acreage, in which the Company also holds
interests. This transaction was closed in November 2007. The
Company entered into another agreement in January 2008 to purchase from another
joint venture participant an additional 5.1% of PEP 38738-02 and PMP 38156-02
(Cardiff), contingent upon that partys completion of the purchase of an
additional 15.1% interest in these permits and legal transfer of the permits.

The Cardiff-2 well has been drilled and cased, and three initial frac
stimulations of separate gas bearing reservoirs have been successfully
completed. Clean-up of the well-bore and reservoirs and initial flow-test
results were inconclusive. A mining permit (PMP
38156) was granted over the Cheal and Cardiff fields in July 2006. The
Cardiff-2A ST1 well was worked over during November and December 2007,
additional wireline work was completed on the well in January 2008, with flow
testing of the K3E zone commencing in late February 2008. Well testing is currently still ongoing with
the well shut-in for a second extended pressure build-up period following a
flow period of the Kapuni, K3E formation at the end of April 2008. It is
unlikely that additional operations will proceed before an independent review
of all well tests performed in the well (including the McKee and K1A test
previously performed, in addition to the more recent K3E test) has been
completed.

DOUGLAS DISCOVERY

An exploration drilling
operation in Papua New Guinea was announced in February 2005. A British public
unlisted company, Rift Oil plc funded the first $6million of expenditure on the
Douglas-1 well, which tested a large, seismically defined structure in the
foreland area of the productive Papuan Basin. This well was confirmed as a
discovery in 2006.
The well was suspended while further studies including seismic
evaluation,

- 23 -

---



and analysis and negotiations to obtain and assess commercialisation
options were undertaken. A Memorandum of Understanding was signed in March 2007
to evaluate a proposal to supply gas to an Australian company via a pipeline.
During 2007, the operator of PPL 235 (Rift Oil plc) continued to assess the
opportunities to sell Douglas gas, and the Papua New Guinea government issued
licence terms for years 5 & 6 (2007 to 2009) of the licence requiring the
drilling of one well (Puk Puk well, which was spudded on May 10, 2008), the
drilling of an optional well contingent on the results of the first well and a
seismic acquisition requirement.

On May 26, 2008, the Company
announced an agreement to sell its interests in Douglas (PPL 235) and in PPL
261, to Rift Oil, subject to certain conditions precedent. Initial completion
of the transaction was made on May 29, 2008, but additional consideration is
due for payment within 3 months, and within 12 months, upon receipt of
governmental approval of the legal transfers of the licences.

STANLEY DISCOVERY

The extension of the term of PRL
4 (Papua New Guinea) was granted in September 2007, after lengthy negotiations
with the PNG government. During 2007, the Stanley joint venture parties
undertook additional infill seismic programme to firm up the structural
interpretation of the Stanley Field and to assist with the selection of the
Stanley-2 well location. At the same time, the joint venture parties have
continued to progress the negotiation of a gas sales agreement with PNG SEL.

After 2007 year end, the Company
announced an agreement to sell its interests in Stanley (PRL 4) and in PRL 5,
to Horizon Oil, subject to certain conditions precedent. This transaction was
completed on May 30, 2008, although the legal transfers of the licences remains
subject to governmental approvals.

OTHER NEW ZEALAND EXPLORATION

Supplejack-1 (drilled in 2005) was originally
considered to have future economic potential, dependent upon further wells
being drilled in the near vicinity. However, after drilling the nearby Ratanui-1 well in February 2007,
for which wireline log interpretation and associated seismic mapping did not
indicate economic hydrocarbons, Ratanui-1 was plugged and abandoned. In early
2008, a decision was made by the joint venture parties to plug and abandon the
Supplejack-1 and Supplejack South 1A wells. This work is expected to be
undertaken during 2008.

In February 2007, PEPs 38766
(onshore Taranaki) and PEP 38258 (offshore Canterbury) were surrendered. Further surrenders were effected
in February 2008 (PEPs 38765 and 38741 (onshore Taranaki)). PEP 38745 expired
at the end of its second 5-year term in November 2007.

In March 2007, the Company was
granted PEP 38524 in the southern offshore Taranaki Basin.

CORPORATE MANAGEMENT

2007 was a year of management
change for the Company  during June /July 2007, the Company appointed three
key new roles within management  Commercial Manager, Head Legal Counsel and
Projects Manager. During further structural review in late 2007, the Commercial
Managers role was later focussed more strongly towards the Cheal project, and
the title changed to Cheal Asset Manager. The current incumbent of that
position, Dr, Chris McKeown, resigned with effect from May 30, 2008. Mr.
Richard Webber, the Chief Executive Officer and a director, resigned from the
Company with effect from April 30, 2007. Mr. Thompson Jewell was appointed to
replace him from May 1, 2007. Mr. Bruce McGregor, the Chief Financial Officer,
left the Company on February 23, 2007 to pursue other opportunities. An interim
CFO, Mr. David McKeogh, was contracted from PricewaterhouseCoopers, and a
permanent CFO, Mr. Derek Gardiner, was appointed with effect from June 11,
2007.

Business Environment

The Company is
subject to government regulation of the oil and gas properties it holds and of
the operations it conducts on those properties, such those relating to waste
disposal, toxic substances, prices, royalties, environmental protection,
occupational health and safety, land access and use, permit conditions, as well
as those regulations which relate to all companies operating in the relevant
jurisdictions such as relating to corporate governance, withdrawal of capital
from a country in which the Company is operating, taxation, and employment
laws. The effects of those regulations are detailed in Item 3.D  Risk Factors,
and in Item 4.D  Property, Plants and Equipment. Management does not believe
that these regulations affect the Companys

- 24 -

---



business in a
manner different from the effects on other companies competing in the same
industry.

The Company strives to be
competitive by utilising current technologies to enhance exploitation, development
and operational activities. However, as noted in Item 3.D  Risk Factors, the
oil and gas industry is highly competitive. The Company actively competes for
prospect acquisitions, exploration permits and licences, drilling equipment and
services, access to production infrastructure, and employment of skilled
industry personnel, and for capital to finance such activities, with a
substantial number of other oil and gas companies, many of which have
significantly greater financial and personnel resources than the Company. The
Companys competitors include major integrated oil and natural gas companies
and numerous other independent oil and natural gas companies and individual
producers and operators.

Certain of the Companys
customers and potential customers are themselves exploring for oil and natural
gas, and the results of such exploration efforts could affect the Companys
ability to sell or supply oil or gas to these customers in the future.

The Companys
business operations and revenue are not seasonal, except to the extent that:

|  |                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------
| | forecast
  weather may determine the timing of operations, and weather delays may affect
  the speed of completion of operations; and
|  |                                                                                                                                      
| | its revenues
  are generally reliant on international oil prices, which are partially
  affected by seasonality.                     

Oil prices
vary in line with international prices, for which there have been, in past
years, seasonal highs in the summer months (for the US driving season) and in
the winter months (for the northern hemisphere heating oil season).

The Companys
revenues are also partially reliant on local gas prices in New Zealand, which
are not affected by seasonality. As gas is sold under long term contract, gas
prices are determined at the outset of the contract and generally only increase
by application of an inflation adjustment formula independent of any
seasonality factors.

The Companys
business does not rely on the supply of raw materials to it, as it operates in
an extractive industry. The volatility of international oil prices (as
discussed above) affects the Companys revenue, rather than its expenses.

Production and Revenue

The Company
sells oil and gas from producing or pre-producing properties (noted as
Development in the above table) in which it holds an interest.

OIL

In 2005 the Company recognised
proved reserves in respect to the Cheal oil field discovery. Development of the
Cheal field commenced in August 2006. Simultaneous production from testing
operations occurred from July to December 2006 and re-started in February 2007,
from new development wells drilled in December 2006. The production station
construction programme was slightly delayed, with first permanent production
commencing in Q3 2007.

During 2005,
2006 and 2007, the Company sold all oil produced from its production testing of
Cheal and Cardiff fields, on short-term temporary arrangements at world parity
prices (less costs, fees and royalties). Permanent production oil and gas is
now sold under longer-term sales contracts. Selling price remains based on world
parity prices (less costs, fees and royalties).

In 2005, 2006
and up to December 2007, the Company sold virtually all of its oil production
to Swift Energy NZ Ltd. From December 2007, the Company commenced selling Cheal
production to Shell (Petroleum Mining) Company Limited. Details of revenues, by
geographic region and by category, are included in Item 4.D  Property, Plants
and Equipment.

GAS

There is no spot market for
natural gas in New Zealand; therefore all gas sales are made under long term
contracts for the primary purpose of electricity generation or reticulation to
homes and businesses.

- 25 -

---



The Company
achieved a small amount of gas and condensate production from the Kahili
discovery in 2004. However all Kahili reserves were written off in 2004, based
on an independent report by Sproule International Limited. There has been no
further production from the Kahili field since this time.

The Company
did not sell any gas in 2005 or 2006. Solution gas associated with oil from the
Cheal field was initially flared to atmosphere (in compliance with consent
conditions) but was later (September 2005) linked to electricity generation
equipment, which equipment is used to generate electricity on-site at Cheal.
Prior to completion of gas export pipelines in December 2007, any power surplus
to site requirements was sold into the national electricity grid system. Since
that time, gas surplus to electric generation requirements is now exported to
the nearby Waihapa treatment station, for treatment under processing contract,
followed by delivery under sales contracts to another third party.

The 2005
independent reserves evaluators report on Cheal also summarized the resource
potential of the Cardiff structure, but as hydrocarbons had not at that time,
nor as at December 31, 2007, been flow-tested from Cardiff-2A ST1 in a
controlled and sustained manner, no reserves have been assigned to Cardiff. The
Cardiff-2A ST1 well did produce gas and condensate on production test during
2005. Gas was flared to atmosphere (in compliance with consent conditions) and
condensate was sold at world parity prices (less costs, fees and royalties).
Some flow testing of Cardiff-2A ST1 was undertaken during 2006, and testing of
the K3E zone in the well commenced February 25, 2008.

The Douglas-1
exploration well (PPL 235; Austral 35%) and the Stanley well (PRL 4; Austral
28.92%) in Papua New Guinea have both been determined to be gas discoveries and
have been suspended while further studies and analysis and negotiations to
obtain and assess commercialisation options were undertaken. Both these
licences have in 2008 been sold by the Company to other joint venture
participants within the respective licences.

C. Organizational Structure

The Company (a
Canadian-incorporated company, whose common shares are listed on the AMEX in
the U.S., the TSX-V in Canada and the NZSX in New Zealand) is the parent
company of, and conducts its operations through, several material wholly-owned
subsidiaries, as set out below (as of May 31, 2008):

|                                         |  |                                 |  |                                             |  |                             
|---------------------------------------- |  | ------------------------------- |  | ------------------------------------------- |  | ----------------------------
|Subsidiary Companies                     |  | Jurisdiction of
  Incorporation |  | Business of
  Subsidiary                    |  | % Ownership &
  Voting Power
|                                         |  |                                 |  |                                             |  |                             
|Source Rock
  Holdings 
  Limited        |  | New Zealand                     |  | Holding
  company                           |  | 100%                        
|                                         |  |                                 |  |                                             |  |                             
|Austral
  Pacific Energy
  (NZ) Limited  |  | New Zealand                     |  | Oil and gas
  exploration
  and development |  | 100%                        
|                                         |  |                                 |  |                                             |  |                             
|Millennium
  Oil & Gas
  Limited         |  | New Zealand                     |  | Oil and gas
  exploration
  and development |  | 100%                        
|                                         |  |                                 |  |                                             |  |                             
|Rata Energy
  Limited                    |  | New Zealand                     |  | Oil and gas
  exploration
  and development |  | 100%                        
|                                         |  |                                 |  |                                             |  |                             
|Totara
  Energy Limited (3)              |  | New Zealand                     |  | Oil and gas
  exploration
  and production  |  | 100%                        
|                                         |  |                                 |  |                                             |  |                             
|Titoki
  Energy Limited (1)              |  | New Zealand                     |  | Oil and gas
  exploration
  and development |  | 100%                        
|                                         |  |                                 |  |                                             |  |                             
|Puka Energy
  Limited (2)                |  | New Zealand                     |  | Oil and gas
  exploration                   |  | 100%                        
|                                         |  |                                 |  |                                             |  |                             
|Hebe Energy
  Limited (2)                |  | New Zealand                     |  | Oil and gas
  exploration                   |  | 100%                        
|                                         |  |                                 |  |                                             |  |                             
|Matai Energy
  Limited (2)               |  | New Zealand                     |  | Oil and gas
  exploration                   |  | 100%                        
|                                         |  |                                 |  |                                             |  |                             
|Austral
  Pacific Energy
  (PNG) Limited |  | Papua New
  Guinea              |  | Oil and gas
  exploration
  and development |  | 100%                        

|    |                                                                                                                                                                                                                                                            
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Acquisition completed
  November 12, 2007. Name changed from International Resource Management
  Corporation Limited on November 20, 2007.                                                                                                                 
|    |                                                                                                                                                                                                                                                            
|(2) | These companies were
  incorporated in March 2007and later received assignment of various permit
  interests from Austral Pacific Energy (NZ) Limited. Their names were changed
  from Austral Pacific NZ No.1 Limited, Austral Pacific NZ No.2 Limited and

- 26 -

---



|    |                                                                                                                                                                                                                                               
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | Austral Pacific NZ No.3
  Limited respectively, in June 2007.                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                               
|(3) | Three subsidiaries of
  Austral Pacific Energy (NZ) Limited (Kanuka Energy Limited, Arrowhead Energy
  Limited and Totara Energy Limited) were amalgamated into one company called
  Totara Energy Limited, with effect from February 1, 2008.

All the
wholly-owned subsidiaries are controlled by the Company. There are no
restrictions on the Companys ability to determine the boards of directors of
these subsidiaries, except the requirement in PNG that one director must be a
resident of Papua New Guinea.

D. Property, Plants and Equipment

Material Tangible Fixed Assets

The Companys
major operations and principal activities are in the oil and gas exploration and
production business. The Company has operated in two countries in the past
three years: New Zealand and Papua New Guinea, and owns interests via its
wholly owned subsidiaries in joint ventures in government issued petroleum
permits or licences in those two countries, as set out in the table at Item 4.B
 Business Overview under the heading Company
Properties. These licences and permits authorise the Company to
prospect and explore, and (in certain permits) to mine, for hydrocarbons.

The Cheal
field production facilities were constructed during 2006 and 2007, commissioned
in August 2007, and officially opened on October 8, 2007. Final commissioning
of the pipelines and Cheal-B site were completed ahead of schedule on December
10, 2007. The Company owns a 69.5% interest in these assets, via the PMP
38156-01 joint venture. The Cheal Production Facilities have a nominal
throughput capacity of 2000 barrels of oil per day.

The Company
also owned, until its sale with effect from May 29, 2008, a 35% share in a drilling
rig, acquired during 2005 for drilling the Douglas well in Papua New Guinea
(sold as part of the Douglas transaction). Other than these assets and its
petroleum properties, the Company holds minor office assets for the purpose of
operating the business, and some oilfield equipment and materials.

See more
detailed descriptions of the Companys principal petroleum properties below,
under the heading Principal Petroleum
Properties.

Major Encumbrances Thereon

At May 31,
2008, the Company had the following encumbrances, liens or mortgages on its
assets:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | a security
  interest granted by Millennium Oil & Gas Limited to NGC New Zealand
  Limited (now called Vector Gas Limited) over Millenniums 25% interest in PMP
  38153 (Kahili), to secure performance of the Company under the gas prepayment
  agreement referred to at Item 17, Note 20(a) of the 2007 Consolidated
  Financial Statements;                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | a security
  interest granted by Arrowhead Energy Limited (now amalgamated with Totara
  Energy Limited) to NGC New Zealand Limited (now called Vector Gas Limited)
  over Arrowheads 33% interest in PMP 38156-01 (Cheal) and its 25% interest in
  PMP 38153 (Kahili), to secure Arrowheads performance under the gas
  prepayment agreement referred to at Item 17, Note 20(b) of the 2007
  Consolidated Financial Statements;                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |  | a security
  interest granted to Investec Bank (Australia) Limited has been given over all
  present and after-acquired property of the Group (as that term is defined in
  the facility documents, refer to Exhibit 2.1) in relation to the loan
  facility. Following the completion of certain events, security will be
  reduced to the interests of the Company within the Cheal project, the Cheal
  project documents, the Risk Management Facility, the Debt Service Reserve Account
  and the Proceeds Accounts.

The Company
does not act as a producer under any long-term supply or similar agreements
with foreign governments or authorities. The Company does not obtain any
natural gas liquids production through or from plant ownership rather than
through permit ownership.

Regulatory Regime

The general
rules applicable to the Companys permits and licences are as follows:

- 27 -

---



NEW ZEALAND

Unless
otherwise indicated, Petroleum Exploration Permits granted in New Zealand
provide an exclusive right to explore for petroleum for an initial term of five
years, renewable for a further five years over one-half of the original area.
Upon application, the holder is required to commit to do certain work in the
permit area, during the permit term. Permit holders can apply for changes to
the committed work programs under certain circumstances. If a discovery is
made, the permit holder may be entitled to apply for a Petroleum Mining Permit,
granted for a term of up to 40 years from the date of issue. The New Zealand
government has reserved a royalty from the sale of petroleum products. For any
discovery made between June 30, 2004 and December 31, 2009, the royalty will be
the greater of (A) 1% of the net sales revenue (from natural gas) and 5% of the
net sales revenues (from oil); or (B) 15 to 20% of accounting profits from the
sale of petroleum products. For other discoveries, the royalty will be the
greater of (A) 5% of net sales revenue or (B) 20% of accounting profits.

PAPUA NEW GUINEA

Petroleum
prospecting licences granted in Papua New Guinea provide for the exclusive
right to explore for petroleum for an initial term of six years, renewable for
a further five years over one-half of the original area, and the right to enter
into a Petroleum Development Licence or Petroleum Retention Licence upon a
discovery. Petroleum retention licences granted in Papua New Guinea provide for
the exclusive retention of interest in the permit for an initial term of five
years, renewable for a further five years over the original area, while
development options are progressed. The Petroleum Development Licence provides
the right to produce any oil and gas discovered for a period of up to 25 years
and may be extended for a further period of up to 20 years from discovery,
subject to a maximum 22.5% participating interest that can be acquired by the
Government of Papua New Guinea and 2% royalty to the government, which royalty
the government pays (all or part of) to project area landowners, local-level
Governments or provincial Government in agreed or determined proportions. The
participants can apply for extensions or reductions of the committed work
programs for the licences under certain circumstances (by way of an Application
for Variation of the Work Program).

Environmental Risks and Hazards

All phases of
the oil and natural gas business present environmental risks and hazards and
are subject to environmental regulation pursuant to a variety of local and
international conventions, laws and regulations. Pro-active management by the
Company of environmental concerns can reduce its exposure, and procedures are
in place to ensure care is taken in the day-to-day management of the Companys
oil and gas properties. Company management believe that the Company follows best
international oil field practices in this area. Environmental legislation
provides for, among other things, restrictions or prohibitions on spills,
releases or emissions of various substances produced in association with oil
and natural gas operations. Exploration legislation also requires that wells
and facility sites be operated, maintained, abandoned and reclaimed to the
satisfaction of applicable regulatory authorities. Compliance with such
legislation can require significant expenditures and a breach may result in the
imposition of fines and penalties, some of which may be material.

Drilling
hazards or environmental damage can greatly increase the cost of operations,
and various field operating conditions may adversely affect the production from
successful wells. These conditions include, but are not limited to, delays in
obtaining governmental approvals or consents, shut-ins of connected wells
resulting from extreme weather conditions, encountering unexpected formations
or pressures, premature decline of or invasion of water into reservoirs,
blow-outs, cratering, sour gas releases, fires and spills, insufficient storage
or transportation capacity, or other geological, infrastructure and mechanical
conditions. While close well supervision and effective maintenance operations
can contribute to maximizing production rates and recoveries over time, and
cash flow and revenue forecasts attempt to realistically estimate production
declines, production declines from normal field operating conditions cannot be
eliminated and can be expected to adversely affect the long term continuity of
revenue and cash flow levels to varying degrees.

Environmental
legislation is evolving in a manner expected to result in stricter standards
and enforcement, larger fines and liability and potentially increased capital
expenditures and operating costs. No assurance can be given that environmental
laws will not result in a curtailment of production or a material increase in
the costs of production, development or exploration activities or otherwise
adversely affect the Companys financial condition, results of operations or
prospects.

Management is
not aware of any present material liability related to environmental matters.
However, the Company may, in the future, be subject to liability for
environmental offences of which it is presently unaware.

- 28 -

---



Carbon Emissions Regime

The New
Zealand government is a signatory to the Kyoto protocol
and in order to meet the
requirements of this protocol it is in the process of implementing Climate Change initiatives. Recently
the government released a Framework
for a New Zealand Emissions Trading Scheme and the New Zealand Energy Strategy. The government has signalled in these
documents the intention to implement an emissions trading scheme
and measures to encourage the
use of renewable sources of power for electricity, to only allow new thermal
generation in circumstances where security of supply requires, to reduce
transport emissions and to promote efficiency in the use of
energy.

A proposed
bill is now before the NZ Parliament and under going the consultation process
to introduce a cap and trade emissions trading scheme. Liquid fossil fuels are proposed to
come under the schemein January
2009 and natural gas in January 2010. The unit of trade is proposed to be linked
to international Kyoto units. The
bill also proposes a 10 year moratorium on the building of new thermal power
generation unless required for security of supply. To fit within the exception, an exemption will be required from
the Minister of Energy who will make this decision based on advice from the NZ Electricity Commission.

Austral, along
with other members of the oil and gas exploration and production community in
New Zealand is involved in the government consultation process. Austral is also assessing the
potential effect on its business of the proposed government initiatives. The
current expectation is that Austral oil
sales will be exempt from the scheme given
these are exported to the East
Coast of Australia. Austral is also monitoring Australian government climate change initiatives in this regard.

In regard to
natural gas, given that New Zealand gas sales from
January 2010are likely to be covered by the emissions trading
scheme, Austral is in the process of reviewing sales contracts to ensure
Austral is able to pass on the costs of purchasing emission trading units. It is also assessing the longer term potential impact on the NZ
market for natural gas given the New Zealands government proposed 10-year
moratorium on new thermal
generation. Austral does not expect the proposed ban to reduce gas demand in
the short term. In addition, Austral has in place gas sale contracts which
require the buyer to take Austral gas for the life of the Kahili field and for
10 years from Cheal.

Principal Petroleum Properties

For
definitions of technical terms used in the description of properties, see the
Glossary of Terms on page 3.

The Companys
individual properties and their locations are listed in Item 4.B  Business
Overview under the heading Company
Properties, and capital expenditure over the last 3 fiscal years,
development plans, and nature of the Companys interests for the Companys
significant properties are set out below. Estimated capital expenditure on
forward programmes is set out in Item 5.B  Liquidity and Capital Resources
under the heading Material Commitments for Capital Expenditure. A number of
the forward programmes discussed have not yet received joint venture or
governmental approval and may not necessarily proceed. Also, depending upon the
outcomes of some of these programmes, different decisions may be reached to
vary work programmes, modify or abandon them altogether.

In New
Zealand, the Companys properties in New Zealand are exploration permits, except
for the Cheal (PMP 38156-01), Cardiff (PMP 38156-02) and Kahili (PMP 38153)
properties. In Papua New Guinea (where the interests have been sold effective
May 2008), the Elevala and Ketu (PRL 5) and Stanley (PRL 4) discoveries are not
proven, and are held in retention licences for further appraisal, while the
Douglas (PPL 235) discovery is still being evaluated and remains under a
prospecting licence.

NEW ZEALAND

The Companys
principal New Zealand properties are located in the Onshore Taranaki Basin of
the North Island of New Zealand. The Taranaki Basin is located on the west
coast of the North Island. The sediments in the Taranaki Basin encompass a
depth of some 25,000 feet with complex structure and geology. Compression
across the eastern portion of the Basin created a thrusted fold belt up to ten
miles wide, which contains the McKee, Tariki, Ahuroa and Waihapa-Ngaere fields.
Further west in the onshore region are the fault bounded Kapuni, Ngatoro,
Kaimiro and Cheal fields. All these fields are currently in production  Cheal
for the Company, and the other fields for other owners.

- 29 -

---



The following
figure shows the locations of the Companys permits in New Zealand:

(MAP)

Cheal (Shallow) and Cardiff (Deep) Fields
PMP 38156 and PEP 38738
(Shallow 69.5%; Deep  44.9%)

PEP 38738 and
PMP 3156 are divided into deep (-02) and remainder or shallow (-01) strata
sections. The separate strata sections are held by separate joint ventures. The
Company holds interests in both the deep and shallow sections, and in both the
mining and surrounding exploration areas.

A joint 3D
seismic survey was conducted over the Cheal and Cardiff discoveries during 2006
($1.65 million, 100% cost). The results of the survey are being used to
determine bottom hole locations for new Cheal wells and to optimize the
drilling and testing plan at Cardiff.

Cheal Field (Shallow
 PMP 38156-01)

In December
2005, the joint venture agreed to cease production testing of the Cheal A1, A2,
A3X and A4 wells previously drilled, in order to agree a field development plan
that would maximise production and value from the field. Extended production
testing (expenses of $0.82 million incurred, 100% cost) of the Cheal wells
using temporary test production facilities re-commenced on July 25, 2006.
During 2006, a total of 28,352 barrels of oil (100%) was produced. The oil was
transported to the Waihapa Production Station where it was sold to Swift Energy
NZ Ltd; the gas produced in association with crude oil production was used to
generate electricity for on-site use.

The
development of the Cheal oil field was planned, submitted to and approved by
the joint venture participants during 2006. An application for a mining permit
over the field was submitted to and approved by the Ministry of Economic
Development. A Petroleum Mining Permit (PMP 38156) covering the Cheal oil field
was granted on July 26, 2006 for an initial term of 10 years. There is a right
to extend the term of the mining permit following delineation of further
reserves. Upon approval of the development plan, and grant of the mining
permit, development of the Cheal oil field commenced from August 2006.

- 30 -

---



In Q4 2006,
four wells (Cheal-B1, B2, B3 and B4) were drilled from a second site, Cheal B,
located to the north of the original Cheal (A) site. Cheal-B1, B2 and B3 were
completed as producers during early 2007. Cheal B4 was an exploration well
targeting Moki, Mt Messenger and Urenui sandstones to the north west of the
fields bounding fault. The well confirmed the presence of hydrocarbon charge
outside the currently recognised limits of the field at the two upper levels,
increasing confidence in the resource potential of the north western extension
of the Cheal Oil Field. This well will be sidetracked in due course and
completed as a producer. Total expenditure on drilling the four Cheal B wells
and completing three wells was $9.19 million (100% cost).

Construction
of the Cheal Production Facilities at the Cheal A site commenced in Q3 2006.
Construction was completed in Q3 2007. The pre-commissioning test phase
commenced on August 10, 2007 and first oil was produced through the facilities
in September 2007. The facilities are now fully certified and were formally
opened on October 8, 2007. Cheal-B1, B2 and B3 were brought into production in
December 2007 following the completion of the tie-ins to the pipelines
connecting the Cheal B site with the Production Facilities at the Cheal A site.
Total expenditure on the production station and pipelines to December 31, 2007
was $20.11 million (100% cost).

Commercial
arrangements for the transportation, storage, processing and sale of both crude
oil and gas production have been completed and are in operation. In fiscal
2007, the Cheal Oil Field produced a total of 132,805 barrels of oil (100%;
company share 92,299 bbls (69.5%)). The oil was transported to the Waihapa
Production Station where it was sold to Swift Energy NZ Ltd. Gas produced in
association with crude oil production is used to generate electricity for
on-site use, with the excess electricity initially being sold into the local
grid. The export of excess gas via a pipeline to the Waihapa Production Station
commenced in December 2007. Production during May 2008 averaged a rate of 505
barrels oil per day and 773 mscf gas per day (100%; Company share 69.5%).

The short-term
Cheal drilling programme targets an additional production of 400-500 bpd by Q4
2008. The Cheal A6 well spudded on June 10, 2008, with Cheal A7 well due to
commence approximately July 3, 2008.

The Company is
the operator of the Cheal project on behalf of the joint venture, and owns a
69.5% beneficial interest in the Cheal Field. An independent report by Sproule
International Ltd (dated December 31, 2007 (see Exhibit 15)) ascribes 2.906
million BOEs (100%; company share 2.020 mmboe (69.5%)) of 2P (proved and
probable) reserves to the Cheal Field.

Cardiff Field (Deep
 PMP 38156-02)

Cardiff-2A well
was deviated out of the Cardiff-2 (Dec 2004) borehole, and drilled (with one
sidetrack) , during 2005, to a depth of 4,931m (16,178 feet) and successfully
logged and cased in preparation for production testing. Three test zones within
the Kapuni formation were hydraulically fractured and perforated. Flow testing
was hindered by the inability to isolate the test zones from each other. It is
apparent that the middle zone (K1A sands) is producing water which is
cross-flowing into the upper lower pressure zone (McKee sands). In early 2006,
the K1A sands were partially isolated from the McKee sands and a production
test commenced to determine the flow rate from the McKee sands. However, the
plug used to isolate the K1A sands did not completely isolate the K1A zone, and
further work was required to isolate this zone. Flow testing of the McKee zone
recommenced in late May 2006. This series of flow and pressure build-up tests
indicated an improvement in well productivity. This was reflected in flow rates
which at times exceeded three million cubic feet per day of gas and 100 barrels
per day of light oil and condensate.

On the basis
that commerciality had been demonstrated from the test of the McKee zone, the
grant of PMP 38156 also included the Cardiff field.

The joint
venture participants obtained specialist fracture technology advice which,
combined with the results of the in-house reservoir simulation studies which
have been undertaken, has enabled them to determine an optimum testing
programme for the K3E interval. Additional desk-top and simulation studies have
also been undertaken during 2007. Total expenditure on preparatory work was
$0.32 million (100% cost).

In August
2007, field operations re-commenced for the workover of the Cardiff-2A ST1
well, ahead of a flow test of the K3E reservoir interval. The upper McKee
Formation was isolated and a drilling rig was mobilised to the site in
November 2007. The workover of the Cardiff 2A-ST1 well was completed in January
2008 ($3.8 million, 100% cost). Testing operations on the K3E zone commenced on
February 25, 2008, and are currently still ongoing with the well shut-in for a
second extended pressure build-up period following a flow period of the Kapuni,
K3E formation at the end of April 2008. The results to date support the current

- 31 -

---



evaluation
that the K3E formation is most likely badly damaged and/or tight and unlikely
to flow commercial quantities of gas from this location. Options to
additionally perforate/complete and flow test the K3E and/or perforate and flow
test additional Kapuni sands are still under consideration depending upon the
results of the ongoing well test and final evaluation. However, it is unlikely
that these operations will proceed before an independent review of all well
tests performed in the well (including the McKee and K1A test previously
performed in addition to the more recent K3E test) has been completed.

No reserves
have yet been assigned to this property.

The Company is
the operator of the Cardiff Field. In August 2007, the Company entered into an
agreement to acquire all of the shares of International Resource Management
Corporation Limited (IRM) (see Exhibits 4.13 and 4.14). IRM held a 19.8%
interest in the Cardiff Field. The purchase of the shares of IRM was completed
in November 2007. This purchase increased the Companys interest in the Cardiff
Field to 44.9%. On 8 January 2008, the Company entered into an agreement to
purchase from another joint venture party an additional 5.1% of PEP 38738-02
and PMP 38156-02 (Cardiff) contingent upon it completing the purchase of
another joint venture partys 15.1% interest in these permits and legal
transfer of the permits being registered. This purchase has completed, but
legal transfer of the 15.1% interest remains subject to receipt of governmental
approval, so the Companys acquisition remains to be completed, as at May 31,
2008.

Kahili Field PMP 38153 (85%)

A seismic
survey within the PEP 38736 permit area was undertaken in May 2005 and a
further seismic line was acquired in March 2006. This infill seismic data
suggested that the Kahili Field contains considerable updip potential. Subject
to securing a farm-in participant or funding, the Company intends to drill the
Kahili-2 well 140 metres updip and in the same structure as the original
Kahili-1 well, which produced for a short period. If successful, Kahili
gas-condensate could come back on-stream relatively quickly because of existing
infrastructure, including a small gas treatment plant.

The Company
holds an 85 percent interest in the Kahili Field and is the operator.

The
surrounding exploration permit (PEP 38736) was surrendered in September 2006.

Other New Zealand Exploration Operations

In March 2007,
the Company was granted PEP 38524 in the southern offshore Taranaki Basin. PEP
38524 is located immediately west and north of DUrville Island and covers an
area of 2,187 square kilometres. The first stage of the work programme requires
Austral to undertake seismic reprocessing, acquire aeromagnetic data and
complete either a 2D or 3D seismic survey by April 1, 2008. The Company has
completed seismic reprocessing ($0.13 million, 100% cost), and in June 2007,
the Company acquired 418km of aeromagnetic data ($0.02 million, 100% cost).
Arrangements to acquire the required seismic survey were made, but the boat
left for other work before the survey was commenced. An application to extend
the time allowed for the seismic survey has been lodged with the Ministry of
Economic Development. Preparations for acquisition of 2D or 3D seismic in 2008
continue.

The Company
has, with effect from May 20, 2008, farmed-out an 80% interest in PEP 38524 to
Australian Worldwide Exploration Ltd. (ASX: AWE). In return AWE has undertaken
to fully fund acquisition of some 350km of 2D seismic within the permit. The
farmout is subject to approval of a revised work programme by the Ministry of
Economic Development

Management
intends to continue an exploration programme in Taranaki by undertaking
rigorous studies to mature and high grade other high impact, drillable
prospects in the portfolio.

- 32 -

---



PAPUA NEW GUINEA

The following
figure shows the locations of the Companys permits in Papua New Guinea during
2007 and until May 30, 2008. By May 30, 2008, all PNG licences had been sold,
although legal transfers to the purchasers still await receipt of governmental
approval:

(MAP)

Douglas Field PPL 235 (35%)

The initial
work stage of PPL 235 was to drill an exploration well within the first two
years of the licence. The Douglas well was selected as being the best prospect
and, in 2005, the Company obtained farm-in funding for the project which
covered the first $6 million of drilling expenditure in exchange for a 65%
interest in the licence. In order to drill the Douglas well expeditiously, the
joint venture acquired a drilling rig in the U.S.A. and mobilised it, during
2005 and early 2006, to Papua New Guinea at a cost of approximately $4 million
(100% cost). Drilling of the Douglas well commenced early April 2006 and
drilling was completed within two months at a cost of approximately $8 million
(100% cost). The well reached a total depth of 1978 metres (6340 feet).
Wireline logs indicated that the well intersected two gas bearing columns, the
first in the Alene sand and the second in the Toro sand. The results obtained
from the drilling record, wireline logs and in particular from the
Multi-Formation Tester, indicated that there are two reservoirs of sweet gas
with good deliverability and likely moderate condensate content.

In the second
half of 2006, Upstream Petroleum were engaged to undertake a pre-feasibility
study designed to evaluate the options for commercialising the Douglas gas
discovery in Papua New Guinea. The results of the study were received and
reviewed in December 2006. The study discusses a range of technologies for
commercialising the Douglas gas discovery, and identifies several potentially
economically viable options. Two of these options, a major longer term project
and another smaller scale but more immediate commercialisation opportunity,
were actively pursued. In March 2007 a Memorandum of Understanding was signed
with Alcan South Pacific to evaluate a proposal to supply 40 billion cubic feet
of gas per year for 20 years to the Gove Refinery in the Northern Territory.

A 2D seismic
survey was undertaken within PPL 235 in Q3 2007 ($1.69 million, 100% cost). The
data acquired confirmed drilling locations on the northern sector of the
Douglas Gas Field and has also confirmed

- 33 -

---



the nearby Puk
Puk prospect as being a valid exploration drilling target.

In September
2007, the joint venture received from the Department of Petroleum and Energy a
years 5 and 6 work programme for the licence. The work programme requires the
joint venture to drill an exploration well (Puk Puk-1), acquire 70km seismic
and drill an optional well contingent upon the results of the earlier well.

The Puk Puk-1
well was spudded on May 10, 2008.

A new licence,
PPL 261, adjacent to the PPL 235 area, in which Austral holds a 50% interest
with Rift, was awarded in late 2006.

In May 2008,
the Company sold its interests in both PPLs 235 and 261, with initial
completion of that transaction occurring on May 29, 2008. Further payments are
due within 3 months, and within 12 months or earlier upon receipt of
governmental approval of the legal transfers of the licences.

Stanley Gas Field PRL 4 (28.92%)

The Stanley-1
well was drilled in 2001.The interpretation of the wireline logs indicated a
gas column of 13 metres in the Toro sandstone formation between 3125 metres and
3138 metres. The well was suspended without being flow-tested, given the
absence of a readily identifiable market for the gas at that time.

In 2006, PNG
Sustainable Energy Limited (PNG SEL) and the PRL 4 Joint Venture entered into a
Memorandum of Understanding to evaluate the Stanley Gas Project. At the same
time, PNG SEL entered into negotiations to supply power to the Ok Tedi mine.
The Ok Tedi mine is located to the north of PRL 4. The mine currently sources
its power from a combination of hydro and diesel. Hydro is the main source of
power with diesel providing back up. The mine uses approximately 200,000
barrels of diesel per annum for power generation. The PNG SEL proposal is to
back out the diesel consumption by replacing it with gas fired power generation
utilising gas from the Stanley Field. Under the Stanley Gas Project, PNG SEL
would buy Stanley gas for delivery to a power plant to be built immediately
adjacent to the PRL 4 surface processing facility. The power would then be
exported to the Ok Tedi mine by transmission lines.

In September
2007, a five year extension was granted to the term of PRL 4. The extension to
the term of the licence was backdated to September 2005.

In Q4 2007,
the Company acquired 44km of 2D seismic, designed to firm up the structural
interpretation of the Stanley Field and assist with the selection of a
Stanley-2 well location ($1.95 million, 100% cost). The joint venture is also
reprocessing the historic K89 survey and this data will be integrated with the
2007 Stanley Seismic data. The joint venture is currently in the planning stage
for an appraisal programme for the Stanley Field.

The Company
assigned operatorship of PRL 4 to InterOil with effect from March 3, 2008. On
March 17, 2008, the Company formally accepted an offer from Horizon Oil Ltd of
the Companys licence interests in PRLs 4 & 5. This transaction completed
on May 30, 2008, although legal transfers of the licences remains subject to
receipt of governmental approvals.

Reserves

The Companys reserves
disclosures (refer to Exhibit 15) in the form of:

|                                                                                                        |   |                                                                                     
|------------------------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------------------
|                                                                                                        |  | Statement of
 Reserves Data and Other Oil and Gas Information;                      
|                                                                                                        |   |                                                                                     
|                                                                                                        |  | Report on
 Reserves Data by Independent Qualified Reserves Evaluator or Auditor; and
|                                                                                                        |   |                                                                                     
|                                                                                                        |  | Report of
 Management and Directors on Oil and Gas Disclosure,                      
|                                                                                                        |   |                                                                                     
|report on
 the Companys reserves and production as at December 31, 2007 and for the
 2007 fiscal year.

As at December
31, 2007, the Company had recognised proved hydrocarbon reserves in respect of
the Cheal discovery, approximately 60% of which reserves are now classified as
Developed. The Cardiff, Stanley and Douglas discoveries are still subject to
appraisal and production testing, and the Company has not recognised any
reserves with respect to them. The Company therefore only has reserves located
in New Zealand at the Cheal Field. The Kahili Field is classified as Developed,
but had no reserves attributed to it at present.

- 34 -

---



In the 2005
fiscal year, an independent assessment of the Cheal discovery by Sproule
International Limited in April 2005 (updated as at December 31, 2005) was
completed, under which Sproule assigned 0.580 million BOEs (Company share) of
Proved Undeveloped reserves to the Cheal Field. The April 2005 Sproule report
also summarized the resource potential of the Cardiff structure, but as
hydrocarbons had not at that time, nor as at end 2005, been flow-tested from
Cardiff-2AST1 in a controlled and sustained manner, no reserves were assigned
to Cardiff.

For the 2006
fiscal year, Sproule International Limiteds report of their independent
evaluation assigned 1.643 million BOEs (Company share 1.142 million BOEs) of
Proved Undeveloped reserves to the Cheal Field.

For the 2007 fiscal year, the
Cheal reserves were further re-evaluated, Sproule assigning a total of 1.562
million BOEs (Company share 1.086 million BOEs) of Proved reserves to the Cheal
Field, as at December 31, 2007 (refer Reserves table below, and Exhibit 15).

|                    |  |                                                                |  |                          |  |                          |  |             |     |                |  |             |  |  |     | 
|------------------- |  | -------------------------------------------------------------- |  | ------------------------ |  | ------------------------ |  | ----------- | --- | -------------- |  | ----------- |  |  | --- | 
|                    |  | Reserves,
 Working Interest Before Royalties - constant prices
|                    |  |                                                               
|                    |  | As at
 December 31, 2007                                       |  | As at
 December 31, 2006 |  | As at
 December 31, 2005
|                    |  | Oil
 & Liquids                                                 |  | Natural Gas              |  | Oil
 & Liquids           |  | Natural Gas |     | Oil
 & Liquids |  | Natural Gas
|                    |  | (Mbbls)                                                        |  | (MMcf)                   |  | (Mbbls)                  |  | (MMcf)      |     | (Mbbls)        |  | (MMcf)     
|                    |  |                                                                |  |                          |  |                          |  |             |     |                |  |            
|Proved              |  |                                                                |  |                          |  |                          |  |             |     |                |  |            
|New
 Zealand:       |  |                                                                |  |                          |  |                          |  |             |     |                |  |            
|Cheal - Developed   |  | 586                                                            |  | 498                      |  |                         |  |             |    |                |  |            |  |  |    | 
|Cheal - Undeveloped |  | 360                                                            |  | 342                      |  | 1,037                    |  |             | 629 |                |  | 517         |  |  | 378 | 
|                    |  |                                                                |  |                          |  |                          |  |             |     |                |  |             |  |  |     | 
|Total Proved        |  | 946                                                            |  | 840                      |  | 1,037                    |  |             | 629 |                |  | 517         |  |  | 378 | 

|                                                      |  |         |   |         |         |         |  |        |  
|----------------------------------------------------- |  | ------- | - | ------- | ------- | ------- |  | ------ | -
|Standardized
 Measure of Undiscounted Net Cash Flows: |  |         |   |         |         |        
|                                                      |  |         |   |         |         |        
|                                                      |  | US$000 |   | US$000 |         | US$000
|                                                      |  |         |   |         |         |        
|New
 Zealand:                                         |  |         |   |         |         |         |  |        |  
|Revenue                                               |  | 94,648  |   |         | 60,943  |         |  | 30,598 |  
|Less: Future production
 costs                        |  | (19,289 | ) |         | (9,224  | )       |  | (4,798 | )
|Less: Future development
 costs                       |  | (5,546  | ) |         | (16,430 | )       |  | (4,891 | )
|                                                      |  |         |   |         |         |         |  |        |  
|Net Revenue                                           |  | 69,813  |   |         | 35,289  |         |  | 20,909 |  
|Less: Taxes                                           |  |        |   |         |        |         |  |       |  
|                                                      |  |         |   |         |         |         |  |        |  
|Net income                                            |  | 69,813  |   |         | 35,289  |         |  | 20,909 |  
|Discounted at 10%                                     |  | (10,408 | ) |         | (9,529  | )       |  | (6,818 | )
|                                                      |  |         |   |         |         |         |  |        |  
|Standardized Measure                                  |  | 59,405  |   |         | 25,760  |         |  | 14,091 |  

All reserves
for New Zealand permits are quoted before
royalties, in accordance with reserves figures published by the
Ministry for Economic Development in New Zealand. Royalties payable to the New
Zealand government on the Companys revenue are calculated on an annual basis
as the greater of 5% of net sales revenue or 20% of adjusted accounting profits
from the sale of petroleum products. The amount (and percentage) of royalty
attributable to the reserves is therefore unable to be precisely calculated,
and so reserves are quoted before royalties.

The change in
the standardized measure of discounted future net cashflow from 2006 to 2007
has been driven by the increase in the oil price used to calculate revenue,
from $61.05 as at December 31, 2006, to $97.60 as at December 31, 2007. The
significant decrease of $10,884,000 from 2006 to 2007 in future development
costs included in the measure relates to development completed; which was
offset by an increase of $10,065,000 in the estimate of future production
(operating) costs from 2006 to 2007.

The main differences between
the Companys reported Proved reserves as at December 31, 2006 and December 31,
2005 can be attributed to:

| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Discoveries three additional wells were
 drilled in the Cheal Oil Field  Cheal B1, B2 and B3;                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                 
| |  | Acquisitions
  in December 2006 the Company acquired all the shares of Arrowhead Energy
 Limited. The acquisition of Arrowhead Energy Limited increased the Companys
 interest in the Cheal Oil Field from 36.50 percent to 69.50 percent; and

- 35 -

---



|                                                                                                                              |   |                                                                                                     
|----------------------------------------------------------------------------------------------------------------------------- | - | ----------------------------------------------------------------------------------------------------
|                                                                                                                              |  | Production 
 a total of 28,352 bbls of oil (100 percent) was produced in 2006.                     
|                                                                                                                              |   |                                                                                                     
|Further
 changes in the Companys reported reserves as between December 31, 2007 and
 December 31, 2006 can be attributed to:
|                                                                                                                              |   |                                                                                                     
|                                                                                                                              |  | Technical
 revisions added 327 MMcf (69.5%) of solution gas; and                                    
|                                                                                                                              |   |                                                                                                     
|                                                                                                                              |  | Production 
 a total of 92 Mbbls of oil and 116 MMcf of solution gas (69.5%) was produced
 in 2007.

The accuracy
of reserves estimates and associated economic analysis is, in part, a function
of the quality and quantity of available data and of engineering and geological
interpretation and judgment. As a well matures and new information becomes
available, revision may be required which may either increase or decrease the
previous reserve assignments. Sometimes these revisions may result not only in
a significant change to the reserves and value assigned to a property, but also
may impact the total company reserve and economic status. The reserves and
forecasts provided in this Report were based upon technical analysis of the
available data using accepted engineering principles. However, they must be
read with the understanding that further information and future reservoir
performance subsequent to the date of the estimate may justify their revision.

The December
31, 2007 undiscounted future net cash flow from proved oil and natural gas
reserves is based on an independent assessment by Sproule International Limited
using data provided by the Company and from public sources, and has been
calculated with the inclusion of all estimated future production and
development costs, before royalties. A discount factor of 10% was applied to
estimated future cash flows to compute the estimated present value of proved
oil and natural gas reserves. This valuation procedure, and the resultant
estimated values, do not represent fair market value of the oil and natural gas
properties to which they relate.

The
undiscounted and discounted future net cash flows as at December 31, 2007, 2006
and 2005 have been evaluated by Sproule International Limited in accordance
with standards set out in the Canadian Oil and Gas Evaluation Handbook (the
COGE Handbook).

Production

Production during 2005, 2006
and 2007 was substantially from the Cheal field in Taranaki, New Zealand, with
very minor amounts produced from Cardiff field (also in Taranaki, New Zealand)
during 2005. The Company has no specific long-term commitments to deliver a
fixed and determinable quantity of oil or gas. However, the Company is
constrained by the following:

| |   |                                                                                                                                                                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The Company
 is required to nominate (on a rolling 3-month schedule) its intended oil
 deliveries for storage and sale. The Company has some storage available to
 it, to enable it to stock-pile oil when any shortfalls from forward
 nominations look likely to occur;                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                    
| |  | The Company
 was required to enter into financial hedges when it obtained a loan facility
 from Investec Bank. See discussion of the requirements and consequences of
 production levels imposed by these hedges under Item 11  Quantitative and
 Qualitative Disclosures About Market Risk, under the heading Derivative financial
instruments.

|            |  |                               |  |                               |  |                               |  |                     |  |                       |  |                    
|----------- |  | ----------------------------- |  | ----------------------------- |  | ----------------------------- |  | ------------------- |  | --------------------- |  | -------------------
|            |  | Year Ended
 December 31, 2007 |  | Year Ended
 December 31, 2006 |  | Year Ended
 December 31, 2005
|            |  |                               |  |                               |  |                              
|            |  | Oil & Liquids
 (bbls)         |  | Natural Gas
 (mscf)           |  | Oil & Liquids
 (bbls)         |  | Natural Gas
 (mscf) |  | Oil & Liquids
 (bbls) |  | Natural Gas
 (mscf)
|            |  |                               |  |                               |  |                               |  |                     |  |                       |  |                    
|Production  |  |                               |  |                               |  |                               |  |                     |  |                       |  |                    
|New Zealand |  | 92,299                        |  | 75,452                        |  | 15,147                        |  |                    |  | 31,228                |  |                   

|                                   |  |       |  |       |  |      
|---------------------------------- |  | ----- |  | ----- |  | -----
|Year ended
 December 31,           |  | 2007  |  | 2006  |  | 2005 
|                                   |  |       |  |       |  |      
|Average
 Sales Price (per bbl)     |  | 80.33 |  | 60.21 |  | 62.35
|Average Production
 Cost (per bbl) |  | 43.33 |  | 32.05 |  | 27.16

- 36 -

---



Drilling & Related Activities

As at May 31, 2008:

| |   |                                                                                                                                                                                                                                                                
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the Company has shut-in the Cardiff 2A ST1
well, after initial shut-in for pressure build-up and flow test (as discussed
in Item 4.D  Property, Plants and Equipment under the heading Principal Petroleum Properties Cardiff Field;                       
| |   |                                                                                                                                                                                                                                                                
| |  | the Cheal A6 well commenced drilling on
 June 10, 2008, with Cheal A7 due to spud on approximately July 3;                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                
| |  | 7 gross (3.4
 net) wells (including Cardiff 2A ST1) are temporarily suspended, pending
 testing and completion, or plug and abandonment decisions by the relevant
 joint venture parties, 2 gross (1.2 net) wells are suspended awaiting plug
 and abandonment;
| |   |                                                                                                                                                                                                                                                                
| |  | the Company has interests in 6 gross (4.33
 net) productive wells.                                                                                                                                                                                             

The number of wells drilled by
the Company (net interest) in the previous 3 fiscal years are:

|                          |  |      |  |  |      |  |  |      | 
|------------------------- |  | ---- |  |  | ---- |  |  | ---- | 
|Year ended December 31,   |  | 2007 |  |  | 2006 |  |  | 2005 | 
|                          |  |      |  |  |      | 
|Exploratory
  Productive |  | 0.70 |  |  | 0.35 |  |  | 0.25 | 
|Exploratory
  Dry        |  | 0.55 |  |  | 0.83 |  |  | 1.0  | 
|Development
  Productive |  | 2.09 |  |  |     |  |  |     | 
|Development
  Dry        |  |     |  |  |     |  |  |     | 

See additional disclosures
relating to permit terms and acreages, developed and undeveloped, at Item 5.B 
Business Overview under the heading Company
Properties.

|         |                           
|-------- | --------------------------
|ITEM 4A. | UNRESOLVED
 STAFF COMMENTS

Not applicable

|        |                                              
|------- | ---------------------------------------------
|ITEM 5. | OPERATING
 AND FINANCIAL REVIEW AND PROSPECTS

The following explanation is
managements view of:

|    |                                                                                                                                                                                                                                                                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | the
 Companys financial condition, changes in financial condition, and operating
 results for the historical periods covered by, and should be read in
 conjunction with, the audited consolidated financial statements of the
 Company (see Item 17) as of December 31, 2007 and 2006, and for the years
 ended December 31, 2007, 2006 and 2005; and
|    |                                                                                                                                                                                                                                                                                                                                                        
|(b) | managements
 assessment of the causes of such changes in financial condition that have
 affected, and the factors and trends which are anticipated to have a material
 effect in future periods on, the Companys financial condition and operating
 results.                                                                                         

The consolidated financial
statements have been prepared in accordance with Canadian GAAP, and the
discussions below refer to such financial statements, except where stated
otherwise. Information relating to the nature and effects of significant
differences to US GAAP is provided in Item 17, Note 27 of 2007 Consolidated
Financial Statements.

A. Operating Results

SUMMARY

During 2007, the Company began
production from permanent facilities at its Cheal field. It remains in the
exploration, production testing or evaluation stage on its other oil and gas
properties. The Company has reported a 2007 loss of $22,030,249 (under US GAAP 
loss of $19,575,624 compared to a net loss of

- 37 -

---



$13,406,828 in
the December 2006 year (restated 2005: $5,767,933). Total losses incurred from
incorporation to December 31, 2007 are $63,118,912 (under US GAAP  total
losses of $67,120,423).

Net loss per
share (basic and diluted) was $0.74 in 2007 compared to $0.57 in 2006 (2005:
$0.30).

Operating cash
flows before financing and investing were -$598,252 in 2007 compared to
-$1,429,378 in 2006 (2005: -$932,612). The improvement is mainly driven through
the net revenue produced by Cheal (after derivative losses) and reduced
expenditure on exploration in 2007, offset by the production and interest costs
associated with Cheal and higher general and administrative expenses.

The Companys
operating and financial highlights for the year ended December 31, 2007 included
the following:

|  |                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------
| | Completing
  and commissioning permanent production facilities for the Cheal field;                                                 
|  |                                                                                                                                     
| | Acquiring an
  increased interest in the Cardiff field, by purchasing International Resource
  Management Corporation Limited (IRM);
|  |                                                                                                                                     
| | Implementing
  significant organisational changes, including the appointment of a new CEO
  and CFO; and                            
|  |                                                                                                                                     
| | Placement of
  US$15.5 million (in cash and assets) of preferred and common shares during
  the year.                               

Subsequent to
year end, the Company announced:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sale of its
  interests in Stanley (PRL 4) and in PRL 5 to a subsidiary of Horizon Oil
  Limited (ASX: HZN) for $3.5 million, which transaction completed on May 30,
  2008, although legal transfer of the licences remains subject to receipt of
  governmental approval;                                                                                                                                                                                        
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Sale of its
  interests in Douglas (PPL 235) and in PPL 261 to a subsidiary of Rift Oil plc
  (AIM: RIFT) for $5 million, initial completion of such transaction occurring
  on May 29, 2008 ($2 million), with further payments due within 3 months ($1.5
  million), and within 12 months ($1.5 million) or earlier upon receipt of
  governmental approval of the legal transfers of the licences, and withdrawal
  of outstanding claims between the companies;
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Farm-out of
  an 80% interest in PEP 38524 to Australian Worldwide Exploration Ltd. (ASX:
  AWE) with effect from May 20, 2008. In return, AWE has undertaken to fully
  fund acquisition of some 350km of 2D seismic within the permit. The farm-out
  is subject to approval of a revised work programme by the Ministry of
  Economic Development;                                                                                                              
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
  placement of 12,500,000 shares at $1.20 (together with a 1:1 warrant) issued
  in February 2008;                                                                                                                                                                                                                                                                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | A
  renegotiation and restructuring of the terms of its loan facility with
  Investec Bank (Australia) Limited and agreement to fully repay the facility
  by December 15, 2008 (through production revenues and capital raising);                                                                                                                                                                                                                                 
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The close
  out of the Companys future crude oil contracts, and a short term loan from
  Investec for $17.8 million; and                                                                                                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
  agreement with TAG Oil Ltd. to settlement of all outstanding disputes between
  the companies in relation to the Cheal project. The settlement agreement
  requires the net payment by the Company to TAG of $1.6 million in a
  combination of cash, stock and expected forward production from the Cheal A7
  well and the issue of 2,273,000 Austral shares to TAG, which issuance
  occurred on Jun 9, 2008.                                             

Construction
of the Cheal Oil Field production station at the Cheal A site commenced in Q3
2006 and was completed in Q3 2007. The pre-commissioning test phase commenced
on August 10, 2007 and first oil was produced through the production station in
September 2007. The production station is now fully certified and was formally
opened on October 8, 2007. Three further Cheal wells (Cheal-B1, B2 and B3) were
brought into production in December 2007 following the completion of the
tie-ins to the pipelines connecting the Cheal B site with the production
facilities at the Cheal A site.

The Cardiff-2A
ST1 well was worked over during November and December 2007, additional wireline
work was completed on the well in January 2008, with flow testing of the K3E
zone commencing in late February 2008. The testing is on-going with the well
shut-in for a second extended pressure build-up period following a flow period
of the Kapuni, K3E formation at the end of April 2008. It is unlikely that
further operations will proceed before an independent review of all well tests
performed in the well (including the McKee and K1A test previously performed,
in addition to the more recent K3E test) has been completed.

- 38 -

---



Oil production
revenues are and will remain subject to international prices, based in US$. The
Company had crude oil forward sales contracts in place for the period July 2007
to December 2010 with an average price of US$65.10 per barrel. These were
closed out effective from May 27, 2008 onwards (and a placement of $90 put
options made). Since oil sales are priced in US$, the NZ$/US$ exchange rate
fluctuations affect the Companys NZ$ cash reserves. It is not possible to
accurately forecast the NZ$/US$ exchange rate or the oil price.

DISCUSSION OF MATERIAL CHANGES

Oil and Gas Revenue

Oil sales
increased to $7,336,906 from $911,931 in 2006 (2005: $1,779,454). The increase
was attributable to higher prices together with increased production volumes as
a result of Cheal being commissioned and commencing permanent production. The
average sales price per barrel increased from $60.21 in 2006 to $80.33 in 2007
(2005: $56.98 per barrel). The realised losses of $1,030,926 on forward oil
sales contracts reduces the average sale price of $80.33 to $69.04 per barrel.
These forward contracts are discussed in more detail in Item 11  Quantitative
and Qualitative Disclosures about Market Risk under the heading Derivative financial
instruments.

The Companys
net oil production in 2007 (all from Cheal) was 92,299 barrels oil  an overall
increase of 77,152 barrels from 15,147 barrels in the 2006 year (2005: 31,228
barrels).

The Company
has not had any significant gas production since November 2004 when the
Kahili-1A well ceased production. Gas produced in association with crude oil
production during 2007 was used to generate electricity for on-site use with
the excess electricity sold into the local grid. The export of gas via a
pipeline to the Waihapa Production Station commenced in December 2007, at
approximately 200 mscf per day. Total gas production during 2007 was 15,147
mscf (2006, 2005: Nil).

Of the $5,772
gas revenue earned in 2007, $4,710 was sold and delivered under the Gas
Prepayment Agreements reducing the prepaid gas revenue liability in the balance
sheet by the same amount.

Total Expenses

The
significant increase of $14,200,476 in Total Expenses of $29,959,281 compared
to 2006 ($15,758,805; 2005: $9,109,897) reflects in large part the Company
moving into the first year of Cheal production from permanent facilities and
the costs attributable to the financing of that investment.

Large
contributors to the production related increase were production costs (increase
of $2,482,553) and depletion (increase of $4,030,899). Production costs reflect
the operations of the Cheal production facility, together with transportation
and other selling costs of Cheal oil. Depletion (capital costs of Cheal times
production over proved developed reserves) increased as a result of the
significant increase in production from Cheal, together with the capital cost
associated with the construction and commissioning of the Cheal field and
facilities.

Allied to the
financing of the Cheal project, are Interest Expenses which increased by
$4,089,696, mainly due to the full year of interest expense of the Investec
loan facility $1,190,946 (2006: $42,204 from mid-December; 2005: $163) plus the
write down of all unamortised fees and discounts ($2,718,732), due to the loan
being reclassified as current in 2007 - see the discussion in Item 5.B 
Liquidity and Resources under the heading Loan
Facility below. The unrealised losses of $7,297,626 associated with
forward oil sales contracts entered into in connection with the Investec loan
facility increased by $6,841,841 on the back of higher international oil prices
(2006: $455,685; 2005: nil) (see detail on these forward oil sales contracts in
Item 11  Quantitative and Qualitative Disclosures about Market Risk under the
heading Derivative financial
instruments.)

Also a factor
in the increase in Total Expenses has been the increase of $3,029,356 in
General and Administrative Expense to
$7,101,911 (2006: $4,072,555; 2005: $3,609,531). Of that, staff related costs
increased by $1,254,010 in 2007. Throughout the year, the personnel resource
was strengthened by the recruitment of technical and administrative staff to
enable the Company to be better placed to maximise the value of its permits and
create shareholder value. The other main area of increase was consulting fees
which increased by $1,130,495. Consultancy charges are incurred for technical
expertise with a proportion of this subsequently recovered from other joint
venture parties. In addition, the Company pursued a number of operating
governance initiatives related to its ability to operate a facility such as
Cheal, and also financial initiatives such as preparation for Sarbanes Oxley
compliance. Also during the year there were several

- 39 -

---



strategic
commercial initiatives which incurred advisor fees.

Some of the
increased General and Administrative Expense was offset by increased cost
recoveries of $1,631,676, compared to $1,043,666 in 2006 (2005: $1,093,417).
These recoveries are in accordance with recovery mechanisms contained within
various joint venture agreements the Company is a party to, and driven largely
by the activity level in the joint ventures for which the Company is the
operator.

In contrast to
these increases in General and Administrative Expense, Oil and Gas Exploration
Expenditure reduced in 2007 to $3,228,674, from $8,171,981 in 2006 (2005:
$3,703,774). In 2007, exploration effort has been principally directed to the
acquisition of 2D seismic in the PNG Stanley permit (PRL 4), finalisation of
costs associated with the Ratanui dry hole, inventory for a planned Kahili-2
well later in 2008, and preparatory costs in advance of the Cardiff workover.
The expenses incurred in the Cardiff permit, for the workover activity preparatory
to a flow test in Q1 2008, are not included in exploration expenditure but have
been capitalised pending the results.

In 2006, the
main impact on exploration expenditure was the voluntary adoption of the
successful efforts accounting policy. The exploration expense written off
included all Papua New Guinea accumulated exploration expenses and New Zealand
accumulated exploration expenses other than for Cheal.The change in accounting policy has
been applied retroactively and prior years figures have been restated (see
discussion at Item 3.A  Selected Financial Data).

Stock
compensation in 2007 was $604,514 compared to $533,935 in 2006 (2005:
$673,711). This was calculated using a Black-Scholes valuation method (see Item
17, Note 17 (c) of 2007 Consolidated Financial Statements).

Interest Income

Interest
income of $269,559 (2006: $437,279; 2005: $460,411) was earned on surplus cash
balances. Interest earned continues to decrease in line with the decreased cash
balances on deposit throughout the year when compared to previous years.

Capital Expenditure

In 2007, the
capital investment of $25,228,873 (2006: $25,705,840; 2005: $6,119,897) in oil
and gas properties was in 3 key areas:

|  |                                                                                                                                                                                                                                                                       
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Capital
 expenditure on the Cheal wells and facilities of $15,519,974;                                                                                                                                                                                                
|  |                                                                                                                                                                                                                                                                       
| | Capitalisation
 of $1,711,070 of Cardiff costs in relation to the workover of the Cardiff-2A
 ST1 well; and                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                       
| | The purchase
 of IRM oil and gas properties with acquisition cost of $7,663,330 (gross),
 increasing Australs interest in the Cardiff permit by a further 19.8% to
 44.9%. See Item 17, Note 5(a) of the 2007 Consolidated Financial Statements
 for further details.

For specific
2007 expenditure, see Item 4.A  History and Development of the Company, under
the heading Principal Capital Expenditures
& Divestitures and Item 4.D  Property, Plants and Equipment.

Inflation

The Company
operates in New Zealand and Papua New Guinea, where inflation for the Companys
operational costs has been at relatively low levels in recent periods  i.e. in
the 2-5% range.

Foreign Currency Fluctuations

The Companys
practice is to raise its equity in United States dollars. However, when the
Company listed on the New Zealand Stock Exchange, equity was also raised in New
Zealand dollars. The Company holds cash denominated in both United States and
New Zealand currency. The Companys current property acquisition and
exploration commitments are denominated in United States and New Zealand
dollars and, to a much lesser extent, in currencies of other countries. The
Company is exposed to foreign currency risk on sales and purchases that are
denominated in a currency other than United States dollars. The currency giving
rise to this risk is primarily the New Zealand dollar due to all operational
and some capital costs being denominated

- 40 -

---



in New Zealand
dollars.

The Company
has established a policy to hedge its exposure to foreign currency exchange
rate risk. The Company has not entered into any forward exchange contracts as
at December 31, 2007 and is currently fully exposed to foreign exchange risk.

Papua New
Guinea, in which the Company operated until May 30 2008, may impose foreign
exchange restrictions that may materially affect the Companys financial
position and results of operations in that country.

During 2007
and up to the end of May 2008, the value of the New Zealand currency has
fluctuated against the value of the US currency. The highest and lowest NZ$:US$ rate throughout the period from
January 1, 2007 to May 31, 2008 is 0.6642 and 0.8214 respectively.

Government Regimes

See Item 3.D 
Risk Factors  Regulatory Requirements,
Item 3.D  Risk Factors  Carbon Emissions
Trading, Item 4.B  Business Overview  Business Environment, Item 4.D  Property, Plants and
Equipment  Regulatory Regime,
Item 10.D  Exchange Controls and Item 10.E  Taxation, for information on the
governmental policies or factors that could materially affect the Companys
operations, or investments made by US shareholders.

Other Factors

Critical Accounting Policies

The Companys
consolidated financial statements have been prepared in accordance with
Canadian GAAP, which differs in some respects from United States GAAP.
Information relating to the nature and effects of such differences in
accounting principles are set out in Item 17, Note 27 Differences between
Canadian and United States Generally Accepted Accounting Principles of the
2007 Consolidated Financial Statements.

The
application of GAAP involves the exercise of varying degrees of judgment. While
the resulting accounting estimates will, by definition, not always precisely
equal the related actual results, the following accounting policies are
considered particularly important, as they require management to make
significant judgments, some of which may relate to matters that are inherently
uncertain:

Financial Statements and Use of Estimates

These
consolidated financial statements have been prepared on a going concern basis
in accordance with Canadian generally accepted accounting principles, which
assumes that the Company will be able to continue in operation for the
foreseeable future and will be able to realize its assets and discharge its
liabilities in the normal course of business. Accordingly, the consolidated
financial statements do not reflect any adjustments in the carrying values of
the assets and liabilities, the reported expenses and balance sheet
classification used that would be necessary if the company was unable to
continue as a going concern. Such adjustments could be material. In preparing
financial statements, management makes informed judgments and estimates that
affect the reported amounts of assets and liabilities as of the date of the
Financial Statements and affect the reported amounts of revenues and expenses
during the reported period. Specifically, estimates were utilized in
calculating depletion, asset retirement obligations, stock-based compensation,
amortization and impairment write-downs. Actual results could differ from these
estimates and the differences could be material. Information relating to usage
of estimates and judgements is set out in Item 17, Note 4 Critical Accounting
Estimates and Judgements.

Accounting for Oil and Gas Operations

Effective in
2006, the Company has followed the successful efforts method of accounting for
its operations. Under this method, acquisition costs of oil and gas properties,
to drill and equip exploratory wells that find proved reserves and costs of
drilling and equipping development wells are capitalized and subject to annual,
or more frequent, impairment testing.

Exploration well costs are
initially capitalized and, if subsequently determined to have not found
sufficient reserves to justify commercial production, are charged to
exploration expense. Exploration well costs that have found sufficient reserves
to justify commercial production, but those reserves cannot be classified as

- 41 -

---



proved,
continue to be capitalized as long as sufficient progress is being made to
assess the reserves and economic viability of the well and or related project.
All other exploration costs, including geological and geophysical costs, are
charged to exploration expense when incurred.

Capitalized
costs of proved oil and gas properties are depleted using the unit of
production method based on estimated gross proved reserves of petroleum and
natural gas as determined by independent engineers. Successful exploratory
wells and development costs and acquired resource properties are depleted over
proved developed reserves. Acquisition costs of unproved reserves are not
depleted or amortized while under active evaluation for commercial reserves.

Costs
associated with significant development projects are depleted once commercial
production commences.

A revision to
the estimate for proved reserves can have a significant impact on earnings as
they are a key component in the calculation of depreciation, depletion and accretion.

Producing
properties and significant unproved properties are assessed annually, or more
frequently as economic events dictate, for potential impairment. Impairment
test is initially based on undiscounted future cash flows from proved and risk
adjusted probable reserves. If an impairment indicator is identified, fair
value is calculated as the present value of estimated expected discounted
future cash flows from proved and risk-adjusted probable reserves. Any
impairment loss is the difference between the carrying value of the oil and gas
property and its fair value. If it is determined that the estimated net
recoverable amount is less than the net carrying amount, a write-down to the
oil and gas propertys fair value is recognized during the period, with a
charge to earnings.

Estimates of
future cash flows used in the evaluation of impairment of assets are performed
based on risk assessments on field and reservoir performance and include
judgment assumptions regarding commodity prices, exchange rates, discount rates
and future costs.

A substantial
portion of the Companys exploration and development activities are conducted
jointly with others. The Financial Statements reflect only the Companys
proportionate interests in such activities.

The Company
engaged Sproule International Limited, an independent geoscience consultancy
firm, to evaluate 100% of the Companys proved and probable oil and natural gas
reserves, and the reserve estimates presented are based on independent
evaluations by Sproule. The estimation of recoverable quantities of proven and
probable reserves is subjective. Forecasts are based on engineering data,
future prices, expected future rates of production and the timing of capital
expenditures, include judgmental assumptions regarding commodity prices,
exchange rates, recovery rates, and production and transportation costs, all of
which are subject to uncertainties and interpretations. It also requires
interpretation of complex and difficult geological and geophysical models in order
to make an assessment if the size, shape, depth and quality if reservoirs and
anticipated recoveries. Reserve estimates will be revised upward or downward
based on the results of future drilling, testing and production levels.

As at December
31, 2007, the Company had recognized proven hydrocarbon reserves in respect of
the Cheal discovery, which reserves are classified as Developed and
undeveloped. The Cardiff, Stanley and Douglas discoveries are still subject to
appraisal and production testing and the Company has not recognized any
reserves with respect to them. The Company therefore only has reserves located
in New Zealand at the Cheal Field. The Kahili Field is classified as Developed,
but had no reserves attributed to it at present.

Accounting Policies

The Company
has adopted the accounting policy permitting Capitalization of Interest Costs.
In so doing it has applied CICA HB section 3061 Property Plant and Equipment
and CICA HB section 3850 Interest Capitalised  disclosure consideration. The
policy requires that the interest (including borrowing) costs are capitalized
for all assets that require a period of time to get them ready for their
intended use (an acquisition period). Cheal development was considered as a
qualifying asset, while it was being developed.

There have
been no other changes in accounting policies applied during the year ended
December 31, 2007.

- 42 -

---



B. Liquidity and Capital Resources

LIQUIDITY

The Company
maintains its liquidity by raising additional capital from outside sources,
farming-out capital expenditures, raising debt finance, or rescheduling or
deferring commitments to meet its work programmes. The Company relies on its
ability to raise additional capital through the issuance of common shares,
which may have a dilutive effect on the Companys shareholders, to fund work
programmes. If the Company chooses to raise additional funding, the Company
cannot give assurance that it will be able to secure outside sources of capital
in an amount that is sufficient for it to undertake its work programmes.

The Company is
currently earning revenue from the sale of Cheal oil and gas.

Cash and Working Capital

At December
31, 2007 the Company had cash and short-term deposits of $9,019,812 (excluding
restricted cash of $3,000,000) compared to $7,144,943 at December 31, 2006
(2005: $15,339,906). As at December 31, 2007, the Company had a working capital
(current assets less current liabilities) deficit of $29,982,748 compared to a
deficit of $1,480,287 in 2006, a decrease in working capital of $28,502,461
compared to 2006 (2005: working capital $14,837,152 surplus). The significant
factors contributing to this change were the classification to current of the
Investec loan facility and the oil hedges, together with the impact of the
rising oil price on the oil hedges.

Current assets
were $19,003,004, including cash on hand of $9,019,812 (mainly equity placement
funds) and accounts receivable of $5,689,279 (principally crude oil debtors and
advances to joint ventures). The current liabilities were $48,985,852  of
significance are:

|  |                                                                                                                                                                                     
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Accounts
  payable of $11,226,465, consisting mainly of trade and sundry creditors
  ($7,588,780) and final payment for the IRM acquisition ($3,100,800 paid on
  January 25, 2008);
|  |                                                                                                                                                                                     
| | Net cash in
  advance being equity placement funds pending share issue ($9,679,614). The
  shares were issued on February 28, 2008;                                                 
|  |                                                                                                                                                                                     
| | Oil hedges
  ($7,753,311) classified as a current liability because of the Investec loan
  covenant breach*; and                                                                    
|  |                                                                                                                                                                                     
| | The Investec
  loan facility ($18,650,000) classified as a current liability because of the
  loan covenant breach*.                                                                

* The position under the Loan
Facility is discussed in more detail below, under the heading Loan Facility.

At May 31,
2008 (unaudited) the Company had cash and short-term deposits of $6,318,471
(excluding restricted cash of $1,000,000) and a working capital (current assets
less current liabilities) deficit of $20,625,713. Current assets were
$16,555,697, including cash on hand of $6,318,471 and accounts receivable of
$7,155,412 (principally crude oil debtors and
advances to joint ventures). The current liabilities were
$37,181,410  of significance are:

|  |                                                                                                                                                                                                                                        
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Accounts
  payable of $6,647,820, consisting mainly of trade and sundry creditors
  ($4,294,786)                                                                                                                                       
|  |                                                                                                                                                                                                                                        
| | The original
  Investec loan facility ($10,950,000) classified as a current liability
  because of the loan covenant breach* plus an additional $17,847,000 advanced
  to fund the close out of the crude oil forward sales contracts

Such a
position raises questions as to Australs capability to continue as a going
concern. Managements plans for securing sufficient sources of liquidity
include the following:

|  |                                                                                                                                                                                                                                                                            
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Issuance of
  additional common shares in a private placement in order to raise
  $15,000,000. As further described in Item 17, Note 25(c) of the 2007
  Consolidated Financial Statements, the Company completed this private
  placement on February 28, 2008;           
|  |                                                                                                                                                                                                                                                                            
| | Sale of its
  interests in Stanley (PRL 4) and in PRL 5 to a subsidiary of Horizon Oil
  Limited (ASX: HZN) for $3.5 million, which transaction completed on May 30,
  2008, although legal transfer of the licences remains subject to receipt of
  governmental approval;

- 43 -

---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Sale of its interests in
  Douglas (PPL 235) and in PPL 261 to a subsidiary of Rift Oil plc (AIM: RIFT)
  for $5 million, initial completion of such transaction occurring on May 29,
  2008 ($2 million), with further payments due within 3 months ($1.5 million),
  and within 12 months ($1.5 million) or earlier upon receipt of governmental
  approval of the legal transfers of the licences;                                                   
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Farm-out of an 80% interest
  in PEP 38524 to Australian Worldwide Exploration Ltd. (ASX: AWE) with effect
  from May 20, 2008, In return AWE has undertaken to fully fund acquisition of
  some 350km of 2D seismic within the permit. The farmout is subject to
  approval of a revised work programme by the Ministry of Economic Development;                                                                                                       
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | Rectifying the covenant breaches
  relating to its loan facility with Investec. A key to rectifying the breach
  is the drilling of at least two further wells to satisfy the completion
  test under the facility. The completion test requires certain proven and
  probable reserves and associated production rates to be achieved, together
  with certain related forward looking financial ratios. Drilling commenced on
  June 10, 2008; and
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | A mix of further capital
  raising and/or sales of joint venture interests.                                                                                                                                                                                                                                                                                                                                                                             

Non-Current Assets

The non-current assets
increased from $26,244,389 in 2006 to $43,728,956 as at December 31, 2007
(2005: $3,597,147)  an increase reflecting the Capital Expenditure described
in Item 5.A  Operating Results under the heading Capital Expenditure, less depletion in 2007. This year-end
balance consists principally of the investment in Cheal (the facilities,
including associated plant and equipment plus the Arrowhead acquisition from
2006) at $32,012,060 plus the acquisition cost of IRM (Cardiff interest)
$7,663,330 and the costs associated with the Cardiff workover at December 31,
2007 ($1,711,070).

Non-Current Liabilities

Non-current liabilities have
increased from $12,668,342 in 2006 to $17,036,310 in 2007 (2005: $1,592,871).
The long term debt of $9,282,806 reflects the preferred shares issued in 2007
(in 2006 non-current liabilities included the Investec loan facility of
$6,662,834 which is now being classified as a current liability at December 31,
2007). Otherwise the main change has been to recognise an additional deferred
tax provision of $1,749,977 arising from the IRM acquisition.

Loan Facility

In order to complete the
development of the Cheal field (including the acquisition of Arrowhead), the
Company put into place a project loan facility in December 2006 with Investec
Bank (Australia) Ltd (Investec). The total amount raised was $23,000,000 of
which $15,738,000 was drawn down as at 31 December 2006 (which included
$3,000,000 held in a restricted bank account as part of the security
arrangements supporting the facility). The remaining $7,262,000 was drawn down
in three instalments during 2007. Repayments made, in accordance with the
schedule, during 2007 totalled $4,350,000. The balance outstanding under the
facility at December 31, 2007 was $18,650,000. See Item 17, Note 21 Debt (a)
Investec Loan.

The Company is in breach of
several covenants relating to its loan facility, following delays in completing
the Cheal project in accordance with established timelines. Accordingly, the
loan facility and hedging arrangements have been disclosed as current
liabilities.

The Company and Investec have
agreed to restructure the facility, with the key financial terms requiring a
principal payment of US$4,200,000 on March 31 2008 (reflecting the scheduled
US$2,200,000 due; with the further US$2,000,000 paid from the restricted cash
held in respect of the loan facility and applied in inverse order of maturity),
since paid. In addition, a further US$3,500,000 was required to be paid on
completion of the announced sale of the PNG PRL 4 and 5 assets (to be applied
as $2,050,000 against the June 30 scheduled principal due; and the balance of
US$1,450,000 million applied in inverse order of maturity); such payment has
since been made. The interest rate margin has increased by an additional 2% on
the total principal outstanding for the period January 31 to December 15, 2008
inclusive. In addition the Company agreed to issue to Investec shares to the
value of US$750,000 based on the Austral share price at March 19, 2008, which
issuance occurred on May 23, 2008. There are several commercial and
administrative conditions which must also be complied with.

Shareholders Equity

The decrease in Shareholders
equity of $15,385,862 (from $12,095,760 in 2006 to -$3,290,102 in 2007; 2005:
$16,841,428) is attributable to the Net Loss of $22,030,249 largely offset by
capital raised in 2007 of

- 44 -

---



$5,490,745. At December 31,
2007 the initial net proceeds received of $9,679,614 from the common stock
placement of $15,000,000 in December 2007 were held on the balance sheet as
net cash in advance pending final approvals from the regulatory authorities.
All funds were received in mid February with final approval received and shares
issued on February 28, 2008.

As at May 31, 2008,
shareholders equity was $4,361,755 is attributable to the net loss for the
period ended May 31, 2008 of $8,212,599.

Subsidiary Restrictions

There are no legal or
economic restrictions on the ability of subsidiaries to transfer funds to the
Company in the form of cash dividends, loans or advance, with the exception
that under the Investec loan facility (see Exhibit 2.1), certain of the
Companys subsidiaries are restricted from transferring funds to the Company
until after the Completion Date under that facility agreement, and after that,
only where permitted by the covenants of the facility. As those subsidiaries
are the groups only recipients of production revenue at this time, in some
circumstances these restrictions may be considered to impair the Companys
ability to meet its obligations. However, management also uses equity raising,
farm-out of permit interest (divestment of part of a permit in exchange for a
proportionally larger contribution to the project), project financing, and
reduction or deferral of commitments to meet or manage the Companys
obligations, and does not anticipate that the restrictions on the distribution
of Cheal project revenue will materially affect the Companys ability to meet
the obligations to which it commits.

Farm-in/Farm-out Arrangements

The Company undertakes
farm-in or farm-out arrangements, whereby the Company or a third party will
take a part share of a permit for a premium to recognize the work previously
undertaken. Farming out part of a permit is one of the options that the Company
has available to it to enable it to meet exploration permit commitments. These
are standard ordinary course of business transactions for the Company. Such
arrangements are important to the Company in ensuring it maintains a balanced
portfolio of exploration options, and manages its cashflow and work programme
commitments. Such arrangements may include a lump sum payment for expenses
previously incurred, an agreement for the party farming-in to pay a greater
contribution for a particular project thereby earning its permit interest,
the grant of a royalty by the farming-in party to the seller, or combinations
of these and other arrangements. There have been no significant farm-in or
farm-out arrangements entered into during the period ended December 31, 2007.
In May 2008, the Company farmed-out an 80% interest in PEP 38524, and
transferred operatorship of that permit, in exchange for the purchaser paying
all costs of the forthcoming seismic survey required to be undertaken in that
permit area.

Another method employed by
the Company of providing or receiving value without incurring immediate
cashflow effects is to grant or receive grant of royalties over permit
interests. The return is received or provided only if revenue is obtained in
the permit.

FINANCIAL INSTRUMENTS, TREASURY ACTIVITIES

The Companys treasury
policies objectives are to ensure that funds are available to implement the
Companys strategy, undertake acquisitions and provide an adequate level of
debt versus equity. No borrowing is authorized without the express approval of
the Board of Directors. The Companys risk management policys objective is
enable the prudent, orderly and efficient management of the financial exposures
of the Company through the effective management of commodity price risk,
interest rate risk, foreign exchange risk and operational risk. The policy
applies to all hedging activities undertaken by the Company. The Company may
only use instruments that have been approved by the Board.

The Companys capital
resources have historically been comprised primarily of private investors, who
are either existing contacts of the Companys management or shareholders or who
come to the attention of the Company through personal and business contacts,
financial institutions and other intermediaries. This process has developed as
a wider shareholder base was established, including some institutional
investors. Due to the speculative nature of the Companys business and its
current limited revenue generating assets, potential investors are generally
limited to sophisticated investors willing to accept a higher degree of risk.

In December 2006, Austral
Pacific Energy (NZ) Limited, a wholly owned subsidiary, entered into a project
loan facility for $23,000,000 with Investec Bank (Australia) Ltd (refer to
section above, under heading Loan Facility).
Information relating to the facilitys variable interest rates is set out in
Item 17, Note 21 Debt and

- 45 -

---



Note 22 (b) Interest rate
risk.

The Company has entered into
a series of put options and forward sales contracts for the future sale of
crude oil produced from the Cheal field (refer Item 11). Derivative instruments
that are not designated as hedges for accounting purposes are recorded on the
Consolidated Balance Sheets at fair value with the resultant net gain or loss
recognised in the Consolidated Statements of Operations and Deficit in the
current period (see Item 17). The fair value of derivative instruments is based
upon a discounted cash flow analysis valuation or option pricing model at the
balance date. The forward price curve of oil is used as an underlying input in
the valuation process. These forward sales contracts were closed out on May 27,
2008 (and a placement of $90 put options made).

Cash and cash equivalents are
held primarily in US dollars. The Company has an ongoing requirement for New
Zealand dollars to meet certain operational and administrative expenses. This
requirement is met by utilizing the spot foreign exchange market to sell US
dollars and purchase New Zealand dollars. The Company currently has no
instruments in place for foreign exchange hedging purposes.

The stock options outstanding,
weighted average prices and stock option compensation cost are set out in the
Companys financial statements for the year ended December 31, 2007 (see Item
17, Note 17(c) of the 2007 Consolidated Financial Statements). Grants and
lapses of options during 2007 are set out in Item 6.E.

During 2007, the Company
issued 4,651,855 common shares. Of these, 1,851,855 shares were issued in part
settlement of the acquisition price for IRM (see Item 4.A  History and
Development of the Company, under the heading Principal
Capital Expenditure & Divestitures), and a private placement of
2,500,000 common shares was made (see Item 4.A  History and Development of the
Company, under the heading Important Events).
Stock options were also exercised (300,000 shares issued  see Item 6.E). The
shares issued in the private placement were priced at $1.30, those issued in
part settlement of the IRM purchase were priced at $1.21, and the shares issued
as a result of options being exercised were priced at $1.20.

Further, the Company
privately placed 7,692,308 preferred shares in September 2007. Information
relating to the fixed interest rate of the preferred shares is set out is Item
17, Note 21 Debt and Note 22 (b) Interest rate risk. The Company has
reached an agreement in principle with the holders of the preferred shares for
the exchange of the preferred shares for convertible debentures, with effect
from January 1, 2008. The convertible debentures would have similar commercial
terms, but would not be entitled to any voting rights. The exchange will be
subject to a number of conditions precedent, including the approval of the TSX.

As at December 31, 2007,
there were 32,416,142 common shares and 7,692,308 preferred shares outstanding.
At year end, net cash in advance of $9,679,614 had been received (in respect of
8,350,000 of a total placement of 12,500,000 shares at a price of $1.20 per
share). The placement completed on February 28, 2008.

As at June 24, 2008, the
Company had binding agreements with nine arms length investors (not including
any managers, shareholders or any other insiders) for additional financing
totaling $5.61 million, for issue of 11.22 million common shares and 5.61 share
purchase warrants. Such agreements (see Exhibit 14.11) are subject to regulatory
approval by the TSX-V, due in the ordinary course.

MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURE

At December 31 2007, the
Company had the following material capital commitments for the year ending
December 31, 2008:

|                      |  |                                                                   |  |            |  |                                  
|--------------------- |  | ----------------------------------------------------------------- |  | ---------- |  | ---------------------------------
|Property              |  | Work description                                                  |  | $US        |  | Source of Financing              
|                      |  |                                                                   |  |            |  |                                  
|PMP 38156S (Cheal)    |  | Completing pipeline,
  facilities and commissioning & 2 new wells |  | 5,548,632  |  | Working capital, further
  equity
|PMP 38156D (Cardiff)  |  | Completion of Workover                                            |  | 306,211    |  | Working capital                  
|PEP 38524 (DUrville) |  | 200km of 2D seismic                                               |  | 558,144    |  | Working capital                  
|PPL 235 (Douglas)     |  | Drilling Puk Puk 1 Well                                           |  | 4,534,866  |  | Working capital                  
|PRL 4 (Stanley)       |  | Completion of Stanley
  Seismic                                   |  | 305,983    |  | Working capital                  
|                      |  |                                                                   |  |            |  |                                  
|                      |  | Total                                                             |  | 11,253,836 |  |                                  

- 46 -

---



As at May 31, 2008, these
commitments had changed, by the completion of some items. Major updated
commitments to December 31, 2008 are therefore as follows:

|                  |  |                    |  |           |  |                                  
|----------------- |  | ------------------ |  | --------- |  | ---------------------------------
|Property          |  | Work
  description |  | $US       |  | Source of
  Financing            
|                  |  |                    |  |           |  |                                  
|PMP 38156 (Cheal) |  | 2 new wells        |  | 2,602,080 |  | Working capital, further
  equity
|                  |  |                    |  |           |  |                                  
|                  |  | Total              |  | 2,602,080 |  |                                  

In addition to the above
required work programmes, the Company is planning to carry out the following
significant projects (but no firm commitment exists) during fiscal 2008:

|                   |  |                    |  |           |  |                          
|------------------ |  | ------------------ |  | --------- |  | -------------------------
|Property           |  | Work
  description |  | $US       |  | Source of
  Financing    
|                   |  |                    |  |           |  |                          
|PMP 38153 (Kahili) |  | Well (Kahili-2)    |  | 6,431,100 |  | Working capital, farm out
|                   |  |                    |  |           |  |                          
|                   |  |                    |  | 6,431,100 |  |                          

In addition to the above
planned significant expenditures for the period May 31 to December 31, 2008,
the Company anticipates expenditures on geology and geophysics desk and field
studies in various permits as work plans are further developed.

Any joint venture commitments
beyond the 2008 fiscal year are summarized in Item 5.F  Tabular Disclosure of
Contractual Obligations. Joint venture commitments generally relate to the
current year exploration work programme only. Any commitments beyond that
period are subject to joint venture participants (including the Company)
deciding that the relevant permit is sufficiently prospective to commit to
subsequent permit years and the work programme specified for those years.

During the current (2008)
fiscal year to May 31, 2008, the Company has funded its projects from working
capital, private placement funds, revenue from production and overhead
recoveries. The Company intends to continue to investigate the possibility of
funding expenditure through farm-outs to other exploration companies and/or by
raising additional capital by private placement, divestment of some assets, or
public investment. If such funding does not become available, the Company
intends to seek deferral of projects until such time as funding is available.
If none of these options are possible, the Company would then be required to
relinquish certain properties without financial penalty.

C. Research and
development, patents and licenses

The Company invests in
research and development activities, insofar as it conducts prospecting
activities in its permits, interprets data acquired within the Companys
permits, and reviews publicly available or traded data, for new prospects.
Significant expenditure on exploration activities is discussed in Items 4.D and
5.A.

D. Trend Information

There are no significant
trends during or since the latest financial year that can be identified in
connection with the Companys business or environment, with perhaps the
exception of rising energy prices and increased costs of exploration.

E. Off-Balance Sheet
Arrangements

The Company did not in fiscal
2007 enter into any off-balance sheet arrangements that would adversely impact
materially on the Companys financial position or results of operations.

F. Tabular
Disclosure of Contractual Obligations

As at year-end 2007, the
Company had various commitments and obligations. These were largely in respect
to permit work programme obligations and the Companys share of approved joint
venture expenditures (see tables under Item 5.B  Liquidity and Capital
Resources  Material Commitments for Capital Expenditure). The Company also has
obligations in respect to two pre-paid gas agreements the first of which was
entered

- 47 -

---



into by Austral in 2003, and
the second as a result of the purchase of Arrowhead Energy Limited in December
2006. These agreements are explained in detail in Item 17, Note 19 of the 2007
Consolidated Financial Statements.

As at December 31, 2007, the
Company had the following contractual obligations:

|                                   |  |                          |            |                   |  |             |  |             |            |               |  |         |  |  |   | 
|---------------------------------- |  | ------------------------ | ---------- | ----------------- |  | ----------- |  | ----------- | ---------- | ------------- |  | ------- |  |  | - | 
|2007                               |  | Payments Due by Period $ |           
|                                   |  |                          |            |                   |  |             |  |             |            |               |  |         |  |  |   | 
|Contractual
 and other obligations |  | Total                    |            | Less than 1
 year |  | 1 - 3 years |  | 3 - 5 years |            | After 5 years | 
|                                   |  |                          |            |                   |  |             |  |             |            |               |  |         |  |  |   | 
|Operating Leases                   |  |                          | 603,604    |                   |  | 148,158     |  |             | 295,897    |               |  | 159,549 |  |  |  | 
|Joint Operations
 Commitments (1)  |  |                          | 11,253,836 |                   |  | 11,253,836  |  |             |           |               |  |        |  |  |  | 
|Debt (2)                           |  |                          | 19,312,984 |                   |  | 19,312,984  |  |             |           |               |  |        |  |  |  | 
|Prepaid gas revenue                |  |                          | 3,352,863  |                   |  | 831,040     |  |             | 1,686,774  |               |  | 835,049 |  |  |  | 
|Preferred Shares (3)               |  |                          | 12,176,438 |                   |  | 800,000     |  |             | 11,376,438 |               |  |        |  |  |  | 
|                                   |  |                          |            |                   |  |             |  |             |            |               |  |         |  |  |   | 
|Total
 Contractual Obligations     |  |                          | 46,699,726 |                   |  | 32,346,018  |  |             | 13,359,109 |               |  | 994,598 |  |  |  | 

(1) The joint venture
commitments are in respect of its current year exploration permit obligations.
The Company is committed to its share of current year exploration permit
obligations to other joint venture participants and has a contractual
obligation to various joint venture participants for these current year
exploration permit obligations. (2) Balance consists of outstanding loan
principal and interest. Because of the breach of several covenants the loan
facility has been reclassified as a current liability and is fully repayable by
December 15, 2008. (3) Balance consists of outstanding principal and dividends.
The preferred shares were issued on September 20, 2007 and have a fixed
preferential cumulative dividend of 8% per year for a 3 year period. After 3
years the holder can request redemption or the Company can redeem the shares.
Refer Item 17 Note 21(b) Preferred shares.

Apart from the items
described above, there have been no material changes outside the ordinary
course of the Companys business in the specified contractual obligations since
December 31, 2007 up to May 31, 2008.

|        |                                           
|------- | ------------------------------------------
|ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A. Directors and
senior management

The names, municipality of
residence and position held of the directors and senior management of the
Company, as at June 13, 2008 are as follows:

Directors

|                   |  |                     |  |                                                          
|------------------ |  | ------------------- |  | ---------------------------------------------------------
|Name (1)           |  | Residence           |  | Position(s) Held                                         
|                   |  |                     |  |                                                          
|Douglas Ellenor    |  | Surrey,             |  | Director                                                 
|                   |  | B.C., Canada        |  |                                                          
|                   |  |                     |  |                                                          
|Peter Hazledine    |  | Wellington,         |  | Director                                                 
|                   |  | New Zealand         |  |                                                          
|                   |  |                     |  |                                                          
|Peter Hill         |  | Boston, MA          |  | Director, Chairman of the
 Board                         
|                   |  | USA                 |  |                                                          
|                   |  |                     |  |                                                          
|Thompson Jewell    |  | Calgary, AB
 Canada |  | Chief Executive Officer (2),
 President (2), Director (2)
|                   |  |                     |  |                                                          
|David Newman       |  | Paraparaumu Beach,  |  | Director                                                 
|                   |  | New Zealand         |  |                                                          
|                   |  |                     |  |                                                          
|Bernhard Zinkhofer |  | Richmond,           |  | Director                                                 
|                   |  | B.C., Canada        |  |                                                          

- 48 -

---



Senior Managers

|                |  |             |  |                               
|--------------- |  | ----------- |  | ------------------------------
|Name (1)        |  | Residence   |  | Position
 Held                
|                |  |             |  |                               
|Derek Gardiner  |  | Wellington, |  | Chief Financial Officer (3)   
|                |  | New Zealand |  |                               
|                |  |             |  |                               
|Joseph Johnston |  | Wellington, |  | Petroleum Engineering
 Manager
|                |  | New Zealand |  |                               
|                |  |             |  |                               
|Carey Mills     |  | Wellington, |  | Exploration Manager           
|                |  | New Zealand |  |                               
|                |  |             |  |                               
|David Pay       |  | Wellington, |  | Head Legal Counsel (4)        
|                |  | New Zealand |  |                               
|                |  |             |  |                               
|Warren Player   |  | Wellington, |  | Manager, Joint Venture and    
|                |  | New Zealand |  | Government Relations          
|                |  |             |  |                               
|Jeanette Watson |  | Wellington, |  | Corporate Secretary           
|                |  | New Zealand |  |                               

|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Neither age nor date of
 birth of directors or senior managers is required to be reported in the
 Companys home country (Canada) nor otherwise publicly disclosed.
|    |                                                                                                                                                                    
|(2) | Mr. Jewell was appointed as
 CEO and President of the Company on May 1, 2007, and appointed as a director
 of the Company on May 4, 2007.                          
|    |                                                                                                                                                                    
|(3) | Appointed June 11, 2007.                                                                                                                                           
|    |                                                                                                                                                                    
|(4) | Appointed August 6, 2007.                                                                                                                                          

DIRECTORS

Dr. Douglas Ellenor

Dr. Ellenor was appointed to
the Board from January 1, 2006. He holds a BSc (Hons) (Queens University,
Kingston) and PhD (University of New England, Australia), both in Geology. He
has over 35 years experience in the exploration and production (E&P)
industry, spending 25 years with the Royal Dutch/Shell Group in Australasia,
Europe and North and South America. During that period, he held progressively
more senior managerial assignments, chiefly in Exploration, culminating in his
appointment as President and CEO of the Shell Companies of Colombia
(1992-1996). He left Shell in 1996 to become CEO of the Colombian E&P
company, Hocol SA, a position he held until 1998. After a posting as Business
Development Director in London, UK, he returned home to Canada and established
an oil and gas consulting company. In this capacity, he again served as CEO of
Hocol SA (2002-2003) and later CEO of Orca Petroleum, Inc. (2004-2006).

Dr. Ellenor was appointed to
the Board of Orca Petroleum, Inc., Calgary (TSX-V: OPI) in 2000, and continued
to serve in that capacity until April 2006. In September 2006, he joined the
board of L&M Petroleum Ltd (NZSX, ASX: LMP) as a non-executive member. He
is a member of the American Association of Petroleum Geologists and Canadian
Society of Petroleum Geologists.

Mr. Peter Hazledine

Mr. Hazledine was appointed
to the Board from January 1, 2008. Mr. Hazledine is a New Zealander with 35
years experience in the international E&P industry. He spent 30 years with
the Royal/Dutch Shell Group in Africa, the Middle East, New Zealand, Europe,
and South America. He worked initially as a petrophysicist and production
technologist, moving into operations engineering and management (including 10
years with Shells New Zealand operating company, Shell Todd Oil Services, on
the Maui and other Taranaki fields). He left Shell in 2004, to take up a senior
management position with Vector Gas (formerly NGC), the principal gas
distributor in the New Zealand market. He left this role in late 2007 to pursue
a more diverse portfolio of opportunities.

Mr. Hazledine has a B.Sc
(Hons) in mineral technology from Otago University, in Dunedin, New Zealand. He
is a member of the Institute of Directors in New Zealand.

- 49 -

---



Dr. Peter Hill

Dr. Hill was appointed to the
Board from January 1, 2006. He holds a B.Sc Degree in Geology from Southampton
University, England, and a shared Doctorate of Philosophy in Sedimentology from
Southampton University and Trinity College, Ireland. Dr. Hill has over 35
years experience in the exploration and production industry, spending 22 years
with British Petroleum in a range of senior positions in Australia, Egypt, New
Zealand, the North Sea and South America. Dr. Hill is now a consultant advising
companies on strategic delivery and governance, and works with Palo Alto
Investors, a large hedge fund, on international energy investment
opportunities.

Dr. Hill was President and CEO
of Benton Oil and Gas Company, originally in Carpinteria, California, now in
Houston, Texas, U.S.A. (now called Harvest Natural Resources, Inc.) from August
2000 until October 2005. He remained on the Board of that company until end May
2006.

Mr. Thompson Jewell  CEO, President

Mr. Jewell has some 30 years
of experience in the international oil and gas industry, having worked in the
Middle East, the United States, the United Kingdom, Australia and Canada.
Educated at the University of Alberta, Mr. Jewell holds a B.Sc in geophysics.
He was appointed as CEO of the Company from May 1, 2007 and elected as a
director from May 4, 2007.

Mr. Jewell has held a variety
of technical and senior executive roles in previous positions with Amoco
(1977-1999) and Santos (2000-2004). He was responsible for the successful
design and execution of Amocos Deep Water Gulf of Mexico E&P strategy that
supported a $100 million per year exploration and appraisal budget. Thompson
represented Amoco as President of the company in Oman during an active
exploration phase. Mr Jewells tenure with Santos in Australia included
significant discoveries in the NW Shelf and appraisal of an Otway Basin
discovery.

Mr. David Newman

Mr. Newman was appointed to
the Board in September 2003. He is a Chartered Accountant and formerly Chief
Executive Officer of the Institute of Directors in New Zealand. He previously
had a 22 year career with British Petroleum, culminating in four years as Chief
Executive and Managing Director of BP New Zealand Limited (1990-1994).

Mr. Newmans current
directorships include Chairman of Infratil Limited (director since February
1994), Wellington International Airport Limited (director since December 1998)
and Loyalty New Zealand Limited (director since December 2006). Mr. Newman is
also a member of the Board of Guardians of the New Zealand Superannuation Fund
and a director of Infratil European Airports Limited. Mr. Newmans past
directorships have included Chairman of Norwich Union and State Insurance Group
in New Zealand, Chairman of the NZ Refining Company Limited and of Finmedia
Limited, member of the advisory board of BP Australia, and a director of New
Zealand Post Limited.

Mr. Bernhard Zinkhofer

Mr. Zinkhofer was educated at
the universities of Calgary (B.Comm, 1977) and Victoria (LL.B, 1983) and is
accredited as a Chartered Accountant (1980) and as a lawyer (1984). He has
practised law as a partner at the law firm of Lang Michener LLP in their
Vancouver, British Columbia office since 1992.

Mr. Zinkhofer served as a
director of the Company from 2001 to 2005, and was re-appointed to the Board on
August 22, 2007. He has served as a director of several public and private
corporations. He is currently corporate secretary to two public companies in
Canada - Great Basin Gold Ltd. and Inviro Medical Inc., and is a director of a
third, Wireless2 Technolgies Inc. (since 2007).

SENIOR MANAGERS

Mr. Derek Gardiner  Chief Financial Officer

Mr. Gardiner was appointed as
the Companys Chief Financial Officer from June 11, 2007. Mr Gardiner holds a
MBS from Massey University (NZ) is a member of the Institute of Chartered
Accountants in New Zealand and also the Institute of Chartered Secretaries. He
is a New Zealand citizen and has worked in the oil and gas

- 50 -

---



industry since 1987 where he
has held senior planning and finance roles for Shell in New Zealand, Brunei,
Malaysia and Australia.

Mr. Gardiner joined the
Company from Shell Development Australia where he has been Finance and Planning
Manager, a member of the management team and a director of the Company. He
oversaw the implementation of the Sarbanes Oxley project and IFRS for Shell
Development Australia. He was also responsible for developing the finance
strategy to enable Shell Development to meet significant expansion plans. He
has broad experience covering governance, operational and commercial issues
(especially in the joint venture arena), balance sheet management (including
capital discipline), due diligence and subsequent integration of acquisitions
and strategic planning.

Mr. Joseph Johnston  Petroleum Engineering Manager

Mr. Johnston holds a B.Sc.
(Hons) in Geology and Maths from Glasgow University and an M Eng in Petroleum
Engineering from Heriot Watt University in Scotland. Prior to joining the
Company in December 2005, Mr. Johnston worked as an independent consultant for
many companies for 9 years on drilling, production and reservoir engineering
projects in NZ, Australia and Thailand. For the 9 years prior to that, he
worked as a drilling and reservoir engineer for New Zealand Oil & Gas Ltd
on projects in NZ, Australia and Papua New Guinea. He started his career
working on both onshore and offshore rigs for various service companies in the
UK and Norwegian sectors of the North Sea, Egypt and Spain.

Mr. Carey Mills  Exploration Manager

Mr. Mills graduated from
Victoria University of Wellington with an M.Sc. (Hons) in Geology in 1988. He
joined Austral initially as a contractor from 1998, becoming an employee in
2005. Prior to working with Austral, he worked as a petrophysicist for Esso on
fields in Australia and Papua New Guinea. Mr. Mills has also worked as a
geophysicist for New Zealand Oil & Gas Ltd and as a consultant geologist in
Angola, Timor Sea, offshore Trinidad, and on Sakhalin Island in Far Eastern
Russia.

Mr. David Pay  Head Legal Counsel

Mr. David Pay was appointed
as Head Legal Counsel from August 2007. He provides in-house legal support and
works with the Company Secretary in consolidating the companys governance and
contracting systems. Mr. Pay has previously worked as Legal Counsel for Contact
Energy and more recently as General Counsel for the Electricity Commission, New
Zealands electricity market oversight body.

Mr. Warren Player  Manager, Joint Venture and Government
Relations

Mr. Player has a B.Sc.
(Geology) from Victoria University of Wellington and a Post-Graduate Diploma in
Engineering Geology from the University of Canterbury, New Zealand. Prior to
joining the Company in May 2006, Mr. Player worked for Crown Minerals (the
government agency responsible for the management of New Zealands petroleum
resource) for 10 years. During his time with Crown Minerals, Mr. Player held a
variety of roles including Senior Geologist and Principal Technical Advisor and
was most recently responsible for the management of the bidding rounds and the
negotiation of the terms for the award of petroleum mining permits. Prior to
joining Crown Minerals, Mr. Player worked as a geologist for mining and
petroleum companies in New Zealand, Australia and the United Kingdom.

Ms Jeanette Watson  Corporate Secretary

Ms. Watson was appointed as
Company Secretary in 2000. Ms Watson has a B.Sc. (Geology) and an LLB from
Victoria University in Wellington, New Zealand and is qualified as a lawyer.
She has practised commercial and corporate law in New Zealand and the
United Kingdom, in large law firms and as a member of the in-house legal team
of the British Coal Corporation.

Other
Information

No director or any member of
senior management has any family relationships with any other director or
manager. There is no arrangement with any major shareholder, customer, supplier
or other party pursuant to which any person was selected as a director or
member of senior management.

- 51 -

---



B. Compensation

The following
table sets forth the aggregate compensation paid by the Company for services
rendered during the last full financial year indicated, reported as at December
31, 2007:

SUMMARY COMPENSATION TABLES

|                       |  |              |         |                                     |   |        |     |         |  |        |      |  |               | 
|---------------------- |  | ------------ | ------- | ----------------------------------- | - | ------ | --- | ------- |  | ------ | ---- |  | ------------- | 
|                       |  | Compensation |         | Options granted over Securities (4) |  
|Director               |  | Salary       |         | Other                               |   | Number |     | Price   |  | Expiry |     
|                       |  |              |         |                                     |   |        |     |         |  |        |     
|Ronald
  Bertuzzi (11) |  |              | Nil     |                                     | $ | 31,096 |     | 50,000  |  | $      | 1.20 |  | Sept 14, 2012 | 
|Douglas
  Ellenor      |  |              | Nil     |                                     | $ | 37,320 |     | 50,000  |  | $      | 1.20 |  | Sept 14, 2012 | 
|Peter Hill             |  |              | Nil     |                                     | $ | 38,373 |     | 75,000  |  | $      | 1.20 |  | Sept 14, 2012 | 
|Thompson
  Jewell (1)  |  | $            | 202,155 |                                     | $ | 53,487 |     | 450,000 |  |        | (5)  |  | (5)           | 
|David Newman           |  |              | Nil     |                                     | $ | 44,916 |     | 50,000  |  | $      | 1.20 |  | Sept 14, 2012 | 
|Richard Webber (1)     |  | $            | 131,526 |                                     |   | Nil    |     | Nil     |  |        | N/a  |  | N/a           | 
|Bernhard Zinkhofer     |  |              | Nil     |                                     | $ | 8,000  | (7) | 110,000 |  |        | (5)  |  | (5)           | 

|                         |  |                  |         |                                     |   |         |     |         |  |        |      |  |               | 
|------------------------ |  | ---------------- | ------- | ----------------------------------- | - | ------- | --- | ------- |  | ------ | ---- |  | ------------- | 
|                         |  | Compensation (3) |         | Options granted over Securities (4) |  
|Senior Manager           |  | Salary           |         | Other                               |   | Number  |     | Price   |  | Expiry |     
|                         |  |                  |         |                                     |   |         |     |         |  |        |     
|Derek
  Gardiner (2)     |  | $                | 99,852  |                                     |   | Nil     |     | 180,000 |  |        | (5)  |  | (5)           | 
|Joseph
  Johnston        |  | $                | 225,521 |                                     | $ | 12,678  |     | 30,000  |  | $      | 1.20 |  | Sept 14, 2012 | 
|Bruce McGregor (2)       |  | $                | 33,615  |                                     |   | Nil     |     | Nil     |  |        | N/a  |  | N/a           | 
|David McKeogh (2)        |  |                  | Nil     |                                     | $ | 72,027  | (6) | Nil     |  |        | N/a  |  | N/a           | 
|Christopher McKeown (10) |  |                  | (8)     |                                     |   | (8)     |     | 130,000 |  |        | (5)  |  | (5)           | 
|Carey Mills              |  | $                | 185,876 |                                     | $ | 10,862  |     | 30,000  |  | $      | 1.20 |  | Sept 14, 2012 | 
|David Pay                |  |                  | (8)     |                                     |   | (8)     |     | 130,000 |  |        | (5)  |  | (5)           | 
|Warren
  Player          |  |                  | (8)     |                                     |   | (8)     |     | 30,000  |  | $      | 1.20 |  | Sept 14, 2012 | 
|Jeanette
  Watson        |  |                  | Nil     |                                     | $ | 156,673 | (9) | Nil     |  |        | N/a  |  | N/a           | 

|     |                                                                                                                                                                                                                                    
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)  | Mr.
  Webber resigned as CEO and director from April 30, 2007, and Mr. Jewell was
  appointed CEO from May 1, 2007 and as a director from May 4, 2007.                                                                             
|     |                                                                                                                                                                                                                                    
|(2)  | Mr.
  McGregor resigned as CFO from Feb 23, 2007, Mr. McKeogh was seconded
  temporarily as CFO from PriceWaterhouseCoopers, and Mr. Gardiner was
  appointed CFO from June 11, 2007.                                              
|     |                                                                                                                                                                                                                                    
|(3)  | Officers
  (other than the CEO and directors) are employed or contracted by, and
  salaries or fees are paid by, a subsidiary of the Company, Austral Pacific
  Energy (NZ) Limited, under a management contract with the Company. 
|     |                                                                                                                                                                                                                                    
|(4)  | Options
  granted in fiscal 2007 as compensation. See discussion of option terms and
  information on applicable exercise prices in Item 6.E  Share Ownership.                                                                    
|     |                                                                                                                                                                                                                                    
|(5)  | Multiple
  grants of options during fiscal 2007  see Item 6.E  Share Ownership for
  information on applicable exercise prices and expiry dates.                                                                                 
|     |                                                                                                                                                                                                                                    
|(6)  | Fees
  paid to PriceWaterhouseCoopers for secondment of Mr. McKeogh.                                                                                                                                                               
|     |                                                                                                                                                                                                                                    
|(7)  | Fees
  paid to Lang Michener LLP for directorial services of Mr. Zinkhofer from
  August 21, 2007.                                                                                                                                 
|     |                                                                                                                                                                                                                                    
|(8)  | Managers
  salaries are not required by the Companys home jurisdiction to be disclosed,
  except in the aggregate and for Named Executive Officers. See aggregate
  figures below under Compensation of Directors and Managers.
|     |                                                                                                                                                                                                                                    
|(9)  | Ms
  Watson is contracted by Austral Pacific Energy (NZ) Limited and receives fees
  rather than salary payments.                                                                                                                  
|     |                                                                                                                                                                                                                                    
|(10) | Dr.
  McKeown resigned as Cheal Asset Manager from May 30, 2008.                                                                                                                                                                   
|     |                                                                                                                                                                                                                                    
|(11) | Mr.
  Bertuzzi resigned as a director with effect from June 6, 2008.                                                                                                                                                               

Compensation Schemes for Directors and
Managers

During fiscal 2007, the Boards Remuneration Committee reviewed the
directors remuneration scheme established in 2006 and compared it with data
from North American and Australasian market surveys of directors remuneration,
taking into account the need to attract and retain industry-experienced
directors. Following this review, an amended remuneration scheme was
established for directors with effect from January 1, 2007, as follows:

- 52 -

---



|                                  |                                                                  
|--------------------------------- | -----------------------------------------------------------------
|Board
  Position                  | Payment                                                          
|                                  |                                                                  
|Annual base
  fee directors       | $25,000 per
  annum                                              
|Chairmans
  fee                  | $40,000 per
  annum                                              
|Audit
  committee chairman        | $10,000 per
  annum                                              
|Audit
  committee member          | $5,000 per
  annum                                               
|Remuneration
  committee chairman | $7,500 per
  annum                                               
|Remuneration
  committee member   | $3,500 per
  annum                                               
|Option grant
  upon appointment   | 60,000 share
  purchase options (5 years at market close)        
|Annual
  option grant (base)      | 50,000 share
  purchase options (5 years at 5-day market average)
|Annual
  option grant (Chairman)  | 75,000 share
  purchase options (5 years at 5-day market average)

In fiscal 2007, the non-executive directors received a total of
$159,705. For the period from September 1, 2006 to January 31, 2007, Dr. Hill
also received additional fees for assisting management in defining job
descriptions and performance criteria for senior management and a structure for
the Company that was consistent with its stated objectives. For fiscal 2007,
the aggregate amount paid for this special assignment was $3,000.

See table and
footnotes under Item 6.E for further details of options granted or to be
granted, and discussion under Item 6.E for terms of stock options. Expenses
directly attributable to services as directors are reimbursed to the directors
by the Company.

In July 2006, the Board adopted a comprehensive remuneration strategy
intended to incentivise employees (including senior management) in a planned
and transparent form. The strategy includes a bonus scheme related to shorter
term performance measures, and an option scheme to provide rewards relating to
the longer term performance of the Company. The CEO may also award small
discretionary bonuses for specific short-term projects. The combination of
bonuses and options, and cash remuneration is balanced so that options
incentivise management for future reward based on success of the Company, cash
bonuses to recognize performance over a shorter-term period and the cash
component of remuneration is based on market rates, taking into account the
international nature of the Companys business, current market demand and
supply, having regard to remuneration paid by companies of similar nature and
the calibre and ability of the employee to influence the Companys performance.
Salaries are adjusted annually by a market adjustment figure, on the
recommendation of the CEO to the Remuneration Committee. The CEOs remuneration
is approved by the Board. Performance contracts have been agreed with all
staff, against which the committee assesses performance bonuses to be paid,
after the end of the fiscal year, under the Employee Performance Bonus Scheme.

In fiscal 2007, members of senior management received a total of
$1,491,532, including awards to senior management employees under the Employee
Performance Bonus Scheme for performance in fiscal 2006 of $29,359.

No pension,
retirement or similar benefits are paid or payable to members of the Board or
senior management, and no amounts are set aside or accrued in connection with
pension, retirement or similar benefits.

Indemnification of Directors and Officers

The Company
has taken out liability insurance to cover Directors and Officers in the
performance of their duties. It has taken out liability insurance for the
former directors of Arrowhead Energy Limited (a subsidiary acquired by the
Company with effect from December 22, 2006).

The Company
has granted a deed of indemnity to the resident director of its Papua New
Guinea subsidiary, and a letter of indemnity to a former director of the
majority of its New Zealand subsidiaries. Arrowhead Energy Limited has granted
deeds of indemnity to two former directors. No other agreements to
contractually provide indemnities have been executed or delivered.

- 53 -

---



C. Board practices

|   |                 
|-- | ----------------
|1. | Term of
  office

All directors
have a term of office expiring at the next annual general meeting of the Company,
but are eligible for re-election, unless a directors office is earlier vacated
in accordance with the Companys Articles or the provisions of the Business
Corporations Act (B.C.). All officers have a term of office lasting until their
resignation or their replacement by the Board of Directors.

As at June 13,
2008:

DIRECTORS

|                   |  |                          |  |                                
|------------------ |  | ------------------------ |  | -------------------------------
|Name of Director   |  | Commencement in
  Office |  | Committees                     
|                   |  |                          |  |                                
|Douglas
  Ellenor  |  | January 2006             |  | Audit, Remuneration, Nominating
|                  
|Peter
  Hazledine  |  | January 2008             |  | Audit, Remuneration            
|                  
|Peter Hill         |  | January 2006             |  | Audit, Nominating              
|                  
|Thompson
  Jewell  |  | May 2007                 |  |                                
|                  
|David Newman       |  | September 2003           |  | Audit, Remuneration, Nominating
|                  
|Bernhard Zinkhofer |  | August 2007              |  |                                

SENIOR MANAGERS

|                                                               |  |                          
|-------------------------------------------------------------- |  | -------------------------
|Name of
  Manager, Position                                    |  | Commencement 
  in Office
|                                                               |  |                          
|Derek
  Gardiner, CFO                                          |  | June 2007                
|                                                              
|Thompson
  Jewell, CEO                                         |  | May 2007                 
|                                                              
|Carey Mills, Exploration Manager                               |  | December 2005            
|                                                              
|Joseph Johnston, Petroleum Engineering Manager                 |  | December 2005            
|                                                              
|David Pay, Head Legal Counsel                                  |  | August 2007              
|                                                              
|Warren Player, Manager, Joint Venture and Government Relations |  | April 2006               
|                                                              
|Jeanette
  Watson, Corporate Secretary                         |  | November 2000            

|   |                               
|-- | ------------------------------
|2. | Directors
  service contracts

No director
has a contract that provides for any benefits upon termination of his/her
service as a director.

The terms of Mr.
Webbers former employment agreement during the term that he was CEO provided
that, upon termination without cause, he would be paid a severance payment
equal to twelve months remuneration. The terms of Mr. Jewells current
employment agreement as CEO, provide that, upon termination without cause, he
will be paid a severance payment equal to twelve months remuneration.

|   |                   
|-- | ------------------
|3. | Board
  Committees

See table in Item 6.C.1  Term
of Office for current Audit, Remuneration and Nominating Committee members as
at June 13, 2008.

- 54 -

---



The Board adopted an Audit Committee Charter on April
24, 2004 (later reviewed and amended, current version dated January 2007, published on the Companys website)
governing the conduct of the Audit & Risk Management Committee, and adopted
procedures for receiving and dealing with accounting complaints on November 8,
2004 (later reviewed and amended, current version dated January 2007). The
Audit Committee monitors the veracity of the financial and regulatory reports
produced by the Company, and monitors and reviews the controls that are in
place to ensure the opportunities for fraud or material error in the financial
statements of the Company are minimised. The Charter sets out the committees role,
membership criteria, responsibilities, operating principles including procedures
for communication with the auditor, members powers and authority and the
requirements against which the Committees performance is measured.

The Board of Directors established a Remuneration Committee
in April 2004 and adopted terms of reference for the remuneration committee on
June 25, 2004 (further reviewed and amended, current version dated August 2007,
published on the Companys
website). The Remuneration Committee must consider and approve remuneration terms for senior management, annual
adjustments in salary levels, and grants of incentive stock options to
employees in accordance with the Companys Share Option Plan and the Options
Policy and Incentive Remuneration Strategy adopted by the Board. Any variation
from the policy or the Plan rules, options granted outside the Plan and policy
criteria, all options granted to directors, and remuneration of the CEO and
directors is recommended by the Committee, but must be approved by the full
Board. The Committee is also responsible for supervision of performance evaluation
of non-management personnel, succession planning and other human resources
policies and procedures, and the health & safety policies of the Company.

The Board established a
Nominating Committee in August 2007. The independent directors of the Board
previously acted in this capacity, having adopted a Director Nominations
Committee Charter in July 2006 (later reviewed and amended, current
version dated January 2008).
The Committee recommends appointees to the Board for nomination, in accordance
with the Director Nominations Committee Charter, and may receive nominations
from shareholders. The Committee Charter (published on the Companys website)
requires the recommendation of criteria for Board membership, identification of
individuals qualified to become Board members, and recommendation of
appointment of directors to committees of the Board. Nominations are based on
the need to obtain persons of the requisite skills for Board membership with
sufficiently diverse and independent backgrounds. Consideration is also given
to the appropriate mix of executive and independent directors. Regulatory
authorities in North America exercise the right to approve any person for
directorship.

D. Employees

The number of employees of the Company as at December 31
of each of the prior three years is presented below:

|                               |  |             |  |             |  |           
|------------------------------ |  | ----------- |  | ----------- |  | ----------
|Office                         |  | 2007        |  | 2006        |  | 2005      
|                               |  |             |  |             |  |           
|Wellington, New Zealand        |  | 19 FT; 3 PT |  | 14 FT; 5 PT |  | 8 FT, 1 PT
|New Plymouth, New Zealand      |  | 1 PT        |  | 1 PT        |  | 1 PT      
|Port Moresby, Papua New Guinea |  | 0           |  | 0           |  | 2 PT      

Note: FT full time
position; PT part-time or temporary position

The Wellington office provides technical management
and support, company and joint venture accounting, financial reporting, and
office management. Branch offices employ or employed operational supervisory and/or
accounting staff.

In addition, the Company also receives technical and
administrative services from a number of contractors and consultants.

- 55 -

---



E. Share Ownership

|   |                                          
|-- | -----------------------------------------
|1. | Share ownership by directors and managers

As at June 13, 2008:

|                   |  |                         |  |                                 |  |         |  |                 |  |        |                               
|------------------ |  | ----------------------- |  | ------------------------------- |  | ------- |  | --------------- |  | ------ | ------------------------------
|                   |  | Beneficial Ownership(1) |  | Securities held under Option(3)
|Director           |  | Number                  |  | %                               |  | Number  |  | Price           |  | Expiry
|                   |  |                         |  |                                 |  |         |  |                 |  |       
|Douglas Ellenor    |  | 106,667                 |  | 0.23                            |  | 110,000 |  | $1.20 
  $2.50 |  |        | Jan 1, 2011  Sept
  14, 2012 
|Peter Hazledine    |  | 0                       |  | 0.00                            |  | 60,000  |  | $1.01           |  |        | Dec 31, 2012                  
|Peter Hill         |  | 374,400                 |  | 0.81                            |  | 135,000 |  | $1.20 
  $2.50 |  |        | Jan 1, 2011  Sept
  14, 2012 
|Thompson Jewell    |  | 280,667                 |  | 0.61                            |  | 450,000 |  | (4)             |  |        | (4)                           
|David Newman       |  | 71,667                  |  | 0.16                            |  | 62,500  |  | $1.20 
  $1.25 |  |        | Oct 15, 2008  Sept
  14, 2012
|Bernhard Zinkhofer |  | 327,467                 |  | 0.71                            |  | 110,000 |  | (4)             |  |        | (4)                           

|                |  |                         |  |                                 |  |                  |  |               |  |        |                           
|--------------- |  | ----------------------- |  | ------------------------------- |  | ---------------- |  | ------------- |  | ------ | --------------------------
|                |  | Beneficial Ownership(1) |  | Securities held under Option(3)
|Senior Manager  |  | Number                  |  | %                               |  | Number           |  | Price         |  | Expiry
|                |  |                         |  |                                 |  |                  |  |               |  |       
|Derek Gardiner  |  | 50,000                  |  | 0.11                            |  | 180,000          |  | (4)           |  |        | (4)                       
|Joseph Johnston |  | 78,667                  |  | 0.17                            |  | 100,000
  30,000 |  | $1.90
  $1.20 |  |        | Dec 1, 2010
  Sep 14, 2012
|Carey Mills     |  | 82,667                  |  | 0.18                            |  | 100,000
  30,000 |  | $1.90
  $1.20 |  |        | Dec 1, 2010
  Sep 14, 2012
|David Pay       |  | (2)                     |  |                                 |  | 130,000          |  | (4)           |  |        | (4)                       
|Warren Player   |  | (2)                     |  |                                 |  | 30,000           |  | $1.20         |  |        | Sept 14, 2012             
|Jeanette Watson |  | 5,000                   |  | 0.01                            |  | Nil              |  | n/a           |  |        | n/a                       

|    |                                                                                                                                                                                                                  
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Common
  shares and common shares under vested options or exercisable warrants held
  directly or indirectly by current directors or officers of the Company, as
  reported by such directors or officers.       
|    |                                                                                                                                                                                                                  
|(2) | Common
  shares and common shares under vested options or exercisable warrants
  beneficially owned is less than one percent of total common shares, and not
  previously disclosed nor required to be disclosed.
|    |                                                                                                                                                                                                                  
|(3) | As
  at June 13, 2008  see under heading Stock Option Plan below for discussion
  of option terms and vesting terms.                                                                                          
|    |                                                                                                                                                                                                                  
|(4) | Multiple
  grants during fiscal 2007  see table under heading Stock Option Plan below
  for details of exercise prices and expiry dates.                                                                      

No shares held by directors or members of senior
management have different voting rights.

|   |                                                                  
|-- | -----------------------------------------------------------------
|2. | Arrangements to involve employees in the capital of
  the Company

Stock Option Plan

The Company established a share option plan for the
granting of options to employees and service providers, which plan was approved
by shareholders on June 25, 2004 at the AGM, and accepted by the TSX-V (2004
Plan). The 2004 Plan was attached as an Exhibit to the Companys Form 20-F for
the year ended December 31, 2003, filed in June 2004. The Plan provided for the
Board to issue non-assignable, non-transferable options, with a term of up to 5
years, terminating within 90 days after the optionee ceasing to be employed by,
or provide services to, the Company, at an exercise price not less than the
TSX-V specified Discounted Market Price, such options generally vesting in
equal amounts over 3 years. All stock options are granted without purchase
price and entitle the holder to the issue of one common share, upon payment of
the exercise price, for each stock option exercised.

The Board of Directors of the Company proposed to the May
2, 2006 annual meeting of shareholders to adopt a new share option plan, which
plan was duly approved and adopted by the shareholders at that meeting

- 56 -

---



(New Plan, see Exhibit 4.5). The New Plan changed
the maximum number of options that can be issued under the plan, from a fixed
number, to an amount equal to 10% of the total outstanding shares at any time. All
other terms of options able to be granted under the New Plan are the same as
under the 2004 Plan, except that vesting may now occur in 3 equal amounts over
18 months (or 24 months for recipients who have been associated with the
Company for less than 6 months at the time of option grant). As a rolling
number option plan, it is required to be approved by the Companys shareholders
at each annual meeting, and was duly confirmed at the Companys Annual General
Meeting on May 22, 2008.

Stock options granted before the 2004 Plan was put in
place (of which there are now (May 31, 2008) only 12,500 outstanding) were
issued at exercise prices determined by the Board of Directors, with options
vesting over 18 months, and terminating 45 days after cessation of involvement
with the Company.

|                |   |                                                                                                                                                                                      
|--------------- | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|In fiscal 2007:
|                |  | a total of 300,000 shares were issued pursuant to
  exercises of incentive stock options, all at an exercise price of $1.20, exercised
  by a former director and CEO of the Company;
|                |   |                                                                                                                                                                                      
|                |  | no exercises of options by employees of the Company
  occurred;                                                                                                                      
|                |   |                                                                                                                                                                                      
|                |  | 450,000 options were cancelled before expiry, on
  settlement with a former director and CEO;                                                                                        
|                |   |                                                                                                                                                                                      
|                |  | 266,666 options lapsed unvested upon cessation of
  involvement with the Company;                                                                                                    
|                |   |                                                                                                                                                                                      
|                |  | 233,334 vested options lapsed unexercised upon
  cessation of involvement with the Company; and                                                                                      
|                |   |                                                                                                                                                                                      
|                |  | 1,645,000 new incentive stock options were granted
  to directors and employees. 1,315,000 of those options were granted to
  directors or senior managers, as follows:              

|                    |  |                               |  |                               |  |                     |  |                             | 
|------------------- |  | ----------------------------- |  | ----------------------------- |  | ------------------- |  | --------------------------- | 
|Director            |  | Number of
  Options
  Granted |  | Expiry Date                   |  | Exercise
  Price(s) |  | Vesting Date                | 
|                    |  |                               |  |                               |  |                     |  |                             | 
|Ronald Bertuzzi (1) |  | 50,000                        |  | Sept 14, 2012                 |  | $1.20               |  | Mar 14, 2009                | 
|Douglas Ellenor     |  | 50,000                        |  | Sept 14, 2012                 |  | $1.20               |  | Mar 14, 2009                | 
|Peter Hill          |  | 75,000                        |  | Sept 14, 2012                 |  | $1.20               |  | Mar 14, 2009                | 
|Thompson Jewell     |  | 400,000
  50,000              |  | May 1, 2012
  Sept 14, 2012   |  | $1.14
  $1.20       |  | Nov 1, 2008
  Sept 14, 2009 | 
|David Newman        |  | 50,000                        |  | Sept 14, 2012                 |  | $1.20               |  | Mar 14, 2009                | 
|Bernhard Zinkhofer  |  | 60,000
  50,000               |  | Sept 14, 2012
  Sept 14, 2012 |  | $1.23
  $1.20       |  | Mar 14, 2009
  Mar 14, 2009 | 

|                          |  |                               |  |                                            |  |                       |  |                                           | 
|------------------------- |  | ----------------------------- |  | ------------------------------------------ |  | --------------------- |  | ----------------------------------------- | 
|Senior Manager            |  | Number of
  Options
  Granted |  | Expiry Date                                |  | Exercise
  Price(s)   |  | Vesting Date                              | 
|                          |  |                               |  |                                            |  |                       |  |                                           | 
|Derek Gardiner            |  | 150,000
  30,000              |  | Jun 11, 2012
  Sept 14, 2012               |  | $1.02
  $1.20         |  | Dec 11, 2008
  Sep 14, 2009               | 
|Joseph Johnston           |  | 30,000                        |  | Sept 14, 2012                              |  | $1.20                 |  | Mar 14, 2009                              | 
|Christopher
  McKeown (2) |  | 50,000
  30,000
  50,000      |  | Jun 1, 2012
  Sept 14, 2012
  Oct 12, 2012 |  | $1.06
  $1.20
  $1.42 |  | Dec 1, 2008
  Mar 14, 2009
  Apr 12, 2009 | 
|Carey Mills               |  | 30,000                        |  | Sept 14, 2012                              |  | $1.20                 |  | Mar 14, 2009                              | 
|David Pay                 |  | 100,000
  30,000              |  | Aug 6, 2012
  Sept 14, 2012                |  | $1.42
  $1.20         |  | Aug 6, 2009
  Sep 14, 2009                | 
|Warren Player             |  | 30,000                        |  | Sept 14, 2012                              |  | $1.20                 |  | Mar 14, 2009                              | 

|    |                                                                                                                                
|--- | -------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Bertuzzi resigned with effect from June 6, 2008,
  so those options not already vested (33,333) lapsed immediately, and all

- 57 -

---



|    |                                                                                                                                                                                                              
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | vested
 options (16,667) will lapse on September 4, 2008 if not exercised prior.                                                                                                                             
|    |                                                                                                                                                                                                              
|(2) | Dr. McKeown
 resigned with effect from May 30, 2008, so those options not already vested
 (86,666) lapsed immediately, and all vested options (43,334) will lapse on August
 28, 2008 if not exercised prior.

After December
31, 2007 up to June 13, 2008:

| |   |                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------
| |  | no options
 were exercised nor shares issued pursuant to exercises of incentive stock
 options;      
| |   |                                                                                                      
| |  | 119,999
 unvested options lapsed upon cessation of involvement with the Company; and                 
| |   |                                                                                                      
| |  | 60,000 new
 incentive stock options were granted to directors, employees or other service
 providers.

Incentive Remuneration Strategy

The Companys
Remuneration Committee adopted an incentive remuneration strategy in 2006 (reviewed
and amended in August 2007), which includes annual grants of options to all
employees and directors. The number of options to be granted to each employee is linked to their
salary band (being a basic method of assessing ability of the employee to influence
the Companys performance), scaled (if necessary) for the number of outstanding
options within the Option Plan. The number and terms of options already held by
employees are not presently taken into account in determining the number of
options to be awarded for annual grants. All annual grants are made on the same
day (being the date of that years Annual General Meeting of the Company
(changed in 2007 to be the date of issue of the Annual Report), and the same
exercise price applies, calculated as a 5-trading day average of the AMEX (USD)
closing market price for the 5-day period after the grant date.

As set out below, non-executive directors are entitled to receive
60,000 options on appointment and 50,000 options annually (except the Chairman
who is entitled to 75,000 options annually). All other terms of the options
granted are as specified by the Companys current option plan. The Board voted
to defer the granting of annual incentive stock options in April 2008, with a
review to occur in Q3 2008.

Options are sometimes granted upon appointment of an executive on
similar terms, except that the exercise price is the AMEX closing market price
on the appointment date, and the number of options being a matter of
negotiation with the executive and the Remuneration Committee.

|        |                                                  
|------- | -------------------------------------------------
|ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A. Major
shareholders

1.
     Beneficial holders of 5% or more of voting
securities

To the
knowledge of the Company or ascertained from public filings, the only persons
holding, directly or indirectly, five percent or more of the Companys of each
class of the Companys voting securities, (as of May 31, 2008) are:

|                                                       |  |                                   |  |                                  |       |   | 
|------------------------------------------------------ |  | --------------------------------- |  | -------------------------------- | ----- | - | 
|Beneficial Owner                                       |  | Number of Shares 
 and Rights (3) |  | Percent of Class 
 (Diluted) (7) |      
|                                                       |  |                                   |  |                                  |      
|Infratil Gas Limited 
 Wellington, New Zealand         |  | 6,044,100                         |  |                                  | 13.15 | % | 
|                                                       |  |                                   |  |                                  |       |   | 
|Mr. P Loretto (1)Vancouver, B.C., Canada               |  | 3,585,190                         |  |                                  | 7.80  | % | 
|                                                       |  |                                   |  |                                  |       |   | 
|Trans-Orient Petroleum Ltd. (2)Vancouver, B.C., Canada |  | 3,110,240                         |  |                                  | 6.77  | % | 
|                                                       |  |                                   |  |                                  |       |   | 
|Treaty Oak Master Fund (4)Austin, Texas, USA           |  | 15,800,000                        |  |                                  | 31.74 | % | 

- 58 -

---



|                                  |  |                                  |     |                                 |             |   | 
|--------------------------------- |  | -------------------------------- | --- | ------------------------------- | ----------- | - | 
|Beneficial Owner                  |  | Number of Shares 
and Rights (3) |     | Percent of Class 
(Diluted) (7) |            
|                                  |  |                                  |     |                                 |            
|Eclectic Investment Trust plc (5) |  | 8,140,000                        |     |                                 | 30.53       | % | 
|                                  |  |                                  |     |                                 |             |   | 
|Chelmsford, UK                    |  | 7,692,308                        | (6) |                                 | 100.00      | % | 
|                                  |  |                                  |     |                                 | (Preferred) |  

|                                                                                                                                                           |                                                                                                                                                                                                                                                                  
|---------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1)                                                                                                                                                        | Mr. Loretto is the CEO, a director, a former President, and a
 principal shareholder of Trans-Orient Petroleum Ltd. (Trans-Orient) and as
 such all holdings disclosed in relation to Trans-Orient Petroleum Ltd. are
 also included in Mr. Lorettos holdings.
|                                                                                                                                                           |                                                                                                                                                                                                                                                                  
|(2)                                                                                                                                                        | Trans-Orient Petroleum Ltd. (Trans-Orient) is a public company
 traded on the OTC Bulletin Board (TOPLF) in the United States.                                                                                                                                 
|                                                                                                                                                           |                                                                                                                                                                                                                                                                  
|(3)                                                                                                                                                        | Common shares and common shares under exercisable convertible securities
 held directly or indirectly by the beneficial holder, as reported in public
 filings, or otherwise known to the Company.                                                               
|                                                                                                                                                           |                                                                                                                                                                                                                                                                  
|(4)                                                                                                                                                        | Three separate investment funds managed by the same fund manager are
 treated as being under common control, despite diverse beneficial ownership
 of the funds by investors.                                                                                    
|                                                                                                                                                           |                                                                                                                                                                                                                                                                  
|(5)                                                                                                                                                        | Two separate investment funds managed by the same fund manager are
 treated as being under common control, despite diverse beneficial ownership
 of the funds by investors.                                                                                      
|                                                                                                                                                           |                                                                                                                                                                                                                                                                  
|(6)                                                                                                                                                        | As discussed below, the holders of the Preferred Shares have
 undertaken not to exercise voting rights applicable to the Preferred Shares
 prior to an agreed exchange of the Preferred Shares for convertible
 debentures.                                      
|                                                                                                                                                           |                                                                                                                                                                                                                                                                  
|(7)                                                                                                                                                        | Percentage assumes all securities convertible within 60 days are so
 converted by that holder only.                                                                                                                                                              
|                                                                                                                                                           |                                                                                                                                                                                                                                                                  
|To the
 knowledge of the Company, the significant changes in percentage share
 ownership held by any major shareholders, during the last three years, are:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the
 acquisition by Exploration Capital Partners Limited Partnership of 1,015,196
 common shares (more than 5% of the Company) during 2004 and its subsequent
 sale of securities to hold less than 5% by end 2005;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | the
 acquisition by Infratil Gas Limited of 2,456,461 common shares and 1,228,230 share
 purchase warrants (more than 5% of the Company) during 2005, and the
 subsequent increases of its holding in October 2006 by the acquisition of
 2,307,000 common shares (17.88%) and in May 2007 by the acquisition of
 1,080,000 common shares (19.84%), followed by dilution upon issue of
 12,500,000 shares in February 2008 and 1,056,338 shares in May 2008, to the
 current 13.14%;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | the
 acquisition, in September 2007, by each of Republic Life Common Fund (L) Ltd
 and Eclectic Investment Trust plc (who are under common control of the same
 fund manager) of 3,846,164 Series 1 preferred shares each (agreed in
 principle to be exchanged for convertible debentures effective January 1,
 2008, each $5 million debenture convertible to 3,846,164 common shares with similar commercial terms to the preferred shares,
 but not entitled to any voting rights until conversion. The exchange is
 subject to a number of conditions precedent, including the approval of the
 TSX. Pending the exchange, the holders of the preferred shares have
 undertaken not to vote the preferred shares). Together with a further
 2,035,000 common shares and 2,035,000 warrants acquired by each fund in
 February 2008, each shareholder holds beneficial voting rights of 8.85% (more
 than 10% on a diluted basis), and common control of 30.53% (diluted);
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |  | the
 acquisition, in February 2008, by Treaty Oak Master Fund of 2,745,750 shares
 and 2,745,750 warrants, Treaty Oak Ironwood of 4,754,250 shares and 4,754,250
 warrants, and Treaty Oak Acorn of 400,000 shares and 400,000 warrants (who
 are under common control of the same fund manager) giving common control of
 31.74% (diluted).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

The Companys
major shareholders do not have different voting rights.

2.      Host country record holders

To the
knowledge of management, as at May 31, 2008, the following shareholdings were
held by registered shareholders in the United States:

|                                    |  |                      |  |                    |        | 
|----------------------------------- |  | -------------------- |  | ------------------ | ------ | 
|Number of U.S. Registered 
 Holders |  | Number of Shares (3) |  | Percent of 
 Class |       
|                                    |  |                      |  |                    |        | 
|435                                 |  | 6,838,353            |  |                    | 14.87% | 

- 59 -

---



3.
     Controlling shareholders

To the
knowledge of management, the Company is not directly or indirectly owned or
controlled by another corporation(s), by any foreign government or by any other
natural or legal person, severally or jointly. None of the major shareholders
listed in Item 7.A  Major Shareholders under the heading Beneficial holders
of 5% or more of voting securities above directly or indirectly owns or
controls the Company.

4.     Arrangements
affecting shareholdings

There are no
arrangements known to the Company the operation of which may at a subsequent
date result in a change of control of the Company.

B. Related party
transactions

During 2007 and up to May 31, 2008, the following related party
transactions occurred:

Directors received a total remuneration of $159,705 during 2007, and
total remuneration of $62,914 during the current (2008) fiscal year to May 31,
2008;

The Company paid Lang Michener LLP in which Bernie Zinkhofer, a former
director, is a partner, $175,740 for legal and directorial services during
2007, and $78,294 during the current (2008) fiscal year to May
31, 2008;

The Company paid Peter Hill, a director, $3,000 for consultancy
services during 2007;

The Company paid Dr David Bennett, the former Chief Executive Officer
of the Company, $54,000 for the cancellation of options granted under a
consultancy agreement which was terminated during fiscal 2007;

A subsidiary of the Company owns 1,495,660 shares, approximately 0.21%
of issued shares in Rift Oil plc, a joint venture participant with the Company
in PPL 235 and PPL 261 in Papua New Guinea.

All
transactions with directors and other related parties were in the normal course
of operations and were measured at the exchange amount, which is the
consideration established and agreed to by the related parties.

C. Interests of
experts and counsel

Not applicable

|        |                      
|------- | ---------------------
|ITEM 8. | FINANCIAL INFORMATION

A. Consolidated
Statements and Other Financial Information

Financial Statements

Consolidated
audited financial statements of the Company as of December 31, 2007 and 2006
and for the years ended December 31, 2007, 2006 and 2005 are provided under
PART III of this Annual Report under Item 17  2007 Consolidated Financial
Statements.

Legal Proceedings

The Company
was during May 2008 a party to legal proceedings as noted below in regard to
the Douglas permit. There are no legal proceedings in which any director,
member of senior management or any affiliate is a party adverse to the Company
nor has a material interest adverse to the Company.

The disputes and
claims in existence involving the Company are discussed below. These disputes
and claims include those made by Austral against third parties and by third
parties against Austral. As at May 31, 2008, all but one of these had been
settled. They were:

| |                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i) Cheal
 Royalty: A dispute regarding the terms of a royalty payment
 required to be paid by the Company in respect of the Arrowhead interest
 acquired in the Cheal shallow joint operations. The total amount involved is
 unable to be accurately quantified because it relies on estimates of future
 oil

- 60 -

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | price and
 production from the Cheal shallow oil joint operations for permit 38738. The
 estimated amount payable relating to historical production is $153,000. The
 company has obtained legal advice regarding the claim which supports the
 Companys position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ii) Cheal
 Project: A number of interrelated claims and issues with TAG Oil
 (NZ) Limited (TAG) concerning the Cheal shallow joint operations and the
 development of the Cheal production facility. The Company has obtained legal
 advice regarding its ability to enforce the payment by TAG of its share of
 outstanding capital expenditure for completion of the production facility
 (amounting to approximately NZ$500,000 (US$388,000)). TAG has written to the
 Company alleging the Company is liable for compensation to TAG in the amount
 of approximately NZ$7.78 million (US$6.03 million). The Company refutes the
 requirement to pay compensation to TAG and has received legal advice
 supporting the Companys position.                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | On May 23,
 2008, the Company agreed with TAG upon the settlement of all outstanding
 disputes between the companies in relation to the Cheal project. The
 settlement agreement requires the net payment by the Company to TAG of $1.6
 million in a combination of cash, stock and expected forward production from
 the Cheal A7 well and the issue of 2,273,000 Austral shares to TAG, which
 issuance occurred on June 9, 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | iii) Douglas
 Permit: The Company is in dispute with Rift Oil regarding the performance of
 Rift as Operator for the PNG PPL 235 licence, in relation to the setting of
 the minimum work commitment for the year five and six (years 2008 and 2009)
 work program. The Company considers the Operator failed to follow due process
 in regard to the program presented to the PNG Government, has failed to
 provide information to it as required under the joint venture agreement,
 failed to set a proper work program under the joint venture agreement and has
 failed to progress the commercial planning requirements called for in a
 memorandum of understanding with ALCAN. In particular, the Company disputes
 the requirement for drilling of a well (Puk Puk) in 2008 and maintains the
 well should be drilled in early 2009. The Company continues to express its
 concerns to Rift, is seeking clarification of circumstances and endeavoring
 to negotiate a resolution of its concerns with the Operator. The Company has
 obtained legal advice supporting its position.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The Company received legal proceedings from Rift Oil regarding the
 Douglas permit. The legal proceedings, issued in the New Zealand High Court,
 sought payment from the Company of US$1.646m being the amount of a cash call
 for the drilling of the Puk Puk well. The Company has also received a notice
 of default in respect of a further cash call for the well in the amount of
 US$1.2m. The Company disputed the proceedings issued and challenged Rift
 Oils entitlement to issue cash calls and progress the drilling of the Puk
 Puk well.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The Puk Puk-1 well was spudded on May 10,
 2008.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | On May 29,
 2008, initial completion of a settlement and sale agreement with Rift Oil plc
 occurred, selling the Companys interests in PPLs 235 and 261 to Rift for $5
 million, and withdrawing outstanding claims between the companies (see further
 detail in Item 4.A  History and Development of the Company, under the
 heading Principal
 Capital Expenditures & Divestitures).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Previously,
the Company was subject to a claim by another party to one joint venture that
the party had an entitlement to purchase part of certain Company properties.
This claim was withdrawn during 2007 without compensation payable by the
Company.

Dividends

The Company
has never previously paid dividends to shareholders nor is there a general
policy in place to do so. All cash-flow derived by the Company is usually
re-invested in oil and gas exploration, development and associated costs. An
exception to this policy was the agreement in July 2007 to issue preferred
shares with an 8% half-yearly dividend. As discussed in Item 4.A  History and
Development of the Company under the heading Important Events since January 1, 2007,
the Company has since agreed with the holders of the preferred shares to
exchange such shares for convertible debentures, with an 8% interest payment
due half-yearly.

B. Significant Changes

No significant
changes material to the Companys business have occurred since the date of the
annual

- 61 -

---



financial
statements, except as disclosed in this Report.

|        |                      
|------- | ---------------------
|ITEM 9. | THE OFFER AND LISTING

A. Offer and Listing
Details

1, 2 &
3. Not applicable

|   |                            
|-- | ---------------------------
|4. | Price
 History of the Stock

Summary
trading by year, in United States dollars per share, for the five most recently
completed fiscal periods ending December 31, 2007:

|     |  |             |  |           |  |              |  |           |  |             |  |           |  |                 |  |          
|---- |  | ----------- |  | --------- |  | ------------ |  | --------- |  | ----------- |  | --------- |  | --------------- |  | ---------
|Year |  | AMEX (2)(5) |  | AMEX      |  | TSX-V (2)(3) |  | TSX-V     |  | NZSX (2)(4) |  | NZSX      |  | OTCBB (1)(2)(5) |  | OTCBB    
|     |  |             |  |           |  |              |  |           |  |             |  |           |  |                 |  |          
|     |  | High        |  | Low       |  | High         |  | Low       |  | High        |  | Low       |  | High            |  | Low      
|     |  |             |  |           |  |              |  |           |  |             |  |           |  |                 |  |          
|     |  |             |  |           |  |              |  |           |  |             |  |           |  |                 |  |          
|2003 |  | No trades   |  | No trades |  | No trades    |  | No trades |  | No trades   |  | No trades |  | 1.55            |  | 0.35     
|2004 |  | No trades   |  | No trades |  | 3.38         |  | 1.32      |  | 3.28        |  | 1.35      |  | 3.40            |  | 1.30     
|2005 |  | 3.47        |  | 1.63      |  | 3.77         |  | 1.39      |  | 3.56        |  | 1.84      |  | 3.80            |  | 2.70     
|2006 |  | 3.02        |  | 1.11      |  | 3.02         |  | 1.18      |  | 2.56        |  | 1.28      |  | No trades       |  | No trades
|2007 |  | 1.83        |  | 0.94      |  | 1.89         |  | 0.89      |  | 2.05        |  | 0.90      |  | No trades       |  | No trades

Summary
trading for the two most recently competed fiscal periods ending December 31,
2007, and the subsequent period, for full quarters:

|          |  |             |  |      |  |             |  |       |  |             |  |     
|--------- |  | ----------- |  | ---- |  | ----------- |  | ----- |  | ----------- |  | ----
|Year      |  | AMEX (2)(5) |  | AMEX |  | TSX-V(2)(3) |  | TSX-V |  | NZSX (2)(4) |  | NZSX
|          |  |             |  |      |  |             |  |       |  |             |  |     
|          |  | High        |  | Low  |  | High        |  | Low   |  | High        |  | Low 
|          |  |             |  |      |  |             |  |       |  |             |  |     
|          |  |             |  |      |  |             |  |       |  |             |  |     
|2006      |  |             |  |      |  |             |  |       |  |             |  |     
|Quarter 1 |  | 1.90        |  | 1.35 |  | 1.97        |  | 1.33  |  | 2.05        |  | 1.52
|Quarter 2 |  | 3.02        |  | 1.21 |  | 3.02        |  | 1.21  |  | 2.56        |  | 1.46
|Quarter 3 |  | 1.73        |  | 1.11 |  | 1.69        |  | 1.15  |  | 1.65        |  | 1.28
|Quarter 4 |  | 2.01        |  | 1.36 |  | 1.99        |  | 1.17  |  | 2.04        |  | 1.43
|2007      |  |             |  |      |  |             |  |       |  |             |  |     
|Quarter 1 |  | 1.83        |  | 1.21 |  | 1.89        |  | 0.97  |  | 2.05        |  | 1.61
|Quarter 2 |  | 1.32        |  | 0.94 |  | 1.40        |  | 0.91  |  | 1.67        |  | 0.90
|Quarter 3 |  | 1.42        |  | 1.13 |  | 1.43        |  | 1.06  |  | 1.60        |  | 1.26
|Quarter 4 |  | 1.52        |  | 1.01 |  | 1.73        |  | 0.89  |  | 1.46        |  | 1.16
|2008      |  |             |  |      |  |             |  |       |  |             |  |     
|Quarter 1 |  | 1.03        |  | 0.65 |  | 0.99        |  | 0.66  |  | 1.21        |  | 0.68

Summary
trading for the six most recently completed months ending May 31, 2008:

|         |  |             |  |      |  |             |  |       |  |             |  |     
|-------- |  | ----------- |  | ---- |  | ----------- |  | ----- |  | ----------- |  | ----
|Month    |  | AMEX (2)(5) |  | AMEX |  | TSX-V(2)(3) |  | TSX-V |  | NZSX (2)(4) |  | NZSX
|         |  |             |  |      |  |             |  |       |  |             |  |     
|         |  | High        |  | Low  |  | High        |  | Low   |  | High        |  | Low 
|         |  |             |  |      |  |             |  |       |  |             |  |     
|         |  |             |  |      |  |             |  |       |  |             |  |     
|Dec 2007 |  | 1.16        |  | 1.01 |  | 1.12        |  | 0.89  |  | 1.22        |  | 1.16
|Jan 2008 |  | 1.03        |  | 0.85 |  | 0.99        |  | 0.90  |  | 1.21        |  | 0.76
|Feb 2008 |  | 0.95        |  | 0.84 |  | 0.97        |  | 0.84  |  | 1.02        |  | 0.83
|Mar 2008 |  | 0.97        |  | 0.65 |  | 0.96        |  | 0.66  |  | 1.12        |  | 0.68
|Apr 2008 |  | 0.72        |  | 0.58 |  | 0.66        |  | 0.60  |  | 0.76        |  | 0.59
|May 2008 |  | 0.74        |  | 0.57 |  | 0.78        |  | 0.59  |  | 0.69        |  | 0.68

|    |                                                                                                                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | OTCBB quotations may
 reflect interdealer prices, without retail markup, markdown or commission and
 may not necessarily reflect actual transactions.                                                    
|    |                                                                                                                                                                                                          
|(2) | OTCBB quotes are from
www.amex.com. All TSX-V, AMEX and NZSX prices are from www.finance.yahoo.com. Quoted prices are closing prices, converted to USD at the average exchange
rate for the relevant day.
|    |                                                                                                                                                                                                          
|(3) | The
 Company listed on the TSX-V from January 2, 2004.                                                                                                                                                   

- 62 -

---



|    |                                                                                                  
|--- | -------------------------------------------------------------------------------------------------
|(4) | The
 Company listed on the NZSX from January 5, 2004.                                            
|    |                                                                                                  
|(5) | The
 Company listed on the AMEX from April 18, 2005, and de-listed from the OTC-BB
 at that time.

5, 6 & 7. Not applicable

B. Plan of
Distribution

Not applicable

C. Markets

The Companys
common shares are listed on the following stock exchanges:

|                                           |  |                  |  |                 |  |                
|------------------------------------------ |  | ---------------- |  | --------------- |  | ---------------
|Name of Exchange                           |  | Exchange
 Symbol |  | Trading
 Symbol |  | Date of Listing
|                                           |  |                  |  |                 |  |                
|American
 Stock Exchange                   |  | AMEX             |  | AEN             |  | Apr 18, 2005   
|Toronto
 Stock Exchange  Venture Exchange |  | TSX-V            |  | APX             |  | Jan 2, 2004    
|New Zealand
 Stock Exchange                |  | NZSX             |  | APX             |  | Jan 5, 2004    

The Board has
resolved, and the process is underway, to delist from the American Stock
Exchange with an anticipated delisting date of June 27, 2008.

D. E. & F.Not applicable

|         |                       
|-------- | ----------------------
|ITEM 10. | ADDITIONAL INFORMATION

A. Share Capital

Not applicable

B. Memorandum and
articles of association

The Articles
of Association and other information required by this Item were previously
filed with Form 10-12G for the year ended December 31, 1997, dated April 8,
1998. At a special general meeting of the shareholders on December 31, 2003,
the Company adopted a new form of Bylaws, which were filed with Form 20-F,
filed for the year ended December 31, 2003.

On April 15,
2005, the Board of Directors resolved to amend the Companys By-laws and that
the amendments would take effect from the end of the 2005 AGM, if they were
confirmed by the shareholders by ordinary resolution. The resolution was so
passed on June 8, 2005. The main change was the establishment of a one-third
quorum requirement for shareholders meetings. The Companys By-laws as amended
were filed with Form 20-F for the year ended December 31, 2004.

In April 2006,
the Board of Directors of the Company resolved to propose the return of the
Companys incorporation to British Columbia from the Yukon Territory, to the
annual meeting of shareholders in May 2006. Consequent upon that decision, the
Board proposed the adoption of new Articles and the authorization of a class of
preferred shares at the May 2006 AGM. These proposals were so confirmed by the
shareholders by special resolution at the AGM on May 2, 2006, and as noted in
Item 4.A  History and Development of the Company, the Company was continued
into the jurisdiction of the Province of British Columbia, Canada in October
2006 (see Exhibit 1.1), which continuation included the adoption of new
Articles of the Company. Notice of Articles was filed with the British Columbia
Registrar of Companies (Exhibit 1.2).

The Articles (Exhibit 1.3) and
Notice of Articles are the primary charter documents of the Company. The
differences between the Companys Bylaws under Yukon law, and the new Articles
were set out in the Management Proxy Circular distributed in relation to the
shareholders meeting noted above, filed under a Form 6-K on April 10, 2006.

- 63 -

---



|   |                                          
|-- | -----------------------------------------
|1. | Corporate
 Registry Entry Number, Objects

The Company is
registered as a corporation under the Business Corporations Act (British Columbia)
(BC Act), entry number 771836. The Company is entitled to carry on all lawful
business which can be carried on by a natural person, except that it is
restricted by law and under its Articles from carrying on the business of a
railway, steamship, air transporter, canal, telegraph, telephone or irrigation
company.

|   |                  
|-- | -----------------
|2. | Directors Powers

(a) Generally

The directors, by majority resolution vote,
have power to cause the Company to enter into and conduct its business and to perform all manner of
agreements and other transactions.

(b) a directors
power to vote on a proposal, arrangement or contract in which the director is
materially interested

The Articles
provide that when a director holds a disclosable interest (as that term is
defined in the BC Act) in a matter which is being considered by the directors,
he or she must disclose the nature and extent of his interest in such contract
or transaction or of any other possible conflict, in accordance with the provisions
of the BC Act.  The BC Act definition
of a disclosable interest can be summarized as a material interest in a
contract or transaction that is material to the company. A director who holds a
disclosable interest may not vote on the transaction (unless all of the
directors have a disclosable interest in that transaction) but will be counted
in the quorum present at the meeting at which such vote is taken. A directors
remuneration is not a matter which falls within the definition of a disclosable
interest.

The quorum for
the transaction of the business of the directors may be set by the directors
and, if not so set, is deemed to be a majority of the directors.

(c) borrowing
powers exercisable by the directors and how such borrowing powers can be variedThe directors
may, on behalf of the Company:



|  |                                                                                                                                                                                                                                                   
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | borrow money
 in such manner and amount, on such security, from such sources and upon such
 terms, and conditions as they consider appropriate;                                                                                                   
|  |                                                                                                                                                                                                                                                   
| | issue bonds,
 debentures, and other debt obligations either outright or as a security for
 any liability or obligation of the Company or any other person and at such
 discounts or premiums and on such other terms as they consider appropriate;
|  |                                                                                                                                                                                                                                                   
| | guarantee
 the repayment of money by any other person or the performance of any
 obligation or any other person; and                                                                                                                              
|  |                                                                                                                                                                                                                                                   
| | mortgage,
 charge or give other security on the undertaking, or on the whole or any part
 of the property and assets, of the Company (both present and future).                                                                                   

(d) retirement
and non-retirement of directors under an age limit requirement

There are no
age limit requirements applicable to the Company under its Articles relating to
the retirement or non-retirement of its directors.

(e) directors
qualification

A director of
the Company is required under the BC Act
to be at least 18 years old, not a bankrupt or mentally incapacitated,
nor have been convicted of fraud. A director is not required to hold a share in
the capital of the Company as qualification for his or her office. There are no
requirements that a director be resident in any particular jurisdiction.

|   |                                                                     
|-- | --------------------------------------------------------------------
|3. | Rights,
 Preferences and Restrictions attaching to Classes of Shares

The authorized
capital of the Company consists two classes namely an unlimited number of
common shares and unlimited number preferred shares issuable in series, and
each class is without par (or nominal) value.
As at Jun 13, 2008, there were 48,245,469 common shares and 7,692,308
preferred shares issued and outstanding.

Voting

Common shares each have the
right to one vote in connection with matters upon which shareholders may

- 64 -

---



vote. This
includes the annual election of directors and approval of other matters
requiring a shareholder vote such as a merger, sale of substantially all of the
Companys assets and undertaking, and transfer from the jurisdiction of British
Columbia. Other matters may require shareholders approval by policy of the
stock exchanges on which the Companys shares are listed. These include such
matters as approval of certain types of non-arms-length transactions, stock
options in excess of certain amounts and share issuances which cause a change
of control. Directors do not stand for re-election at staggered intervals.
Directors are elected by simple plurality of votes (the candidates with the
largest number of votes for win until the maximum number of Board positions
are filled). Cumulative voting does not apply (that is a shareholder does not
get a number of votes equal to the number of candidates in a way that allows
the shareholder to skew his or her voting by voting more votes for only a
single candidate).

Preferred
Shares have the right to vote on the same basis as the common shares, one vote
per share, except that, in relation to the Series 1 Preferred Shares issued in
September 2007, the Company has agreed in principle with the holders to
exchange such preferred shares for convertible debentures effective January 1,
2008, each $5 million debenture convertible to 3,846,164 common shares with
similar commercial terms to the preferred shares, but not entitled to any
voting rights until conversion. The exchange is subject to a number of
conditions precedent, including the approval of the TSX. Pending the exchange,
the holders of the preferred shares have undertaken not to vote the preferred
shares.

(a) dividend rights

Preferred
shares may be entitled to a fixed dividend when the share is issued provided
that the directors have provided for a dividend by agreement with the purchaser
of the preferred share. Common shares are entitled to dividends only if and
when declared by the Board. The Company has not declared or paid any dividends
on its common shares, and has no expectation that dividends will be declared in
the foreseeable future as the Company re-invests its cash to further its
exploration and development activities.

(b), (c), (d) rights to vote, and to share in profits or surplus on
liquidation,

All the common
shares rank equally in respect to any entitlement to a surplus (after
creditors) upon liquidation or wind-up. Preferred shares rank in priority to
common shares to the extent of their paid-up value plus accrued dividends.

(e), (f) redemption provisions, sinking fund provisions

There are no
such provisions in the Companys Articles in relation to establishing a
redemption or sinking fund for any class of shares. The preferred shares can be
made subject to redemption.

(g) liability to further capital calls

The BC Act
does not permit the issuance of partially paid shares hence all presently
outstanding share capital is not subject to any call or assessment, all having
been issued as fully paid and non-assessable.

(h) provisions discriminating against holder due to
ownership fn a substantial number of shares

There are no
such provisions in the Companys Articles.

Other relevant
provisions relating to the rights and restrictions on holders rights are:

Elimination of Fractional Shares

The Articles
permit the Company to either round up or round down any fractional shares
resulting from a share consolidation (reverse-split) or share subdivision
(share split) or alternatively to unilaterally cause the purchase for
cancellation of any outstanding fractional shares of the Company by paying the
holder thereof its fair value.

Further Particulars of Preferred Shares

The directors
of the Company may issue the preferred shares in one or more series under
Article 27 of the Companys Articles. The directors may, by resolution, alter
the Notice of Articles to fix the number of shares in, and to determine the
designation of the shares of, each series. The directors may also, by
resolution, alter the Notice of Articles to create, define and attach special
rights and restrictions to the shares of each series, subject to the following
special rights and restrictions attaching to the preferred shares under the
Companys Articles:

|  |                                                                                                                                                                                                                                       
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The holders
 of the preferred shares are entitled to receive notices of and to attend and
 vote at all meetings of the shareholders of the Company in the same manner
 and to the same extent as are the holders of the common shares;

- 65 -

---



|                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                          | The holders
 of the preferred shares are entitled to receive dividends as and when they
 are declared by the Board of directors, and the directors are empowered, upon
 agreeing to sell a preferred share, to contract as to the rate of dividend
 which will be paid on the share, if any, how often the dividends are to be
 paid, whether they are to be accumulative, and whether the rate is to be
 fixed for the life of the share or to be subject to declaration by the board
 of directors each year;                                                                                                 
|                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                          | The holders
 of the preferred shares are entitled to exchange them for common shares in
 the Company, provided that when the directors agree to the issuance of any
 preferred shares they shall be entitled to specify the terms, conditions and
 rates during which and upon which the holders of the preferred shares will be
 entitled to exercise such conversion privileges;                                                                                                                                                                                                                              
|                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                          | The Company
 may, upon giving not less than 30 days written notice, redeem the whole or
 any part of the preferred shares on payment for each share to be redeemed of
 the amount paid up thereon, together with all dividends declared thereon and
 unpaid, provided that in the case of a redemption of a part of the then
 outstanding preferred shares, the shares to be redeemed will be selected by
 lot in such manner as the directors in their discretion shall decide or, if
 the directors so determine, will be redeemed on a pro rata basis; and                                                  
|                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                          | The
 preferred shares will rank both as regards dividends and return of capital,
 in priority to all other shares of the Company, but will not be entitled to
 any further right to participate in the profits or assets of the Company. In
 the event of the liquidation, dissolution or winding-up of the Company, the
 holders of the preferred shares will be entitled to receive, before any
 distribution of any part of the property and assets of the Company among the
 holders of any other shares, an amount equal to 100% of the amount paid
 thereon and any dividends declared thereon and unpaid.
|                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|4.                                                                                                                                                                                         | Changing the
 Rights of Shareholders                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|Under the BC
 Act, a company may, by the type of shareholders resolution specified by the
 articles, or, if the articles do not specify the type of resolution, by a
 special resolution:
|                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                          | create
 special rights or restrictions for, and attach those special rights or
 restrictions to, the shares of any class or series of shares, whether or not
 any or all of those shares have been issued; or                                                                                                                                                                                                                                                                                                                                                                                                   
|                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                          | vary or
 delete any special rights or restrictions attached to the shares of any class
 or series of shares, whether or not any or all of those shares have been
 issued.                                                                                                                                                                                                                                                                                                                                                                                                                                       

The Companys
Articles provide that the general authority required to amend all provisions of
the Companys Articles is an ordinary resolution (that is, 50% plus one of the
votes cast), subject to certain changes that require a special resolution (at
least 2/3 of votes cast) in accordance with the BC Act.

The Company
may by resolution of the directors authorize an alteration of its Notice of
Articles in order to change its name or to effect a reverse split or a share
split. Other more substantive capital alterations require an ordinary
resolution.

The Articles
provide that the attachment, variation and deletion of special rights and
restrictions to any class of shares must be authorized by an ordinary
resolution. If the amendment prejudices or interferes with the rights or
special rights attached to any class of issued shares, the BC Act requires the
consent of the holders of that class of shares be obtained by a separate
special resolution. If a series of preferred shares has been issued, there can
be no interference with that series rights by another series without the
earlier series holders consent by separate special resolution.

The BC Act
also provides that the Company may reduce its paid-up capital accounts if it is
authorized to do so by a court order, or, if the capital is reduced to an
amount that is not less than the realizable value of the companys assets less
its liabilities, by a special resolution or court order.

|   |                          
|-- | -------------------------
|5. | Meetings Of
 Shareholders

The Company
must hold its annual shareholders meeting once in every calendar year (and in
a period not exceeding more than 15 months from the last annual shareholders
meeting) at such time and place to be determined by the directors of the
Company. The Company must publish an advance notice in the manner required by
the BC Act of any general meeting at which directors are to be elected. The
directors may fix in advance a record date, which is no fewer than 21 days
prior to the date of the meeting and not more than 60

- 66 -

---



days before.
All the holders of common shares as at that record date are entitled to receive
notice of and to attend and vote at a general meeting.

The Articles
provide that the quorum for the transaction of business at any meeting of
shareholders is two persons who are, or who represent by proxy, shareholders
who, in the aggregate, hold at least thirty three and one third percent (33
1/3%) of the issued shares entitled to be voted at the meeting. If a quorum is
not present, the meeting is set over for one week and then whatever number of
shares that is represented at the set-over meeting shall be deemed to
constitute a quorum.

In addition to
the requirements of the BC Act, there is extensive regulation of the
requirements for the form and content of proxy materials and the corporate
disclosures made therein, which are mandated by Canadian securities legislation
applicable to the Company.

|   |                                               
|-- | ----------------------------------------------
|6. | No
 Limitations on the Right to Own Securities

The Companys
Articles do not contain any restrictions on the rights of any person, including
any non-resident or foreign shareholder to hold or exercise voting rights on
the Companys securities. There are no restrictions applicable to such
ownership in Canadian law as discussed in Item 10.D  Exchange Controls.

|   |                                                                                   
|-- | ----------------------------------------------------------------------------------
|7. | Restrictions
 On Change In Control, Merger, Acquisition Or Corporate Restructuring

There are no
provisions in the Companys Articles that would have the effect of delaying,
deferring or preventing a change in control of the Company or that would
operate only with respect to a merger, acquisition or corporate restructuring
involving the Company. The BC Act does not contain any provisions that would
have the effect of delaying, deferring or preventing a change of control of the
Company. Stock exchange policies applicable to the Company however do impose
shareholder approval requirements for certain types of control change
transactions.

|   |                                                 
|-- | ------------------------------------------------
|8. | Ownership
 Threshold Requiring Public Disclosure

There are no
provisions in the Companys Articles or in the BC Act governing the threshold
above which shareholder ownership must be disclosed. The Company is a reporting
company under the Securities Act (British Columbia) and the Securities Act
(Alberta), and is governed by the securities legislation in New Zealand, and in
the U.S.A., as a foreign private issuer.

Canadian
provincial securities legislation requires that a shareholder disclose
ownership of 10% or more of the shares (and any further increases of 2% or
more) of the Company by issuing a news release and filing a report (both
containing prescribed disclosure) with the Securities Commissions in those
provinces. They also require the Company to disclose, in its information
circular sent out for an annual meeting or special meeting, the names of
holders known to the Company to beneficially own more than 10% of the Companys
issued and outstanding shares.

New Zealand
securities legislation requires that a shareholder disclose ownership of 5% or
more of the shares (and any further increases of 1% or more) of the Company by
filing a report (containing prescribed disclosure) with the New Zealand Stock
Exchange and the Company.

Most state
corporation statutes do not contain provisions governing the threshold above
which shareholder ownership must be disclosed. United States federal securities
laws require a company that is subject to the reporting requirements of the
Securities Exchange Act 1934 to disclose, in its annual reports filed with the
Securities and Exchange Commission those shareholders who own more than 5% of the
corporations issued and outstanding shares. Shareholders are required to file
a disclosure statement on Schedule 13G if they own more than 5% of the
corporations issued and outstanding shares.

|   |                                                                            
|-- | ---------------------------------------------------------------------------
|9. | Significant
 differences between U.S. Law and the Law Applicable to Company

The law
applicable to the Company and its own governance practices differ from those
followed by U.S. domestic companies pursuant to AMEX listing standards in the
following material respects:

 Solicitation of Proxies

AMEX requires
the solicitation of proxies and delivery of proxy statements for all
shareholder meetings, and requires that these proxies shall be solicited
pursuant to a proxy statement that conforms to applicable SEC

- 67 -

---



proxy rules.
The Company is a foreign private issuer as defined in Rule 3b-4 under the 1934
Act, and the equity securities of the Company are accordingly exempt from the
proxy rules set forth in Sections 14(a), 14(b), 14(c) and 14(f) of the
Securities Exchange Act of 1934, as amended. The Company solicits proxies in
accordance with applicable rules and regulations in Canada.

 Shareholders Approval for Dilutive Private Placement
Financings

Section 713 of
the AMEX Company Guide requires that the Company obtain the approval of its
shareholders for share issuances equal to 20 percent or more of presently
outstanding shares for a price which is less than the greater of book or market
value of the shares. There is no such requirement under British Columbia law or
under the Companys home stock exchange rules (Toronto Stock Exchange or TSX
Venture Exchange) unless the dilutive financing results in a change of control.

The Company
will seek a waiver from AMEXs section 713 requirements should a dilutive
private placement financing trigger the AMEX shareholders approval requirement
in circumstances where the same financing does not trigger such a requirement
under British Columbia law or under the Companys home country stock exchange
rules.

|    |                                  
|--- | ---------------------------------
|10. | Changes to
 the Companys Capital

The Companys
Articles do not contain any provisions governing changes in capital more
stringent than those required by the BC Act.

C. Material contracts

The Company
has entered into, or remains subject to, the following material contracts in
the two years prior to May 31, 2008 which can reasonably be regarded as being
not in the ordinary course of the Companys business (which ordinary course
includes the routine purchase and farm-in/farm-out of oil and gas properties,
and settlement of claims):

|                                                       |  |                                                                            |  |                                                                                                                                                                                                                             
|------------------------------------------------------ |  | -------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Document;
 Date                                        |  | Parties                                                                    |  | Particulars                                                                                                                                                                                                                 
|                                                       |  |                                                                            |  |                                                                                                                                                                                                                             
|Gas
 Pre-payment 
 and Option 
 Agreement
 Apr 2, 2003 |  | NGC Energy;
 Austral                                                       |  | NGC lent the
 Company NZ$2 million for the right of first negotiation in respect to onshore
 NZ gas discoveries (refer to Item 4.B under Kahili Field, and Item 17, Note
 20(a) of Financial Statements).                 
|                                                       |  |                                                                            |  |                                                                                                                                                                                                                             
|Stock Option
 Plan
 Mar 3, 2006                        |  | Employees
 & directors;
 Austral                                           |  | Stock Option
 Plan and grants thereunder pursuant to which 1,987,500 shares were reserved
 for issuance as at Dec 31, 2007 (refer to Item 7.E.2 under Stock Option
 Plan).                                                
|                                                       |  |                                                                            |  |                                                                                                                                                                                                                             
|Unit
 Subscription
 Agreement
 Oct 18, 2006            |  | Various;
 Austral                                                          |  | Private
 placement raising $6.5 million by the issue of 5,007,000 shares at $1.30
 each, closing November 2006.                                                                                                             
|                                                       |  |                                                                            |  |                                                                                                                                                                                                                             
|Share Sale
 Agreement
 Oct 18, 2006                    |  | Shareholders
 of Arrowhead
 Energy Ltd;
 Austral Pacific Energy (NZ) Ltd   |  | Purchase by
 Austral of all the shares in Arrowhead Energy Ltd (principal asset 33% Cheal
 Field permits), closing December 2006 for consideration of $12.08 million
 (refer to Item 17, Note 5(b) of Financial Statements).
|                                                       |  |                                                                            |  |                                                                                                                                                                                                                             
|Gas
 Pre-Payment
 and Sale Agreement
 Feb 4, 2004      |  | NGC Energy
 International Resource Management Corporation (IRM)            |  | NGC lent IRM
 NZ$2.5 million for the right to purchase Kahili and Cheal gas at an agreed
 price (refer to Item 17, Note 20(b) of Financial Statements).                                                                     
|                                                       |  |                                                                            |  |                                                                                                                                                                                                                             
|Asset Sale
 Agreement
 Oct 23, 2005                    |  | International
 Resource Management Corporation (IRM)
 Arrowhead Energy Ltd |  | Purchase by
 Arrowhead Energy of Cheal and Kahili assets from IRM, including transfer of obligations
 under Gas Pre-Payment Agreement (Feb 04).                                                                             

- 68 -

---



|                                                            |  |                                                                                                       |  |                                                                                                                                                                                                                                                                                                     
|----------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Document;
 Date                                             |  | Parties                                                                                               |  | Particulars                                                                                                                                                                                                                                                                                         
|                                                            |  |                                                                                                       |  |                                                                                                                                                                                                                                                                                                     
|US$ Cash
 Advance
 Agreement
 Dec 21, 2006                  |  | Investec
 Bank (Australia) Ltd;
 various Austral companies                                            |  | Establishing
 a $23 million loan facility for a term of 4 years at commercial lending rates
 (refer to Item 5.B under Loan Facility, and Item 17, Note 21 of Financial
 Statements).                                                                                                              
|                                                            |  |                                                                                                       |  |                                                                                                                                                                                                                                                                                                     
|Warrant
 Agreement
 Dec 21, 2006                            |  | Investec
 Bank;
 Austral                                                                              |  | Granted 2.5
 million warrants to Investec exercisable at $2.11 per for 24 months share as
 partial consideration for the loan facility.                                                                                                                                                             
|                                                            |  |                                                                                                       |  |                                                                                                                                                                                                                                                                                                     
|Unit
 Subscription
 Agreement
 Mar 30, 2007                 |  | Various;
 Austral                                                                                     |  | Private
 placement raising $3.25 million by the issue of 2,500,000 shares at $1.30
 each, closing May 2007.                                                                                                                                                                                         
|                                                            |  |                                                                                                       |  |                                                                                                                                                                                                                                                                                                     
|Share Sale
 Agreement
 Aug 6, 2007; variation
 Aug 31, 2007 |  | Shareholders
 of International Resource Management Corporation Ltd;
 Austral Pacific Energy (NZ)
 Ltd |  | Purchase by
 Austral of all the shares in International Resource Management Corporation
 Ltd, later varied to clarify treatment of shareholder loans, closed November
 12, 2007 (refer to Item 17 Note 5(a) of Financial Statements).                                                               
|                                                            |  |                                                                                                       |  |                                                                                                                                                                                                                                                                                                     
|Preferred
 Share
 Subscription
 Agreement
 Jul 7, 2007      |  | Eclectic/Republic;
 Austral                                                                           |  | Private
 placement raising $10 million by the issue of 7,692,308 Series 1 preferred
 shares at $1.30 each, closing September 20, 2007 (refer to Item 4.A under
 Important Events).                                                                                                                
|                                                            |  |                                                                                                       |  |                                                                                                                                                                                                                                                                                                     
|Warrant
 Agreement
 Sep 20, 2007                            |  | Morgan
 Keegan;
 Austral                                                                              |  | Granted
 150,000 warrants to Morgan Keegan exercisable at $1.30 per share for 24
 months as partial consideration for broker services (refer to Item 4.A under
 Important Events).                                                                                                                
|                                                            |  |                                                                                                       |  |                                                                                                                                                                                                                                                                                                     
|Unit
 Subscription
 Agreement
 Dec 12, 2007                 |  | Various;
 Austral                                                                                     |  | Private
 placement raising $15 million by the issue of 12.5 million units at $1.20
 each (1 common share plus 1 12-month share purchase warrant exercisable at
 $2.25), closing February 28, 2008 (refer to Item 4.A under Important
 Events).                                                    
|                                                            |  |                                                                                                       |  |                                                                                                                                                                                                                                                                                                     
|Unit
 Subscription
 Agreement
 Jun 12, 2008                 |  | Various;
 Austral                                                                                     |  | Private
 placement raising $5,611,180 million by the issue of 11,222,360 million units
 at $0.50 each (1 common share plus one-half 15-month share purchase warrant
 exercisable at $1.00), closing subject to regulatory approval (refer to Item
 4.A under Important Events, and Exhibit 14.11).

D. Exchange controls

The Company is
a corporation governed by the laws of the Province of British Columbia, Canada.
There is no law or governmental decree or regulation in Canada that restricts
the export or import of capital, or affects the remittance of dividends,
interest or other payments to a non-resident holder of common shares of the
Company (the Common Shares), other than withholding tax requirements. Any
such remittances to United States residents are generally subject to
withholding tax, however no such remittances are likely in the foreseeable
future. See Taxation, below.

There is no
limitation imposed by the laws of Canada or by the charter or other constituent
documents of the Company on the right of a non-resident to hold or vote its
common shares, other than as provided in the Investment Canada Act(Canada)
(the Investment Act). The following discussion summarizes the material
features of the Investment Actfor a non-resident who proposes to acquire a
controlling number of the Companys common shares. It is general only, it is
not a substitute for independent advice from an investors own advisor, and it
does not anticipate statutory or regulatory amendments. The Company does not
believe the Investment Actwill have any affect on it or on its non-Canadian
shareholders due to a number of factors including the nature of its operations
and the Companys relatively small capitalization.

- 69 -

---



The Investment Actgenerally prohibits
implementation of a reviewable investment by an individual, government or
agency thereof, corporation, partnership, trust or joint venture (each an
entity) that is not a Canadian as defined in the Investment Act(i.e. a non-Canadian),
unless after review
by the Minister responsible for the Investment
Act is satisfied that the investment is likely to be of net benefit
to Canada. An investment in the Companys common shares by a non-Canadian
(other than a WTO investor as that term is defined in the Investment Actand which term includes
entities which are nationals of or are controlled by nationals of member states
of the World Trade Organization) when the Company was not controlled by a WTO
investor, would be reviewable under the Investment
Actif it was an investment to acquire control of the Company and
the value of the assets of the Company, as determined in accordance with the
regulations promulgated under the Investment Act, was over CDN$5 million, or if
an order for review was made by the federal cabinet on the grounds that the
investment related to Canadas cultural heritage or national identity,
regardless of the value of the assets of the Company. An investment in the
Common Shares of the Company by a WTO investor, or by a non-Canadian when the
Company was controlled by a WTO investor, would be reviewable under the Investment Actif it was an investment to
acquire control of the Company and the value of the assets of the Company, as
determined in accordance with the regulations promulgated under the Investment Act, was not less than a
specified amount, which for 2007 is CDN$295 million. A non-Canadian would
acquire control of the Company for the purposes of the Investment Act if the non-Canadian
acquired a majority of the Common Shares of the Company. The acquisition of
less than a majority but one-third or more of such Common Shares would be
presumed to be an acquisition of control of the Company unless it could be
established that, on the acquisition, the Company was not controlled in fact by
the acquirer through the ownership of the Common Shares.

The foregoing
assumes the Company will not engage in the production of uranium or own an
interest in a producing uranium property in Canada, or provide any financial
service or transportation service or is a cultural business, as the rules under
the Investment Actgoverning
these businesses are different.

Certain
transactions relating to the Common Shares of the Company would be exempt from
the Investment Act, including

|    |                                                                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | an
 acquisition of the Common Shares by a person in the ordinary course of that
 persons business as a trader or dealer in securities,                                                                                                                                     
|    |                                                                                                                                                                                                                                                                             
|(b) | an
 acquisition of control of the Company in connection with the realization of
 security granted for a loan or other financial assistance and not for a purpose
 related to the provisions of the Investment
 Act, and                                                     
|    |                                                                                                                                                                                                                                                                             
|(c) | an
 acquisition of control of the Company by reason of an amalgamation, merger,
 consolidation or corporate reorganization following which the ultimate direct
 or indirect control in fact of the Company, through the ownership of the
 Common Shares, remained unchanged.

E. Taxation

Certain Canadian Federal Income Tax
Information for United States Residents

The following
summarizes the principal Canadian federal income tax considerations generally
applicable to the holding and disposition of common shares of the Company by a
holder (a) who, for the purposes of the Income Tax Act (Canada) (the Tax
Act), is not resident in or deemed to be resident in Canada, deals at arms
length with the Company, holds the common shares as capital property and does
not use or hold the common shares in the course of carrying on, or otherwise in
connection with, a business in Canada, and (b) who, for the purposes of the
Canada-United States Income Tax Convention (the Treaty), is a resident of the
United States, has never been a resident of Canada, has not held or used (and
does not hold or use) common shares in connection with a permanent
establishment or fixed base in Canada, and who otherwise qualifies for the full
benefits of the Treaty. Holders who meet all such criteria in clauses (a) and
(b) are referred to herein as a U.S. Holder or U.S. Holders, and this
summary only addresses such U.S. Holders. The summary does not deal with
special situations, such as particular circumstances of traders or dealers,
limited liability companies, tax-exempt entities, insurers, financial
institutions (including those to which the mark-to-market provisions of the Tax
Act apply), or otherwise.

This summary
is based on the current provisions of the Tax Act and the regulations
thereunder, all proposed amendments to the Tax Act, regulations and the Treaty
publicly announced by the Minister of Finance (Canada) to the date hereof, the
current provisions of the Treaty and the current administrative practices of
the Canada Revenue Agency. It has been assumed that all currently proposed
amendments will be enacted

- 70 -

---



as proposed
and that there will be no other relevant change in any governing law, the
Treaty or administrative policy, although no assurance can be given in these
respects. This summary does not take into account provincial, U.S. or other
foreign income tax considerations, which may differ significantly from those
discussed herein. The summary also assumes that the Company will be treated
solely as a resident of Canada for purposes of the Tax Act and the Treaty. No
opinion or tax ruling has been sought or obtained in respect of any assumption
made in this summary.

This summary
is not exhaustive of all possible Canadian income tax consequences. It is not
intended as legal or tax advice to any particular holder of common shares and
should not be so construed. The tax consequences to any particular holder of
common shares will vary according to the status of that holder as an
individual, trust, corporation or member of a partnership, the jurisdictions in
which that holder is subject to taxation and, generally, according to that
holders particular circumstances.

Each holder should
consult the holders own tax advisor with respect to the income tax
consequences applicable to the holders own particular circumstances.

Dividends

Dividends paid
or deemed to be paid or credited by the Company to a U.S. Holder are subject to
Canadian withholding tax at the rate of 25% unless a lower Treaty rate can be
substantiated. Under the Treaty, the rate of withholding tax on dividends paid
to a qualifying U.S. Holder is generally limited to 15% of the gross dividend
(or 5% in the case of corporate shareholders owning at least 10% of the
Companys voting shares).

Disposition

A US Holder is
subject to tax under the Tax Act in respect of a capital gain realized on the
sale or other disposition of a common share only if the US Holder holds the
common share as taxable Canadian property for purposes of the Tax Act and is
not entitled to relief under the Treaty.

In general,
provided the common shares are listed on a designated exchange in Canada at the
relevant time (maintaining the current TSX listing would be sufficient for this
purpose), common shares will not be taxable Canadian property unless (i) at
any time during the 60 month period ending at the time of disposition, the US Holder
and/or persons and entities not dealing at arms length with the US Holder
(alone or together) owned 25% or more of the issued shares of any class or
series of the capital stock of the Company, or (ii) the US Holders common
shares were acquired in certain types of tax-deferred exchanges in
consideration for property that was itself taxable Canadian property.

Furthermore,
even if common shares are so held as taxable Canadian property, relief under
the Treaty is generally available provided the value of the common shares is
not derived principally from real property situated in Canada. Management of
the Company believes that the value of the Companys common shares is currently
not derived principally from real property in Canada. US Holders claiming Treaty
relief should do so by filing a Canadian income tax return for the relevant
taxation year, and should consult with their own advisors in this regard.

U.S. Taxation Effects

The following
is a general discussion of the material United States Federal income tax laws
for U.S. holders that hold common shares in the Company as a capital asset, as
defined under United States Federal income tax law and is limited to discussion
of U.S. Holders that own less than 10% of the common stock. This discussion does
not address all potentially relevant U.S. Federal income tax matters and it
does not address consequences peculiar to persons subject to special provisions
of U.S. Federal income tax law, such as those described below as excluded from
the definition of a U.S. Holder. In addition, this discussion does not cover
any state, local or foreign tax consequences.

The following
discussion is based upon the sections of the U.S. Internal Revenue Code of
1986, as amended to the date hereof (the Code), Treasury Regulations,
published Internal Revenue Service (IRS) rulings, published administrative
positions of the IRS and court decisions that are currently applicable, any or
all of which could be materially and adversely changed, possibly on a
retroactive basis, at any time. In addition, this discussion does not consider
the potential effects, both adverse and beneficial, of any future legislation
which, if enacted, could be applied, possibly on a retroactive basis, at any
time.

THE FOLLOWING
DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IT IS NOT INTENDED TO

- 71 -

---



BE, NOR SHOULD IT BE
CONSTRUED TO BE, LEGAL OR TAX ADVICE TO ANY HOLDER OR PROSPECTIVE HOLDER OF
COMMON SHARES OF THE COMPANY AND NO OPINION OR REPRESENTATION WITH RESPECT TO
THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO ANY SUCH HOLDER OR
PROSPECTIVE HOLDER IS MADE. THE FOLLOWING DISCUSSION WAS NOT WRITTEN AND IS NOT INTENDED TO BE USED, AND
CANNOT BE USED, BY ANY PERSON FOR THE AVOIDANCE OF ANY PENALTIES WITH RESPECT
TO TAXES THAT MAY BE IMPOSED ON SUCH PERSON. ACCORDINGLY, U.S. HOLDERS
AND PROSPECTIVE U.S. HOLDERS OF COMMON SHARES OF THE COMPANY SHOULD CONSULT
THEIR OWN TAX ADVISORS ABOUT THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN, TAX
CONSEQUENCES OF PURCHASING, OWNING AND DISPOSING OF COMMON SHARES OF THE
COMPANY.

U.S. Holders

As used
herein, a U.S. Holder is a holder of common shares of the Company who or
which is a citizen or individual resident (or is treated as a citizen or
individual resident) of the United States for U.S. federal income tax purposes,
a corporation or partnership created or organized (or treated as created or
organized for U.S. federal income tax purposes) in the United States, including
only the States and District of Columbia, or under the law of the United States
or any State or Territory or any political subdivision thereof, or a trust or
estate the income of which is includable in its gross income for U.S. federal
income tax purposes without regard to its source, if, (i) a court within
the United States is able to exercise primary supervision over the
administration of the trust and (ii) one or more United States trustees
have the authority to control all substantial decisions of the trust. For
purposes of this discussion, a U.S. Holder does not include persons subject to
special provisions of U.S. Federal income tax law, such as tax-exempt
organizations, qualified retirement plans, financial institutions, insurance
companies, real estate investment trusts, regulated investment companies,
broker-dealers and Holders who acquired their stock through the exercise of
employee stock options or otherwise as compensation.

Distributions on
common shares of the Company

U.S. Holders
receiving dividend distributions (including constructive dividends) with
respect to common shares of the Company are required to include in gross income
for United States Federal income tax purposes the gross amount of such
distributions, equal to the U.S. dollar value of such distributions on the date
of receipt (based on the exchange rate on such date), to the extent that the
Company has current or accumulated earnings and profits, without reduction for
any Canadian or other foreign income tax withheld from such distributions. Such
Canadian or other foreign tax withheld may be credited, subject to certain
limitations, against the U.S. Holders United States Federal income tax
liability or, alternatively, may be deducted in computing the U.S. Holders
United States Federal taxable income by those who itemize deductions. (See more
detailed discussion at Foreign Tax Credit below).

Dividends
distributed by the Company (if any) to a non-corporate U.S. Holder may be
eligible for the 15% maximum Federal income tax rate that applies to dividends
received by individuals from certain foreign corporations prior to January 1,
2009. To the extent that distributions exceed current or accumulated earnings
and profits of the Company, they will be treated first as a tax-free return of
capital to the extent of the U.S. Holders adjusted basis in the common shares
and thereafter as gain from the sale or exchange of the common shares.
Preferential tax rates for long-term capital gains are applicable to a U.S.
Holder which is an individual, estate or trust. There are currently no
preferential tax rates for long-term capital gains for a U.S. Holder which is a
corporation.

Dividends paid
on the common shares of the Company will not generally be eligible for the
dividends received deduction provided to corporations receiving dividends from
certain United States corporations. A U.S. Holder which is a corporation may,
under certain circumstances, be entitled to a 70% deduction of the United
States source portion of dividends received from a qualified 10-percent owned
foreign corporation (other than a passive foreign investment company) if such
U.S. Holder owns shares representing at least 10% of the voting power and value
of such corporation. The availability of this deduction is subject to several
complex limitations which are beyond the scope of this discussion.

Under current
Treasury Regulations, dividends paid on the Companys common shares, if any,
generally will not be subject to information reporting and generally will not
be subject to U.S. backup withholding tax. However, dividends and the proceeds
from a sale of the Companys common shares paid in the U.S. through a U.S. or
U.S. related paying agent (including a broker) will be subject to U.S.
information reporting requirements and may also be subject to the 28% U.S.
backup withholding tax, unless the paying agent is

- 72 -

---



furnished with
a duly completed and signed Form W-9. Any amounts withheld under the U.S.
backup withholding tax rules will be allowed as a refund or a credit against
the U.S. Holders U.S. federal income tax liability, provided the required
information is furnished to the IRS.

Foreign Tax Credit

A U.S. Holder
who pays (or has withheld from distributions) Canadian or other foreign income
tax with respect to the ownership of common shares of the Company may be
entitled, at the option of the U.S. Holder, to either a deduction or a tax
credit for such foreign tax paid or withheld. Generally, it will be more
advantageous to claim a credit because a credit reduces United States Federal
income taxes on a dollar-for-dollar basis, while a deduction merely reduces the
taxpayers income subject to tax. This election is made on a year-by-year basis
and applies to all foreign taxes paid by (or withheld from) the U.S. Holder
during that year. There are significant and complex limitations which apply to
the credit, among which is the general limitation that the credit cannot exceed
the proportionate shares of the U.S. Holders United States income tax
liability that the U.S. Holders foreign source income bears to his or its
world-wide taxable income. In the determination of the application of this
limitation, the various items of income and deduction must be classified into
foreign and domestic sources. Complex rules govern this classification process.
There are further limitations on the foreign tax credit for certain types of
income such as passive income, high withholding tax interest, financial
services income, shipping income and certain other classifications of
income. The availability of the foreign tax credit and the application of the
limitations on the credit are fact specific and holders and prospective holders
of common shares of the Company should consult their own tax advisors regarding
their individual circumstances.

Disposition of common
shares of the Company

A U.S. Holder
will recognize gain or loss upon the sale of common shares of the Company equal
to the difference, if any, between the amount of cash plus the fair market
value of any property received, and the Holders adjusted tax basis in the
common shares of the Company. This gain or loss will be capital gain or loss if
the common shares are a capital asset in the hands of the U.S. Holder. Any
capital gain or loss will be a short-term or long-term if the U.S. Holders
holding period for the Companys common shares is one year or more. Gains and
losses are netted and combined according to special rules in arriving at the
overall capital gain or loss for a particular tax year. Deductions for net
capital losses are subject to significant limitations. A non-corporate U.S.
Holder may deduct capital losses not offset by capital gains against such
Holders ordinary income up to a maximum annual amount of $3,000 ($1,500 for
married taxpayers filing separately) and any unused portion of such net capital
loss may be carried over to be used indefinitely in later tax years until such
net capital loss is thereby exhausted. A corporate U.S. Holder (other than
corporations subject to Subchapter S of the Code), may deduct capital losses
only to the extent of its capital gains, and any unused net capital loss may be
carried back three years from the loss year and carried forward five years from
the loss year to be offset against capital gains until such net capital loss is
thereby exhausted.

Passive Foreign
Investment Company Considerations

Management
believes that the Company will not be treated as a Passive Foreign Investment
Company (PFIC), for U.S. federal income tax purposes for the current taxable
year, nor for the foreseeable future. However, an actual determination of PFIC
status is factual in nature and generally cannot be made until the close of the
applicable taxable year. We will be a PFIC if either:

|  |                                                                                                                                                                    
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 75% or more
 of our gross income in a taxable year is passive income, which includes
 dividends, interest, royalties, rents, annuities, and some types of gains; or
|  |                                                                                                                                                                    
| | the average
 percentage of the value of our assets that produce or are held for the
 production of passive income is at least 50%.                                 

If the Company
were classified as a PFIC, U.S. shareholders would be subject to certain
adverse U.S. tax consequences, including the application of special rules to
certain extraordinary distributions, possible characterization of gain with
respect to the shares as ordinary and the possible imposition of an interest
charge on taxes that U.S. holders would be deemed to have deferred.

U.S.
shareholders are urged to consult their own tax advisors concerning the
potential application of the PFIC rules to their ownership and disposition of
the Companys shares.

- 73 -

---



F. Dividends and
paying agents

Not applicable

G. Statement by
experts

Not applicable

H. Documents on
display

Documents
concerning the Company which are referred to in this document may be inspected
at the offices of Austral Pacific Energy Ltd., at Level 3, 40 Johnston Street,
Wellington 6011, New Zealand, or at the Companys registered office at Suite
1500 Royal Centre, 1055 West Georgia Street, Vancouver, B.C. V6E 4N7, Canada,
or via the Companys website at: www.austral-pacific.com

Documents
referred to in this document are filed with the US Securities Commission
(SEC), and are available for view on the SEC website at: http//www.sec.gov

I. Subsidiary
information

Not applicable

|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Cash and cash
equivalents, accounts receivable, accounts payable and accrued liabilities are
carried at cost which approximates fair value due to the short-term maturity of
these instruments. Unless otherwise noted, it is managements opinion that the
Company is not exposed to significant interest, currency exchange rate or
credit risks arising from these financial instruments.

Interest rate risk

The Company is
a party to the Gas Pre-purchase and Option Agreement between the Company and
NGC New Zealand Limited (now called Vector Limited) that may give rise to
interest rate exposure (see Item 17, Note 20(a) of the 2007 Consolidated
Financial Statements, and Exhibit 4.2). In the event that
insufficient gas is delivered by the Company to discharge the advance, and the
Company elects to refund the advance, interest will be payable for the period
on the outstanding balance at April 2, 2013, calculated at the average New
Zealand bank bill rate. The Company has several alternatives at its discretion
for repayment of the advance. The Companys current intention is to repay the
advance by physical delivery of gas in which instance interest will not be
incurred.

On February 4,
2004, Arrowhead Energy Ltd, a company acquired on December 22, 2006, entered
into a gas prepayment and sale agreement with Vector Limited (Item 17, Note
20(b) of the 2007 Consolidated Financial Statements, and Exhibits 4.3 and 4.4).
The obligations of Arrowhead under the gas prepayment agreement survive the
repayment of the advance. The gas prepayment agreement can only be terminated
in certain circumstances and in the event of termination the outstanding amount
of the advance is repayable without interest for a period of 14 days after
which interest becomes payable on any balance of the advance not repaid, calculated
at the average New Zealand bank bill rate.The Companys
current intention is to repay the advance by physical delivery of gas, in which
instance interest will not be incurred.

In December
2006, Austral Pacific Energy (NZ) Limited, a wholly owned subsidiary, entered
into a project loan facility with Investec Bank (Australia) Ltd and the first
drawdown was made on December 22, 2006 (refer to Item 5 and Exhibit 2.1).
Interest on the facility is variable based upon the London Interbank Offered
Rate (LIBOR) plus a margin dependent upon the tranche of the loan.

The facility
is structured into three tranches:

|     |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(i)  | $18,000,000
 Senior tranche The interest rate prior to project completion is LIBOR plus
 2.00% (post completion LIBOR plus 1.75%). This interest rate has been
 increased to LIBOR plus 4.00% for the period January 31 to December 15, 2008.
 At December 31, 2007 a total drawdown of $18,000,000 had been made from the
 Senior tranche and $4,350,000 had been repaid. At May 31, 2008, a further
 $7,700,000 had been repaid.
|     |                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(ii) | $5,000,000
 Junior tranche. The interest rate prior to project completion is LIBOR plus
 4.00%                                                                                                                                                                                                                                                                                                                                     

- 74 -

---



|      |                                                                                                                                                                                                                                           
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | (post
 completion LIBOR plus 3.5%). This interest rate has been increased to LIBOR
 plus 6.00% for the period January 31 to December 15, 2008. At December 31, 2006
 a total drawdown of $5,000,000 had been made from the Junior tranche;
|      |                                                                                                                                                                                                                                           
|(iii) | NZ$2,500,000
 Guarantee tranche. The interest rate prior to project completion is 2.00%
 (post completion 1.75%).                                                                                                                       

In May 2008 a further
$17,847,000 was borrowed under the facility to fund the close out of the
forward oil sale contracts, a series of put options and interest costs to
December 15, 2008 when the facility will be repayable in full.

In the normal course of
business, the Company invests cash not immediately required for operational
purposes. The primary objective of the Companys investment activity is to
preserve principal and maximise interest income without taking significant
risk. The Company currently invests in bank deposits with a number of banks.
The Company is exposed to interest rate risk resulting from changes in interest
rates relating to these investments.

Credit Risk

Credit risk arises from cash and cash equivalents, and deposits with
banks, as well as credit exposures to customers, including outstanding
receivables and committed transactions. Investments are to be made only with
approved third party financial institutions. A significant portion of the
Companys accounts receivable, $1,949,355 (2006: $347,216) is due from one oil
and gas customer. Credit quality of this customer is assessed taking into
account its financial position, past experience and other factors.

Equity price
risk

The Company holds investments
in one publicly held entity listed on the AIM market in London. Any changes in
the value of this investment would not materially impact the financial results
of the Company.

Exchange rate
risk

As the Company operates in New
Zealand and Papua New Guinea (until May 31, 2008), there is an exposure to
foreign exchange risk arising from fluctuations in the exchange rates of these
currencies. To a lesser extent, fluctuations in the Canadian dollar exchange
rate will have an impact as the Company incurs costs in Canadian dollars
relating primarily to corporate activities.

The Company does not currently
engage in foreign currency hedging although the treasury policy approved by the
Board of Directors allows hedging arrangements to be entered into within
specified limits when considered appropriate by management. Refer to Item 5.A 
Operating Results, under the heading Foreign
Currency Fluctuation for further information.

Commodity
price risk

The Company is involved in
exploring for oil and natural gas. Sales of oil will be subject to commodity
price risk which will increase as production rates increase. As
at December 31, 2007, the Company had entered into a series of forward sales
contracts for the future sale of crude oil produced from the Cheal oil field.
These were closed out in May 2008. Refer to paragraph on derivative financial
instruments below for further information.

Translation
exposure

Translation exposure is defined
as the Companys exposure to currency risk when translating the results and net
assets of foreign subsidiaries to United States dollars. The translation
effects on the Companys accounts are not hedged.

Derivative
financial instruments

As noted in the paragraph on
commodity price risk above, as at December 31, 2007, the Company has entered into a series of
forward sales contracts for the future sale of crude oil produced from the Cheal
field. The contracts were entered into in connection with the raising of the
long term loan. As the forward sales contracts hedge commodity price against
the WTI Futures Contract, the Company has assessed the long term effectiveness
of the forwards sales contracts as not being sufficiently effective to enable
it to apply hedge

- 75 -

---



accounting.

The Companys outstanding contracts for derivative instruments, (which
account for ~20% of Cheal proved and probable oil reserves), and the related
fair values at December 31, 2007 are as follows:

|                           |  |                     |  |                            |  |                         |  |                                |  
|-------------------------- |  | ------------------- |  | -------------------------- |  | ----------------------- |  | ------------------------------ | -
|                           |  | QUANTITY
 (BARRELS) |  | MATURITY DATE              |  | AVERAGE
 PRICE
 US$/BBL |  | FAIR VALUE
 DECEMBER
 31, 2007 |  
|                           |  |                     |  |                            |  |                         |  |                                |  
|                          
|Crude
 oil forward options |  | 323,700             |  | January 2008-December 2010 |  | 65.10                   |  | (7,753,311                     | )

As at December 31, 2007 the average price per bbl of equivalent crude
oil forward sales contracts for the period November 2007 to January 2011 ranged
from 85.60 to 96.33, thus giving rise to a negative fair value for these
derivatives of $7,753,311. The forward sales were valued against the forward
oil curve prices and discounted. As a result of the forward oil curve prices
being higher than the swap price these contracts resulted in a loss. The change
in fair value of the contracts is charged as income or expense in accordance
with the accounting standards requirements. The actual gain or loss on each
monthly hedged position will be determined at the time of settlement dependent
upon the oil price prevailing at that time.

At end May 2008, the Company has closed out the crude oil forward sales
contracts (effective June 2008 onwards), established a series of $90 put
options (September 2008 to August 2009) and including the associated interest
cost at a total cost of $17,847,000 (the funds were borrowed from Investec with
repayment due December 15, 2008).

|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not applicable

PART II

|         |                                                
|-------- | -----------------------------------------------
|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

As reported in
Item 17, Note 21 of the Consolidated Financial Statements 2007 and Item 5.B 
Liquidity and Capital Resources under the heading Loan Facility, the Company
has breached several covenants under its loan facility provided by Investec
Bank (Australia) Limited. Until the agreed restructuring is complete and the
Company satisfies the completion test defined in the US$ Cash Advance
Agreement (see Exhibit 2.1), the Company will remain in default under the
facility.

The Company
has not paid any dividends on the Series 1 Preferred Shares, the first payment
of which was due on January 1, 2008. As reported in Item 17, Note 25 (f) of the
Consolidated Financial Statements 2007, the Company has reached an agreement in principle with the
holders of the preferred shares for the exchange of the preferred shares into
convertible debentures, with effect from January 1, 2008. The convertible
debentures would have similar commercial terms, but would not be entitled to
any voting rights. The exchange will be subject to a number of conditions
precedent, including the approval of the TSX. While the proposed exchange
remains outstanding, the dividends have agreed not to be paid.

|         |                                                                              
|-------- | -----------------------------------------------------------------------------
|ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
 PROCEEDS

The
Company issued 7.7 million preferred shares on September 30, 2007. The
preferred shares have the following rights and are subject to the following
limitations:

|  |                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------
| | the
 preferred shares are convertible into common shares at a conversion price of
 $1.30 per share for three years from issue date;
|  |                                                                                                                                    
| | the
 preferred shares are redeemable at par by the Company after three years;                                                      
|  |                                                                                                                                    
| | the preferred shares are retractable by the
 holder after three years;                                                             

- 76 -

---



|  |                                                                                                                                                                
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the preferred shares have voting rights
  after December 31, 2007 (subject to completion of the agreement in principle
  discussed below);                     
|  |                                                                                                                                                                
| | the preferred shares are entitled to the
  payment of cumulative dividends at the rate of 8% per annum; and                                                    
|  |                                                                                                                                                                
| | the preferred shares are entitled to a
  liquidation preference over the common shares in an amount equal to the par
  value plus accumulated unpaid dividends.

The Company has reached an
agreement in principle with the holders of the preferred shares for the
exchange of the preferred shares into convertible debentures. The convertible
debentures would have similar commercial terms, but would not be entitled to
any voting rights. The exchange will be subject to a number of conditions
precedent, including the approval of the TSX. Pending exchange, the holders of
the preferred shares have undertaken not to exercise their voting rights on
these shares.

The rights of the Companys
common shareholders have been materially modified by the creation and issuance
of the preferred shares to the extent that the preferred shares are entitled to
preferential dividends, a preference on liquidiation and future voting rights.
In addition, conversion of the preferrred shares into common shares would
result in dilution to existing holders of common shares. As at May 31, 2008,
none of the Series 1 Preferred Shares had been converted by the holders.

|                 |                        
|---------------- | -----------------------
|ITEM 15.         | CONTROLS AND PROCEDURES
|                 |                        
|Not
  applicable |                        
|                 |                        
|ITEM 15T.        | CONTROLS AND PROCEDURES

EVALUATION OF
DISCLOSURE CONTROLS AND PROCEDURES

Our
management, including our Chief Executive Officer and Chief Financial Officer,
are responsible for establishing and maintaining our disclosure controls and
procedures. The term disclosure controls and procedures, as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934, as amended, means controls
and other procedures of a company that are designed to ensure that information
required to be disclosed by a company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SECs rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the companys management, including its principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure. Management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.

We evaluated
the effectiveness of our disclosure controls and procedures under the
supervision of our Chief Executive Officer and Chief Financial Officer as of
the end of the period covered by this annual report on Form 20-F. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that our disclosure controls and procedures were not effective as of
such date. The basis for this determination was that, as discussed below, we
have identified material weaknesses in our internal control over financial
reporting, which we view as an integral part of our disclosure controls and
procedures.

MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act.

Because of its
inherent limitations, internal controls over financial reporting are not
intended to provide absolute assurance that a misstatement of our financial
statements would be prevented or detected. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

- 77 -

---



Under the
supervision and with the participation of our management, including our Chief
Executive Officer and our Chief Financial Officer, we conducted an evaluation
of the effectiveness of our internal controls over financial reporting based on
the framework in Internal Control  Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO).

A material
weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the
annual financial statements will not be prevented or detected. In connection
with our managements evaluation of our internal control over financial
reporting, a material weakness was identified as of December 31, 2007 in
the limited knowledge of key accounting and finance staff in Canadian and
US GAAP. We did not have a sufficient number of personnel with an
appropriate level of accounting knowledge, experience and training in the
selection, application and implementation of Canadian and U.S. GAAP (in
particular relating to non-routine transactions and the application of specific
technical accounting requirements and the work papers supporting the accounting
treatment). Consequently, and as result of the audit by our independent
registered public accounting firm, this led to material audit adjustments to
our consolidated financial statements in respect to the following items:

|  |                                                                                                                                                                   
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Recognition
  and measurement of capitalized development costs, related provisions (i.e.
  asset retirement obligations) and subsequent amortization and depletion
|  |                                                                                                                                                                   
| | Appropriate
  expensing of exploration and evaluation expenditure in the period incurred;                                                                         
|  |                                                                                                                                                                   
| | Recognition
  and measurement of fair value of prepaid gas revenue;                                                                                               
|  |                                                                                                                                                                   
| | Recognition
  and measurement of deferred tax;                                                                                                                    
|  |                                                                                                                                                                   
| | Recognition
  and measurement of preference shares issued and corresponding dividends;                                                                            
|  |                                                                                                                                                                   
| | Recognition
  of unincorporated joint venture asset and liability positions at balance
  date;                                                                    
|  |                                                                                                                                                                   
| | Translation
  to Companys functional currency of both monetary and non-monetary items; and                                                                       
|  |                                                                                                                                                                   
| | Disclosure
  of all commitments and contractual obligation.                                                                                                       

Because of the
material weaknesses described above, our management has concluded that we did
not maintain effective internal control over our financial reporting as of
December 31, 2007 based on Internal Control  Integrated Framework issued
by the COSO. The weakness referred to above did not relate to fraud and was
fully addressed prior to completion of the financial statements presented in
this Report

MANAGEMENTS
PLAN FOR REMEDIATION OF MATERIAL WEAKNESS

In light of
the conclusion that our Companys internal control over financial reporting was
not effective, our management has developed a plan intended to remediate such
ineffectiveness and to strengthen our internal control over financial reporting
through the implementation of certain remedial measures, which include:

|  |                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | identifying
  an appropriate U.S. GAAP training program for the accounting and finance
  personnel of our Company to attend; and                                                        
|  |                                                                                                                                                                                         
| | continuing
  to engage and more fully utilise third-party accounting professionals to
  provide Canadian and U.S. GAAP consulting services and conduct timely reviews
  and evaluations.

CHANGES IN
INTERNAL CONTROL OVER FINANCIAL REPORTING

During the
fiscal year ended December 31, 2007, the change in both the CFO and Financial
Controller (including the absence of a permanent CFO between mid February and
mid June 2007 inclusive) had the capability to materially affect the Companys
internal control over financial reporting. The CFO and the Financial Controller
have limited experience with detailed Canadian and US GAAP reporting. In
response, the Company sought accounting advice from an independent major
accounting firm to assist in the interpretation and application of Canadian and
US accounting standards.

|          |                                 
|--------- | --------------------------------
|ITEM 16.  | [RESERVED]                      
|          |                                 
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT

The Companys
Board of Directors has determined that it has one Audit Committee financial
expert serving on its Audit Committee. This financial expert is Mr. David
Newman, who is the Audit Committee Chairman. Mr. Newman is accredited in New
Zealand as a Chartered Accountant. During his career with BP, Mr. Newman served
as CFO of BP Oil South Africa, and as CEO of BP New Zealand was direct
supervisor for the companys CFO. Previously, he spent 10 years with Deloitte
and Touche, and Ernst & Young, in New Zealand

- 78 -

---



and in the
United Kingdom, including 5 years as an
Audit Manager. He has served as Audit Committee chairman for a number of
New Zealand public issuers and other significant companies.

The Board has
determined that Mr. Newman is independent. Although Mr. Newman also serves as a
director and Chairman of Infratil Limited (the parent company of Infratil Gas
Limited, a greater than 10% shareholder of the Company), he is not employed by
Infratil or the Company, is remunerated only in his capacity as a director of
each company, and serves as chairman of Infratil in a part-time capacity only.
Under both US and Canadian rules, he does not, by virtue of such relationships
alone, lose his status as an independent director, and the Board has determined
that he does not have any other material relationship with the Company which
might interfere with the exercise of his independent judgement. Therefore, in
accordance with the independent director requirements of Section 121A of the
AMEX Company Guide and Rule 10A-3 of the Securities Exchange Act of 1934, Mr.
Newman meets the standard for independence as a member of the Board of
Directors and as a member of the Audit Committee.

|          |               
|--------- | --------------
|ITEM 16B. | CODE OF ETHICS

The Company
has adopted a code of ethics that applies to the Chief Executive Officer and
the Chief Financial Officer, as well as to all other staff. The Code of Ethics
was amended by the inclusion of a number of more specific requirements in
December 2006 (Exhibit 11). The Company has made available its code of ethics
on its website, www.austral-pacific.com and has filed it on the Canadian
securities regulatory administrators website www.sedar.com.

|          |                                       
|--------- | --------------------------------------
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES

The nature of
the services provided by KPMG under each of the categories indicated in the
table is described below.

|                               |  |                                                 |  |                                                 |         |  | 
|------------------------------ |  | ----------------------------------------------- |  | ----------------------------------------------- | ------- |  | 
|Principal
  Accountant Service |  | For the
  fiscal year ended
  December 31, 2007 |  | For the
  fiscal year ended
  December 31, 2006 |        
|                               |  |                                                 |  |                                                 |        
|Audit Fees                     |  | 333,630                                         |  |                                                 | 261,797 |  | 
|Audit
  Related Services       |  | 16,496                                          |  |                                                 | 15,560  |  | 
|Tax Fees                       |  | 165,322                                         |  |                                                 | 38,870  |  | 
|All Other
  Fees               |  | 1,805                                           |  |                                                 | Nil     |  | 

Audit Fees

Audit fees
were for professional services rendered by KPMG for the audit of the Companys
annual financial statements and services provided in connection with statutory
and regulatory filing or engagements.

Audit-Related Fees

Audit-related
fees were for assurance and related services and costs reasonably related to
the performance of the audit or review of the annual statements or bi-annual
statements that are not reported under Audit Fees above.

Tax Fees

Tax fees were for tax compliance, tax advice and tax planning provided
by the Companys external auditor.

Pre-Approval
Policies and Procedures

It is within
the mandate of the Companys Audit Committee to approve all audit and other
non-audit related fees paid to the independent auditor. The auditors present
the estimate for the annual audit related services to the Committee for
approval prior to undertaking the annual audit of the financial statements, and
for all other services.

|          |                                                           
|--------- | ----------------------------------------------------------
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

Not applicable

|          |                                                                         
|--------- | ------------------------------------------------------------------------
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
  PURCHASERS

None

- 79 -

---



PART III

|         |                     
|-------- | --------------------
|ITEM 17. | FINANCIAL STATEMENTS

INDEX
TO FINANCIAL STATEMENTS

|                                                             |     
|------------------------------------------------------------ | ----
|                                                             | Page
|                                                             |     
|Report
  of Independent Registered Public Accounting Firm    | 84  
|Consolidated
  Balance Sheets                                | 85  
|Consolidated
  Statements of Operations and Deficit          | 86  
|Consolidated
  Statements of Changes in Stockholders Equity | 87  
|Consolidated
  Statements of Cash Flows                      | 88  
|Notes to the
  Consolidated Financial Statements             | 89  

|                 |                     
|---------------- | --------------------
|ITEM 18.         | FINANCIAL STATEMENTS
|                 |                     
|Not
  applicable |                     
|                 |                     
|ITEM 19.         | EXHIBITS            

LIST OF EXHIBITS

|                  |  |                                                |  |              |  |                                                                           |  |          
|----------------- |  | ---------------------------------------------- |  | ------------ |  | ------------------------------------------------------------------------- |  | ---------
|Exhibit Reference |  | Document                                       |  | Date         |  | Parties                                                                   |  | Reference
|                  |  |                                                |  |              |  |                                                                           |  |          
|1.1               |  | Certificate
  of Continuance 
  of the Company |  | Oct 16, 2006 |  |                                                                           |  | (5)      
|                  |  |                                                |  |              |  |                                                                           |  |          
|1.2               |  | Notice of
  Articles                           |  | Oct 16, 2006 |  |                                                                           |  | (5)      
|                  |  |                                                |  |              |  |                                                                           |  |          
|1.3               |  | Articles of
  the Company                      |  | Oct 16, 2006 |  |                                                                           |  | (5)      
|                  |  |                                                |  |              |  |                                                                           |  |          
|2.1               |  | US$ Cash
  Advance 
  Agreement                |  | Dec 21, 2006 |  | Investec
  Bank (Australia) Ltd;various Austral companies                 |  | (4)      
|                  |  |                                                |  |              |  |                                                                           |  |          
|2.2               |  | Warrant
  Agreement                            |  | Dec 21, 2006 |  | Investec
  Bank (Australia) Ltd;Austral                                   |  | (4)      
|                  |  |                                                |  |              |  |                                                                           |  |          
|4.1               |  | Form of
  Stock Option Agreement               |  | Oct 15, 2002 |  | various
  employees, directors, and consultants; Austral                  |  | (1)      
|                  |  |                                                |  |              |  |                                                                           |  |          
|4.2               |  | Gas
  Pre-payment and 
  Option Agreement      |  | Apr 2, 2003  |  | NGC Energy;Austral                                                        |  | (3)      
|                  |  |                                                |  |              |  |                                                                           |  |          
|4.3               |  | Gas
  Pre-Payment and
  Sale Agreement         |  | Feb 4, 2004  |  | NGCEnergy
  International Resource Management Corporation (IRM)           |  | (4)      
|                  |  |                                                |  |              |  |                                                                           |  |          
|4.4               |  | Asset Sale
  Agreement                         |  | Oct 23, 2005 |  | International
  Resource Management Corporation (IRM)Arrowhead Energy Ltd |  | (4)      

- 80 -

---



|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|----------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | -------------------------------------------------------------------------------------------------------------- |  | ---------
|Exhibit Reference |  | Document                                                                                                                                                          |  | Date         |  | Parties                                                                                                        |  | Reference
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.5               |  | Stock Option Plan                                                                                                                                                 |  | Mar 3, 2006  |  |                                                                                                                |  | (2)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.6               |  | Form of Unit Subscription Agreement                                                                                                                               |  | Oct 18, 2006 |  | Austral and various purchasers of the Units                                                                    |  | (4)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.7               |  | Form of Unit
  Subscription
  Agreement                                                                                                                           |  | Mar 30, 2007 |  | Austral and
  various purchasers of the Units                                                                  |  | (4)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.8               |  | Form of
  Preferred Share
  Subscription Agreement                                                                                                                |  | Jul 7, 2007  |  | Austral and
  various purchasers of the Units                                                                  |  | (7)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.9               |  | Warrant
  Agreement                                                                                                                                               |  | Sep 30, 2007 |  | Morgan
  Keegan & Company, Inc. Austral                                                                        |  | (7)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.10              |  | Form of Unit
  Subscription Agreement                                                                                                                             |  | Dec 12, 2007 |  | Austral and
  various purchasers of the Units                                                                  |  | (7)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.11              |  | Form of Unit
  Subscription 
  Agreement                                                                                                                          |  | Jun 12, 2008 |  | Austral and
  various purchasers of the Units                                                                  |  | (7)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.12              |  | Share Sale
  Agreement                                                                                                                                            |  | Oct 18, 2006 |  | Shareholders
  of Arrowhead Energy Ltd;Austral Pacific Energy (NZ) Ltd                                         |  | (4)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.13              |  | Share Sale
  Agreement                                                                                                                                            |  | Aug 6, 2007  |  | Shareholders
  of International Resource Management Corporation Limited (IRM)Austral
  Pacific Energy (NZ) Ltd |  | (7)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.14              |  | Variation of
  Share Sale Agreement                                                                                                                               |  | Aug 31, 2007 |  | Shareholders
  of International Resource Management Corporation Limited (IRM)Austral
  Pacific Energy (NZ) Ltd |  | (7)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.15              |  | Offer of
  Employment                                                                                                                                             |  | Apr 23, 2007 |  | Austral;T B
  Jewell                                                                                           |  | (4)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|4.16              |  | Variation to
  offer of 
  employment                                                                                                                             |  | May 24, 2007 |  | Austral;T B
  Jewell                                                                                           |  | (4)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|8                 |  | List of
  Subsidiaries of the Company                                                                                                                             |  | May 31, 2008 |  |                                                                                                                |  | (7)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|11                |  | Code of
  Ethics                                                                                                                                                  |  | Dec 19, 2006 |  |                                                                                                                |  | (4)      
|                  |  |                                                                                                                                                                   |  |              |  |                                                                                                                |  |          
|12.1              |  | Certification
  of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |  | (7)         

- 81 -

---



|                  |  |                                                                                                                                                                                                |  |                           |  |         |  |          
|----------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | ------- |  | ---------
|Exhibit Reference |  | Document                                                                                                                                                                                       |  | Date                      |  | Parties |  | Reference
|                  |  |                                                                                                                                                                                                |  |                           |  |         |  |          
|                  |  |                                                                                                                                                                                                |  |                           |  |         |  |          
|12.2              |  | Certification
  of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as
  adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                              |  | (7)                      
|                  |  |                                                                                                                                                                                                |  |                           |  |         |  |          
|13.1              |  | Certification
  of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and
  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 |  | (7)                      
|                  |  |                                                                                                                                                                                                |  |                           |  |         |  |          
|13.2              |  | Certification
  of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and
  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
  Sarbanes-Oxley Act of 2002 |  | (7)                      
|                  |  |                                                                                                                                                                                                |  |                           |  |         |  |          
|15                |  | Companys
  reserves reporting NI51-101F1, F2, F3 (Canada)                                                                                                                                     |  | As at
  December 31, 2007 |  | (8)    

|    |                                                                                                          
|--- | ---------------------------------------------------------------------------------------------------------
|(1) | Incorporated
  by reference, previously included in our Form 20-F for the year ended
  December 31, 2002.
|    |                                                                                                          
|(2) | Incorporated
  by reference, previously included in our Form 20-F for the year ended
  December 31, 2003.
|    |                                                                                                          
|(3) | Incorporated
  by reference, previously included in our Form 20-F for the year ended
  December 31, 2004.
|    |                                                                                                          
|(4) | Incorporated
  by reference, previously included in our Form 20-F for the year ended
  December 31, 2006.
|    |                                                                                                          
|(5) | Incorporated by reference, previously included in a Form 6-K filed
  October 26, 2006.                   
|    |                                                                                                          
|(6) | Incorporated by reference, previously included in a Form 6-K filed
  April 3, 2007.                      
|    |                                                                                                          
|(7) | Filed as an exhibit to this Annual Report on Form 20-F.                                                  
|    |                                                                                                          
|(8) | Incorporated by reference, previously included in a Form 6-K filed
  March 28, 2008.                     

SIGNATURES

The registrant
hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorised the undersigned to sign this Annual
Report on its behalf.

|                      |                               |                                      | 
|--------------------- | ----------------------------- | ------------------------------------ | 
|                      | AUSTRAL
  PACIFIC ENERGY LTD. |                                     
|                      |                               |                                      | 
|Date: June
  24, 2008 | By:                           | T B Jewell                          | 
|                      |                               |                                      | 
|                      |                               |                                      | 
|                      | Name:                         | Thompson
  Jewell                    | 
|                      |                               |                                      | 
|                      | Title:                        | Chief
  Executive Officer, President | 

- 82 -

---



AUSTRAL PACIFIC ENERGY LTD.

CONSOLIDATED
FINANCIAL STATEMENTS 
(Expressed in United States Dollars)

Years DECEMBER 31, 2007, 2006 and 2005

- 83 -

---



Report of Independent Registered Public
Accounting Firm

To the Board
of Directors and Shareholders of Austral Pacific Energy Ltd:

We have
audited the accompanying consolidated balance sheets of Austral Pacific Energy
Ltd as of December 31, 2007 and 2006, and the related consolidated statements
of operations and deficit, cash flows, and changes in stockholders equity for
each of the years in the three-year period ended December 31, 2007. These
consolidated financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Austral Pacific Energy Ltd
as of December 31, 2007 and 2006, and the results of its operations and deficit
and its cash flows for each of the years in the three-year period ended
December 31, 2007, in conformity with generally accepted accounting principles
in Canada.

The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As further described in Note 2 to
the Companys consolidated financial statements, the Company has suffered
recurring losses from operations, has a working capital deficit and a net
capital deficiency and has also been unable to generate net cash from operating
activities. In addition, the Company is in breach of several covenants relating
to its bank loan facility. These conditions raise substantial doubt about the
Companys ability to continue as a going concern. Managements plans in regard
to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Accounting
principles generally accepted in Canada vary in certain significant respects
from U.S. generally accepted accounting principles. Information relating to the
nature and effect of such differences is presented in Note 26 to the
consolidated financial statements.

Wellington,
New Zealand
June 26, 2008

- 84 -

---



|                                    
|------------------------------------
|                                    
|                                    
|AUSTRAL PACIFIC ENERGY LTD.         
|Consolidated Balance Sheets         
|(Expressed in United States Dollars)
|                                    

|                                                              |  |                       |             |                       |  |             |  
|------------------------------------------------------------- |  | --------------------- | ----------- | --------------------- |  | ----------- | -
|As at :                                                       |  | December 31, 2007
  $ |             | December 31, 2006
  $ | 
|                                                              |  |                       |             |                       | 
|Assets                                                        |  |                       |             |                       |  |             |  
|Current                                                       |  |                       |             |                       |  |             |  
|Cash and
  cash equivalents (Note 6)                          |  |                       | 9,019,812   |                       |  | 7,144,943   |  
|Accounts
  receivable (Note 10)                               |  |                       | 5,689,279   |                       |  | 1,418,071   |  
|Restricted
  cash (Note 6)                                    |  |                       | 3,000,000   |                       |  |            |  
|Financial
  instruments (Note 22)                             |  |                       |            |                       |  | 210,416     |  
|Inventory
  (Note 12)                                         |  |                       | 488,486     |                       |  | 475,280     |  
|Prepaid
  expenses and deposits                               |  |                       | 805,527     |                       |  | 500,572     |  
|                                                              |  |                       |             |                       |  |             |  
|                                                              |  |                       | 19,003,104  |                       |  | 9,749,282   |  
|                                                              |  |                       |             |                       |  |             |  
|Non-current                                                   |  |                       |             |                       |  |             |  
|Investments
  (Note 13)                                       |  |                       | 100,822     |                       |  | 136,528     |  
|Restricted
  cash (Note 6)                                    |  |                       |            |                       |  | 3,000,000   |  
|Held for
  sale asset (Note 7)                                |  |                       |            |                       |  | 235,353     |  
|Property and
  equipment (Note 7)                             |  |                       | 41,609,165  |                       |  | 20,853,539  |  
|Goodwill
  (Note 5(b),8)                                      |  |                       | 2,018,969   |                       |  | 2,018,969   |  
|                                                              |  |                       |             |                       |  |             |  
|Total Assets                                                  |  |                       | 62,732,060  |                       |  | 35,993,671  |  
|                                                              |  |                       |             |                       |  |             |  
|Liabilities                                                   |  |                       |             |                       |  |             |  
|Current                                                       |  |                       |             |                       |  |             |  
|Current debt
  (Note 21)                                      |  |                       | 18,650,000  |                       |  | 6,266,944   |  
|Financial
  instruments (Note 22)                             |  |                       | 7,753,311   |                       |  | 75,781      |  
|Accounts
  payable and accrued liabilities (Note 10)          |  |                       | 11,226,465  |                       |  | 3,839,736   |  
|Prepaid gas
  revenue (Note 20)                               |  |                       | 831,040     |                       |  | 1,047,108   |  
|Asset
  retirement obligations (Note 9)                       |  |                       | 845,422     |                       |  |            |  
|Net cash in
  advance (Note 11)                               |  |                       | 9,679,614   |                       |  |            |  
|                                                              |  |                       |             |                       |  |             |  
|                                                              |  |                       | 48,985,852  |                       |  | 11,229,569  |  
|                                                              |  |                       |             |                       |  |             |  
|Non-current                                                   |  |                       |             |                       |  |             |  
|Financial
  instruments (Note 22)                             |  |                       |            |                       |  | 590,320     |  
|Deferred
  taxation provision (Note 19)                       |  |                       | 3,994,013   |                       |  | 2,018,969   |  
|Prepaid gas
  revenue (Note 20)                               |  |                       | 2,521,823   |                       |  | 2,330,660   |  
|Asset
  retirement obligations (Note 9)                       |  |                       | 1,237,668   |                       |  | 1,065,559   |  
|Long term
  debt (Note 21)                                    |  |                       | 9,282,806   |                       |  | 6,662,834   |  
|                                                              |  |                       |             |                       |  |             |  
|Total Liabilities                                             |  |                       | 66,022,162  |                       |  | 23,897,911  |  
|                                                              |  |                       |             |                       |  |             |  
|Stockholders Equity                                          |  |                       |             |                       |  |             |  
|Common stock
  without par value (Note 17);                   |  |                       |             |                       |  |             |  
|unlimited
  number of shares authorized;                      |  |                       |             |                       |  |             |  
|Issued and
  outstanding 32,416,142 (2006: 27,764,287) shares |  |                       | 55,913,721  |                       |  | 50,045,527  |  
|Preferred
  shares                                            |  |                       | 480,838     |                       |  |            |  
|Contributed
  surplus                                         |  |                       | 1,876,279   |                       |  | 1,545,218   |  
|Share
  purchase warrants reserve                             |  |                       | 1,540,762   |                       |  | 1,540,762   |  
|Accumulated
  other comprehensive income                      |  |                       | 17,210      |                       |  | 52,916      |  
|Accumulated
  deficit                                         |  |                       | (63,118,912 | )                     |  | (41,088,663 | )
|                                                              |  |                       |             |                       |  |             |  
|Total
Stockholders (Deficit)/Equity                          |  |                       | (3,290,102  | )                     |  | 12,095,760  |  
|                                                              |  |                       |             |                       |  |             |  
|Total Liabilities and Stockholders Equity                    |  |                       | 62,732,060  |                       |  | 35,993,671  |  
|                                                              |  |                       |             |                       |  |             |  

|                             |  |           
|---------------------------- |  | ----------
|Approved by
  the Directors: |  |           
|D A R Newman                 |  | T B Jewell
|                            
|                             |  |           
|Director                     |  | Director  

See accompanying notes to the consolidated
financial statements

- 85 -

---



|                                                 
|-------------------------------------------------
|AUSTRAL PACIFIC ENERGY LTD.                      
|Consolidated Statements of Operations and Deficit
|(Expressed in United States Dollars)             
|                                                 

|                                            |  |                    |             |                    |    |                    |   |    |             |  
|------------------------------------------- |  | ------------------ | ----------- | ------------------ | -- | ------------------ | - | -- | ----------- | -
|For the
  years to/ended:                   |  | December 31, 2007$ |             | December 31, 2006$ |    | December 31, 2005$ |  
|                                            |  |                    |             |                    |    |                    |  
|Production Income                           |  |                    |             |                    |    |                    |   |    |             |  
|Oil and gas
  sales                         |  |                    | 7,342,678   |                    |    | 911,931            |   |    | 1,779,454   |  
|Net realised
  derivative loss              |  |                    | (1,030,926  | )                  |    |                   |   |    |            |  
|Royalties                                   |  |                    | (388,777    | )                  |    | (40,899            | ) |    | (74,930     | )
|                                            |  |                    |             |                    |    |                    |   |    |             |  
|Net Revenue                                 |  |                    | 5,922,975   |                    |    | 871,032            |   |    | 1,704,524   |  
|                                            |  |                    |             |                    |    |                    |   |    |             |  
|Expenses                                    |  |                    |             |                    |    |                    |   |    |             |  
|General and
  administrative expense        |  |                    | (7,101,911  | )                  |    | (4,072,555         | ) |    | (3,609,531  | )
|Foreign
  exchange loss                     |  |                    | (581,228    | )                  |    | (1,973,650         | ) |    | (791,234    | )
|Unrealised
  derivative loss                |  |                    | (7,297,626  | )                  |    | (455,685           | ) |    |            |  
|Production
  costs                          |  |                    | (2,968,000  | )                  |    | (485,447           | ) |    | (848,174    | )
|Depletion
  (Note 7)                        |  |                    | (4,378,105  | )                  |    | (347,206           | ) |    | (61,979     | )
|Operating
  leases/rental expense           |  |                    | (142,282    | )                  |    | (103,526           | ) |    | (44,008     | )
|Amortization
  (Note 7)                     |  |                    | (129,555    | )                  |    | (106,551           | ) |    | (51,034     | )
|Interest
  expense (Note 14)                |  |                    | (4,131,900  | )                  |    | (42,204            | ) |    | (163        | )
|Oil and gas
  exploration expenditure       |  |                    | (3,228,674  | )                  |    | (8,171,981         | ) |    | (3,703,774  | )
|                                            |  |                    |             |                    |    |                    |   |    |             |  
|Total Expenses                              |  |                    | (29,959,281 | )                  |    | (15,758,805        | ) |    | (9,109,897  | )
|                                            |  |                    |             |                    |    |                    |   |    |             |  
|Net loss for
  the year before other income |  |                    | (24,036,306 | )                  |    | (14,887,773        | ) |    | (7,405,373  | )
|                                            |  |                    |             |                    |    |                    |   |    |             |  
|Other Income                                |  |                    |             |                    |    |                    |   |    |             |  
|Interest
  income                           |  |                    | 269,559     |                    |    | 437,279            |   |    | 460,411     |  
|Joint
  operation recoveries                |  |                    | 1,631,676   |                    |    | 1,043,666          |   |    | 1,093,417   |  
|Other                                       |  |                    | 104,822     |                    |    |                   |   |    | 83,612      |  
|                                            |  |                    |             |                    |    |                    |   |    |             |  
|Net loss for the year                       |  |                    | (22,030,249 | )                  |    | (13,406,828        | ) |    | (5,767,933  | )
|                                           
|Deficit,
  beginning of year                |  |                    | (41,088,663 | )                  |    | (27,681,835        | ) |    | (21,913,902 | )
|                                            |  |                    |             |                    |    |                    |   |    |             |  
|Deficit, end of year                        |  |                    | (63,118,912 | )                  |    | (41,088,663        | ) |    | (27,681,835 | )
|                                            |  |                    |             |                    |    |                    |   |    |             |  
|Basic loss per share (Note 18)              |  | ($                 | 0.74        | )                  | ($ | 0.57               | ) | ($ | 0.30        | )
|                                            |  |                    |             |                    |    |                    |   |    |             |  
|Diluted loss per share (Note 18)            |  | ($                 | 0.74        | )                  | ($ | 0.57               | ) | ($ | 0.30        | )
|                                            |  |                    |             |                    |    |                    |   |    |             |  

See accompanying notes to the consolidated
financial statements

- 86 -

---



|                                                                         
|-------------------------------------------------------------------------
|                                                                         
|AUSTRAL PACIFIC ENERGY LTD.                                              
|Consolidated Statements of Changes in Stockholders
  Equity/(Deficiency)
|(Expressed in United States Dollars)                                     
|                                                                         

|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|--------------------------------------------------------------------------- |  | -------------- | ---------- | ------------------ |  | --------------------- | - |  | ------- | --------------------- |  | ------------------------------------------------- | - | ------------------------------------- | --------- | ----------------------------------------------- |  | ------- | - |  | ----------- | - |  | ----------- | -
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   | Share
  Purchase
  Warrants
  Reserve |           | Accumulated
  Other Compre -
  hensive
  income |  |         |   |  |             |   | 
|                                                                            |  | Common
  Stock |            | Preferred
  Shares |  | Contributed
  Surplus |   |  |         | Accumulated
  Deficit |  | Total
  Stock -
  holders Equity/
  (Deficiency) |  
|                                                                            |  | Shares         |            | Amount
  $         |  |                       |   |  |         |                       | 
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|Balance at
  January 1, 2005                                                |  |                | 17,720,045 |                    |  | 32,683,328            |   |  |        |                       |  | 361,854                                           |   |                                       |          |                                                 |  |        |   |  | (21,913,902 | ) |  | 11,131,280  |  
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|Issuance of common shares
  for cash
  (Note 17(a))                         |  |                | 4,000,000  |                    |  | 10,000,000            |   |  |        |                       |  |                                                  |   |                                       |          |                                                 |  |        |   |  |            |   |  | 10,000,000  |  
|Less Deferred Offering Costs
  (Note
  17(a))                               |  |                |           |                    |  | (448,371              | ) |  |        |                       |  |                                                  |   |                                       |          |                                                 |  |        |   |  |            |   |  | (448,371    | )
|Exercise of share purchase
  warrants
  for cash (Note 17(a))               |  |                | 846,408    |                    |  | 1,127,741             |   |  |        |                       |  |                                                  |   |                                       |          |                                                 |  |        |   |  |            |   |  | 1,127,741   |  
|Exercise of share purchase
  options
  (Note 17(a))                         |  |                | 100,000    |                    |  | 136,598               |   |  |        |                       |  | (11,598                                           | ) |                                       |          |                                                 |  |        |   |  |            |   |  | 125,000     |  
|Stock option compensation                                                   |  |                |           |                    |  |                      |   |  |        |                       |  | 673,711                                           |   |                                       |          |                                                 |  |        |   |  |            |   |  | 673,711     |  
|Net loss for the year                                                       |  |                |           |                    |  |                      |   |  |        |                       |  |                                                  |   |                                       |          |                                                 |  |        |   |  | (5,767,933  | ) |  | (5,767,933  | )
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|Balance at
  December 31, 2005                                              |  |                | 22,666,453 |                    |  | 43,499,296            |   |  |        |                       |  | 1,023,967                                         |   |                                       |          |                                                 |  |        |   |  | (27,681,835 | ) |  | 16,841,428  |  
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|Issuance of common shares
  for cash
  (Note 17(a))                         |  |                | 5,007,000  |                    |  | 6,509,100             |   |  |        |                       |  |                                                  |   |                                       |          |                                                 |  |        |   |  |            |   |  | 6,509,100   |  
|Less Deferred Offering Costs
  (Note
  17(a))                               |  |                |           |                    |  | (89,096               | ) |  |        |                       |  |                                                  |   |                                       |          |                                                 |  |        |   |  |            |   |  | (89,096     | )
|Exercise of share options
  for cash
  (Note 17(a))                         |  |                | 90,834     |                    |  | 126,227               |   |  |        |                       |  | (12,684                                           | ) |                                       |          |                                                 |  |        |   |  |            |   |  | 113,543     |  
|Stock option compensation
  (Note
  17(c))                                  |  |                |           |                    |  |                      |   |  |        |                       |  | 533,935                                           |   |                                       |          |                                                 |  |        |   |  |            |   |  | 533,935     |  
|Share purchase warrants
  reserve                                           |  |                |           |                    |  |                      |   |  |        |                       |  |                                                  |   |                                       | 1,540,762 |                                                 |  |        |   |  |            |   |  | 1,540,762   |  
|Other comprehensive income                                                  |  |                |           |                    |  |                      |   |  |        |                       |  |                                                  |   |                                       |          |                                                 |  | 52,916  |   |  |            |   |  | 52,916      |  
|Net loss for the year                                                       |  |                |           |                    |  |                      |   |  |        |                       |  |                                                  |   |                                       |          |                                                 |  |        |   |  | (13,406,828 | ) |  | (13,406,828 | )
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|Balance at
  December 31, 2006                                              |  |                | 27,764,287 |                    |  | 50,045,527            |   |  |        |                       |  | 1,545,218                                         |   |                                       | 1,540,762 |                                                 |  | 52,916  |   |  | (41,088,663 | ) |  | 12,095,760  |  
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|Issuance of common shares
  for cash
  and other consideration (Note 17(a)) |  |                | 4,351,855  |                    |  | 5,490,745             |   |  |        |                       |  |                                                  |   |                                       |          |                                                 |  |        |   |  |            |   |  | 5,490,745   |  
|Less Deferred Offering Costs
  (Note
  17(a))                               |  |                |           |                    |  | (202,004              | ) |  | (10,639 | )                     |  |                                                  |   |                                       |          |                                                 |  |        |   |  |            |   |  | (212,643    | )
|Preferred shares (Note
  21(b))                                             |  |                |           |                    |  |                      |   |  | 491,477 |                       |  |                                                  |   |                                       |          |                                                 |  |        |   |  |            |   |  | 491,477     |  
|Exercise of share purchase
  options
  (Note 17(a))                         |  |                | 300,000    |                    |  | 579,453               |   |  |        |                       |  | (219,453                                          | ) |                                       |          |                                                 |  |        |   |  |            |   |  | 360,000     |  
|Cancellation of options
  payment                                           |  |                |           |                    |  |                      |   |  |        |                       |  | (54,000                                           | ) |                                       |          |                                                 |  |        |   |  |            |   |  | (54,000     | )
|Stock option compensation
  (Note
  17(c))                                  |  |                |           |                    |  |                      |   |  |        |                       |  | 604,514                                           |   |                                       |          |                                                 |  |        |   |  |            |   |  | 604,514     |  
|Accumulated other
  comprehensive
  income (Note 13))                       |  |                |           |                    |  |                      |   |  |        |                       |  |                                                  |   |                                       |          |                                                 |  | (35,706 | ) |  |            |   |  | (35,706     | )
|Net loss for the year                                                       |  |                |           |                    |  |                      |   |  |        |                       |  |                                                  |   |                                       |          |                                                 |  |        |   |  | (22,030,249 | ) |  | (22,030,249 | )
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  
|Balance at
  December 31, 2007                                              |  |                | 32,416,142 |                    |  | 55,913,721            |   |  | 480,838 |                       |  | 1,876,279                                         |   |                                       | 1,540,762 |                                                 |  | 17,210  |   |  | (63,118,912 | ) |  | (3,290,102  | )
|                                                                            |  |                |            |                    |  |                       |   |  |         |                       |  |                                                   |   |                                       |           |                                                 |  |         |   |  |             |   |  |             |  

See accompanying notes to the consolidated
financial statements

- 87 -

---



|                                     
|-------------------------------------
|                                     
|AUSTRAL PACIFIC ENERGY LTD.          
|Consolidated Statements of Cash Flows
|(Expressed in United States Dollars) 
|                                     
|                                     

|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|------------------------------------------------------------------------------- |  | ------------------- | ----------- | ------------------- |  | ------------------- | - |  | ---------- | -
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|For the years to/ended                                                          |  | December
31, 2007
$ |             | December
31, 2006
$ |  | December
31, 2005
$ |  
|                                                                                |  |                     |             |                     |  |                     |  
|Operating
  Activities                                                          |  |                     |             |                     |  |                     |   |  |            |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|Net loss for the year                                                           |  |                     | (22,030,249 | )                   |  | (13,406,828         | ) |  | (5,767,933 | )
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|Adjustments
  to reconcile net loss to
  cash provided by operating activities: |  |                     |             |                     |  |                     |   |  |            |  
|Asset retirement obligation
  accretion                                         |  |                     | 123,795     |                     |  | 42,484              |   |  | 18,196     |  
|Depletion                                                                       |  |                     | 4,378,105   |                     |  | 347,206             |   |  | 61,979     |  
|Write-off of oil and gas
  properties                                           |  |                     | 3,033,654   |                     |  | 8,071,981           |   |  | 3,703,774  |  
|Amortization                                                                    |  |                     | 129,555     |                     |  | 98,187              |   |  | 51,034     |  
|Unrealised derivative loss                                                      |  |                     | 7,297,626   |                     |  | 455,685             |   |  |           |  
|Stock compensation                                                              |  |                     | 604,514     |                     |  | 533,935             |   |  | 673,711    |  
|Write down in inventory                                                         |  |                     | 195,020     |                     |  | 100,000             |   |  |           |  
|Interest capitalized                                                            |  |                     | (475,359    | )                   |  |                    |   |  |           |  
|Amortisation of debt
  expenses and discount                                    |  |                     | 2,874,243   |                     |  |                    |   |  |           |  
|Net unrealized foreign
  exchange loss/(gain)                                   |  |                     | 557,031     |                     |  | 1,973,650           |   |  | (394,563   | )
|Change in non-cash
  operating working capital                                  |  |                     | 2,713,813   |                     |  | 354,322             |   |  | 721,190    |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|                                                                                |  |                     | (598,252    | )                   |  | (1,429,378          | ) |  | (932,612   | )
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|Financing
  Activities                                                          |  |                     |             |                     |  |                     |   |  |            |  
|Common Stock issues                                                             |  |                     | 3,407,996   |                     |  | 6,533,547           |   |  | 10,803,109 |  
|Preferred shares issued                                                         |  |                     | 9,697,624   |                     |  |                    |   |  |           |  
|Cash received in advance
  from private placement
  (note 11, 25(c))            |  |                     | 9,679,614   |                     |  |                    |   |  |           |  
|Net proceeds from debt                                                          |  |                     | 2,912,000   |                     |  | 14,470,540          |   |  |           |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|                                                                                |  |                     | 25,697,234  |                     |  | 21,004,087          |   |  | 10,803,109 |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|Investing
  Activities                                                          |  |                     |             |                     |  |                     |   |  |            |  
|Purchase of furniture and
  equipment                                           |  |                     | (34,414     | )                   |  | (226,419            | ) |  | (430,223   | )
|Purchase of investments                                                         |  |                     |            |                     |  |                    |   |  | (83,612    | )
|Oil and gas capital
  expenditure                                               |  |                     | (22,279,118 | )                   |  | (13,624,178         | ) |  | (6,119,897 | )
|Acquisition of subsidiary                                                       |  |                     |            |                     |  | (12,081,662         | ) |  |           |  
|Restricted cash (Note 6)                                                        |  |                     |            |                     |  | (3,000,000          | ) |  |           |  
|Change in joint venture
  working capital                                       |  |                     | (585,313    | )                   |  | 1,183,741           |   |  | 588,383    |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|                                                                                |  |                     | (22,898,845 | )                   |  | (27,748,518         | ) |  | (6,045,349 | )
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|Net
  increase/(decrease) in cash during the year                               |  |                     | 2,200,137   |                     |  | (8,173,809          | ) |  | 3,825,148  |  
|Effect of
  exchange rate fluctuations on cash and
  short-term deposits        |  |                     | (325,268    | )                   |  | (21,154             | ) |  | 326,834    |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|Cash and
  cash equivalents, beginning of year                                  |  |                     | 7,144,943   |                     |  | 15,339,906          |   |  | 11,187,924 |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|Cash and
  cash equivalents, end of year                                        |  |                     | 9,019,812   |                     |  | 7,144,943           |   |  | 15,339,906 |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|Supplemental
  Cash Flow Information                                            |  |                     |             |                     |  |                     |   |  |            |  
|Interest paid                                                                   |  |                     | 1,413,168   |                     |  | 29,933              |   |  | 163        |  
|Interest received                                                               |  |                     | 269,559     |                     |  | 437,279             |   |  | 460,411    |  
|                                                                                |  |                     |             |                     |  |                     |   |  |            |  
|Significant
  Non Cash Items                                                    |  |                     |             |                     |  |                     |   |  |            |  
|IRM Acquisition                                                                 |  |                     | 2,240,745   |                     |  |                    |   |  |           |  
|Share based compensation                                                        |  |                     | 604,514     |                     |  | 533,935             |   |  | 673,711    |  

See accompanying notes to the consolidated
financial statements

- 88 -

---



NOTE 1 - NATURE OF OPERATIONS

Austral Pacific Energy Ltd
(and its subsidiaries, hereby called the Company) is a limited liability
company incorporated in British Columbia under the Business Corporations Act
(British Columbia). The Company domiciles in New Zealand. The Companys
consolidated financial statements were authorized for issue by the Board of
Directors on March 28, 2008.

The Company is primarily
engaged in the acquisition, exploration, appraisal and development of oil and
gas properties in New Zealand and Papua New Guinea.

NOTE 2  ABILITY TO CONTINUE AS A GOING CONCERN

For the year ended December
31, 2007, the Company had a net loss of $22,030,249 and accumulated deficit of
$63,118,912. The Company also had a working capital deficit of $29,982,748 and
a shareholders deficit of $3,290,102 as at December 31, 2007. In addition the Company
has also been unable to generate net cash from operating activities for each of
the years in the three year period ended December 31, 2007. For the five months
ending May 31, 2008, the Company had an unaudited net loss of $8,212,599 and
unaudited accumulated deficit of $71,331,511. The Company also had an unaudited
working capital deficit of $20,625,713 and an unaudited shareholders equity of
$4,361,755 as at May 31, 2008. The Companys cash balances and working capital
are not sufficient to fund all of its obligations with respect to its ongoing
work program requirements related to the exploration permits. In addition, the
Company is in breach of several covenants relating to its Investec Bank
(Australia) Ltd (Investec) loan facility, following delays in completing the
project in accordance with established timelines. Accordingly, the loan
facility and hedging arrangements have been disclosed as current liabilities in
the Consolidated Financial Statements. The factors raise substantial doubt
about the Companys ability to continue as a going concern for a reasonable
period of time.

Managements plans for
securing sufficient sources of liquidity (or reducing commitments) include the
following:

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Issuance of additional
  common shares in a private placement in order to raise $15,000,000. As
  further described in Note 25(c), the Company completed this private placement
  on February 28, 2008;                                                                                                                                                                                                                                                          
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Sale of its interests in
  Stanley (PRL 4) and in PRL 5 to a subsidiary of Horizon Oil Limited (ASX:
  HZN) for $3.5 million, which transaction completed on May 30, 2008, although
  legal transfer of the licences remains subject to receipt of governmental
  approval;                                                                                                                                                                                      
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Sale of its interests in
  Douglas (PPL 235) and in PPL 261 to a subsidiary of Rift Oil plc (AIM: RIFT)
  for $5 million, initial completion of such transaction occurring on May 29,
  2008 ($2 million), with further payments due within 3 months ($1.5 million),
  and within 12 months ($1.5 million) or earlier upon receipt of governmental
  approval of the legal transfers of the licences;                                                            
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Farm-out of an 80%
  interest in PEP 38524 to Australian Worldwide Exploration Ltd. (ASX: AWE)
  with effect from May 20, 2008, In return AWE has undertaken to fully fund
  acquisition of some 350km of 2D seismic within the permit. The farm-out is
  subject to approval of a revised work programme by the Ministry of Economic
  Development;                                                                                                             
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | Rectifying the covenant
  breaches relating to its loan facility with Investec. A key to rectifying the
  breach is the drilling of at least two further wells to satisfy the
  completion test under the facility. The completion test requires certain
  proven and probable reserves and associated production rates to be achieved,
  together with certain related forward looking financial ratios. Drilling is
  planned to commence in mid June 2008;
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | A mix of further capital
  raising and/or sales of joint venture interests.                                                                                                                                                                                                                                                                                                                                                                                      

The cash flow forecast
prepared by management leads it to conclude that the Company can continue to
meet its ongoing obligations for a reasonable period of time. This forecast
assumes the Companys on-going production is sustained; its two well Cheal
drilling programme is successful as to reserves and production rates; sustained
oil prices at or about $90 per barrel; normal expenditure; a mix of further
capital raising and/or asset sales, and the Investec loan facility being
restructured with full repayment by year end from revenue generation and
further equity injection. The Company and Investec have agreed, in the interim,
to restructure the facility, with the key financial terms requiring a principal
payment of US$4.2 million on March 31, 2008 (reflecting the scheduled US$2.2
million due; and the further US$2 million paid from the restricted cash held in
respect of the loan facility and applied in inverse order of maturity), since
paid. In addition, a further US$3.5 million was to be paid on completion of the
announced sale of the PNG Stanley (PRL 4) and PRL 5 assets (to

- 89 -

---



be applied as $2.05 million against the June 30 scheduled
principal due; and the balance of US$1.45 million applied in inverse order of
maturity), since paid on May 30, 2008. The crude oil forward sales contracts
were closed out on May 27, 2008 funded by a short term loan ($17.8 million)
from Investec (repayable on December 15, 2008). It has been further agreed that
any cash in excess of operating requirements will be used to reduce principal
outstanding. The interest rate margin has been increased by an additional 2% on
the total principal outstanding for the period January 31 to December 15, 2008
inclusive. In addition, the Company issued to Investec 1,056,338 shares to the
value of US$750,000 (based on the Austral share price at March 19, 2008), on
May 23, 2008. There are several commercial and administrative conditions which
must also be complied with.

These consolidated financial
statements have been prepared on a going concern basis in accordance with
Canadian generally accepted accounting principles, which assumes that the
Company will be able to continue in operation for the foreseeable future and
will be able to realize its assets and discharge its liabilities in the normal
course of business. Accordingly, the consolidated financial statements do not
reflect any adjustments in the carrying values of the assets and liabilities,
the reported expenses and balance sheet classification used that would be
necessary if the company was unable to continue as a going concern. Such
adjustments could be material.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) | Accounting
  Principles and Use of Estimates                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | These financial statements
  are prepared in accordance with Canadian generally accepted accounting
  principles, which requires management to make informed judgments and
  estimates that affect the reported amounts of assets and liabilities and
  disclosures of contingent assets, commitments and contingent liabilities at
  the date of the financial statements and the reported amounts of the revenues
  and expenses for the years presented. Specifically, estimates were utilized
  in calculating depletion, asset retirement obligations, stock based
  compensation, amortization and impairment write-downs. Actual results could
  differ from these estimates and the differences could be material.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | Material differences between
  Canadian generally accepted accounting principles and United States generally
  accepted accounting principles which affect the Company are referred to in
  Note 26.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|b) | Basis of
  Consolidation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   | These consolidated
  financial statements include the accounts of Austral Pacific Energy Ltd. and
  its wholly-owned subsidiaries tabled below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

- 90 -

---



| |                                           |  |                           |  |                          |  |                                    
| | ----------------------------------------- |  | ------------------------- |  | ------------------------ |  | -----------------------------------
| | Name of Subsidiaries                      |  | Country of
 incorporation |  | Proportion of
 ownership |  | Comment                            
| |                                           |  |                           |  |                          |  |                                    
| | Indo-Pacific Energy Australia Pty Limited |  | Australia                 |  | 100%                     |  | deregistered in 2007               
| | Odyssey International Pty Limited         |  | Australia                 |  | 100%                     |  | deregistered in 2007               
| | Trans-Orient Petroleum (Aust) Pty Limited |  | Australia                 |  | 100%                     |  | deregistered in 2007               
| | ZOCA 96-16 Pty Limited                    |  | Australia                 |  | 100%                     |  | deregistered in 2007               
| | Austral Pacific Energy (PNG) Limited      |  | Papua New Guinea          |  | 100%                     |  | previously known as Trans-Orient   
| |                                           |  |                           |  |                          |  | Petroleum (PNG) Limited            
| | Source Rock Holdings Limited              |  | New Zealand               |  | 100%                     |  |                                    
| | Austral Pacific Energy (NZ) Limited       |  | New Zealand               |  | 100%                     |  |                                    
| | Rata Energy Limited                       |  | New Zealand               |  | 100%                     |  |                                    
| | Millennium Oil & Gas Limited              |  | New Zealand               |  | 100%                     |  |                                    
| | Totara Energy Limited                     |  | New Zealand               |  | 100%                     |  |                                    
| | Kanuka Energy Limited                     |  | New Zealand               |  | 100%                     |  |                                    
| | Arrowhead Energy Limited                  |  | New Zealand               |  | 100%                     |  |                                    
| | Titoki Energy Limited                     |  | New Zealand               |  | 100%                     |  | previously known as International  
| |                                           |  |                           |  |                          |  | Resource Management Corporation Ltd
| | Puka Energy Limited                       |  | New Zealand               |  | 100%                     |  |                                    
| | Hebe Energy Limited                       |  | New Zealand               |  | 100%                     |  |                                    
| | Matai Energy Limited                      |  | New Zealand               |  | 100%                     |  |                                    
| | Austral Pacific NZ No 4 Limited           |  | New Zealand               |  | 100%                     |  | registered March 2007, non trading 
| | Austral Pacific NZ No 5 Limited           |  | New Zealand               |  | 100%                     |  | registered March 2007, non trading 
| | Austral Pacific NZ No 6 Limited           |  | New Zealand               |  | 100%                     |  | registered March 2007, non trading 
| | Austral Pacific NZ No 7 Limited           |  | New Zealand               |  | 100%                     |  | registered March 2007, non trading 
| | Austral Pacific NZ No 8 Limited           |  | New Zealand               |  | 100%                     |  | registered March 2007, non trading 
| | Austral Pacific NZ No 9 Limited           |  | New Zealand               |  | 100%                     |  | registered March 2007, non trading 
| | Austral Pacific NZ No 10 Limited          |  | New Zealand               |  | 100%                     |  | registered March 2007, non trading 
| | Austral Pacific NZ No 11 Limited          |  | New Zealand               |  | 100%                     |  | registered March 2007, non trading 
| | Austral Pacific NZ No 12 Limited          |  | New Zealand               |  | 100%                     |  | registered March 2007, non trading 

|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | Substantially,
 all the Companys operations in New Zealand and Papua New Guinea are
 conducted through joint operations, and accordingly, these financial
 statements reflect the Companys proportional interest. All significant
 inter-company balances and transactions have been eliminated upon
 consolidation. All subsidiaries have the same balance date as the parent
 entity.                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Austral
 Pacific Energy Ltd has one associate, Coral Sea Drilling Ltd (35% ownership).
 Results of associates are equity-accounted where significant.                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|c) | Joint Operations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Substantially
 all of the Companys upstream exploration and development activities are
 conducted jointly with third parties and accordingly these financial
 statements reflect only the Companys proportionate share of assets,
 liabilities, revenues, expenses and cash flows from these activities.                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|d) | Translation of Foreign Currencies                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The
 Companys functional and presentational currency is the United States dollar.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Results
 of foreign operations, all of which are considered financially and
 operationally integrated, are translated to United States dollars using the
 monthly average exchange rate for revenue and expenses. Monetary assets and
 liabilities are translated into United States dollars at the rates prevailing
 on the balance sheet date. Non-monetary assets and liabilities are translated
 into United States dollars at the rates prevailing on the transaction dates.
 Exchange gains and losses are recorded as income or expense in the year in
 which they occur.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|e) | Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | A
 financial instrument is recognized if the Company becomes a party to the
 contractual provisions of the instrument. Financial instruments are
 derecognized if the Companys contractual rights to the cash flows                                                                                                                                                                                                                                                                                                                                                            

- 91 -

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | from
 the financial instruments expire or if the Company transfers the financial
 instruments to another party without retaining control or substantially all
 risks and rewards of the financial instrument.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | (i)
 Non-Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Cash
 and cash equivalents, cash advances, current debt, accounts receivable,
 accounts payable and accrued liabilities are carried at cost which
 approximates fair value due to the short-term maturity of these instruments.
 Unless otherwise noted the Company is not exposed to significant interest,
 currency or credit risks arising from these financial instruments. Initially,
 the fair value of the long term debt is calculated based on the present value
 of future principal and interest cash flows, discounted at the market rate of
 interest. Subsequent to initial recognition, long term debt is measured at
 amortized cost using effective interest method.                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | (ii)
 Derivative Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The
 Company may use derivative financial instruments to manage its exposure to
 market risks resulting from fluctuations in foreign exchange rates, interest rates
 and commodity prices. These derivative financial instruments are not used for
 speculative purposes and are not held for trading purposes. A system of
 controls is maintained that includes a policy covering the authorisation,
 reporting and monitoring of derivative activity.                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Derivative
 instruments that are not designated as hedges for accounting purposes are
 recorded on the Consolidated Balance Sheets at fair value with the resultant
 net gain or loss recognised in the Consolidated Statements of Operations and
 Deficit in the current period. The fair value of derivative instruments is
 based upon a discounted cash flow analysis valuation or option pricing model
 at the balance date. The forward price curve of oil is used as an underlying
 input in the valuation process.                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | (iii)
 Preferred Shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Preferred
 shares that can be converted to share capital at the option of the holder,
 where the number of shares does not vary with changes in their values, are
 accounted as compound instruments. Transaction costs that relate to the issue
 of a compound instrument are allocated to the liability and equity components
 in proportion to the proceedings. The equity component of the preferred
 shares is calculated as the excess of the issue proceeds over the present
 value of the future interest and principal payments, discounted at the market
 rate of interest applicable to similar liabilities that do not have a
 conversion option. The interest expense recognized in the income statement is
 calculated using effective interest method.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|f) | Cash and Cash Equivalents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Cash
 and cash equivalents includes deposits in banks, funds held in trust accounts
 and certificates of deposit with original maturities of three months or less.
 Restricted cash is excluded from cash and cash equivalents.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|g) | Property and Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Property
 and Equipment is recorded at cost and includes production assets, oil and gas
 property acquisition costs, capitalized exploration and development costs and
 furniture and equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | The
 successful efforts method is used to account for oil and gas exploration and
 development costs. Under this method, acquisition costs of oil and gas
 properties, to drill and equip exploratory wells that find proved reserves
 and costs of drilling and equipping development wells are capitalized and
 subject to annual impairment testing.                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   | Licences
 and exploration well costs are initially capitalized and, if subsequently
 determined to have not found sufficient reserves to justify commercial
 production, are charged to exploration expense. Exploration well costs that
 have found sufficient reserves to justify commercial production, but those
 reserves cannot be classified as proved, continue to be capitalized as long
 as sufficient progress is being made to assess the reserves and economic
 viability of the well and or related project. All other exploration costs,
 including geological and geophysical costs, are charged to exploration
 expense when incurred.                                                                                                              

- 92 -

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | On
 the sale or retirement of a complete unit of a capitalized proved and
 unproven property, the cost and related accumulated depreciation, depletion,
 and amortization are eliminated from the property accounts, and the resultant
 gain or loss is recognized. On the retirement or sale of a partial unit of
 proved and unproven property, the cost is charged to accumulated
 depreciation, depletion, and amortization with a resulting gain or loss
 recognized in income.                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | On
 the sale of an entire interest in an unproved property for cash or cash
 equivalent, gain or loss on the sale is recognized, taking into consideration
 the amount of any recorded impairment if the property had been assessed
 individually. If a partial interest in an unproved property is sold, the
 amount received is treated as a reduction of the cost of the interest
 retained.                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|h) | Impairment of oil and gas properties                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Producing
 properties and significant unproved properties are assessed annually, or more
 frequently as economic events dictate, for potential impairment. Impairment
 test is initially based on an undiscounted future cash flows from proved and
 risk adjusted probable reserves. If an impairment is identified fair value is
 calculated as the present value, based on discounted estimated expected
 future cash flows from proved and risk adjusted probable reserves. Any
 impairment loss is the difference between the carrying value of the oil and
 gas property and its fair value. If it is determined that the estimated net
 recoverable amount is less than the net carrying amount, a write-down to the
 oil and gas propertys fair value is recognized during the period, with a
 charge to earnings.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Estimates
 of future cash flows used in the evaluation of impairment of assets are
 performed based on risk assessments on field and reservoir performance and
 include judgment assumptions regarding commodity prices, exchange rates,
 discount rates and future costs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|i) | Depreciation, Depletion and Amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Furniture
 and office equipment are depreciated using the straight line method at annual
 rates of 5% to 33 1/3%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Capitalized
 costs of proved oil and gas properties are depleted using the unit of
 production method. Successful exploratory wells, development costs and
 acquired resource properties are depleted over proved developed reserves.
 Acquisition costs of unproved reserves are not depleted or amortized while
 under active evaluation for commercial reserves.                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Costs
 associated with significant development projects are depleted once commercial
 production commences.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|j) | Production costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Production
 costs comprising costs relating to the lifting of oil and gas to the surface
 and gathering, treatment, processing storage and transport are expensed as
 incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|k) | Asset Retirement Obligations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The
 fair value of the statutory, contractual or legal liability associated with
 the retirement and reclamation of oil and gas properties is recorded when
 incurred, with a corresponding increase to the carrying amount of the related
 oil and gas properties. Increase to capitalized costs is depleted to earnings
 on a unit of production basis over the life of the proved reserves of each
 property. Subsequent changes in the estimated fair value of the asset
 retirement obligations (ARO) are capitalized and depleted over the remaining
 useful life of the underlying oil and gas properties.                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The
 ARO liabilities are carried on the Consolidated Balance Sheets at their
 discounted present value and are accreted over time for the change in their
 present value, with this accretion charge included in general and
 administrative expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Actual
 expenditures incurred are charged against the accumulated obligation with the
 resulting difference                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

- 93 -

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | recognized
 in consolidated statements of operations and deficit as a gain or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|l) | Impairment of Financial Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | A
 financial instrument is considered to be impaired if objective evidence
 indicates that one or more events have had a negative effect on the estimated
 future cash flows of that instrument. An impairment loss in respect of a
 financial asset measured at amortized cost is calculated as the difference
 between its carrying amount, and the present value of the estimated future
 cash flows discounted at the original effective interest rate. An impairment
 loss in respect of an available-for-sale financial asset is calculated by
 reference to its current fair value. Individually significant financial
 instruments are tested for impairment on an individual basis. The remaining
 financial instruments are assessed collectively in groups that share similar
 credit risk characteristics.                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | All
 impairment losses are recognized in profit or loss. Any cumulative loss in
 respect of an available-for-sale financial asset recognized previously in
 equity is transferred to profit or loss.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|m) | Provisions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | A
 provision is recognized as a result of a past event, results from a present
 legal or constructive obligation. It is recognized if it can be estimated
 reliably, and it is possible that an outflow of future economic benefits will
 be required to settle the obligation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|n) | Capitalized Interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Interest
 costs associated with major development projects are capitalized until the
 necessary facilities are completed and ready for use. These costs are
 subsequently depleted with the related assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|o) | Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | The
 Company uses the asset and liability method of accounting for income taxes.
 Under this method current income taxes are recognized for the estimated
 income taxes payable for the current year. Future income taxes are recognized
 for temporary differences between the tax and accounting bases of assets and
 liabilities and for the benefit of losses available to be carried forward for
 tax purposes that are likely to be realized. Future income tax assets and
 liabilities are measured using enacted or substantively enacted tax rates
 expected to apply to taxable income in the years in which those temporary
 differences are expected to be recovered or settled. The effect on future tax
 assets and liabilities of a change in tax rates is recognized in income in
 the period that included the date of enactment or substantive enactment.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|p) | Inventory                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Inventories
 of crude oil held by the Company and the Companys share of joint operations
 inventory are valued at the lower of cost and net realizable value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|q) | Oil and Gas Revenue Recognition                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Crude
 oil revenue is recognized upon delivery from the Company to the customer.
 Proceeds received under gas prepayment agreements are recorded as a
 liability. The liability is reduced by gas sold and delivered under gas sale
 arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|r) | Lease Payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Payments
 made under operating leases are recognized in Consolidated Statements of
 Operations and Deficit on a straight-line basis over the term of the lease.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|s) | Interest Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   | Interest
 income is recognized as it accrues and is comprised of income from funds
 invested. Interest income is recognized in the consolidated statement of
 operations and deficit using the effective interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

- 94 -

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|t) | Interest expense                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Interest
 expense comprises interest expense on debt and dividends on preferred shares
 recognized as a compound instrument. Interest expense, except where
 capitalized, is recognized in the Consolidated Statement of Operations and
 Deficit using the effective interest method.                                                                                                                                                                                                                                                                                                                                                                           
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|u) | Joint Operations Recoveries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Joint
 operations recoveries are recognized and invoiced in the period that they
 incurred. Joint operations recoveries represent the recovery of specific
 joint operator costs from the joint operations parties. The determination of
 the costs recovered is based on the individual Joint Operations Operator
 Agreement.                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|v) | Share Capital                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Incremental
 costs directly attributable to the issue of common shares are recognized as a
 deduction from equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|w) | Per Share Amounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Basic
 per share amounts are calculated by dividing the net income or loss by the
 weighted average shares outstanding during the reporting period. Diluted per
 share amounts are calculated similar to basic per share amounts except that
 the weighted average shares outstanding are increased to include additional
 in-the-money shares from the assumed exercise of dilutive stock options. The
 number of outstanding shares would be calculated by assuming that the
 outstanding stock options were exercised and that the proceeds from such
 exercises were used to acquire common shares at the average market price
 during the reporting period.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|x) | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The
 Company has recognized stock based compensation expense as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | All
 stock option based awards granted on or after January 1, 2002 are measured
 and recognized in the consolidated financial statements using a fair value
 based method. Fair value is calculated using the Black-Scholes option-pricing
 model and the compensation cost is amortized over the vesting period.                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | The
 Company measures compensation expense for the options where there has been a
 substantive change or modification to such options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Consideration
 received upon the exercise of stock options together with the amount of
 non-cash compensation expense recognized in contributed surplus is recorded
 as share capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|y) | Investments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Long
 term investments are valued at fair value. An impairment test is conducted on
 an annual basis and any impairment is recognized in the Statement of
 Operations and Deficit. Any increase in value is recorded as Other
 comprehensive income within Stockholders Equity.                                                                                                                                                                                                                                                                                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|z) | Acquisitions                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | When
 the Company acquires a group of assets or net assets that does not constitute
 a business, purchase consideration is allocated between the identifiable
 assets and liabilities based on their relative fair values at the acquisition
 date.                                                                                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   | Acquisitions
 are accounted for using the purchase method. Where an entity becomes part of
 the Company during the year, the results of the entity are included in the
 consolidated results from the date that control or significant influence
 commenced. When an entity is acquired all identifiable assets and                                                                                                                                                                                                                                                                                                                                             

- 95 -

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | liabilities
 are recognized at their fair value at acquisition date. The fair value does
 not take into consideration any future intentions by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|aa) | Goodwill                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | All
 business combinations are accounted for using the purchase method. Under this
 method, identifiable assets and liabilities are recorded at fair value as of
 the date of acquisition. Goodwill represents the excess of the purchase price
 over the fair value of the acquired net asset.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The
 carrying value of goodwill is assessed for impairment at every year end, or
 more frequently as economic events dictate, by comparing the fair value of
 the reporting unit to its carrying value, including goodwill. If the fair
 value of the reporting unit is less than its carrying value, a goodwill
 impairment is recognized as the excess of the carrying value of the goodwill
 over the fair value of the goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|ab) | Segment Reporting                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | A
 segment reporting is a distinguishable component of the Company that is
 engaged in providing related products or services within a particular
 economic environment (geographical segment) which is subject to risks and
 rewards that are different from those of other segments. The Companys
 primary format for segment reporting is based on geographical segment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|ac) | Changes in Accounting Policy                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | There
 have been no changes in accounting policies applied during the year ended
 December 31, 2007.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|ad) | New accounting policies, standards adopted and
 interpretations not yet adopted                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The
 Company has adopted the accounting policy, set out in n) of this note, in
 respect to capitalizing interest costs on qualifying assets. In applying this
 policy the Company has applied: - CICA HB section 3061 Property, Plant and
 Equipment - CICA HB section 3850 Interest Capitalised  disclosure
 considerations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | The
 Company has chosen to early adopt CICA HB section 1400 General Standards of
 Financial Statements Presentation to incorporate the requirements of the
 standard for assessing and disclosing an entitys ability to continue as a
 going concern.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | CICA
 HB section 1500 Cash Flow Statements, effective for periods ending March
 31, 2007 and addresses the disclosures of terms and conditions of cash
 distributions of financial instruments classified as equity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | Other
 new announcements effective for periods January 1, 2007 were prospectively
 adopted by the company January 1, 2006 as follows: CICA section 3855
 Financial instruments  Recognition and measurement; CICA section 3861
 Financial instruments  Disclosure and presentation; CICA HB section 1530
 Comprehensive income; CICA HB section 3251 Equity; and CICA HB section
 3865 Hedges                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|    | A
 number of new pronouncements are not yet effective for the year ended
 December 31, 2007, and have not been applied in preparing these consolidated
 financial statements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   | CICA
 HB section 3031 Inventories addresses the accounting and disclosure for
 inventory including the elimination of LIFO method of accounting, requirement
 to measure inventory at the lower of cost and net realisable value; the
 allocation of overhead based on normal capacity; the use of the specific cost
 method for inventories that are not ordinarily interchangeable, or goods and
 services produced for specific purposes; the requirement for an entity to use
 a consistent cost formula for inventory of a similar nature; the reversal of
 previous write-downs to net realizable value when there is a subsequent
 increase in the value of inventories and in addition disclosure requirements of
 the standard have been enhanced. Management does not expect the change to
 have any significant impact on the consolidated financial statements.

- 96 -

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | CICA
 HB section 3064 Intangible Assets reinforces the principle-based approach
 to the recognition of costs as an asset under the current definition of
 assets and the recognition principles in the conceptual framework and
 clarifies the application of the concept of matching of revenues and
 expenses. Management does not expect the change to have any significant
 impact on the consolidated financial statements.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | CICA
 HB 1100, Generally Accepted Accounting Principles removes the temporary
 exemption providing relief to entities subject to rate regulation from
 applying the requirements of HB 1100 to the recognition and measurement of
 assets and liabilities. Management does not expect the change to have any
 significant impact on the consolidated financial statements.                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|   | CICA
 HB 3465, Income Taxes removes the exemption provided to rate-regulated
 enterprises from the requirement to recognize future income taxes. Management
 does not expect the change to have any significant impact on the consolidated
 financial statements                                                                                                                                                                
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|ae) | Comparative Figures                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    | Certain
 comparative figures have been reclassified to conform to the current period
 presentation.                                                                                                                                                                                                                                                                                                                               

NOTE 4 - CRITICAL ACCOUNTING
ESTIMATES AND JUDGMENTS

Estimates
and adjustments are continually evaluated and are based on historical
experience and other factors, including expectations of future events that are
believed to be reasonable under the circumstances.

The
Company makes estimates and assumptions concerning the future. The resulting
accounting estimates will, by definition, seldom equal the related actual
results. These estimates and assumptions that have a significant risk of
causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year are discussed below.

|   |                            
|-- | ---------------------------
|a) | Determination of fair value

A
number of the Companys accounting policies and disclosures require the
determination of fair value, for both financial and non-financial assets and
liabilities. Fair values have been determined for measurement and/or disclosure
purposes bases on the following methods.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | i) Fair Value of derivatives                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
 fair value of derivatives is determined using valuation techniques. The
 Company uses its judgment to make assumptions that are mainly based on market
 conditions existing at the balance sheet date. The Company has used
 discounted cash flow analysis to value crude oil forward sales derivatives.
 The analysis is based on the forward oil price sale curve and a discount rate
 that approximates the credit adjusted risk free rate for the Company.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ii) Share based payments                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
 fair value of stock based compensation to be recognized as an expense over
 the vesting period and in equity. Compensation expense is based on fair value
 at grant date and recognized over the vesting periods of the respective
 options. Fair value has been determined using the Black Scholes method.
 Expected volatility is based on the historical share price.                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | iii) Asset Retirement Obligation Provision                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | The
 fair value of this provision is recognized based on managements best estimate
 of the expenditure required to settle the obligation, discounted to reflect
 net present value. The discount rate is determined at the time an obligation
 is recognized and based on the Companys risk free rate plus any credit
 margin                                                                                                                                     

- 97 -

---



|   |                                                                                                                                                                                          
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | which
 is materially consistent with the companys weighted average cost of capital.
 Further assumptions are required regarding restoration dates and future
 environmental legislation.
|   |                                                                                                                                                                                          
|   | iv) Trade and other receivables                                                                                                                                                          
|   |                                                                                                                                                                                          
|   | The
 carrying amount of trade and other receivables is treated as a proxy for the
 fair value due to receivables being payable within twelve months.                                     
|   |                                                                                                                                                                                          
|   | v) Available-for-sale                                                                                                                                                                    
|   |                                                                                                                                                                                          
|   | The
 fair value of available-for-sale financial assets is determined by reference
 to their quoted bid price at the reporting date.                                                      
|   |                                                                                                                                                                                          
|b) | Deferred taxes                                                                                                                                                                           

The
Company is subject to income taxes in numerous jurisdictions. Significant
judgment is required in determining the worldwide provision for and deferral of
income taxes. There are many transactions and calculations for which the
ultimate tax determination is uncertain during the ordinary course of business.
The Company recognizes liabilities for anticipated deferred tax expenses based
on the expected recoverable amount of assets that exceeds their acquisition
price or their tax base.

The
Company has not recognized deferred tax assets in the balance sheet largely attributable
to tax losses carried forward which management have determined are not more
likely than not to be realized due to the Companys recent history of losses.

|   |                  
|-- | -----------------
|c) | Reserve Estimates

Estimates
of recoverable quantities of proven and probable reserves include judgmental
assumptions regarding commodity prices, exchange rates, recovery rates, and
production and transportation costs. It also requires interpretation of complex
and difficult geological and geophysical models in order to make an assessment
if the size, shape, depth and quality if reservoirs and anticipated recoveries.
Reserve estimates are based on independent valuations obtained from Sproule
International Limited.

As
at December 31, 2007, the Company had recognized proven hydrocarbon reserves in
respect of the Cheal discovery, which reserves are classified as Developed and
undeveloped. The Cardiff, Stanley and Douglas discoveries are still subject to
appraisal and production testing and the Company has not recognized any
reserves with respect to them. The Company therefore only has reserves located
in New Zealand at the Cheal Field. The Kahili Field is classified as Developed,
but had no reserves attributed to it at present.

|   |                     
|-- | --------------------
|d) | Impairment of assets

In
determining recoverable assets, in the absence of quoted market prices,
estimations are made regarding the present value of future cash flows. For oil
and gas properties expected future cash flow estimation is based on reserves,
future production profiles, commodity prices and costs. Under Canadian GAAP the
impairment test is undiscounted. Under NZ IFRS the impairment test has been
discounted.

NOTE 5  ACQUISITIONS

a) Acquisition of Titoki Energy
Limited (previously known as International Resource Management Ltd)

On
November 12, 2007 the Company completed the acquisition of 100% shares of
International Resource Management Ltd (IRM) (renamed as Titoki Energy Limited
subsequent to acquisition). The acquisition consideration of NZ$4,277,965
($3,316,278) including costs of NZ$94,670 ($73,388), was settled by the issuing
of 1,851,855 shares in the Company at $1.21 which equates to NZ$3,000,000
($2,240,745); and a cash payment of NZ$1,277,965 ($1,075,533) made in January
2008. The acquisition was treated as an acquisition of net assets that does not
constitute a business.

An advance of
NZ$2,816,705 ($2,183,510) owed to vendors of International Resource Management
was repaid by the Company subsequent to acquisition. Accordingly, total
consideration paid, including costs, was

- 98 -

---



NZ$7,094,670
($5,499,788).

The two permit
interests of IRM Ltd at the time of acquisition were:
          (a)   19.8%
interest in PMP38156 Deep (Cardiff)
          (b)   19.8%
interest in PEP38738 Deep (Cardiff exploration)

The
consideration was allocated to assets and liabilities as follows:

|                                                       |  |                |            |                                       |  |                                       |   |  |            |  
|------------------------------------------------------ |  | -------------- | ---------- | ------------------------------------- |  | ------------------------------------- | - |  | ---------- | -
|                                                       |  | Carryingvalue$ |            | Fair value
 and other
 adjustments
 $ |  | Recognized
 values on
 acquisition
 $ |  
|                                                       |  |                |            |                                       |  |                                       |  
|Purchase
 price including acquisition costs            |  |                |            |                                       |  |                                       |   |  | 3,316,278  |  
|Non current
 asset: Oil and gas properties             |  |                | 2,608,872  |                                       |  | 5,054,458                             |   |  | 7,663,330  |  
|Current
 assets                                        |  |                | 2,793      |                                       |  |                                      |   |  | 2,793      |  
|Current
 liabilities                                   |  |                | (2,554,389 | )                                     |  |                                      |   |  | (2,554,389 | )
|Non current
 liabilities: Asset retirement obligations |  |                |           |                                       |  | (45,479                               | ) |  | (45,479    | )
|Net Assets                                             |  |                |            |                                       |  |                                       |   |  | 5,066,255  |  
|Deferred
 taxation provision                           |  |                |           |                                       |  | (1,749,977                            | ) |  | (1,749,977 | )
|                                                       |  |                |            |                                       |  |                                       |  
|                                                       |  |                | 57,276     |                                       |  | 3,259,002                             |   |  | 3,316,278  |  

As Deferred
Tax is a liability it has been revalued at December 31, 2007 at $1,774,006.

b) Acquisition of Arrowhead Energy Limited

On December
22, 2006 the Company completed the acquisition of the issued and outstanding
shares of Arrowhead Energy Ltd. The acquisition was accounted for by the
purchase method and total consideration of NZ$17,137,109 (US$12,081,662)
including costs, was allocated to assets and liabilities as follows:

|                                            |  |                    |            |                                       |  |                                       |   |  |            |  
|------------------------------------------- |  | ------------------ | ---------- | ------------------------------------- |  | ------------------------------------- | - |  | ---------- | -
|                                            |  | Carrying
 value
 $ |            | Fair value
 and other
 adjustments
 $ |  | Recognized
 values on
 acquisition
 $ |  
|                                            |  |                    |            |                                       |  |                                       |  
|Purchase
 price including acquisition costs |  |                    |            |                                       |  |                                       |   |  | 12,081,662 |  
|Oil and gas
 properties                     |  |                    | 11,659,105 |                                       |  | 2,678,652                             |   |  | 14,337,757 |  
|Working
 Capital                            |  |                    | 7,783      |                                       |  |                                      |   |  | 7,783      |  
|Prepaid gas
 agreement                      |  |                    | (2,078,901 | )                                     |  |                                      |   |  | (2,078,901 | )
|Asset
 retirement obligation                |  |                    | (184,977   | )                                     |  |                                      |   |  | (184,977   | )
|Net Assets                                  |  |                    |            |                                       |  |                                       |   |  | 12,081,662 |  
|Deferred
 taxation provision                |  |                    |           |                                       |  | (2,018,969                            | ) |  | (2,018,969 | )
|                                            |  |                    |            |                                       |  |                                       |   |  | 10,062,693 |  
|Goodwill                                    |  |                    |            |                                       |  |                                       |   |  | 2,018,969  |  
|                                            |  |                    |            |                                       |  |                                       |  
|                                            |  |                    |            |                                       |  |                                       |   |  | 12,081,662 |  

NOTE 6  CASH AND CASH EQUIVALENTS

The Company
considers deposits in banks, funds held in trust accounts and certificates of
deposit with original maturities of three months or less as cash or cash
equivalents. The components of cash and cash equivalents are as follows:

- 99 -

---



|                                   |  |                   |           |                   |  |           | 
|---------------------------------- |  | ----------------- | --------- | ----------------- |  | --------- | 
|Cash on
 Deposit (USD equivalents) |  | December 31, 2007 |           | December 31, 2006 | 
|                                   |  |                   |           |                   | 
|                                   |  |                   |           |                   |  |           | 
|New Zealand
 Dollars               |  |                   | 1,437,509 |                   |  | 3,251,980 | 
|U.S. Dollars                       |  |                   | 7,582,303 |                   |  | 3,878,508 | 
|PNG Kina                           |  |                   |          |                   |  | 14,455    | 
|                                   |  |                   |           |                   | 
|                                   |  |                   | 9,019,812 |                   |  | 7,144,943 | 

At balance
sheet date, total cash of $579,534 (2006: $3,027,532) has been recognized by
the Company as held by joint operations in New Zealand dollar accounts. The Company
does not maintain direct control of this cash as it is controlled by the joint
operations operators.

The cash on
deposit balance does not include $3,000,000 (2006: $3,000,000) cash that has
restricted access under the terms of the project loan facility (refer Note 21).

NOTE 7 - PROPERTY AND EQUIPMENT

|                                |  |                                   |            |                                       |  |                                                           |  |                                   |            |   |  |            | 
|------------------------------- |  | --------------------------------- | ---------- | ------------------------------------- |  | --------------------------------------------------------- |  | --------------------------------- | ---------- | - |  | ---------- | 
|2007                            |  | Net Book Value
 31 December 2006$ |            | Additions/Transfers
 During the Year$ |  | Amortization/Depletion
 and Write Downs
 During the Year$ |  | Net Book Value
 31 December 2007$ |           
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |           
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |            |   |  |            | 
|Plant and
 equipment            |  |                                   |            |                                       |  |                                                           |  |                                   |            |   |  |            | 
|Furniture and office equipment  |  |                                   | 273,924    |                                       |  | 34,414                                                    |  |                                   | (85,633    | ) |  | 222,705    | 
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |            |   |  |            | 
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |           
|                                |  |                                   | 273,924    |                                       |  | 34,414                                                    |  |                                   | (85,633    | ) |  | 222,705    | 
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |            |   |  |            | 
|Oil and
 gas properties Proved: |  |                                   |            |                                       |  |                                                           |  |                                   |            |   |  |            | 
|Production Assets               |  |                                   | 419,431    |                                       |  | 7,405,549                                                 |  |                                   | (871,133   | ) |  | 6,953,847  | 
|Capital Expenditure             |  |                                   | 20,160,184 |                                       |  | 8,448,924                                                 |  |                                   | (3,550,895 | ) |  | 25,058,213 | 
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |           
|Total
 Proved                   |  |                                   | 20,579,615 |                                       |  | 15,854,473                                                |  |                                   | (4,422,028 | ) |  | 32,012,060 | 
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |           
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |            |   |  |            | 
|Unproved:                       |  |                                   |            |                                       |  |                                                           |  |                                   |            |   |  |            | 
|Capital Expenditure             |  |                                   |           |                                       |  | 1,711,070                                                 |  |                                   |           |   |  | 1,711,070  | 
|Acquisition Expenditure         |  |                                   |           |                                       |  | 7,663,330                                                 |  |                                   |           |   |  | 7,663,330  | 
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |           
|Total unproved                  |  |                                   |           |                                       |  | 9,374,400                                                 |  |                                   |           |   |  | 9,374,400  | 
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |           
|                                |  |                                   |            |                                       |  |                                                           |  |                                   |            |   |  |            | 
|Total
 property and equipment   |  |                                   | 20,853,539 |                                       |  | 25,263,287                                                |  |                                   | (4,507,661 | ) |  | 41,609,165 | 

Included in the
additions to production assets is the reclassification of the oil rig in PNG
that was previously classified as held for sale at $235,353, plus subsequent
costs associated with its refurbishment. The Company intends to use the rig for
future drilling therefore it has been reclassified as a production asset.

- 100 -

---



|                                |  |                                   |           |                                       |  |                                                           |  |                                 |          |   |  |            | 
|------------------------------- |  | --------------------------------- | --------- | ------------------------------------- |  | --------------------------------------------------------- |  | ------------------------------- | -------- | - |  | ---------- | 
|2006                            |  | Net Book Value
 31 December 2005$ |           | Additions/Transfers
 During the Year$ |  | Amortization/Depletion
 and Write Downs
 During the Year$ |  | Net Book Value31 December 2006$ |         
|                                |  |                                   |           |                                       |  |                                                           |  |                                 |         
|                               
|Plant and
 equipment            |  |                                   |           |                                       |  |                                                           |  |                                 |          |   |  |            | 
|Furniture and office
 equipment |  |                                   | 139,234   |                                       |  | 226,419                                                   |  |                                 | (91,729  | ) |  | 273,924    | 
|                                |  |                                   |           |                                       |  |                                                           |  |                                 |          |   |  |            | 
|                                |  |                                   |           |                                       |  |                                                           |  |                                 |         
|                                |  |                                   | 139,234   |                                       |  | 226,419                                                   |  |                                 | (91,729  | ) |  | 273,924    | 
|                               
|Oil and
 gas properties Proved: |  |                                   |           |                                       |  |                                                           |  |                                 |          |   |  |            | 
|Production Assets               |  |                                   | 400,770   |                                       |  | 33,483                                                    |  |                                 | (14,822  | ) |  | 419,431    | 
|Capital Expenditure             |  |                                   | 1,038,198 |                                       |  | 19,565,262                                                |  |                                 | (443,276 | ) |  | 20,160,184 | 
|                                |  |                                   |           |                                       |  |                                                           |  |                                 |         
|Total
 Proved                   |  |                                   | 1,438,968 |                                       |  | 19,598,745                                                |  |                                 | (458,098 | ) |  | 20,579,615 | 
|                                |  |                                   |           |                                       |  |                                                           |  |                                 |         
|Total
 property and equipment   |  |                                   | 1,578,202 |                                       |  | 19,825,164                                                |  |                                 | (549,827 | ) |  | 20,853,539 | 

|                                                     |  |                                   |          |                     |  |                                              |   |          |            |   |  |            |  
|---------------------------------------------------- |  | --------------------------------- | -------- | ------------------- |  | -------------------------------------------- | - | -------- | ---------- | - |  | ---------- | -
|                                                     |  | Furniture
 & Office
 Equipment
 $ |          | Production
 Assets$ |  | Proved
 and Unproved
 Capital Expenditure
 $ |   | Total
 $ |           
|                                                     |  |                                   |          |                     |  |                                              |   |          |           
|At December 31, 2006                                 |  |                                   |          |                     |  |                                              |   |          |            |   |  |            |  
|Cost                                                 |  |                                   | 637,478  |                     |  | 542,038                                      |   |          | 20,569,371 |   |  | 21,748,887 |  
|Accumulated depreciation, depletion and amortisation |  |                                   | (330,650 | )                   |  | (122,607                                     | ) |          | (409,187   | ) |  | (862,444   | )
|Disposals                                            |  |                                   | (32,904  | )                   |  |                                             |   |          |           |   |  | (32,904    | )
|                                                     |  |                                   |          |                     |  |                                              |   |          |           
|Net book value                                       |  |                                   | 273,924  |                     |  | 419,431                                      |   |          | 20,160,184 |   |  | 20,853,539 |  
|                                                     |  |                                   |          |                     |  |                                              |   |          |           
|                                                     |  |                                   |          |                     |  |                                              |   |          |            |   |  |            |  
|Additions                                            |  |                                   | 34,414   |                     |  | 7,405,549                                    |   |          | 10,159,994 |   |  | 17,599,957 |  
|Acquisition                                          |  |                                   |         |                     |  |                                             |   |          | 7,663,330  |   |  | 7,663,330  |  
|Depreciation, depletion and amortisation             |  |                                   | (76,622  | )                   |  | (839,113                                     | ) |          | (3,538,989 | ) |  | (4,454,724 | )
|Disposals                                            |  |                                   | (9,011   | )                   |  | (43,926                                      | ) |          |           |   |  | (52,937    | )
|                                                     |  |                                   |          |                     |  |                                              |   |          |           
|Closing net book value                               |  |                                   | 222,705  |                     |  | 6,941,941                                    |   |          | 34,444,519 |   |  | 41,609,165 |  
|                                                     |  |                                   |          |                     |  |                                              |   |          |           
|                                                     |  |                                   |          |                     |  |                                              |   |          |            |   |  |            |  
|At December 31, 2007                                 |  |                                   |          |                     |  |                                              |   |          |            |   |  |            |  
|Cost                                                 |  |                                   | 671,892  |                     |  | 7,947,587                                    |   |          | 38,392,695 |   |  | 47,012,174 |  
|Accumulated depreciation, depletion and amortisation |  |                                   | (407,272 | )                   |  | (961,720                                     | ) |          | (3,948,176 | ) |  | (5,317,168 | )
|Disposals                                            |  |                                   | (41,915  | )                   |  | (43,926                                      | ) |          |           |   |  | (85,841    | )
|                                                     |  |                                   |          |                     |  |                                              |   |          |           
|Net book value                                       |  |                                   | 222,705  |                     |  | 6,941,941                                    |   |          | 34,444,519 |   |  | 41,609,165 |  

- 101 -

---



|                                                     |  |                                   |          |                     |  |                                 |   |        |            |   |  |            |  
|---------------------------------------------------- |  | --------------------------------- | -------- | ------------------- |  | ------------------------------- | - | ------ | ---------- | - |  | ---------- | -
|                                                     |  | Furniture
 & Office
 Equipment
 $ |          | Production
 Assets$ |  | Proved
 Capital
 Expenditure
 $ |   | Total$ |           
|                                                     |  |                                   |          |                     |  |                                 |   |        |           
|At December 31, 2005                                 |  |                                   |          |                     |  |                                 |   |        |            |   |  |            |  
|Cost                                                 |  |                                   | 190,268  |                     |  | 400,770                         |   |        | 1,100,179  |   |  | 1,691,217  |  
|Accumulated depreciation, depletion and amortisation |  |                                   | (51,034  | )                   |  |                                |   |        | (61,981    | ) |  | (113,015   | )
|                                                     |  |                                   |          |                     |  |                                 |   |        |           
|Net book value                                       |  |                                   | 139,234  |                     |  | 400,770                         |   |        | 1,038,198  |   |  | 1,578,202  |  
|                                                     |  |                                   |          |                     |  |                                 |   |        |           
|                                                     |  |                                   |          |                     |  |                                 |   |        |            |   |  |            |  
|Additions                                            |  |                                   | 447,210  |                     |  | 141,268                         |   |        | 19,469,192 |   |  | 20,057,670 |  
|Acquisition                                          |  |                                   |         |                     |  |                                |   |        |           |   |  |           |  
|Depreciation, depletion and amortisation             |  |                                   | (279,616 | )                   |  | (122,607                        | ) |        | (347,206   | ) |  | (749,429   | )
|Disposals                                            |  |                                   | (32,904  | )                   |  |                                |   |        |           |   |  | (32,904    | )
|                                                     |  |                                   |          |                     |  |                                 |   |        |           
|Closing net book value                               |  |                                   | 273,924  |                     |  | 419,431                         |   |        | 20,160,184 |   |  | 20,853,539 |  
|                                                     |  |                                   |          |                     |  |                                 |   |        |           
|                                                     |  |                                   |          |                     |  |                                 |   |        |            |   |  |            |  
|At December 31, 2006                                 |  |                                   |          |                     |  |                                 |   |        |            |   |  |            |  
|Cost                                                 |  |                                   | 637,478  |                     |  | 542,038                         |   |        | 20,569,371 |   |  | 21,748,887 |  
|Accumulated depreciation, depletion and amortisation |  |                                   | (330,650 | )                   |  | (122,607                        | ) |        | (409,187   | ) |  | (862,444   | )
|Disposals                                            |  |                                   | (32,904  | )                   |  |                                |   |        |           |   |  | (32,904    | )
|                                                     |  |                                   |          |                     |  |                                 |   |        |           
|Net book value                                       |  |                                   | 273,924  |                     |  | 419,431                         |   |        | 20,160,184 |   |  | 20,853,539 |  

PETROLEUM LICENCE REGIMES

a) NEW ZEALAND

Unless
otherwise indicated, Petroleum Exploration Permits granted in New Zealand
provide an exclusive right to explore for petroleum for an initial term of five
years, renewable for a further five years over one-half of the original area.
Upon application, the holder is required to commit to do certain work in the
permit area, during the permit term. Permit holders can apply for changes to
the committed work programs under certain circumstances. If a discovery is
made, the permit holder may be entitled to apply for a Petroleum Mining Permit,
granted for a term of up to 40 years from the date of issue. The New Zealand
government has reserved a royalty from the sale of petroleum products. For any
discovery made between June 30, 2004 and December 31, 2009, the royalty will be
the greater of (A) 1% of the net sales revenue (from natural gas) and 5% of the
net sales revenues (from oil); or (B) 15 to 20% of accounting profits from the
sale of petroleum products. For other discoveries, the royalty will be the
greater of (A) 5% of net sales revenue or (B) 20% of accounting profits.

b) PAPUA NEW GUINEA

Petroleum prospecting licences
granted in Papua New Guinea provide for the exclusive right to explore for
petroleum for an initial term of six years, renewable for a further five years
over one-half of the original area, and the right to enter into a Petroleum
Development Licence or Petroleum Retention Licence upon a discovery. Petroleum
Retention Licences granted in Papua New Guinea provide for the exclusive
retention of interest in the permit for an initial term of five years,
renewable for a further five years over the original area, while development
options are progressed. The Petroleum Development Licence provides the right to
produce any oil and gas discovered for a period of up to 25 years and may be
extended for a further period of up to 20 years from discovery, subject to a
maximum 22.5% participating interest that can be acquired by the Government of
Papua New Guinea and 2% royalty to the government, which royalty the government
pays (all or part of) to project area landowners, Local-level Governments or
Provincial Government in agreed or determined proportions. The participants can
apply for extensions or reductions of the committed work programs for the
licences under certain circumstances (by way of an Application for Variation of
the Work Program). The Company has entered into an agreement for the disposal
of specific permits in Papua New Guinea, refer Note 25.

- 102 -

---



NOTE 8  GOODWILL

The following
table summaries the changes in goodwill:

|                         |  |      |           |      |  |           | 
|------------------------ |  | ---- | --------- | ---- |  | --------- | 
|                         |  | 2007 |           | 2006 | 
|                         |  |      |           |      | 
|                         |  | $    |           | $    | 
|Opening net
  book value |  |      | 2,018,969 |      |  |          | 
|Additions                |  |      |          |      |  | 2,018,969 | 
|                         |  |      |           |      |  |           | 
|Closing net
  book value |  |      | 2,018,969 |      |  | 2,018,969 | 
|                         |  |      |           |      |  |           | 

Goodwill is
assessed for impairment on an annual basis and no indications were identified
at December 31, 2007.

NOTE 9  ASSET RETIREMENT OBLIGATION

The Company
has obligations to plug and abandon petroleum and natural gas wells at the end
of their useful lives. The present value of these obligations have been
projected based on an estimated future liability of $6.72 million (2006: $2.28
million) discounted using credit adjusted risk-free rates of 8.05% - 17%. The
costs are expected to be incurred between 2008 and 2020. Throughout the year
the Company re-estimated its obligations and increased the present value of
future liabilities by $0.47 million (2006: decrease $0.01 million). The
movement in the provision is as follows:

|                                                 |  |      |           |      |  |           |  
|------------------------------------------------ |  | ---- | --------- | ---- |  | --------- | -
|                                                 |  | 2007 |           | 2006 | 
|                                                 |  |      |           |      | 
|                                                 |  | $    |           | $    | 
|Obligations
  at beginning of year               |  |      | 1,065,559 |      |  | 337,075   |  
|Obligations
  incurred during the year           |  |      | 269,593   |      |  | 496,234   |  
|Obligations
  through acquisition (refer Note 5) |  |      | 45,479    |      |  | 184,977   |  
|Revision in
  estimated obligations              |  |      | 466,902   |      |  | (10,405   | )
|Accretion
  expense                              |  |      | 123,794   |      |  | 46,118    |  
|Foreign
  exchange movement                      |  |      | 111,763   |      |  | 11,560    |  
|                                                 |  |      |           |      |  |           |  
|Obligations
  at end of year                     |  |      | 2,083,090 |      |  | 1,065,559 |  
|                                                 |  |      |           |      |  |           |  

NOTE 10  ACCOUNTS RECEIVABLE/PAYABLE

Total accounts
receivable comprises the following categories:

|                             |  |      |           |      |  |           | 
|---------------------------- |  | ---- | --------- | ---- |  | --------- | 
|                             |  | 2007 |           | 2006 | 
|                             |  |      |           |      | 
|                             |  | $    |           | $    | 
|Trade receivables            |  |      | 1,978,227 |      |  | 755,909   | 
|Joint operations receivables |  |      | 3,711,052 |      |  | 662,162   | 
|                             |  |      |           |      |  |           | 
|                             |  |      | 5,689,279 |      |  | 1,418,071 | 
|                             |  |      |           |      |  |           | 

Total accounts
payable and accrued liabilities comprises the following categories:

- 103 -

---



|                                                  |  |      |            |      |  |           | 
|------------------------------------------------- |  | ---- | ---------- | ---- |  | --------- | 
|                                                  |  | 2007 |            | 2006 | 
|                                                  |  |      |            |      | 
|                                                  |  | $    |            | $    | 
|Trade
  payables                                  |  |      | 4,041,484  |      |  | 590,371   | 
|Joint
  operations payables                       |  |      | 3,547,296  |      |  | 2,998,340 | 
|Accrued
  expenses                                |  |      | 536,885    |      |  | 251,025   | 
|Acquisition
  consideration and advance repayable |  |      | 3,100,800  |      |  |          | 
|                                                  |  |      |            |      |  |           | 
|                                                  |  |      | 11,226,465 |      |  | 3,839,736 | 
|                                                  |  |      |            |      |  |           | 

NOTE 11  NET CASH IN ADVANCE

Cash, less
deferred costs, of $9,679,614 has been received by the Company in respect of
8,350,000 shares, of a total of 12,500,000 shares, issued through a private
placement of common shares, with attached warrants, unit price of $1.20,
consisting of one common share and one share purchase unit. At December 31,
2007 the placement was still subject to TSX Venture Exchange authorization.
Subsequent to balance date approval has been received refer note 25(c).

NOTE 12  INVENTORY

Total
inventory comprises the following categories:

|                                                       |  |      |         |      |  |         | 
|------------------------------------------------------ |  | ---- | ------- | ---- |  | ------- | 
|                                                       |  | 2007 |         | 2006 | 
|                                                       |  |      |         |      | 
|                                                       |  | $    |         | $    | 
|Oil                                                    |  |      | 73,982  |      |  |        | 
|Share of
  joint operation and Company owned inventory |  |      | 414,504 |      |  | 475,280 | 
|                                                       |  |      |         |      |  |         | 
|Closing net
  book value                               |  |      | 488,486 |      |  | 475,280 | 
|                                                       |  |      |         |      |  |         | 

During the
year the Company has written off $195,020 (2006: $100,000) to recognize
inventory at its net realizable value.

NOTE 13  INVESTMENTS

The Company
owns 1,495,660 shares (2006: 1,495,660) (approximately 0.21% of issued shares)
in Rift Oil PLC, a company listed on the AIM stock exchange. As at December 31,
2007, the shares are recorded at the market value of $100,822 (2006: $136,528),
and the loss is recognized in Other Comprehensive Income.

NOTE 14  INTEREST EXPENSE

|                     |  |          |           |          |  |          |  |  |     | 
|-------------------- |  | -------- | --------- | -------- |  | -------- |  |  | --- | 
|                     |  | 2007
  $ |           | 2006
  $ |  | 2005
  $ | 
|                     |  |          |           |          |  |          | 
|Preferred Shares     |  |          | 288,243   |          |  |         |  |  |    | 
|Loan interest        |  |          | 4,319,016 |          |  | 42,204   |  |  | 163 | 
|Capitalised interest |  |          | (475,359  | )        |  |         |  |  |    | 
|                     |  |          |           |          |  |          | 
|                     |  |          | 4,131,900 |          |  | 42,204   |  |  | 163 | 

The Company
used its effective interest rate of 17% in 2007 to determine the amount of
interest expense eligible for capitalization.

NOTE 15  RELATED PARTY TRANSACTIONS

Directors
received a total remuneration of $159,705 during 2007 (2006: $124,000; 2005:
$57,721).

The Company
paid a former CEO (and Director) $54,000 during 2007 (2006: $nil) for the
cancellation of options granted under a consultancy agreement which was
terminated.

- 104 -

---



The Company
incurred costs of $3,000 (2006: $54,923) on behalf of a Director providing
consultancy - 105 - services
to the Company.

The Company
paid a law firm, in which a Director is a Partner, $175,740 for legal and
directorial services (2006: $42,538; 2005: $66,470).

The Company
paid a company that employs a Director, $1,500 during 2006 (2005:$18,000) for
financial services provided during the period prior to the resignation of the
Director.

During 2006,
the Company paid $25,221 (2005: $36,524; 2004: $37,553) in rent to a trust of
which the former Chief Executive Officer of the Company is a trustee.

TAG Oil (NZ)
Limited, a subsidiary of TAG Oil Ltd, which had a common director with the
Company until January 2006, participates in certain oil and gas properties with
the Company.

As part of its
normal day to day operations the Company enters into transactions with joint
operations for which it is operator. The noted transactions were in the normal
course of operations and were measured at the exchange amount, which is the
consideration established and agreed to by the related parties.

The only
transactions that the Company enters into with its subsidiaries is the
extension of non interest bearing loans, which are repayable on demand, and are
written down to their recoverable amount at year end. Net advances of $14.1
million (2006: $12.7 million) are outstanding at balance date. The parent
entity earns no revenue and incurs no expense from the subsidiaries.

NOTE 16 -
COMMITMENTS AND CONTINGENCIES

|   |                                                                                                                                                                                                                                                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|a) | Commitments                                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                                                         
|   | The Company
  participates in oil and gas exploration and development operations jointly
  with independent third and related parties and is contractually committed
  under agreements to complete certain exploration programs. The Company
  estimates that the total commitments under various agreements as at December
  31, 2007 are $11,857,440.
|   |                                                                                                                                                                                                                                                                                                                                                         
|   | The
  Companys commitments under license obligations and other agreements are
  summarized as follows:                                                                                                                                                                                                                                                 

| |                                     |  |                          |            |                    |  |             |  |             |         |               |  |         |  |  |   | 
| | ----------------------------------- |  | ------------------------ | ---------- | ------------------ |  | ----------- |  | ----------- | ------- | ------------- |  | ------- |  |  | - | 
| | 2007                                |  | Payments Due by Period $ |           
| |                                     |  |                          |           
| | Contractual
  and other obligations |  | Total                    |            | Less than 1
  year |  | 1 - 3 years |  | 3 - 5 years |         | After 5 years | 
| |                                     |  |                          |            |                    |  |             |  |             |         |               | 
| | Operating Leases                    |  |                          | 603,604    |                    |  | 148,158     |  |             | 295,897 |               |  | 159,549 |  |  |  | 
| | Joint Operations
  Commitments (1)  |  |                          | 11,253,836 |                    |  | 11,253,836  |  |             |        |               |  |        |  |  |  | 
| |                                     |  |                          |            |                    |  |             |  |             |         |               | 
| | Total
  Contractual Obligations     |  |                          | 11,857,440 |                    |  | 11,401,994  |  |             | 295,897 |               |  | 159,549 |  |  |  | 

| |                                                                                                                                                                                                                                                                                                                                                                                | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| | (1) The Joint operations commitments are in
  respect of its current year exploration permit obligations. The Company is
  committed to its share of current year exploration permit obligations to
  other joint operations participants and has a contractual obligation to
  various joint operations participants for these current year exploration
  permit obligations.

| |                                     |  |                          |            |                    |  |             |  |             |         |               |  |         |  |  |        | 
| | ----------------------------------- |  | ------------------------ | ---------- | ------------------ |  | ----------- |  | ----------- | ------- | ------------- |  | ------- |  |  | ------ | 
| | 2006                                |  | Payments Due by Period $ |           
| |                                     |  |                          |           
| | Contractual
  and other obligations |  | Total                    |            | Less than 1
  year |  | 1 - 3 years |  | 3 - 5 years |         | After 5 years | 
| |                                     |  |                          |            |                    |  |             |  |             |         |               | 
| | Operating Leases                    |  |                          | 637,054    |                    |  | 132,118     |  |             | 248,961 |               |  | 236,849 |  |  | 19,126 | 
| | Joint Operations
  Commitments      |  |                          | 19,369,150 |                    |  | 19,369,150  |  |             |        |               |  |        |  |  |       | 
| |                                     |  |                          |            |                    |  |             |  |             |         |               | 
| | Total
  Contractual Obligations     |  |                          | 20,006,204 |                    |  | 19,501,268  |  |             | 248,961 |               |  | 236,849 |  |  | 19,126 | 

| |                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The
  Companys share of commitments are as recorded on various license documents,
  but the Company may meet these commitments by various means which could
  include: farm out of major expenditures, farm out interests in the respective
  license, renegotiate terms of the license or seek further investor funds

- 105 -

---



|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                              | to meet the
  commitments listed. In view of this the Companys share of expenditure
  required to be funded will not necessarily be the full amount of the
  commitment listed above.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                              | At May 31,
  2008 the Companys material commitments through Joint Operations
  Commitments had reduced from $11,253,836 to $2,600,000 following the sale of
  its interests in PNG Stanley (PRL 4) and PRL 5 to Horizon Oil Limited, the
  sale of its interests in PNG Douglas (PPL 235) and PPL 261 to Rift Oil and
  the farmout of PEP38524 in New Zealand (see Note 25).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|b)                                                                                                                                                                                                                                                                                            | Potential
  Legal Proceedings                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|The Company
  was a party to legal proceedings as noted below in regard to the Douglas
  permit. There are no legal proceedings in which any director, member of
  senior management or any affiliate is a party adverse to the Company nor has
  a material interest adverse to the Company.
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|The disputes
  and claims in existence involving the Company are discussed below. These
  disputes and claims include those made by Austral against third parties and
  by third parties against Austral. As at May 31, 2008, all but one of these
  had been settled. They were:            
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                              | i) Cheal
Royalty: A dispute regarding the terms of a royalty payment required to be
paid by the Company in respect of the Arrowhead interest acquired in the
Cheal shallow joint operations. The total amount involved is unable to be
accurately quantified because it relies on estimates of future oil price and
production from the Cheal shallow oil joint operations for permit 38738. The
estimated amount payable relating to historical production is $153,000. The
company has obtained legal advice regarding the claim which supports the
Companys position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                              | ii) Cheal
Project: A number of interrelated claims and issues with TAG Oil (NZ) Limited
(TAG) concerning the Cheal shallow joint operations and the development of
the Cheal production facility. The Company has obtained legal advice
regarding its ability to enforce the payment by TAG of its share of
outstanding capital expenditure for completion of the production facility
(amounting to approximately NZ$500,000 (US$388,000)). TAG has written to the
Company alleging the Company is liable for compensation to TAG in the amount
of approximately NZ$7.78 million (US$6.03 million). The Company refutes the
requirement to pay compensation to TAG and has received legal advice
supporting the Companys position.                                                                                                                                                                                                                                                                                                                                                           
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                              | On May 23,
  2008, the Company agreed with TAG the settlement of all outstanding disputes
  between the companies in relation to the Cheal project. The settlement
  agreement requires the net payment by the Company to TAG of $1.6 million in a
  combination of cash, stock and expected forward production from the Cheal A7
  well, and the issue of 2,273,000 Austral shares to TAG, which issuance
  occurred on Jun 9, 2008. At December 31, 2007 the Company had provided $0.5
  million in respect to the dispute.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                              | iii) Douglas
Permit: The Company is in dispute with Rift Oil regarding the performance of
Rift as Operator for the PNG PPL 235 licence, in relation to the setting of
the minimum work commitment for the year five and six (years 2008 and 2009)
work program. The Company considers the Operator failed to follow due process
in regard to the program presented to the PNG Government, has failed to
provide information to it as required under the joint venture agreement,
failed to set a proper work program under the joint venture agreement and has
failed to progress the commercial planning requirements called for in a
memorandum of understanding with Alcan South Pacific. In particular, the
Company disputes the requirement for drilling of a well (Puk Puk) in 2008 and
maintains the well should be drilled in early 2009. The Company continues to
express its concerns to Rift, is seeking clarification of circumstances and
endeavoring to negotiate a resolution of its concerns with the Operator. The
Company has obtained legal advice supporting its position.
|                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                              | The Company
  received legal proceedings from Rift Oil regarding the Douglas permit. The
  legal proceedings, issued in the New Zealand High Court, sought payment from
  the Company of $1.646m being the amount of a cash call for the drilling of
  the Puk Puk well. The Company has also received a notice of default in
  respect of a further cash call for the well in the amount of $1.2m. The
  Company disputed the proceedings issued and challenged Rift Oils entitlement
  to issue cash calls and progress the drilling of the Puk Puk well.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

- 106 -

---



| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Puk
  Puk-1 well was spudded on May 10, 2008.                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                
| | On May 29,
  2008, initial completion of a settlement and sale agreement with Rift Oil plc
  occurred, selling the Companys interests in PPLs 235 and 261 to Rift for $5
  million, and withdrawing outstanding claims between the companies (see Note
  25).

Previously,
the Company was subject to a claim by another party to one joint venture that
the party had an entitlement to purchase part of certain Company properties.
This claim was withdrawn during 2007 without compensation payable by the
Company.

|   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|c) | Political Risks                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | Papua New
  Guinea is subject to political uncertainty and instability and the Company
  faces a number of risks and uncertainties, which may adversely impact on its
  ability to pursue its exploration and development activities in this area. As
  at May 31, 2008 the Company has sold, subject to governmental approval, its
  interests in Papua New Guinea.                                                
|   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|d) | Environmental Laws and Regulations                                                                                                                                                                                                                                                                                                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                     
|   | The Company
  is not aware of any events of non-compliance in its operations with any
  environmental laws or regulations or of any potentially material
  contingencies related to environmental issues. However, the Company cannot
  predict whether any new or amended environmental laws or regulations introduced
  in the future will have a material adverse effect on the future business of
  the Company.

NOTE 17  STOCKHOLDERS EQUITY

|   |                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------
|a) | Authorized and Issued Share Capital                                                                                
|   |                                                                                                                    
|   | The
  authorized share capital of the Company is an unlimited number of shares of
  common stock without par value.

|                               |                    |           
|------------------------------ | ------------------ | ----------
|ISSUED AND FULLY PAID          | NUMBER
  OF SHARES | $         
|                               |                    |           
|                              
|Balance at
  December 31, 2004 | 17,720,045         | 32,683,328
|Issued
  during 2005           | 4,946,408          | 10,815,968
|Balance at December 31,
  2005 | 22,666,453         | 43,499,296
|Issued during 2006             | 5,097,834          | 6,546,231 
|Balance at December 31,
  2006 | 27,764,287         | 50,045,527
|Issued during 2007             | 4,651,855          | 5,868,194 
|                               |                    |           
|Balance at December 31,
  2007 | 32,416,142         | 55,913,721

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2005,
  4,000,000 units at $2.50 were issued by the Company for net proceeds of
  $9,551,629 under a private placement. Each unit entitled the holder to one
  common share and one-half of one common share purchase warrant. Each whole
  warrant was exercisable to acquire one additional common share at $3.50 until
  October 13, 2006. The Company had the right to accelerate exercise of the
  warrants if at any time after February 13, 2006 the closing price of the
  common shares of the Company was greater than or equal to $4.50 on any stock
  exchange or other quotation service on which it is listed for any 10 consecutive
  trading days. All warrants expired unexercised in October 2006.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | For the
  period ending 31 December, 2005 the Company received $125,000 from the
  exercise of 100,000 share options and transferred $11,598 from contributed
  surplus to common stock in respect of the past compensation costs relating to
  these options.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | For the
  period ending 31 December, 2005 the Company had received $11,264,339 from the
  conversion of 354,315 New Zealand public float warrants, 264,820 New Zealand
  special class warrants, 227,273                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

- 107 -

---



|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | convertible note warrants, 4,000,000 private
  placement units and 100,000 exercised share options. Private
  placement expenses of $448,371 were deducted from common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | During 2006
  the Company issued 5,007,000 common shares for proceeds of $6,509,100.
  Private placement expenses of $89,096 were deducted from common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | For the
  period ending 31 December, 2006 the Company received $113,543 from the
  exercise of 90,834 share options and transferred $12,684 from contributed
  surplus to common stock in respect of the past compensation costs relating to
  these options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | For the
  period ending 31 December, 2007, the Company received $360,000 from the
  exercise of 300,000 share options and transferred $219,453 from contributed
  surplus to common stock in respect of the past compensation costs relating to
  these options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | During 2007
  the Company issued a private placement for 2,500,000 common shares for cash
  proceeds of $3,250,000. Expenses of $202,004 were deducted from common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | On
  acquisition of IRM Ltd in 2007 the Company issued 1,851,855 shares as partial
  settlement for a value of NZ$3,000,000 ($2,240,745).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|b) | Incentive Stock Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The Company
  has established a stock option plan for the granting of options to employees
  and service providers. The plan was originally approved by shareholders on
  May 2, 2006 at the annual general meeting of the shareholders, and accepted
  by the TSX-V, and confirmed unchanged, by the shareholders on August 22, 2007
  and approved by the TSX-V. The plan provides for the Board to issue
  non-assignable, non-transferable options, with a term of up to 5 years,
  terminating within 90 days after the optionee ceases to be associated with
  the Company (except in relation to optionees performing investor relations
  activities, whose options terminate within 30 days after ceasing to be
  associated), at an exercise price not less than the TSX-V specified
  Discounted Market Price, such options vesting over 18 months.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|   | The
  following stock options were outstanding at December 31, 2007:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

- 108 -

---



| |                      |                  |                     |                                     |                                               |                    
| | -------------------- | ---------------- | ------------------- | ----------------------------------- | --------------------------------------------- | -------------------
| | NUMBER
  OF
  SHARES | TYPE OF
  OPTION | DATE
  FULLY VESTED | NUMBER
  VESTED
  DECEMBER 31, 2007 | EXERCISE/WEIGHTED
  AVERAGE PRICE PER
  SHARE | EXPIRY
  DATE      
| |                      |                  |                     |                                     |                                               |                    
|
| | 12,500               | vesting          | 15
  October 2004   | 12,500                              | 1.25                                          | 15
  October 2008  
| | 200,000              | vesting          | 1
  December 2008   | 133,334                             | 1.90                                          | 1
  December 2010  
| | 40,000               | vesting          | 1
  January 2007    | 40,000                              | 1.80                                          | 1
  January 2011   
| | 40,000               | vesting          | 1
  January 2008    |                                    | 2.00                                          | 1
  January 2011   
| | 40,000               | vesting          | 1
  January 2009    |                                    | 2.50                                          | 1
  January 2011   
| | 10,000               | vesting          | 2
  February 2009   | 3,334                               | 1.90                                          | 2
  February 2011  
| | 400,000              | vesting          | 1
  November 2008   | 133,334                             | 1.14                                          | 1
  May 2012       
| | 50,000               | vesting          | 1
  December 2008   | 16,667                              | 1.06                                          | 1
  June 2012      
| | 150,000              | vesting          | 11
  December 2008  | 50,000                              | 1.02                                          | 11
  June 2012     
| | 100,000              | vesting          | 2
  July 2009       |                                    | 1.30                                          | 2
  July 2012      
| | 100,000              | vesting          | 6
  August 2009     |                                    | 1.42                                          | 6
  August 2012    
| | 60,000               | vesting          | 14
  March 2009     |                                    | 1.23                                          | 14
  September 2012
| | 545,000              | vesting          | 14
  March 2009     |                                    | 1.20                                          | 14
  September 2012
| | 160,000              | vesting          | 14
  September 2009 |                                    | 1.20                                          | 14
  September 2012
| | 30,000               | vesting          | 8
  October 2009    |                                    | 1.23                                          | 8
  October 2012   
| | 50,000               | vesting          | 8
  April 2009      |                                    | 1.42                                          | 12
  October 2012  
| | 150,000              | vesting          | 30
  September 2007 | 150,000                             | 1.30                                          | 30
  September 2010
| |                      |                  |                     |                                     |                                               |                    
| | 2,137,500            |                  |                     | 539,169                             |                                               |                    

| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The weighted
  average exercise price for options outstanding at December 31, 2007 is $1.32
  (December 31, 2006: $1.62). During 2007, 300,000 options were exercised at an
  average exercise price of $1.20. (2006: 90,834 - average price $1.25).
| |                                                                                                                                                                                                                                                     
| | The weighted average exercise price for options fully vested at December 31, 2007
  is $1.46 (December 31, 2006: $1.31).                                                                                                                            
| |                                                                                                                                                                                                                                                     
| | A summary of
  stock option activities for the years presented is as follows:                                                                                                                                                                       

| |                                          |                     |                                               
| | ---------------------------------------- | ------------------- | ----------------------------------------------
| | DESCRIPTION OF ACTIVITY                  | NUMBER
  OF OPTIONS | WEIGHTED
  AVERAGE/EXERCISE
  PRICE PER OPTION
| |                                          |                     |                                               
|
| | Outstanding at December
  31,2005        | 1,475,000           | $1.00
  - $4.75                               
| | Granted in 2006: vesting                 | 1,280,000           | $1.20
  - $2.50                               
| | Cancelled in 2006: vesting               | (900,000)           | $1.00
  - $1.10                               
| | Exercised in 2006: vesting
  (converted) | (90,834)            | $1.25                                         
| | Expired in 2006: vesting                 | (141,666)           | $1.25
  - $4.75                               
| |                                          |                     |                                               
| | Outstanding at December
  31,2006        | 1,622,500           | $1.20
  - $2.75                               
| | Granted in 2007: vesting                 | 1,795,000           | $1.02
  - $1.42                               
| | Cancelled in 2007: vesting               | (450,000)           | $1.20                                         
| | Exercised in 2007: vesting
  (converted) | (300,000)           | $1.20                                         
| | Forfeited in 2007:vesting                | (500,000)           | $1.50
  - $2.75                               
| | Expired in 2007: vesting                 | (30,000)            | $1.20
  - $1.25                               
| |                                          |                     |                                               
| | Outstanding at December
  31,2007        | 2,137,500           | $1.02
  - $2.50                               
| |                                          |                     |                                               

- 109 -

---



|   |                                                                                                                                                                                                                                                                                                                                                                       
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|c) | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                                                                                                       
|   | Stock option
  compensation expense of $604,514, has been recognized for 2007 (2006:
  $533,935 expense and 2005: $673,711 expense). The fair value of each stock
  option, granted after 1 January 2002, was estimated on the date of grant,
  using the Black-Scholes option-pricing model, and amortized over the vesting
  period using the following assumptions:
|   |                                                                                                                                                                                                                                                                                                                                                                       

| |                           |                   |                  
| | ------------------------- | ----------------- | -----------------
| |                           | 2007              | 2006             
| |                           |                   |                  
|
| | Expected dividend yield   | 0.00%             | 0.00%            
| | Expected price volatility | 69.57%
  - 76.57% | 73.60%
  - 76.40%
| | Risk-free interest rate   | 4.176%
  - 5.074% | 3.86%            
| | Expected life of option   | 5
  years         | 2
  to 5 years   

|   |                                                                                                                  
|-- | -----------------------------------------------------------------------------------------------------------------
|   | The weighted
  average fair value of the options granted in 2007 was $0.76 (2006: $0.92).                        
|   |                                                                                                                  
|d) | Share Purchase Warrants                                                                                          
|   |                                                                                                                  
|   | The
  following share purchase warrants to purchase shares of the Company are
  outstanding at December 31, 2007:

| |                    |                  |               |                    
| | ------------------ | ---------------- | ------------- | -------------------
| | NUMBER OF WARRANTS | EXERCISE
  PRICE | EXPIRY
  DATE
| |                    |                  |              
|
| |                    | 2,500,000        | $2.11         | December
  21, 2008

| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | A summary of
  share purchase warrant activities for the years presented is as follows:
| |                                                                                        

| |                                   |  |                        |            |                                |   |      |    
| | --------------------------------- |  | ---------------------- | ---------- | ------------------------------ | - | ---- | ---
| | DESCRIPTION OF ACTIVITY           |  | NUMBER
  OF
  WARRANTS |            | EXERCISE
  PRICE PER
  WARRANT |  
| |                                   |  |                        |            |                                |  
| | Outstanding at December
  31,2005 |  |                        | 2,000,000  |                                | $ | 3.50 |    
| | Cancelled in 2006                 |  |                        | (2,000,000 | )                              | $ | 3.50 |    
| | Granted in 2006                   |  |                        | 2,500,000  |                                | $ | 2.11 | (1)
| |                                   |  |                        |            |                                |  
| | Outstanding at December
  31,2006 |  |                        | 2,500,000  |                                | $ | 2.11 |    
| | Cancelled in 2007                 |  |                        |           |                                |   |     |    
| | Granted in 2007                   |  |                        |           |                                |   |     |    
| | Outstanding at December
  31,2007 |  |                        | 2,500,000  |                                | $ | 2.11 |    

|   |                                                                                                                                                                                                                                                                                                                                                                    
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   | (1)      Under the terms of the
  Investec Facility Agreement proceeds from the exercise of the warrants is to
  be applied firstly in extinguishment of any balance outstanding under the
  Junior Tranche at the time of exercise (refer Note 21).                                                                                                               
|   |                                                                                                                                                                                                                                                                                                                                                                    
|   | As part of
  the term facility (refer note 19) 2,500,000 share purchase warrants were
  issued with an exercise price of $2.11. The fair value of these warrants was
  estimated at $1,676,000. This value, offset by the portion of debt raising expenses
  related to this, of $135,238, has been accounted for in the share purchase
  warrants reserve account.
|   |                                                                                                                                                                                                                                                                                                                                                                    
|   | Fair value
  is calculated using the Black-Scholes option-pricing model and the
  compensation cost is amortized using the effective interest rate over the
  term of the loan.                                                                                                                                                                                    
|   |                                                                                                                                                                                                                                                                                                                                                                    
|e) | Preferred shares                                                                                                                                                                                                                                                                                                                                                   
|   |                                                                                                                                                                                                                                                                                                                                                                    
|   | On September
  20, 2007 the Company completed a private placement of 7,692,308 preferred
  shares at a price of $1.30 per share, for total financing proceeds of $10
  million. The preferred shares pay an annual                                                                                                                                                 

- 110 -

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | cumulative
 dividend of 8%. At any time up to September 20, 2010 the holders have the
 right to convert each of their shares into one fully paid Common share. After
 this date the shares may be redeemed for cash at the request of the holder or
 the Company. A liability component of $9,508,523 representing the present
 value of the principal, less allocated transaction costs, is disclosed in
 Note 21. The residual of $491,477 is recognized in stockholders equity.

NOTE 18  LOSS PER SHARE:

The following
is a reconciliation of the numerators and denominators of the basic and diluted
loss per share calculations for the years ending:

|                                            |  |                                  |             |      |   |             |   |   |            |  
|------------------------------------------- |  | -------------------------------- | ----------- | ---- | - | ----------- | - | - | ---------- | -
|                                            |  | For the years ended December 31, |            
|                                            |  |                                 
|                                            |  | 2007                             |             | 2006 |   | 2005        |  
|                                            |  |                                  |             |      |   |             |  
|Numerator,
 net loss for the year           |  | $                                | (22,030,249 | )    | $ | (13,406,828 | ) | $ | (5,767,933 | )
|Denominator:                                |  |                                  |             |      |   |             |   |   |            |  
|Weighted-average number of
 shares -basic   |  |                                  | 29,877,550  |      |   | 23,327,042  |   |   | 19,489,336 |  
|Basic loss per share                        |  | $                                | (0.74       | )    | $ | (0.57       | ) | $ | (0.30      | )
|                                            |  |                                  |             |      |   |             |  
|Denominator:                                |  |                                  |             |      |   |             |   |   |            |  
|Weighted-average number of shares
 -diluted |  |                                  | 29,877,550  |      |   | 23,327,042  |   |   | 19,489,336 |  
|Diluted loss per share                      |  | $                                | (0.74       | )    | $ | (0.57       | ) | $ | (0.30      | )

Due to net losses incurred
during 2007, 2006 and 2005 stock options and share purchase warrants
outstanding were not included in the computation of diluted loss per share as
the inclusion of such securities would be antidilutive. There were a total of
539,169 vested options outstanding at December 31, 2007. These vested options
are currently antidilitive but, if exercised, these have the potential to
dilute earnings of future periods.

NOTE 19 - INCOME TAXES

No income
taxes are currently payable by the Company in any of the jurisdictions in which
it operates. A reconciliation between the tax cost, using the Canadian
statutory income tax rate of 34.12% (2006: 34.12%; 2005: 37.12%) and the
provision for income taxes is as follows:

|                                                     |  |      |             |      |  |             |   |  |            |  
|---------------------------------------------------- |  | ---- | ----------- | ---- |  | ----------- | - |  | ---------- | -
|For the
 years ended December 31,                    |  | 2007 |             | 2006 |  | 2005        |  
|                                                     |  |      |             |      |  |             |  
|Net loss for the year
 before tax                    |  |      | (22,030,249 | )    |  | (13,406,828 | ) |  | (5,767,933 | )
|                                                     |  |      |             |      |  |             |   |  |            |  
|Benefit of tax at statutory
 rate                    |  |      | (7,516,721  | )    |  | (4,574,410  | ) |  | (2,141,057 | )
|Foreign tax rate
 differential                       |  |      | 844,398     |      |  | 132,705     |   |  | 166,205    |  
|Non-deductible stock based
 compensation expenditure |  |      | 181,362     |      |  | 185,643     |   |  | 250,655    |  
|Other                                                |  |      | 311,831     |      |  | 771,337     |   |  | 47,592     |  
|Increase in valuation
 allowance                     |  |      | 6,179,130   |      |  | 3,484,725   |   |  | 1,676,605  |  
|                                                     |  |      |             |      |  |             |   |  |            |  
|Income Tax Provision                                 |  |      |            |      |  |            |   |  |           |  

In Canada the
Company has net operating losses of approximately $7.02 million available for
future reduction from taxable income derived in Canada, which expire as
follows:

- 111 -

---



|     |                    | 
|---- | ------------------ | 
|     | Net
Operating Loss | 
|     |                    | 
|2008 | 394,654            | 
|2009 | 413,314            | 
|2010 | 719,876            | 
|2011 | 1,131,645          | 
|2015 | 1,422,722          | 
|2026 | 1,148,110          | 
|2027 | 1,786,981          | 
|     |                    | 
|     | 7,017,302          | 

In addition,
in Canada, at December 31, 2007, the Company has approximately $1.75 million of
resource and other unused tax pools to offset future taxable income derived in
Canada. The Companys Canadian resource and other unused tax pools are
available to the Company for an indefinite period.

The Company
also has losses and deductions of approximately $48.01 million available to
offset future taxable income derived in New Zealand. The Companys losses and
deductions that are available to offset future taxable income derived in New
Zealand are available to the Company for an indefinite period, provided that
the company maintains a 49% continuity of shareholding from the time that the
losses and deductions are incurred until the point of offset against taxable
income.

The components
of the net future income tax asset at December 31, 2007 are summarized below:

|                                     |  |       |             |       |  |            |  
|------------------------------------ |  | ----- | ----------- | ----- |  | ---------- | -
|                                     |  | 2007$ |             | 2006$ | 
|                                     |  |       |             |       | 
|Future income tax assets:            |  |       |             |       |  |            |  
|Net operating loss carry
 forwards   |  |       | 16,612,865  |       |  | 5,919,309  |  
|Property and equipment               |  |       | (3,684,688  | )     |  | 1,896,532  |  
|Resource tax pool                    |  |       | 552,198     |       |  | 503,038    |  
|Share issuance costs                 |  |       | 152,684     |       |  | 171,805    |  
|Asset retirement obligation          |  |       | 624,927     |       |  | 351,634    |  
|                                     |  |       |             |       | 
|Total gross future income
 tax asset |  |       | 14,257,987  |       |  | 8,842,318  |  
|Less: Valuation allowance            |  |       | (14,257,987 | )     |  | (8,842,318 | )
|                                     |  |       |             |       | 
|Net future income tax asset          |  |       |            |       |  |           |  
|                                     |  |       |             |       | 
|Future income tax
 liabilities:      |  |       |             |       |  |            |  
|Property and equipment
 acquired     |  |       | 3,994,013   |       |  | 2,018,969  |  
|                                     |  |       |             |       | 
|Net deferred tax liability           |  |       | 3,994,013   |       |  | 2,018,969  |  

A valuation
allowance has been established, and accordingly, no benefit has been recognized
for the Companys net operating losses and other deferred tax assets. The
Company believes that, based on a number of factors, the available objective
evidence creates sufficient uncertainty regarding the realizability of the
future tax assets such that a full valuation allowance has been recorded. These
factors include the Companys recent history of net losses and the expected
near-term future losses. The Company will continue to assess the ability to
realize the future tax assets based on actual and forecasted operating results.

NOTE 20  PREPAID GAS AGREEMENT

The Company is
a party to two prepaid gas agreements, each with differing terms and
obligations:

(a) On April
2, 2003, the Company entered into a gas prepayment agreement with a New Zealand
company, whereby the issuer provided NZ$2,000,000 (approximately $1,550,400) to
fund the Companys ongoing

- 112 -

---



exploration
programs. This money was advanced on April 3, 2003, with the Company to deliver
NZ$2,000,000 (approximately $1,550,400) of gas to the issuer, under contracts
to be negotiated at then prevailing market rates. For each gas producing
discovery the Company will negotiate in the first instance with the issuer, and
if no contract is entered into within a certain time period after notification,
the Company is free to seek other markets for the gas. A waiver of this
obligation was obtained for New Zealand permit PEP 38738 Deep. If the amount is
not discharged through gas sales to the issuer over a ten year period, it must
either be repaid by the Company or may be converted into share equity in one of
the Companys New Zealand subsidiaries, Austral Pacific Energy (NZ) Limited.
The prepayment is secured under a registered charge over Millennium Oil and Gas
Ltds (a wholly-owned subsidiary of the Company) 25% interest in the Kahili
joint operations PEP 38736. This property has nil carrying value as at December
31, 2007.

In the event
that insufficient gas is delivered to discharge the advance, and the Company
elects to refund the advance, interest will be payable for the period on the
outstanding balance at April 2, 2013, calculated at the average New Zealand
bank bill rate. As the outstanding balance refundable at April 2, 2013 can not
be reliably estimated no interest has been accrued at balance date. As at
December 31, 2007, the Company had delivered gas worth NZ$160,682 ($124,559),
(2006: NZ$157,565).

(b) On
February 4th, 2004, Arrowhead Energy Ltd, a company acquired on
December 22nd, 2006, entered into a gas prepayment agreement with a
New Zealand company, whereby the issuer provided NZ$2,500,000 (approximately
$1,938,000) to fund Arrowheads development programs. Arrowhead is obliged to
deliver NZ$2,500,000 (approximately $1,938,000) of gas to the issuer, under the
Kahili Gas Sales Agreement and the Cheal Gas Sales Agreement, negotiated in
2007. Under the terms of the gas prepayment agreement the issuer has exclusive
rights to purchase all gas that Arrowhead is entitled to from the Kahili and
Cheal gas fields, at the gas price determined within the Kahili Gas Sales
Agreement.

The
obligations of Arrowhead under the gas prepayment agreement survive the
repayment of the advance. The gas prepayment agreement can only be terminated
in certain circumstances and in the event of termination the outstanding amount
of the advance is repayable without interest for a period of 14 days after
which interest becomes payable on any balance of the advance not repaid. The
prepayment is secured under a registered charge over Arrowhead Energy Ltds 33%
interest in the Cheal joint operations PMP 38156 and its 25% interest in the
Kahili joint operations PMP 38153 and supported by a guarantee of NZ$2,500,000
provided by Investec Bank (Australia) Ltd. As at December 31, 2007, Arrowhead
Energy Ltd had delivered gas worth NZ$14,163 ($10,978), (2006: NZ$11,204).

|                       |  |         |           |         |  |           | 
|---------------------- |  | ------- | --------- | ------- |  | --------- | 
|In summary:            |  |         |           |         |  |           | 
|                       |  |         |           |         |  |           | 
|                       |  | 2007
 $ |           | 2006
 $ | 
|                       |  |         |           |         | 
|Current
 Liability     |  |         | 831,040   |         |  | 1,047,108 | 
|Non Current
 Liability |  |         | 2,521,823 |         |  | 2,330,660 | 
|                       |  |         |           |         | 
|                       |  |         | 3,352,863 |         |  | 3,377,768 | 
|                       |  |         |           |         | 

The balances
outstanding in respect to the prepaid gas agreements are denominated in New
Zealand dollars and translated at year end exchange rate and therefore are
subject to fluctuations as a consequence of changes in the US$:NZ$ exchange
rate. The portion of the prepayments that are estimated to be satisfied by
delivery of gas within the next twelve months have been classified as a current
liability.

NOTE 21  DEBT

(a) Investec Loan

In December
2006, Austral Pacific Energy (NZ) Limited, a wholly owned subsidiary, entered
into a project loan facility for $23,000,000 with Investec Bank (Australia) Ltd
(Investec). Interest on the facility is variable based upon the London
Interbank Offered Rate (LIBOR) plus a margin dependent upon the tranche of
the loan.

The facility
was structured into three tranches:

| |      |                                                                                                                                     
| | ---- | ------------------------------------------------------------------------------------------------------------------------------------
| | (iv) | $18,000,000
 Senior tranche The interest rate prior to project completion is LIBOR plus
 2.00% (post completion LIBOR plus 1.75%),
| |      |                                                                                                                                     
| | (v)  | $5,000,000
 Junior tranche. The interest rate prior to project completion is LIBOR plus
 4.00%                                     

- 113 -

---



| |      |                                                                                                                   
| | ---- | ------------------------------------------------------------------------------------------------------------------
| |      | (post
 completion LIBOR plus 3.5%,                                                                                
| |      |                                                                                                                   
| | (vi) | NZ$2,500,000
 Guarantee tranche. The interest rate prior to project completion is 2.00%
 (post completion 1.75%)

The original
term of the facility was 4 years with the remaining principal repayments
anticipated as follows:

|     |  |                     |            |                     |  |           | 
|---- |  | ------------------- | ---------- | ------------------- |  | --------- | 
|     |  | SENIOR
 TRANCHE 
 $ |            | JUNIOR
 TRANCHE 
 $ | 
|     |  |                     |            |                     | 
|2008 |  |                     | 7,950,000  |                     |  |          | 
|2009 |  |                     | 5,700,000  |                     |  |          | 
|2010 |  |                     |           |                     |  | 5,000,000 | 
|     |  |                     |            |                     | 
|     |  |                     | 13,650,000 |                     |  | 5,000,000 | 

As at 31
December, 2007 the status of the facility was as follows:

|                                                |  |   |            |  
|----------------------------------------------- |  | - | ---------- | -
|                                                |  | $ |           
|Drawdown in
 year ended December 31, 2006       |  |   | 15,738,000 |  
|Drawdown in
 year ended December 31, 2007       |  |   | 7,262,000  |  
|Loan
 Repayment in year ended December 31, 2007 |  |   | (4,350,000 | )
|                                               
|Balance
 December 31, 2007                      |  |   | 18,650,000 |  

As a result of
the companys breach of several covenants the loan, as at 31 December 2007, has
been reclassified as a current liability. Accordingly the unamortised costs
associated with the facility have been expensed in total rather than amortised
over the period of the loan. In addition the restricted cash held in a Debt
Service Reserve Account has been classified as a current asset which can
ultimately be applied to the principal outstanding.

In 2007 the
Company had continued to operate under the facility having received various
time extension waivers with respect to meeting the various facility covenants.
These waivers have now expired and have not been renewed. Under the terms of
the facility Investec can demand both repayment of the principal outstanding and
the closing out of the oil swaps, (refer below).

The breach of
covenants result from the continuing delays in completing the Cheal Oil
project. The key to rectifying the breach is the drilling of at least two
further wells to satisfy the completion test under the facility. The
completion test requires certain proven and probable reserves and associated
production rates to be achieved, together with certain related forward looking
financial ratios.

As a result of
the Companys breach of several covenants the original terms have been
renegotiated between the Company and Investec. The Company has agreed with
Investec to repay the total facility by December 15, 2008. To facilitate this
Investec have agreed to restructure the facility, with the key financial terms
requiring a principal payment of US$4.2 million which was completed on March 31
2008 (reflecting the scheduled US$2.2 million due; and the further US$2 million
paid from the restricted cash held in respect of the loan facility and applied
in inverse order of maturity). In addition a further US$3.5 million was
required to be paid on completion of the announced sale of PNG Stanley (PRL 4)
and PRL 5 assets (to be applied as $2.05 million against the June 30 scheduled
principal due; and the balance of US$1.45 million applied in inverse order of
maturity); such payment since made, on May 30, 2008. Cash in excess of
operating requirements will be used to reduce principal outstanding. Further
Investec agreed to provide a short term loan of $17.8 million, repayable on
December 15, 2008 with the balance of the principal, to fund the close out of
the crude oil forward sales contracts (and placement of $90 put options)
together with capitalized interest. The interest rate margin was increased by
an additional 2% on the total principal outstanding on the original tranches
for the period January 31 to December 15, 2008 inclusive. In addition Investec
was issued with shares to the value of US$750,000 based on the Austral share
price at March 19, 2008. There are several commercial and administrative
conditions which must also be complied with.

Other key
terms of the original loan facility are set out below.

The Company
established a Debt Service Reserve Account which has been funded with
$3,000,000. Upon the Senior Tranche final maturity date the balance in the
account can be reduced to $1,500,000 with the

- 114 -

---



$1,500,000
released being applied as a principal prepayment of the Junior Tranche. The
remaining $1,500,000 will be applied in repayment of the Junior Tranche on the
Junior Tranche maturity date.

The Guarantee
Tranche matures on the earlier of the day on which the exposure under the
Arrowhead Energy Ltd Prepaid Gas Agreements (refer Note20(b)) reduces to nil or
the day on which the project loan facility is repaid.

As part of the
facility Austral issued 2.5 million warrants to Investec Bank at an exercise
price of US$2.11. The price was calculated as a 30% premium to the 30 day
weighted average share price (per AMEX trading) for the period immediately prior
to the acceptance date (by Austral) of the facility. The warrants expire on
December 21, 2008 and entitle the holder to acquire one common share for each
warrant held. If the warrants are exercised by Investec the proceeds are
initially to be used to repay any Junior tranche balance outstanding with any
excess funds being available to Austral for general usage.

Costs of
$1,279,731 were incurred in relation to the financing. Of this amount, $135,238
was attributed to the equity related portion of the funding, $12,271 amortized
in 2006, and the remainder of $1,132,222 included within the current term
liability balance in the Consolidated Balance Sheets. The unamortized costs at
December 31, 2007 have now been expensed.

A summary of
the accounting treatment of the debt raising is as follows:

|                                           |  |              |            |                  |  |             |   |  |            |  
|------------------------------------------ |  | ------------ | ---------- | ---------------- |  | ----------- | - |  | ---------- | -
|                                           |  | Current
 
 $ |            | Non-Current
 
 $ |  | Total 
 $   |  
|                                           |  |              |            |                  |  |             |  
|Balance
 outstanding at January 1, 2007    |  |              | 6,550,000  |                  |  | 9,188,000   |   |  | 15,738,000 |  
|Fair value
 of warrants at January 1, 2007 |  |              |           |                  |  | (1,676,000  | ) |  | (1,676,000 | )
|Prepaid
 expenses at January 1, 2007       |  |              | (283,056   | )                |  | (849,166    | ) |  | (1,132,222 | )
|                                           |  |              |            |                  |  |             |   |  |            |  
|At January
 1, 2007                        |  |              | 6,266,944  |                  |  | 6,662,834   |   |  | 12,929,778 |  
|Drawdowns to
 December 31, 2007            |  |              |           |                  |  | 7,262,000   |   |  | 7,262,000  |  
|Repayments
 to December 31, 2007           |  |              | (4,350,000 | )                |  |            |   |  | (4,350,000 | )
|Transfer to
 current                       |  |              | 16,450,000 |                  |  | (16,450,000 | ) |  |           |  
|Amortisation
 to December 31, 2007         |  |              | 283,056    |                  |  | 2,525,166   |   |  | 2,808,222  |  
|                                           |  |              |            |                  |  |             |   |  |            |  
|Reported
 balance December 31, 2007        |  |              | 18,650,000 |                  |  |            |   |  | 18,650,000 |  

A product
price hedging program (Risk Management Facility) was entered into by the
Company to mitigate its exposure to lower US dollar oil prices throughout the
term of the facility. Full details of this are included in Note 22.

As at December
31, 2007 security for the facility is over all present and after-acquired
property of the Company. Following the completion of certain events, security
will be reduced to the interests of the Company within the Cheal project, the
Cheal project documents, the Risk Management Facility, the Debt Service Reserve
Account and the Proceeds Accounts.

(b) Preferred Shares

The Company
issued 7,692,308 preferred shares on 20 September 2007 at a price of $1.30, for
total proceeds of $10,000,000. The shares are convertible one-for-one into the
Companys common shares for a three-year period. They have a fixed preferential
cumulative dividend of 8% per year, payable six monthly. After 3 years the
holder can request redemption or the Company can redeem the shares. Refer Note
25 (f).

The Company
initially recognised $9,508,523 and associated liability portion of deferred
costs as a liability. The balance of the Preferred shares of $491,477 is
recorded as equity.

The broker,
Morgan Keegan was paid fees of $150,000 and was issued 150,000 warrants in
September 2007 vesting on issue at a strike price of $1.30. AMEX, TSX and NZX
fees were also paid. Related costs totalled $302,376 allocated to liability
$291,737 and equity $10,639.

- 115 -

---



At balance
date total accrued arrears on fixed preferential dividends is $222,222.

|                                      |  |          |           |  
|------------------------------------- |  | -------- | --------- | -
|                                      |  | 2007
  $ |          
|                                      |  |          |          
|Liability portion of preferred shares |  |          | 9,508,523 |  
|Liability portion of deferred costs   |  |          | (291,737  | )
|Amortisation                          |  |          | 66,021    |  
|                                      |  |          |          
|Reported balance December 31, 2007    |  |          | 9,282,806 |  

NOTE 22  FINANCIAL INSTRUMENTS AND
DERIVATIVES

The Company
has entered into a series of put and call options and forward sales contracts
for the future sale of crude oil produced from the Cheal field. The contracts
were entered into in connection with the raising of debt (refer Note 21). As
the put and call options and forward sales contracts hedge commodity price
against the WTI Crude Futures Contract the Company has assessed the long term
effectiveness of the forwards sales contracts as not being sufficiently
effective to enable it to apply hedge accounting. As a consequence the
$7,297,626 (2006: $455,685) net reduction in the fair value of the derivative
instruments has been recognized in the Statements of Operations and Deficit in
the current period.

At May 31,
2008 the Company had closed out the forward sales contracts effective June 1,
2008 onwards.

The Companys
outstanding contracts for derivative instruments, and the related fair values
at December 31st, 2007 were as follows:

|                          |  |                      |  |                                |  |                               |  |                                     |  
|------------------------- |  | -------------------- |  | ------------------------------ |  | ----------------------------- |  | ----------------------------------- | -
|                          |  | QUANTITY
  (BARRELS) |  | MATURITY DATE                  |  | AVERAGE
  PRICE US$ PER
  BBL |  | FAIR VALUE AT
  DECEMBER
  31, 2007 |  
|                          |  |                      |  |                                |  |                               |  |                                     |  
|Crude oil
  forward sales |  | 323,700              |  | January 2008
  - December 2010 |  | 65.10                         |  | (7,753,311                          | )

At December 31, 2007, the loss
has been categorized as a current liability as Investec may require it to be
immediately settled given the status of the loan (see Note 21).

|                          |  |                      |  |                             |  |                               |  |                                       |  
|------------------------- |  | -------------------- |  | --------------------------- |  | ----------------------------- |  | ------------------------------------- | -
|                          |  | QUANTITY
  (BARRELS) |  | MATURITY
  DATE             |  | AVERAGE
  PRICE US$ PER
  BBL |  | FAIR
  VALUE AT
  DECEMBER
  31, 2006 |  
|                          |  |                      |  |                             |  |                               |  |                                       |  
|Crude oil
  put options   |  | 72,000               |  | April
  2007 - June 2007    |  | 64.00                         |  | 210,416                               |  
|Crude oil
  forward sales |  | 417,600              |  | July
  2007 - December 2010 |  | 65.10                         |  | (666,101                              | )

At December
31, 2006 the loss was categorized by current $75,781 and non-current $590,320.

Exposure to
credit, interest rate, foreign currency risk, commodity price and liquidity
risk arises in the normal course of the Companys business.

(a) Credit Risk

Credit risk
arises from cash and cash equivalents, and deposits with banks, as well as credit
exposures to customers, including outstanding receivables and committed
transactions. Investments are to be made only with approved third party
financial institutions. A significant portion of the Companys accounts
receivable, $1,949,355 (2006: $347,216) is due from one oil and gas customer.
Credit quality of this customer is assessed taking into account its financial
position, past experience and other factors. The table below shows the balance
of the major counterparties at balance sheet date.

- 116 -

---



|                                 |  |                     |           |                     |  |           | 
|-------------------------------- |  | ------------------- | --------- | ------------------- |  | --------- | 
|                                 |  | December
  31, 2007 |           | December
  31, 2006 | 
|                                 |  |                     |           |                     | 
|                                 |  | $                   |           | $                   | 
|Cash and cash deposits           |  |                     |           |                     |  |           | 
|ASB Bank Limited                 |  |                     | 2,324,920 |                     |  | 2,629     | 
|ANZ National Bank Limited        |  |                     | 2,002,411 |                     |  | 3         | 
|Bank of New Zealand              |  |                     | 3,004,870 |                     |  |          | 
|                                 |  |                     |           |                     |  |           | 
|                                 |  |                     | 7,332,201 |                     |  | 2,632     | 
|Receivables                      |  |                     |           |                     |  |           | 
|Swift Energy New Zealand Limited |  |                     | 1,949,355 |                     |  | 347,216   | 
|Cheal Petroleum Limited          |  |                     | 28,872    |                     |  | 4,410     | 
|Joint operations parties         |  |                     | 3,711,052 |                     |  | 1,066,445 | 
|                                 |  |                     |           |                     |  |           | 
|                                 |  |                     | 5,689,279 |                     |  | 1,418,071 | 

Of the amount
owed by the joint operations parties, $930,000 was loaned by the Company to the
joint operations due to the dispute with TAG see Note 16 b) ii). This was
repaid on March 7, 2008. The balance is owed by joint operations where the
Company is operator and the company does not expect any losses from these
counterparties, therefore no impairment loss has been recorded.

(b) Interest Rate Risk

Effective
Interest Rates and Repricing Analysis

In respect of
financial assets and financial liabilities, the following table indicates their
effective interest rates at the balance sheet date and the periods in which
they reprice.

|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|---------------------------------------- |  | -------------------------------------------- | - | ------------------- | - | ------------------------------------- |  | ------------------------------------------ |  | ------------------------------------------ |  | -------------------- |  | ------ |  | --------- |  | ------ |  | --------- |  | ---------- |  | --------- |  | ---------- |  | ---------- | 
|                                         |  | WEIGHTED AVERAGE
  EFFECTIVE
  INTEREST RATE |   | FIXED INTEREST RATE |   | FLOATING INTEREST RATEMATURING 1 YEAR |  | FLOATING INTEREST RATEMATURING 1 - 2 YEARS |  | FLOATING INTEREST RATEMATURING 2 - 5 YEARS |  | NON-INTEREST BEARING |  | TOTAL  | 
|                                         |  | 2007
%                                       |   | 2006
%              |   | 2007
$                                |  | 2006
$                                     |  | 2007
$                                     |  | 2006
$               |  | 2007
$ |  | 2006
$    |  | 2007
$ |  | 2006
$    |  | 2007
$     |  | 2006
$    |  | 2007
$     |  | 2006
$     | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|Financial Assets                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|Cash and Cash equivalents                |  | 3.25                                         | % | 2.57                | % |                                      |  |                                           |  | 9,019,812                                  |  | 7,144,943            |  |       |  |          |  |       |  |          |  |           |  |          |  | 9,019,812  |  | 7,144,943  | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|Restricted Cash                          |  | 3.70                                         | % | 4.70                | % |                                      |  |                                           |  | 3,000,000                                  |  |                     |  |       |  |          |  |       |  | 3,000,000 |  |           |  |          |  | 3,000,000  |  | 3,000,000  | 
|Financial Instruments                    |  | 4.75                                         | % | 5.25                | % |                                      |  | 210,416                                    |  |                                           |  |                     |  |       |  |          |  |       |  |          |  |           |  |          |  |           |  | 210,416    | 
|Prepaid expenses and deposits            |  |                                             |   |                    |   |                                      |  |                                           |  |                                           |  |                     |  |       |  |          |  |       |  |          |  | 805,527    |  | 500,572   |  | 805,527    |  | 500,572    | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|Investments                              |  |                                             |   |                    |   |                                      |  |                                           |  |                                           |  |                     |  |       |  |          |  |       |  |          |  | 100,822    |  | 136,528   |  | 100,822    |  | 136,528    | 
|Accounts receivable                      |  |                                             |   |                    |   |                                      |  |                                           |  |                                           |  |                     |  |       |  |          |  |       |  |          |  | 5,689,279  |  | 1,418,071 |  | 5,689,279  |  | 1,418,071  | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|                                        
|Total Financial Assets                   |  | 3.31                                         | % | 3.20                | % |                                      |  | 210,416                                    |  | 12,019,812                                 |  | 7,144,943            |  |       |  |          |  |       |  | 3,000,000 |  | 6,595,628  |  | 2,055,171 |  | 18,615,440 |  | 12,410,530 | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|Financial Liabilities                    |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|Accounts payable and accrued liabilities |  |                                             |   |                    |   |                                      |  |                                           |  |                                           |  |                     |  |       |  |          |  |       |  |          |  | 11,226,465 |  | 3,839,736 |  | 11,226,465 |  | 3,839,736  | 
|Net Cash in Advance                      |  |                                             |   |                    |   |                                      |  |                                           |  |                                           |  |                     |  |       |  |          |  |       |  |          |  | 9,679,614  |  |          |  | 9,679,614  |  |           | 
|Financial Instruments                    |  |                                             |   |                    |   |                                      |  |                                           |  |                                           |  |                     |  |       |  |          |  |       |  |          |  | 7,753,311  |  | 666,101   |  | 7,753,311  |  | 666,101    | 
|Loans and borrowings                     |  | 7.85                                         | % | 15.81               | % |                                      |  |                                           |  | 18,650,000                                 |  |                     |  |       |  | 6,266,944 |  |       |  | 6,662,834 |  |           |  |          |  | 18,650,000 |  | 12,929,778 | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|Asset retirement obligation              |  |                                             |   |                    |   |                                      |  |                                           |  |                                           |  |                     |  |       |  |          |  |       |  |          |  | 2,083,090  |  | 1,065,559 |  | 2,083,090  |  | 1,065,559  | 
|Prepaid gas revenue                      |  |                                             |   |                    |   |                                      |  |                                           |  |                                           |  |                     |  |       |  |          |  |       |  |          |  | 3,352,863  |  | 3,377,768 |  | 3,352,863  |  | 3,377,768  | 
|Long term debt                           |  | 11.19                                        | % |                    |   | 9,282,806                             |  |                                           |  |                                           |  |                     |  |       |  |          |  |       |  |          |  |           |  |          |  | 9,282,806  |  |           | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|                                         |  |                                              |   |                     |   |                                       |  |                                            |  |                                            |  |                      |  |        |  |           |  |        |  |           |  |            |  |           |  |            |  |            | 
|Total Financial Liabilities              |  | 8.25                                         | % | 15.81               | % | 9,282,806                             |  |                                           |  | 18,650,000                                 |  |                     |  |       |  | 6,266,944 |  |       |  | 6,662,834 |  | 34,095,343 |  | 8,949,164 |  | 62,028,149 |  | 21,878,942 | 

As the Company
has no significant interest-bearing assets, the Companys income and operating
cash flows are substantially independent of changes in market interest rates.

- 117 -

---



The Companys
interest rate risk mainly arises from interest bearing borrowings. At December
31, 2007 if interest rates had been 100 basis points higher/lower with all
other variables held constant, loss for the year would have been $159,980
higher or lower.

Following the
recognition of the debt facility loan as current in 2007 the weighted average
effective interest rate represents coupon rate. 2006 comprises borrowing costs,
discounts and coupon rate.

c) Foreign Currency Risk

The Company is
exposed to foreign currency risk on sales and purchases that are denominated in
a currency other than United States dollars. The currency giving risk to this
risk is primarily New Zealand dollars. The Company has not entered into any
forward exchange contracts as at December 31, 2007 and is currently fully
exposed to foreign exchange risk.

d) Commodity Price Risk

The Company is
exposed to oil price risk on sales as part of its normal operations. The
Company has entered into forward arrangements to manage this risk. A
fluctuation in oil prices at 10% from closing would result in an unrealized
derivative gain/loss of $2,794,504.

e) Liquidity Risk

The Company
manages liquidity by monitoring present cash flows and ensuring that adequate
cash reserves, financing facilities and equity raisings are undertaken to
ensure that the Company can meet its obligations.

The table
below analyses the Companys financial liabilities and net-settled derivative
financial liabilities into relevant maturity groupings based on the remaining
period at the balance sheet date to the contractual maturity date. The amounts
disclosed in the table are the contractual undiscounted cash flows.

|                         |  |                  |            |                       |  |                       |  |              |           |      |  |           |  |      |            |      |  |           |  |  |   |  |  |         | 
|------------------------ |  | ---------------- | ---------- | --------------------- |  | --------------------- |  | ------------ | --------- | ---- |  | --------- |  | ---- | ---------- | ---- |  | --------- |  |  | - |  |  | ------- | 
|                         |  | Less than 1 year |            | Between 1 and 2 years |  | Between 2 and 5 years |  | Over 5 years |          
|                         |  | 2007             |            | 2006                  |  | 2007                  |  | 2006         |           | 2007 |  | 2006      |  | 2007 |            | 2006 | 
|                        
|                         |  | $                |            | $                     |  | $                     |  | $            |           | $    |  | $         |  | $    |            |      | 
|Preferred shares         |  |                  | 800,000    |                       |  |                      |  |              | 800,000   |      |  |          |  |      | 10,576,438 |      |  |          |  |  |  |  |  |        | 
|Loan                     |  |                  | 19,312,984 |                       |  | 5,558,281             |  |              |          |      |  | 7,010,174 |  |      |           |      |  | 5,629,964 |  |  |  |  |  |        | 
|Financial instruments    |  |                  | 4,280,102  |                       |  | 78,817                |  |              | 2,244,535 |      |  | 348,918   |  |      | 1,535,845  |      |  | 308,423   |  |  |  |  |  |        | 
|Trade and other payables |  |                  | 11,226,465 |                       |  | 3,839,736             |  |              |          |      |  |          |  |      |           |      |  |          |  |  |  |  |  |        | 
|Net cash in advance      |  |                  | 9,679,614  |                       |  |                      |  |              |          |      |  |          |  |      |           |      |  |          |  |  |  |  |  |        | 
|Prepaid gas agreement    |  |                  | 831,040    |                       |  | 1,047,108             |  |              | 1,686,774 |      |  | 1,629,940 |  |      | 835,049    |      |  | 598,434   |  |  |  |  |  | 102,286 | 
|                        
|                         |  |                  | 46,130,205 |                       |  | 10,523,941            |  |              | 4,731,309 |      |  | 8,989,032 |  |      | 12,947,332 |      |  | 6,536,821 |  |  |  |  |  | 102,286 | 

Financial
instruments, as derivatives, are classified in the balance sheet as current
liabilities at December 31, 2007. As above maturity analysis is based on the
contractual production profile, representing the expected maturity.

As a result of
several breaches in covenants the loan has been classified as current. The
Company is in negotiation with Investec to establish new repayment terms refer
Note 21.

f) Capital Risk Management

The Companys
objectives when managing capital are to safeguard the Companys ability to
continue as a going concern in order to provide the basis from which to grow
the Company.

In order to
maintain or adjust the capital structure the Company may effectively raise
funds through a mix of public offerings, private placements, farm-outs, and/or
the sale of assets. Such fund raising may be applied to both its exploration
and development programme and/or to reduce its debt.

Consistent
with others in the industry, the Company endeavours to fund exploration
activity from equity whilst managing a balance of debt and equity to finance
development assets.

- 118 -

---



The Companys
policies in respect of capital management are reviewed regularly by the Board
of Directors. There have been no material changes in the Companys management
of capital during the year.

g) Classification and fair values

The net fair
values of assets and liabilities of the Company approximate their carrying
amounts. The net fair value of other monetary financial assets and liabilities are
based on market prices. The Company has no off-balance sheet financial
instruments.

|                                                     |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|---------------------------------------------------- |  | ----------- | --------- | --------------------------- |  | ------------------------- |  | ---------------------------- | ------- | ------------------------------------------ |  | ---------- |  |  | ---------- | 
|2007                                                 |  | Trading
  $ |           | Loans and
  receivables
  $ |  | Available-for-
  sale
  $ |  | Other
  amortized
  cost
  $ |         | Total
  carrying
  amount/Fair
  value
  $ | 
|Assets                                               |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Current                                              |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Cash and cash equivalents
  (Note 6)                 |  |             |          |                             |  | 9,019,812                 |  |                              |        |                                            |  |           |  |  | 9,019,812  | 
|Accounts receivable (Note
  10)                      |  |             |          |                             |  | 5,689,279                 |  |                              |        |                                            |  |           |  |  | 5,689,279  | 
|Restricted cash (Note 6)                             |  |             |          |                             |  | 3,000,000                 |  |                              |        |                                            |  |           |  |  | 3,000,000  | 
|Prepaid expenses and deposits                        |  |             |          |                             |  | 805,527                   |  |                              |        |                                            |  |           |  |  | 805,527    | 
|                                                     |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Total Current Assets                                 |  |             |          |                             |  | 18,514,618                |  |                              |        |                                            |  |           |  |  | 18,514,618 | 
|                                                     |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Non-current                                          |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Investments (Note 13)                                |  |             |          |                             |  |                          |  |                              | 100,822 |                                            |  |           |  |  | 100,822    | 
|                                                     |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Total Assets                                         |  |             |          |                             |  | 18,514,618                |  |                              | 100,822 |                                            |  |           |  |  | 18,615,440 | 
|                                                     |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Liabilities                                          |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Current                                              |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Accounts payable and
  accrued liabilities (Note 10) |  |             |          |                             |  |                          |  |                              |        |                                            |  | 11,226,465 |  |  | 11,226,465 | 
|Net Cash in Advance (Note
  11)                      |  |             |          |                             |  |                          |  |                              |        |                                            |  | 9,679,614  |  |  | 9,679,614  | 
|Financial instruments (Note
  22)                    |  |             | 7,753,311 |                             |  |                          |  |                              |        |                                            |  |           |  |  | 7,753,311  | 
|Asset retirement obligation
  (Note 9)               |  |             |          |                             |  |                          |  |                              |        |                                            |  | 845,422    |  |  | 845,422    | 
|Current debt (Note 21)                               |  |             |          |                             |  |                          |  |                              |        |                                            |  | 18,650,000 |  |  | 18,650,000 | 
|Prepaid gas revenue (Note
  20)                      |  |             |          |                             |  |                          |  |                              |        |                                            |  | 831,040    |  |  | 831,040    | 
|                                                     |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Total Current Liabilities                            |  |             | 7,753,311 |                             |  |                          |  |                              |        |                                            |  | 41,232,541 |  |  | 48,985,852 | 
|                                                     |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Non-current                                          |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Prepaid gas revenue (Note
  20)                      |  |             |          |                             |  |                          |  |                              |        |                                            |  | 2,521,823  |  |  | 2,521,823  | 
|Asset retirement
  obligations (Note 9)              |  |             |          |                             |  |                          |  |                              |        |                                            |  | 1,237,668  |  |  | 1,237,668  | 
|Long term debt (Note 21)                             |  |             |          |                             |  |                          |  |                              |        |                                            |  | 9,282,806  |  |  | 9,282,806  | 
|                                                     |  |             |           |                             |  |                           |  |                              |         |                                            |  |            |  |  |            | 
|Total Liabilities                                    |  |             | 7,753,311 |                             |  |                          |  |                              |        |                                            |  | 54,274,838 |  |  | 62,028,149 | 

- 119 -

---



|                                                    |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|--------------------------------------------------- |  | -------- | ------- | --------------------- |  | ------------------- |  | ------------------- | ------- | -------------------------------------- |  | ---------- |  |  | ---------- | 
|2006                                                |  | Trading$ |         | Loans andreceivables$ |  | Available-for-sale$ |  | Otheramortizedcost$ |         | Total
 carrying
 amount/Fair
 value
 $ | 
|                                                    |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Assets                                              |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Current                                             |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Cash and cash equivalents (Note 6)                  |  |          |        |                       |  | 7,144,943           |  |                     |        |                                        |  |           |  |  | 7,144,943  | 
|Accounts receivable (Note 10)                       |  |          |        |                       |  | 1,418,071           |  |                     |        |                                        |  |           |  |  | 1,418,071  | 
|Financial instruments (Note 22)                     |  |          | 210,416 |                       |  |                    |  |                     |        |                                        |  |           |  |  | 210,416    | 
|Prepaid expenses and deposits                       |  |          |        |                       |  | 500,572             |  |                     |        |                                        |  |           |  |  | 500,572    | 
|                                                    |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Total Current Assets                                |  |          | 210,416 |                       |  | 9,063,586           |  |                     |        |                                        |  |           |  |  | 9,274,002  | 
|                                                    |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Non-current                                         |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Investments (Note 13)                               |  |          |        |                       |  |                    |  |                     | 136,528 |                                        |  |           |  |  | 136,528    | 
|Restricted cash (Note 6)                            |  |          |        |                       |  | 3,000,000           |  |                     |        |                                        |  |           |  |  | 3,000,000  | 
|                                                    |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Total Assets                                        |  |          | 210,416 |                       |  | 12,063,586          |  |                     | 136,528 |                                        |  |           |  |  | 12,410,530 | 
|                                                    |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Liabilities                                         |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Current                                             |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Accounts payable and accrued liabilities
 (Note 10) |  |          |        |                       |  |                    |  |                     |        |                                        |  | 3,839,736  |  |  | 3,839,736  | 
|Financial instruments (Note 22)                     |  |          | 75,781  |                       |  |                    |  |                     |        |                                        |  |           |  |  | 75,781     | 
|Current debt (Note 21)                              |  |          |        |                       |  |                    |  |                     |        |                                        |  | 6,266,944  |  |  | 6,266,944  | 
|Prepaid gas revenue (Note 20)                       |  |          |        |                       |  |                    |  |                     |        |                                        |  | 1,047,108  |  |  | 1,047,108  | 
|                                                    |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Total Current Liabilities                           |  |          | 75,781  |                       |  |                    |  |                     |        |                                        |  | 11,153,788 |  |  | 11,229,569 | 
|                                                    |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Non-current                                         |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Financial instruments (Note 22)                     |  |          | 590,320 |                       |  |                    |  |                     |        |                                        |  |           |  |  | 590,320    | 
|Prepaid gas revenue (Note 20)                       |  |          |        |                       |  |                    |  |                     |        |                                        |  | 2,330,660  |  |  | 2,330,660  | 
|Asset retirement obligation (Note 9)                |  |          |        |                       |  |                    |  |                     |        |                                        |  | 1,065,559  |  |  | 1,065,559  | 
|Long term debt (Note 21)                            |  |          |        |                       |  |                    |  |                     |        |                                        |  | 6,662,834  |  |  | 6,662,834  | 
|                                                    |  |          |         |                       |  |                     |  |                     |         |                                        |  |            |  |  |            | 
|Total Liabilities                                   |  |          | 666,101 |                       |  |                    |  |                     |        |                                        |  | 21,212,841 |  |  | 21,878,942 | 

The
carrying value of the preferred shares was determined September 20, 2007, and
movements in fair value subsequent are not expected to be material. As the
prepaid gas revenue could be fully satisfied in the current year, carrying
value was deemed to be not materially different from fair value.

|                              | 
|----------------------------- | 
|NOTE 23 - SEGMENT INFORMATION

The
Company operates in one industry: petroleum, exploration and production. It
operates in several geographical regions, therefore information on country
segments is provided as follows.

- 120 -

---



|                                    |  |        |            |             |  |             |   |                   |   |                |  |           |   |  |             |  
|----------------------------------- |  | ------ | ---------- | ----------- |  | ----------- | - | ----------------- | - | -------------- |  | --------- | - |  | ----------- | -
|2007                                |  | CANADA |            | NEW ZEALAND |  | AUSTRALIA   |   | PAPUA NEW
 GUINEA |   | TOTAL
 COMPANY | 
|                                    |  |        |            |             |  |             |   |                   |   |                | 
|                                    |  | $      |            | $           |  | $           |   | $                 |   | $              | 
|Production income:                  |  |        |            |             |  |             |   |                   |   |                |  |           |   |  |             |  
|Oil and gas sales                   |  |        |           |             |  | 7,342,678   |   |                   |  |                |  |          |   |  | 7,342,678   |  
|Net realised derivative loss        |  |        |           |             |  | (1,030,926  | ) |                   |  |                |  |          |   |  | (1,030,926  | )
|Royalties                           |  |        |           |             |  | (388,777    | ) |                   |  |                |  |          |   |  | (388,777    | )
|                                    |  |        |            |             |  |             |   |                   |   |                |  |           |   |  |             |  
|Net Revenue                         |  |        |           |             |  | 5,922,975   |   |                   |  |                |  |          |   |  | 5,922,975   |  
|Interest income                     |  |        |           |             |  | 268,272     |   |                   |  |                |  | 1,287     |   |  | 269,559     |  
|Joint operation recoveries          |  |        |           |             |  | 1,631,676   |   |                   |  |                |  |          |   |  | 1,631,676   |  
|Other income                        |  |        |           |             |  | 104,822     |   |                   |  |                |  |          |   |  | 104,822     |  
|Foreign exchange loss               |  |        | (115,987   | )           |  | (415,994    | ) |                   |  |                |  | (49,247   | ) |  | (581,228    | )
|Unrealised derivative loss          |  |        |           |             |  | (7,297,626  | ) |                   |  |                |  |          |   |  | (7,297,626  | )
|Administrative expenses             |  |        | (1,130,915 | )           |  | (6,089,640  | ) |                   |  |                |  | (23,638   | ) |  | (7,244,193  | )
|Interest expense                    |  |        | (288,243   | )           |  | (3,843,657  | ) |                   |  |                |  |          |   |  | (4,131,900  | )
|Amortization                        |  |        |           |             |  | (129,555    | ) |                   |  |                |  |          |   |  | (129,555    | )
|Production costs                    |  |        |           |             |  | (2,968,000  | ) |                   |  |                |  |          |   |  | (2,968,000  | )
|Depletion                           |  |        |           |             |  | (4,378,105  | ) |                   |  |                |  |          |   |  | (4,378,105  | )
|Oil and gas exploration expenditure |  |        |           |             |  | (2,483,292  | ) |                   |  |                |  | (745,382  | ) |  | (3,228,674  | )
|                                    |  |        |            |             |  |             |   |                   |   |                |  |           |   |  |             |  
|Net loss                            |  |        | (1,535,145 | )           |  | (19,678,124 | ) |                   |  |                |  | (816,980  | ) |  | (22,030,249 | )
|                                    |  |        |            |             |  |             |   |                   |   |                |  |           |   |  |             |  
|Goodwill                            |  |        |           |             |  | 2,018,969   |   |                   |  |                |  |          |   |  | 2,018,969   |  
|Property and equipment              |  |        |           |             |  | 41,095,251  |   |                   |  |                |  | 513,914   |   |  | 41,609,165  |  
|Current assets                      |  |        | 4,892      |             |  | 18,372,708  |   |                   |  |                |  | 625,504   |   |  | 19,003,104  |  
|Non-current assets                  |  |        |           |             |  | 100,822     |   |                   |  |                |  |          |   |  | 100,822     |  
|                                    |  |        |            |             |  |             |   |                   |   |                |  |           |   |  |             |  
|Total assets                        |  |        | 4,892      |             |  | 61,587,750  |   |                   |  |                |  | 1,139,418 |   |  | 62,732,060  |  
|                                    |  |        |            |             |  |             |   |                   |   |                |  |           |   |  |             |  
|Total liabilities                   |  |        | 19,672,639 |             |  | 45,609,425  |   |                   |  |                |  | 740,099   |   |  | 66,022,162  |  
|                                    |  |        |            |             |  |             |   |                   |   |                |  |           |   |  |             |  
|Specific Items:                     |  |        |            |             |  |             |   |                   |   |                |  |           |   |  |             |  
|Purchase of property and equipment  |  |        |           |             |  | 34,414      |   |                   |  |                |  |          |   |  | 34,414      |  
|Acquisition costs                   |  |        |           |             |  | 7,663,330   |   |                   |  |                |  |          |   |  | 7,663,330   |  
|Capital expenditure                 |  |        |           |             |  | 17,067,690  |   |                   |  |                |  | 497,853   |   |  | 17,565,542  |  

- 121 -

---



|                                      |  |        |            |             |  |            |   |                    |          |                 |  |            |   |  |             |  
|------------------------------------- |  | ------ | ---------- | ----------- |  | ---------- | - | ------------------ | -------- | --------------- |  | ---------- | - |  | ----------- | -
|2006                                  |  | CANADA |            | NEW ZEALAND |  | AUSTRALIA  |   | PAPUA NEW
  GUINEA |          | TOTAL
  COMPANY | 
|                                      |  |        |            |             |  |            |   |                    |          |                 | 
|                                      |  | $      |            | $           |  | $          |   | $                  |          | $               | 
|Production
  income:                  |  |        |            |             |  |            |   |                    |          |                 |  |            |   |  |             |  
|Oil and gas sales                     |  |        |           |             |  | 911,931    |   |                    |         |                 |  |           |   |  | 911,931     |  
|Royalties                             |  |        |           |             |  | (40,899    | ) |                    |         |                 |  |           |   |  | (40,899     | )
|                                      |  |        |            |             |  |            |   |                    |          |                 |  |            |   |  |             |  
|Net Revenue                           |  |        |           |             |  | 871,032    |   |                    |         |                 |  |           |   |  | 871,032     |  
|Interest income                       |  |        | 980        |             |  | 436,299    |   |                    |         |                 |  |           |   |  | 437,279     |  
|Joint operation recoveries            |  |        |           |             |  | 1,043,666  |   |                    |         |                 |  |           |   |  | 1,043,666   |  
|Foreign exchange loss                 |  |        | (2,071     | )           |  | (1,822,823 | ) |                    | (81,320  | )               |  | (67,436    | ) |  | (1,973,650  | )
|Unrealised derivative loss            |  |        |           |             |  | (455,685   | ) |                    |         |                 |  |           |   |  | (455,685    | )
|Administrative expenses               |  |        | (1,376,233 | )           |  | (1,871,392 | ) |                    | (59,000  | )               |  | (839,242   | ) |  | (4,145,867  | )
|Interest and accretion expense        |  |        |           |             |  | (72,229    | ) |                    |         |                 |  | (188       | ) |  | (72,417     | )
|Amortization                          |  |        |           |             |  | (92,874    | ) |                    |         |                 |  | (13,677    | ) |  | (106,551    | )
|Production costs                      |  |        |           |             |  | (485,447   | ) |                    |         |                 |  |           |   |  | (485,447    | )
|Depletion                             |  |        |           |             |  | (347,206   | ) |                    |         |                 |  |           |   |  | (347,206    | )
|Oil and gas exploration
  expenditure |  |        |           |             |  | (5,232,887 | ) |                    |         |                 |  | (2,939,094 | ) |  | (8,171,981  | )
|                                      |  |        |            |             |  |            |   |                    |          |                 |  |            |   |  |             |  
|Net loss                              |  |        | (1,377,324 | )           |  | (8,029,546 | ) |                    | (140,320 | )               |  | (3,859,637 | ) |  | (13,406,827 | )
|                                      |  |        |            |             |  |            |   |                    |          |                 |  |            |   |  |             |  
|Goodwill                              |  |        |           |             |  | 2,018,969  |   |                    |         |                 |  |           |   |  | 2,018,969   |  
|Property and equipment                |  |        |           |             |  | 20,853,539 |   |                    |         |                 |  |           |   |  | 20,853,539  |  
|Current assets                        |  |        | 1,602      |             |  | 9,552,132  |   |                    |         |                 |  | 195,548    |   |  | 9,749,282   |  
|Non-current assets                    |  |        |           |             |  | 3,136,528  |   |                    |         |                 |  | 235,353    |   |  | 3,371,881   |  
|                                      |  |        |            |             |  |            |   |                    |          |                 |  |            |   |  |             |  
|Total assets                          |  |        | 1,602      |             |  | 35,561,168 |   |                    |         |                 |  | 430,901    |   |  | 35,993,671  |  
|                                      |  |        |            |             |  |            |   |                    |          |                 |  |            |   |  |             |  
|Total liabilities                     |  |        | 270,186    |             |  | 23,273,419 |   |                    | 848      |                 |  | 353,458    |   |  | 23,897,911  |  
|                                      |  |        |            |             |  |            |   |                    |          |                 |  |            |   |  |             |  
|Specific
  Items:                     |  |        |            |             |  |            |   |                    |          |                 |  |            |   |  |             |  
|Purchase of property and
  equipment  |  |        |           |             |  | 259,902    |   |                    |         |                 |  |           |   |  | 259,902     |  
|Capital expenditure                   |  |        |           |             |  | 19,565,262 |   |                    |         |                 |  |           |   |  | 19,565,262  |  

- 122 -

---



|                                     |  |        |            |             |  |            |   |                    |         |                 |  |          |   |  |            |  
|------------------------------------ |  | ------ | ---------- | ----------- |  | ---------- | - | ------------------ | ------- | --------------- |  | -------- | - |  | ---------- | -
|2005                                 |  | CANADA |            | NEW ZEALAND |  | AUSTRALIA  |   | PAPUA NEW
  GUINEA |         | TOTAL
  COMPANY | 
|                                     |  |        |            |             |  |            |   |                    |         |                 | 
|                                     |  | $      |            | $           |  | $          |   | $                  |         | $               | 
|Production
  income:                 |  |        |            |             |  |            |   |                    |         |                 |  |          |   |  |            |  
|Oil and gas sales                    |  |        |           |             |  | 1,779,454  |   |                    |        |                 |  |         |   |  | 1,779,454  |  
|Royalties                            |  |        |           |             |  | (74,930    | ) |                    |        |                 |  |         |   |  | (74,930    | )
|                                     |  |        |            |             |  |            |   |                    |         |                 |  |          |   |  |            |  
|Net Revenue                          |  |        |           |             |  | 1,704,524  |   |                    |        |                 |  |         |   |  | 1,704,524  |  
|Interest income                      |  |        | 6,113      |             |  | 450,077    |   |                    |        |                 |  | 4,221    |   |  | 460,411    |  
|Joint operation recoveries           |  |        |           |             |  | 1,093,417  |   |                    |        |                 |  |         |   |  | 1,093,417  |  
|Other income                         |  |        |           |             |  | 83,612     |   |                    |        |                 |  |         |   |  | 83,612     |  
|Foreign exchange loss                |  |        | (10,794    | )           |  | (641,463   | ) |                    | (69,527 | )               |  | (69,450  | ) |  | (791,234   | )
|Administrative expenses              |  |        | (1,716,156 | )           |  | (1,748,721 | ) |                    | (12,199 | )               |  | (158,267 | ) |  | (3,635,343 | )
|Interest and accretion expense       |  |        |           |             |  | (18,359    | ) |                    |        |                 |  |         |   |  | (18,359    | )
|Amortization                         |  |        |           |             |  | (49,056    | ) |                    |        |                 |  | (1,978   | ) |  | (51,034    | )
|Production costs                     |  |        |           |             |  | (848,174   | ) |                    |        |                 |  |         |   |  | (848,174   | )
|Depletion                            |  |        |           |             |  | (61,979    | ) |                    |        |                 |  |         |   |  | (61,979    | )
|Oil and gas exploration expenditure  |  |        |           |             |  | (3,610,036 | ) |                    | (12,745 | )               |  | (80,993  | ) |  | (3,703,774 | )
|                                     |  |        |            |             |  |            |   |                    |         |                 |  |          |   |  |            |  
|Net loss                             |  |        | (1,720,837 | )           |  | (3,646,158 | ) |                    | (94,471 | )               |  | (306,467 | ) |  | (5,767,933 | )
|                                     |  |        |            |             |  |            |   |                    |         |                 |  |          |   |  |            |  
|Property and equipment               |  |        |           |             |  | 3,481,259  |   |                    |        |                 |  | 32,276   |   |  | 3,513,535  |  
|Current assets                       |  |        | 198,900    |             |  | 16,523,225 |   |                    | 2,041   |                 |  | 54,592   |   |  | 16,778,758 |  
|Non-current assets                   |  |        |           |             |  | 83,612     |   |                    |        |                 |  |         |   |  | 83,612     |  
|                                     |  |        |            |             |  |            |   |                    |         |                 |  |          |   |  |            |  
|Total assets                         |  |        | 198,900    |             |  | 20,088,096 |   |                    | 2,041   |                 |  | 86,868   |   |  | 20,375,905 |  
|                                     |  |        |            |             |  |            |   |                    |         |                 |  |          |   |  |            |  
|Total liabilities                    |  |        | 198,446    |             |  | 3,323,162  |   |                    | 8,786   |                 |  | 4,083    |   |  | 3,534,477  |  
|                                     |  |        |            |             |  |            |   |                    |         |                 |  |          |   |  |            |  
|Specific
  Items:                    |  |        |            |             |  |            |   |                    |         |                 |  |          |   |  |            |  
|Purchase of property and
  equipment |  |        |           |             |  | 397,947    |   |                    |        |                 |  | 32,276   |   |  | 430,223    |  
|Capital expenditure                  |  |        |           |             |  | 1,100,177  |   |                    |        |                 |  |         |   |  | 1,100,177  |  

NOTE 24  SALES TO SIGNIFICANT
CUSTOMERS

The
Company made oil sales of $7,246,058 (2006: $875,247, 2005: $1,769,421) to
Swift Energy (NZ) Limited during the year.

During
2007 the Company made $4,710 gas deliveries (2006: Nil) to Vector Gas Ltd under
the prepaid gas agreements (refer to Note 20).

NOTE 25 - SUBSEQUENT EVENTS

The
following events have occurred since December 31, 2007:

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) | Peter
  Hazledine has been appointed to the board of directors from January 1, 2008,
  and Ronald Bertuzzi resigned from the board of directors from June 6, 2008;                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (b) | Kanuka
  Energy Limited and Arrowhead Energy Limited which are both subsidiaries of
  Austral Pacific Energy (NZ) Limited were amalgamated with Totara Energy
  Limited with effect from February 1, 2008. Totara Energy Limited is the
  surviving company;                                                                                                                                                                                                
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (c) | On
  February 28, 2008, a private placement of 12,500,000 shares with 12,500,000
  warrants attached was completed at a unit price of $1.20 per unit. A unit
  consists of one common share and one share purchase warrant. The warrants are
  convertible one-for-one into common stock for twelve months from closing at
  exercise price of $2.25. At the balance sheet date $9,679,614 had been
  received and recorded as net cash received in advance;
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (d) | Sale
  of the Companys interests in PNG Stanley (PRL 4) and PRL 5 assets for US$3.5
  million - to a                                                                                                                                                                                                                                                                                                                                                       

- 123 -

---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |     | subsidiary
  of Horizon Oil Limited (ASX: HZN), which completed on May 30, 2008, although
  legal transfer of the licences remains subject to receipt of governmental
  approval;                                                                                                                                                                                                                                                                           
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (e) | Sale
  of the Companys interests in Douglas (PPL 235) and in PPL 261 to a
  subsidiary of Rift Oil plc (AIM: RIFT) for $5 million, initial completion of
  such transaction occurring on May 29, 2008 ($2 million), with further
  payments due within 3 months ($1.5 million), and within 12 months ($1.5
  million), or earlier upon receipt of governmental approval of the legal
  transfers of the licences;                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (f) | Farm-out
  of an 80% interest in PEP 38524 to Australian Worldwide Exploration Ltd.
  (ASX: AWE) with effect from May 20, 2008. In return AWE has undertaken to
  fully fund acquisition of some 350km of 2D seismic within the permit. The
  farm-out is subject to approval of a revised work programme by the Ministry
  of Economic Development;                                                                                                        
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (g) | The
  Company has entered into an agreement to purchase an additional 5.1% of the
  Cardiff permit to bring the total share to 50%. The payment of NZ$400,941
  consists of the purchase price of $119,000 and the Companys share of
  outstanding cash calls at time of purchase of NZ$281,941. This acquisition is
  subject to the completion of a third party transaction related to this
  permit;                                                    
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (h) | The
  Company has reached an agreement in principle with the holders of the
  preferred shares for the conversion of the preferred shares into convertible
  debentures, with the expected effective date from June 30, 2008. The
  convertible debentures would have similar commercial terms, but would not be
  entitled to any voting rights. The conversion will be subject to a number of
  conditions precedent, including the approval of the TSX-V;
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | (i) | The
  close-out of the Companys forward oil contracts (including placement of a
  series of $90 put options) funded by Investec at a cost of $17.9 million. The
  Company will recognize a loss on these forward oil contracts in 2008 of $9.7
  in addition to the unrealized losses of $7.3 million previously recognised in
  2007, resulting in a total loss of $17 million.                                                                           

NOTE 26 - DIFFERENCES BETWEEN
CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The
Companys consolidated financial statements have been prepared in accordance
with Canadian GAAP which differs in some respects from United States GAAP. Any
differences in accounting principles as they pertain to the accompanying
consolidated financial statements were insignificant except as described below.

- 124 -

---



Reconciliation of Net Loss and Loss per share
under Canadian GAAP to U.S. GAAP

|                                                                           |  |                                   |             |                                   |  |                                   |   |  |            |  
|-------------------------------------------------------------------------- |  | --------------------------------- | ----------- | --------------------------------- |  | --------------------------------- | - |  | ---------- | -
|                                                                           |  | Year
  Ended
  December 31
  2007 |             | Year
  Ended
  December 31
  2006 |  | Year
  Ended
  December 31
  2005 |  
|                                                                           |  |                                   |             |                                   |  |                                   |   |  |            |  
|Net loss for the year under
  Canadian GAAP                                |  |                                   | (22,030,249 | )                                 |  | (13,406,828                       | ) |  | (5,767,933 | )
|                                                                           |  |                                   |             |                                   |  |                                   |   |  |            |  
|Add back Canadian GAAP compensation cost (c)                               |  |                                   | 531,541     |                                   |  | 533,935                           |   |  | 673,711    |  
|Stock option compensation cost (c)                                         |  |                                   |             |                                   |  |                                   |   |  |            |  
|Employees                                                                  |  |                                   | (559,626    | )                                 |  | (348,559                          | ) |  | (3,599     | )
|Contractors                                                                |  |                                   |            |                                   |  |                                  |   |  | (604,338   | )
|Interest on prepaid gas agreement                                          |  |                                   |            |                                   |  | 47,291                            |   |  |           |  
|Net adjustment to accretion of preferred shares (b)                        |  |                                   | 40,482      |                                   |  |                                  |   |  |           |  
|Classification of interest expense on preferred shares as a dividend
  (b) |  |                                   | 222,222     |                                   |  |                                  |   |  |           |  
|Recognition of tax benefit from operating losses (d)                       |  |                                   | 2,220,006   |                                   |  |                                  |   |  |           |  
|NZ tradable warrants realised expense (a)                                  |  |                                   |            |                                   |  |                                  |   |  | 99,325     |  
|                                                                           |  |                                   |             |                                   |  |                                   |   |  |            |  
|Net loss for the year under US GAAP                                        |  |                                   | (19,575,624 | )                                 |  | (13,174,161                       | ) |  | (5,602,834 | )
|Net loss attributable to common shareholders                               |  |                                   | (19,838,328 | )                                 |  | (13,174,161                       | ) |  | (5,602,834 | )
|Weighted average number of shares under US GAAP                            |  |                                   |             |                                   |  |                                   |   |  |            |  
|Basic                                                                      |  |                                   | 29,877,550  |                                   |  | 23,327,042                        |   |  | 19,489,336 |  
|Diluted                                                                    |  |                                   | 29,877,550  |                                   |  | 23,327,042                        |   |  | 19,489,336 |  
|                                                                           |  |                                   |             |                                   |  |                                   |   |  |            |  
|Loss per share under US GAAP                                               |  |                                   |             |                                   |  |                                   |   |  |            |  
|Basic                                                                      |  |                                   | ($0.66      | )                                 |  | ($0.56                            | ) |  | ($0.29     | )
|Diluted                                                                    |  |                                   | ($0.66      | )                                 |  | ($0.56                            | ) |  | ($0.29     | )

Accumulated deficit under Canadian GAAP and
U.S. GAAP

|                                         |  |                          |   |                          |   |                          |   |             |   |                 |   |             |  
|---------------------------------------- |  | ------------------------ | - | ------------------------ | - | ------------------------ | - | ----------- | - | --------------- | - | ----------- | -
|                                         |  | As at
  December 31 2007 |   | As at
  December 31 2006 |   | As at
  December 31 2005 |  
|                                         |  |                          |   |                          |   |                          |   |             |   |                 |   |             |  
|                                         |  | Canadian
  GAAP          |   | US
  GAAP                |   | Canadian
  GAAP          |   | US
  GAAP   |   | Canadian
  GAAP |   | US
  GAAP   |  
|                                         |  |                          |   |                          |   |                          |   |             |   |                 |   |             |  
|Accumulated
  deficit, beginning of year |  | (41,088,663              | ) | (47,322,577              | ) | (27,681,835              | ) | (34,148,416 | ) | (21,913,902     | ) | (28,545,582 | )
|                                         |  |                          |   |                          |   |                          |   |             |   |                 |   |             |  
|Net loss                                 |  | (22,030,249              | ) | (19,575,624              | ) | (13,406,828              | ) | (13,174,161 | ) | (5,767,933      | ) | (5,602,834  | )
|Dividends on preference
  shares (b)     |  |                         |   | (222,222                 | ) |                         |   |            |   |                |   |            |  
|                                         |  |                          |   |                          |   |                          |   |             |   |                 |   |             |  
|                                         |  |                          |   |                          |   |                          |   |             |   |                 |   |             |  
|Accumulated
  deficit, end of year       |  | (63,118,912              | ) | (67,120,423              | ) | (41,088,663              | ) | (47,322,577 | ) | (27,681,835     | ) | (34,148,416 | )

- 125 -

---



Equity reconciliation from Canadian GAAP to
U.S. GAAP

|                                                             |  |                             |            |                             |  |                             |  |  |            |  
|------------------------------------------------------------ |  | --------------------------- | ---------- | --------------------------- |  | --------------------------- |  |  | ---------- | -
|                                                             |  | As at
  December 31,
  2007 |            | As at
  December 31,
  2006 |  | As at
  December 31,
  2005 | 
|                                                             |  |                             |            |                             |  |                             |  |  |            |  
|Total Stockholders (Deficit)/Equity under Canadian
  GAAP   |  |                             | (3,290,102 | )                           |  | 12,095,760                  |  |  | 16,841,428 |  
|                                                             |  |                             |            |                             |  |                             |  |  |            |  
|Reclassification of equity component of preferred shares
(b) |  |                             | (480,838   | )                           |  |                            |  |  |           |  
|Net adjustment to accretion of preferred shares (b)          |  |                             | 40,482     |                             |  |                             |  |  |            |  
|Recognition of tax benefit from operating losses (d)         |  |                             | 2,220,006  |                             |  |                             |  |  |            |  
|Interest on prepaid gas revenue                              |  |                             |           |                             |  |                            |  |  | (47,291    | )
|                                                             |  |                             |            |                             |  |                             |  |  |            |  
|                                                             |  |                             |            |                             |  |                             |  |  |            |  
|Total Stockholders (Deficit)/Equity under US
GAAP           |  |                             | (1,510,452 | )                           |  | 12,095,760                  |  |  | 16,794,137 |  
|                                                             |  |                             |            |                             |  |                             |  |  |            |  

- 126 -

---



Balance sheet under Canadian GAAP and U.S.
GAAP

|                                                               |  |                                           |   |                         |   |                         |   |                |   |             |  
|-------------------------------------------------------------- |  | ----------------------------------------- | - | ----------------------- | - | ----------------------- | - | -------------- | - | ----------- | -
|                                                               |  |                                           |   | As at
 December 31 2007 |   | As at
 December 31 2006 |  
|                                                               |  |                                           |   | Canadian
 GAAP          |   | US
 GAAP                |   | Canadian
 GAAP |   | US
 GAAP    |  
|                                                               |  |                                          
|Assets                                                         |  |                                           |   |                         |   |                         |   |                |  
|Current                                                        |  |                                           |   |                         |   |                         |   |                |  
|                                                               |  | Cash and cash equivalents                 |   | 9,019,812               |   | 9,019,812               |   | 7,144,943      |   | 7,144,943   |  
|                                                               |  | Accounts receivable                       |   | 5,689,279               |   | 5,689,279               |   | 1,418,071      |   | 1,418,071   |  
|                                                               |  | Restricted cash                           |   | 3,000,000               |   | 3,000,000               |   |               |   |            |  
|                                                               |  | Financial instruments                     |   |                        |   |                        |   | 210,416        |   | 210,416     |  
|                                                               |  | Inventory                                 |   | 488,486                 |   | 488,486                 |   | 475,280        |   | 475,280     |  
|                                                               |  | Prepaid expenses and
 deposits            |   | 805,527                 |   | 805,527                 |   | 500,572        |   | 500,572     |  
|                                                               |  |                                           |   | 19,003,104              |   | 19,003,104              |   | 9,749,282      |   | 9,749,282   |  
|                                                               |  | Investments                               |   | 100,822                 |   | 100,822                 |   | 136,528        |   | 136,528     |  
|                                                               |  | Restricted cash                           |   |                        |   |                        |   | 3,000,000      |   | 3,000,000   |  
|                                                               |  | Held for sale asset                       |   |                        |   |                        |   | 235,353        |   | 235,353     |  
|                                                               |  | Property and equipment                    |   | 41,609,165              |   | 41,609,165              |   | 20,853,539     |   | 20,853,539  |  
|                                                               |  | Goodwill                                  |   | 2,018,969               |   | 2,018,969               |   | 2,018,969      |   | 2,018,969   |  
|                                                               |  |                                           |   |                         |   |                         |   |                |   |             |  
|Total
 Assets                                                  |  | 62,732,060                                |   | 62,732,060              |   | 35,993,671              |   | 35,993,671     |  
|                                                               |  |                                          
|Liabilities                                                    |  |                                           |   |                         |   |                         |   |                |  
|Current                                                        |  |                                           |   |                         |   |                         |   |                |  
|                                                               |  | Current debt                              |   | 18,650,000              |   | 18,650,000              |   | 6,266,944      |   | 6,266,944   |  
|                                                               |  | Financial instruments                     |   | 7,753,311               |   | 7,753,311               |   | 75,781         |   | 75,781      |  
|                                                               |  | Accounts payable and
 accrued liabilities |   | 11,226,465              |   | 11,004,243              |   | 3,839,736      |   | 3,839,736   |  
|                                                               |  | Prepaid gas revenue                       |   | 831,040                 |   | 831,040                 |   | 1,047,108      |   | 1,047,108   |  
|                                                               |  | Asset retirement obligation               |   | 845,422                 |   | 845,422                 |   |               |   |            |  
|                                                               |  | Net cash in advance                       |   | 9,679,614               |   | 9,679,614               |   |               |   |            |  
|                                                               |  |                                           |   |                         |   |                         |   |                |   |             |  
|                                                               |  |                                           |   | 48,985,852              |   | 48,763,630              |   | 11,229,569     |   | 11,229,569  |  
|                                                               |  |                                           |   |                         |   |                         |   |                |   |             |  
|                                                               |  | Financial instruments                     |   |                        |   |                        |   | 590,320        |   | 590,320     |  
|                                                               |  | Deferred taxation provision               |   | 3,994,013               |   | 1,774,007               |   | 2,018,969      |   | 2,018,969   |  
|                                                               |  | Prepaid gas revenue                       |   | 2,521,823               |   | 2,521,823               |   | 2,330,660      |   | 2,330,660   |  
|                                                               |  | Asset retirement
 obligations             |   | 1,237,668               |   | 1,237,668               |   | 1,065,559      |   | 1,065,559   |  
|                                                               |  | Long term debt                            |   | 9,282,806               |   |                        |   | 6,662,834      |   | 6,662,834   |  
|                                                               |  |                                           |   |                         |   |                         |   |                |   |             |  
|Total
 Liabilities                                             |  | 66,022,162                                |   | 54,297,128              |   | 23,897,911              |   | 23,897,911     |  
|                                                               |  |                                           |   |                         |   |                         |   |                |   |             |  
|Preferred
 Shares (b)                                          |  |                                          |   | 9,945,384               |   |                        |   |               |  
|Stockholders
 Equity                                          |  |                                           |   |                         |   |                         |   |                |  
|                                                               |  | Paid in capital                           |   | 59,828,810              |   | 65,609,971              |   | 53,184,423     |   | 59,418,337  |  
|                                                               |  | Accumulated deficit                       |   | (63,118,912             | ) | (67,120,423             | ) | (41,088,663    | ) | (47,322,577 | )
|                                                               |  |                                           |   |                         |   |                         |   |                |   |             |  
|Total
 Stockholders (Deficit)/Equity                          |  | (3,290,102                                | ) | (1,510,452              | ) | 12,095,760              |   | 12,095,760     |  
|                                                               |  |                                           |   |                         |   |                         |   |                |  
|Total Liabilities / Preferred Shares and
 Stockholders Equity |  | 62,732,060                                |   | 62,732,060              |   | 35,993,671              |   | 35,993,671     |  

(a) Derivative Contracts

During the
year ended December 31, 2004 the Company issued two series of share purchase
warrants with exercise prices stated in New Zealand dollars. These warrants
require physical settlement in common shares of the Company. The Companys
functional currency is United States dollars. Typically, contracts indexed to a
companys own stock do not meet the definition of a derivative. However,
guidance provided by the Derivatives Implementation Group in Issue C8 states
the difference between the currency of the stated exercise price and the
functional currency gives rise to an embedded derivative. Furthermore, SFAS
133, Accounting for Derivative Instruments
and Hedging Activity, provides that when an embedded derivative
cannot be separated from its host contract, that contract must be treated as a

- 127 -

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | derivative
  in its entirety. Accordingly, warrants with a stated exercise price in New
  Zealand dollars are considered derivatives for the purposes of US GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | SFAS 133
  requires that derivatives be recognizsed as an asset or liability and
  measured at fair value over their life. Changes in fair value are charged to
  net earnings. Consequently during the year ended December 31, 2004 the change
  in fair value of those contracts settled resulted in a net realised loss of
  $2,670,591 for the purposes of US GAAP. Warrants outstanding at 31 December
  2004 were recognised at their fair value with the change in fair value
  charged to the net earnings. Consequently, at December 31, 2004, a liability
  of $960,620 was recognised in relation to the fair value of unexercised
  warrants.                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | During the
  year ended December 31, 2005 all outstanding warrants were settled. Upon
  exercise or lapse of the warrants in accordance with their terms, the change
  in fair value of $99,325 was recognised in the computation of net earnings.
  The balance of the liability of $861,295 was de-recognised and treated as
  paid-in capital.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(b) | Preferred Shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | On September
  20, 2007 the Company completed a private placement of 7,692,308 preferred
  shares at a price of $1.30 per share, for total financing proceeds of $10
  million (see note 17). Under SEC EIFT D-98 rule Classification and measurement of redeemable securities
  preferred securities that are redeemable for cash or other assets are
  classified outside of permanent equity if they are redeemable at a fixed or
  determinable price on a fixed or determinable date, at the option of the
  holder, or upon the occurrence of an event that is not solely within the
  control of the issuer. These instruments are reported outside of permanent
  equity and classified as temporary equity. Preferred shares are initially
  recorded at their fair value being the full financing proceeds less any
  issuance costs.                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Issuance
  costs totaling $302,376 are subsequently accreted as part of the effective
  yield of the instruments until they become immediately redeemable. For the
  year ended December 31, 2007 the Company recognised $27,000 of accretion
  expenses resulting in a net reduction to accretion of preferred shares
  amounting to $40,482 reported under Canadian GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | The amount of interest expense recognised under US GAAP is less than the amount reported under Canadian GAAP due to the following two factors:
a) all fees directly attributable to the share issuance have been allocated to the mezzanine equity component and b) all the proceeds received upon issuance have
been allocated to the mezzanine equity component. Therefore there has been no amortisation of the debt discount reported under Canadian GAAP.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Accrued
  dividends amounting to $222,222 are accounted and reported as a reduction of
  earnings available to common shareholders.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|(c) | Stock Based Compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Prior to
  fiscal 2006, the Company applied the intrinsic value method as prescribed in
  Accounting Principles Board Opinion No. 25, Accounting
  for Stock Issued to Employees(APB No. 25), and related
  interpretations, in accounting for stock options granted under the stock
  option plan. Under the intrinsic value method, no compensation cost is
  recognized if the exercise price of the Companys employee stock options was
  equal to or greater than the market price of the underlying stock on the date
  of the grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    | Effective
  January 1, 2006, the Company adopted FASB Statement No. 123(R), Share-Based Payment(Statement 123(R)).
  This statement replaces FASB Statement No. 123, Accounting for Stock-Based Compensation(Statement 123)
  and supersedes APB No. 25. Statement 123(R) requires that all stock-based
  compensation be recognized as an expense in the financial statements and that
  such cost be measured at the fair value of the award. This statement was
  adopted using the modified prospective method of application, which requires
  the Company to recognize compensation cost on a prospective basis. Therefore,
  prior years financial statements have not been restated. The Company
  recorded stock-based compensation expense for awards granted prior to, but
  not yet vested as of January 1, 2006, using the fair value amounts determined
  for pro forma disclosures under Statement 123. For stock-based awards granted
  after January 1, 2006, the Company recognizes compensation expense based on
  estimated grant date fair value using the Black-Scholes option-pricing model.

- 128 -

---



| |                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Share-based
  compensation cost that has been included in income from continuing operations
  amounted to $559,626 for the year ended December 31, 2007 (2006: $348,559).
  No income tax benefit has been recognized in the income statement for
  share-based compensation arrangements for the year ended December 31, 2007.                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                  
| | The
  following table illustrates the effect on net income for the year ended
  December 31, 2005 as if the Company had applied the fair value recognition
  provisions of Statement 123(R) to options granted under the Companys stock
  plans prior to adoption of Statement 123(R) on January 1, 2006.                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                  
| | No pro forma
  disclosure has been made for periods subsequent to January 1, 2006 as all
  stock-based compensation has been recognized in net income. For purposes of
  this pro forma disclosure, the value of the options is estimated using a
  Black-Scholes option-pricing model and amortized to expense over the options
  service periods with forfeitures recognized as they occurred.

| |                                                              |  |                     |           |  
| | ------------------------------------------------------------ |  | ------------------- | --------- | -
| |                                                              |  | December 31,
  2005 |          
| |                                                              |  |                     |          
| | Net income,
  as reported                                    |  |                     | 5,602,834 |  
| | Less pro
  forma stock compensation cost, net of tax benefit |  |                     | 673,711   |  
| |                                                              |  |                     |           |  
| | Pro forma
  net income                                       |  |                     | 4,929,123 |  
| |                                                              |  |                     |           |  
| |                                                              |  |                     |           |  
| | Pro forma
  Earnings Per share                               |  |                     | (0.25     | )

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(d) | Recognition of Tax Benefit Related to Tax Operating Losses                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | On December
  22, 2006, the Company recognised a deferred tax liability in the acquisition
  of Arrowhead Energy Ltd as the future taxable income from the reversal of
  this deferred tax liability is prohibited from offsetting pre-existing tax
  loss carry forwards of the existing New Zealand tax group as of the
  acquisition date. At December 31, 2007, the Company has recognised under US
  GAAP a tax benefit of $2,220,006 related to the amount of tax operating loss
  generated during 2007 that will be allowed to offset future taxable income
  from the reversal of this existing deferred tax liability. The tax operating
  loss is recognised once the subsidiary has been assessed as part of the New
  Zealand tax group for a sustained period that enables the allowable deduction
  of an operating loss within the New Zealand tax group.

Cash Flow Statement under Canadian GAAP and
U.S. GAAP

There is no
material difference in the cash flow statement under Canadian GAAP and U.S.
GAAP

- 129 -

---



Index to
Exhibits

|                   |  |                                                 |  |              |  |                                                                             |  |          
|------------------ |  | ----------------------------------------------- |  | ------------ |  | --------------------------------------------------------------------------- |  | ---------
|Exhibit
 Reference |  | Document                                        |  | Date         |  | Parties                                                                     |  | Reference
|                   |  |                                                 |  |              |  |                                                                             |  |          
|1.1                |  | Certificate
 of Continuance of the Company      |  | Oct 16, 2006 |  | (5)                                                                        
|                   |  |                                                 |  |              |  |                                                                             |  |          
|1.2                |  | Notice of
 Articles                             |  | Oct 16, 2006 |  | (5)                                                                        
|                   |  |                                                 |  |              |  |                                                                             |  |          
|1.3                |  | Articles of
 the Company                        |  | Oct 16, 2006 |  | (5)                                                                        
|                   |  |                                                 |  |              |  |                                                                             |  |          
|2.1                |  | US$Cash
 Advance Agreement                      |  | Dec 21, 2006 |  | Investec
 Bank (Australia) Ltd;
 various Austral companies                  |  | (4)      
|                   |  |                                                 |  |              |  |                                                                             |  |          
|2.2                |  | Warrant
 Agreement                              |  | Dec 21, 2006 |  | Investec
 Bank(Australia) Ltd;
 Austral                                     |  | (4)      
|                   |  |                                                 |  |              |  |                                                                             |  |          
|4.1                |  | Form of
 Stock Option Agreement                 |  | Oct 15, 2002 |  | various
 employees, directors, and consultants;
 Austral                    |  | (1)      
|                   |  |                                                 |  |              |  |                                                                             |  |          
|4.2                |  | Gas
 Pre-payment and Option Agreement           |  | Apr 2, 2003  |  | NGC Energy;
 Austral                                                        |  | (3)      
|                   |  |                                                 |  |              |  |                                                                             |  |          
|4.3                |  | Gas
 Pre-Payment and Sale Agreement             |  | Feb 4, 2004  |  | NGC Energy
 International Resource Management Corporation (IRM)             |  | (4)      
|                   |  |                                                 |  |              |  |                                                                             |  |          
|4.4                |  | Asset Sale
 Agreement                           |  | Oct 23, 2005 |  | International
 Resource Management Corporation (IRM) 
 Arrowhead Energy Ltd |  | (4)      
|                   |  |                                                 |  |              |  |                                                                             |  |          
|4.5                |  | Stock Option
 Plan                              |  | Mar 3, 2006  |  | (2)                                                                        
|                   |  |                                                 |  |              |  |                                                                             |  |          
|4.6                |  | Form of Unit
 Subscription Agreement            |  | Oct 18, 2006 |  | Austral and
 various purchasers of the Units                                |  | (4)      
|                   |  |                                                 |  |              |  |                                                                             |  |          
|4.7                |  | Form of Unit
 Subscription Agreement            |  | Mar 30, 2007 |  | Austral and
 various purchasers of the Units                                |  | (4)      
|                   |  |                                                 |  |              |  |                                                                             |  |          
|4.8                |  | Form of
 Preferred Share Subscription Agreement |  | Jul 7, 2007  |  | Austral and
 various purchasers of the Units                                |  | (7)      
|                   |  |                                                 |  |              |  |                                                                             |  |          
|4.9                |  | Warrant
 Agreement                              |  | Sep 30, 2007 |  | Morgan
 Keegan & Company, Inc.
 Austral                                     |  | (7)      
|                   |  |                                                 |  |              |  |                                                                             |  |          
|4.10               |  | Form of Unit
 Subscription Agreement            |  | Dec 12, 2007 |  | Austral and
 various purchasers of the Units                                |  | (7)      

- 130 -

---



|                  |  |                                                                                                                                                                                             |  |                          |  |                                                                                                                |  |          
|----------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ |  | -------------------------------------------------------------------------------------------------------------- |  | ---------
|Exhibit Reference |  | Document                                                                                                                                                                                    |  | Date                     |  | Parties                                                                                                        |  | Reference
|                  |  |                                                                                                                                                                                             |  |                          |  |                                                                                                                |  |          
|4.11              |  | Form
 of Unit Subscription Agreement                                                                                                                                                        |  | Jun
 12, 2008            |  | Austral
 and various purchasers of the Units                                                                   |  | (7)      
|                  |  |                                                                                                                                                                                             |  |                          |  |                                                                                                                |  |          
|4.12              |  | Share
 Sale Agreement                                                                                                                                                                       |  | Oct
 18, 2006            |  | Shareholders
 of
 Arrowhead Energy Ltd; Austral Pacific Energy (NZ) Ltd                                        |  | (4)      
|                  |  |                                                                                                                                                                                             |  |                          |  |                                                                                                                |  |          
|4.13              |  | Share
 Sale Agreement                                                                                                                                                                       |  | Aug
 6, 2007             |  | Shareholders
 of
 International Resource Management Corporation Limited (IRM) Austral Pacific
 Energy (NZ) Ltd |  | (7)      
|                  |  |                                                                                                                                                                                             |  |                          |  |                                                                                                                |  |          
|4.14              |  | Variation
 of Share Sale Agreement                                                                                                                                                          |  | Aug
 31, 2007            |  | Shareholders
 of
 International Resource ManagementCorporation Limited (IRM)Austral Pacific
 Energy (NZ) Ltd   |  | (7)      
|                  |  |                                                                                                                                                                                             |  |                          |  |                                                                                                                |  |          
|4.15              |  | Offer
 of Employment                                                                                                                                                                        |  | Apr
 23, 2007            |  | Austral;
 T B Jewell                                                                                           |  | (4)      
|                  |  |                                                                                                                                                                                             |  |                          |  |                                                                                                                |  |          
|4.16              |  | Variation
 to offer of employment                                                                                                                                                           |  | May
 24, 2007            |  | Austral;
 T B
 Jewell                                                                                          |  | (4)      
|                  |  |                                                                                                                                                                                             |  |                          |  |                                                                                                                |  |          
|8                 |  | List
 of Subsidiaries of the Company                                                                                                                                                        |  | May
 31, 2008            |  | (7)                                                                                                           
|                  |  |                                                                                                                                                                                             |  |                          |  |                                                                                                                |  |          
|11                |  | Code
 of Ethics                                                                                                                                                                             |  | Dec
 19, 2006            |  | (4)                                                                                                           
|                  |  |                                                                                                                                                                                             |  |                          |  |                                                                                                                |  |          
|12.1              |  | Certification
 of Chief Executive Officer pursuant to Rule 13a-14(a) of the Exchange Act, as
 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                             |  | (7)                     
|                  |  |                                                                                                                                                                                             |  |                         
|12.2              |  | Certification
 of Chief Financial Officer pursuant to Rule 13a-14(a) of the Exchange Act, as
 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002                             |  | (7)                     
|                  |  |                                                                                                                                                                                             |  |                         
|13.1              |  | Certification
 of Chief Executive Officer pursuant to Rule 13a-14(b) of the Exchange Act and
 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
 Sarbanes-Oxley Act of 2002 |  | (7)                     
|                  |  |                                                                                                                                                                                             |  |                         
|13.2              |  | Certification
 of Chief Financial Officer pursuant to Rule 13a-14(b) of the Exchange Act and
 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
 Sarbanes-Oxley Act of 2002 |  | (7)                     
|                  |  |                                                                                                                                                                                             |  |                         
|15                |  | Companys
 reserves reporting NI51-101F1, F2, F3 (Canada)                                                                                                                                   |  | As
 at December 31, 2007 |  | (8)                                                                                                           

|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|(1) | Incorporated
 by reference, previously included in our Form 20-F for the year ended
 December 31, 2002.
|    |                                                                                                        
|(2) | Incorporated
 by reference, previously included in our Form 20-F for the year ended
 December 31, 2003.

- 131 -

---



|    |                                                                                                        
|--- | -------------------------------------------------------------------------------------------------------
|    |                                                                                                        
|(3) | Incorporated
 by reference, previously included in our Form 20-F for the year ended
 December 31, 2004.
|    |                                                                                                        
|(4) | Incorporated
 by reference, previously included in our Form 20-F for the year ended
 December 31, 2006.
|    |                                                                                                        
|(5) | Incorporated
 by reference, previously included in a Form 6-K filed October 26, 2006.                  
|    |                                                                                                        
|(6) | Incorporated
 by reference, previously included in a Form 6-K filed April 3, 2007.                     
|    |                                                                                                        
|(7) | Filed as an
 exhibit to this Annual Report on Form 20-F.                                               
|    |                                                                                                        
|(8) | Incorporated
 by reference, previously included in a Form 6-K filed March 28, 2008.                    

- 132 -

---